Q3 2021 Shell Midstream Partners LP Earnings Call
Good morning, My name is Jeff and I'll be your conference operator today.
This time I would like to welcome everyone to today's webcast for shell Midstream partners.
At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question. During this time, you will need to press star one on your telephone keypad.
If you require any further assistance please press star zero.
I will now turn the call over to Mr. Jamie Parker Investor relation.
You may begin your conference.
Thank you Jeff.
To today's webcast for shell Midstream partners with me today are Steve Ledbetter, CEO, Shawn Carsten, CFO, and Sean Guillory, VP commercial and business development.
Slide two contains our safe harbor statement, you'll be making forward looking statements related to future events and expectations. During the presentation and Q&A session. Actual results may differ materially from such statements and factors that could cause actual results to be different are included here is old in today's press release and under risk factors in our filings with the SEC.
He did.
This call also contains certain non-GAAP financial measures. Please refer to the earnings press release and appendix one of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure we will take questions at the end of the presentation with that I will turn the call over to Steve Ledbetter.
Thanks, Jamie.
Morning, and welcome to our third quarter earnings webcast.
First let me start by saying how proud I am of our entire shell midstream team.
We continue to show grit and resilience in the midst of adversity.
As you know hurricane Ida impacted the United States Gulf Coast with the most significant impacts being in Louisiana, an area, where many of our staff live.
Their ability to bring back our assets and normal operations in a short timeframe, while dealing with impacts to their own homes and families is truly remarkable.
And I would like to express my sincere gratitude to those who worked and continue to work to bring our assets back online.
Sean will address the short term impacts in a bit.
And I will focus on the longer term outlook.
As you recall last quarter, we introduced an updated financial framework, which will drive our capital allocation into the future.
Building upon this framework, we want to align our strategic intent for shell Midstream partners, which we believe will drive long term sustainability.
As we move forward, our decisions will support fueling stable and ratable cash flows with moderate growth to the partnership.
This will be delivered by optimizing our diversified strategic asset base to increase value added services to our customers.
Investing selectively to further strengthen our current position and take advantage of evolving market dynamics.
Evaluating opportunities to expand logistics services into energy transition themes like Ccs or keep clean fuels.
And all the while continuing to focus on competitiveness in cost and capital efficiency and our decision making.
So midstream partners continues to benefit from its core fundamentals upon which we always deliver and which drive confidence in our ability to deliver value to unit holders year over year.
We believe in our portfolio and the capabilities of our people to execute safely and responsibly and with respect and care for each other and the environment in which we live and work.
Holding diversified assets with exposure to efficient and competitive basin.
<unk>, such as the Gulf of Mexico, offering optionality to multiple market centers and having access to cost advantaged supply are all key benefits we enjoy.
Our strong financial footing complemented by a refreshed framework, which offers options for cash deployment and drives resilience through cycles.
And a track record of operational delivery with the expectation that we will continue to deliver stable and ratable cash flows with moderate growth for the long term.
Our cash delivery will be driven mainly by our offshore and onshore crude and product systems.
With our assets and the ongoing activity in the Gulf of Mexico.
We believe the region will continue to grow and.
In the near term.
Story will be tie backs with flat production across our assets in the midterm, we anticipate veto power nap and anchor to flow into our systems to not only replenish but also to grow our cash flows and longer term. We expect producers to remain active as the basin continues to be one of the most economic.
Areas to explore and should provide long life cash flows.
A few specific examples to share our margin expansion is progressing well and we will stand ready for first oil from Vito empower now in 2022.
We also intend to expand in the Auger corridor.
Capturing new production in the area that is ready to come online in the midterm.
We expect that opportunity to have a capital outlay of between 35 and $45 million and to deliver an anticipated annual EBITDA value of between 15% and $20 million.
With an F E timeline of 2022 and expectation to come online in 2025.
Both projects are examples of continued investment in strategic areas of our business and will provide value to unit holders.
Moving onshore we expect demand to continue to return to pre COVID-19 levels.
As we've discussed in the past our cash flows are expected to be ratable and growing with inflation.
And I will note that our assets should have minimal contractual risk as we move forward.
What will drive onshore growth, we'll be selective investments in core positions such as our intended Lockport expansion, which we anticipate will reach FID early next year.
This opportunity allows us to take advantage of Canadian crude movements into the Midwest markets and staging to move into St James and Clovelly for exports.
We expect that project capex to be between 20% and $25 million and to deliver an annual take or pay EBITDA value of between three and $6 million.
And further downstream in southeast, Louisiana, we look to utilize our asset positions to link St James to Clovelly.
All with the intent of providing an efficient path to the water from the Midwest.
Additionally.
We see strategic growth opportunities in our non operated refined products portfolio, namely the previously announced explorer project to expand the system and the north Dallas market.
And although we will continue to take advantage of our portfolio position and the continued need for fossil fuels well into the future <unk>.
In time, we will look to leverage our footprint and expand into alternative energy transition themes such.
As renewable fuels hydrogen and Ccs solutions.
One potential opportunity in this space would be shell's recent announcement to explore potential Ccs project in the Gulf Coast.
Where we could be well positioned to provide the midstream solution.
This is our core based plan.
Which provides stable and ratable cash flows with moderate growth.
All with small levels of Capex required.
And we anticipate having excess cash above our distribution levels, which will allow us to weather uncertainties like hurricane Ida.
And deliver upon our strategic intent as we move forward.
With this excess cash flow, we will follow the framework, we discussed last quarter to drive further value to the company.
First we will maintain our balance sheet strength in order to remain resilient.
And pursue additional growth opportunities aligned with our view of the market.
And.
We will look to return dollars to unit holders.
It is my belief that the market is undervalued, our units and ability to deliver over the long term.
As such we are evaluating options such as using excess cash for a potential buyback program or increasing distributions in the future.
Finally, we continue to have access to our runway of assets, where we could opportunistically pursue a dropped to provide additional ratable cash flows and unlock future growth opportunities. If it makes sense from a market and unit holder value.
Perspective.
Now as I close we believe in our diversified asset base, which connects key supply areas to strategic market centers across the country.
The long term resilience of the Gulf and our advantageous position there will continue to serve us well.
And when combined with our onshore Gulf Coast logistics assets, we believe our partnership remains well positioned to fuel stable cash flows and moderate growth well into the future.
With that I will now hand, the call over to Sean.
Thanks, Steve and good morning, everyone. I think we can all agree it's been quite a ride over the past 18 months, but we've proven our capability and strength multiple times over.
I really can't say enough about the resilience of our staff and our assets, which continued to deliver best in class performance.
Now all of this resilience is underpinned by our strong and diversified asset base.
It's my view that the United States and the World will have a need for the hydrocarbons that we transport for many years to come.
And we believe that even as the energy transition evolves our assets will be some of the most resilient in the infrastructure space.
So with our strong set of assets to build upon our financial framework now in place.
And more details on how we intend to continue to move forward I am confident in the partnership's ability to deliver consistent cash returns to our unit holders.
So now let me cover a few of our key financial metrics for the quarter.
For the quarter, even with the storm impacts and colonials decision to not declared a third quarter dividend. Our partnership was able to meet its commitments. This speaks to our financial strength.
Our total revenue was $128 million a decrease of about 20 billion from the second quarter. Now this was primarily related to lower throughput on zydeco in the offshore as we experienced downtime related to hurricane items.
This decrease was partially offset by higher product revenue.
Operating expenses were $79 million down about $4 million from the prior quarter, mostly related to the timing of project spend and some work with delay which was partially offset by higher cost of allowance oil sales.
Income from equity investments was $86 million down about 19 million from the prior quarter, mostly due to storm impacts and lower volumes unexplored.
All of this adjusted EBITDA attributable to the partnership it was about $145 million.
And after interest expense maintenance capital and other adjustments total cash available for distribution was $122 million.
Our partnership declared a distribution of <unk> 30 per LP unit now this resulted in a coverage ratio for the quarter of one times.
Now, let me turn to the partnership's balance sheet and liquidity as.
As of September 30, the partnership had total debt outstanding of $2 7 million.
Ultimately $1 2 billion in available liquidity.
We believe in the strength of our balance sheet as it provides us both the flexibility to effectively navigate events like hurricane, Idaho, and the ability to pursue opportunities as they arise.
So now let me quickly provide a few updates for the rest of this year.
In the Gulf, we expect to see an impact of roughly $10 million to $15 million to both net income and hence the FTE in Q4, all the way into the repairs on West Delta $1 43 platform, which we anticipate being completed around mid November.
It is important to understand that the other impacts are not expected to have any long term effects on our company and once the fields are backup they should resume a normal production profile.
And finally for a little housekeeping, we expect to file a renewal of our shelf registration statement, which is set to expire in the near future.
Although we do not anticipate any near term needs to issue units, we believe it prudent to keep our shelf registration.
As I close we're optimistic about the future of the partnership and we believe in our ability to drive long term value for unit holders as we maximize value from our diversified asset base to move Americas energy.
So with all that we'll now take your questions operator.
At this time I would like to remind everyone in order to ask your questions Press Star then the number one on your telephone keypad.
Again, Thats star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Snore guys Shunyi from UBS. Your line is open.
Hi, good morning, everyone.
I just wanted to go back to your comment specifically about you know kind of the return of capital discussion.
When do we start that thought process does the colonial way case, you have to be decided and you have to know exactly what that is in place and so that's something that we should be thinking about kind of that is the triggering event.
Or is it something that youre already evaluating today, you've cut the distribution you've sort of right size.
Cash inflow and outflow and so forth.
Relative to the highly accretive projects that youre working on Im just trying to understand kind of your thought process about when that is something that we should be thinking about as a near term event.
Hey, Shneur. This is Steve I'll take that one it's a good question.
I wouldn't link it to any one event I think what we have done in terms of our refreshed financial framework has allowed us to weather the headwinds that we see just like hurricane Ida and over time will allow us to build excess.
Cash and that along with the strength of our balance sheet will allow us to take opportunities to deploy that capital and as part of that grow value in the name.
And one of those items is looking at a buyback program or returning dollars to shareholders timing of that will be as we as we move along and grow excess cash through the cycle, we're not talking about a specific point in time today.
Okay.
A quick clarification. When you wrote this slide on slide seven you did buyback.
Buybacks versus distributions second if there is something for us to read into that is that your preference right now or.
They are both.
Holly.
Hey, Shneur this is Shawn.
They're just two options of ways to return cash to unitholders.
Great and maybe one final question if I can slip one in is there any risk that you would have to put any capital into colonial.
The capital injection or the fact that it is not paying a distribution for the last few quarters. It's building up capital in case, there's a need for that.
Yes.
Good question.
We view it.
As we as we discussed last quarter.
The risks associated with the rate case as well as the 100 billion incident could impact for distributions and here. We are here, we sit with the second.
Okay.
<unk> in a row, where they didn't declare a distribution. However, we believe that colonial colonial we will be able to manage that within their financial framework.
Anticipate the need for.
Cash injection from owners.
And also we see coming out of that that the strategic nature of colonial is still there. We believe in our investment and we believe that it will turn to our distribution in time and are happy with our position there.
Perfect. Thank you very much really appreciate the color and have a great weekend.
Thanks Sarah.
Your next question comes from the line of Theresa Chen from Barclays. Your line is open.
Good morning, I'd like to follow up on <unk> question related to colonial if you don't mind can you just remind us from here what are the next steps as far as the sequence of events go.
And what kind of outcome do you expect as far as the.
<unk> resolution.
Hi, Teresa Yeah, I mean as far as the next steps go we'd point you back directly to colonial on that as you know there was an ALJ decision scheduled for November we understand that that has been pushed.
Just a bit but again, we put you back on a point you back to to colonial for any of the specifics.
Okay.
In terms of your potential participation.
And the sponsors.
<unk>.
Energy transition can you talk more about the Ccs option and what exactly would that entail from yearend.
Hey, Theresa this is Sean.
Take that yes.
I think from a DCF perspective, you may have seen the recent announcements.
From the sponsor about.
Work that they are looking at to have in the Gulf Coast.
I think what we've said before we'll continue to look at what makes sense for us.
The society.
Oh.
Look at things like carbon capture and storage hydrogen low carbon fuel and doing anything that would be pipelines or terminals to.
A good value and possibly.
Feedback from the partnership.
Yes.
And Theresa this Sean Carson.
I had a little bit.
How do we participate these will be backed by more traditional midstream contracts as you've seen in the past. So we our objective is to support our affiliates and play that integrated plate, but also ensure that value returns to our unit holders.
Thank you.
Your next question comes from the line of Doug Irwin from Credit Suisse. Your line is open.
Hey, Thanks for the question.
Just wondering around the hurricane impact if you can help frame that from a cost perspective in terms of kind of how much costs went into the quarter on repairs.
And then to the extent that you're able to are you able to talk about what might be more comfortable under insurance policies.
Too early to say on that.
Alright, Doug This is Steve I think I heard the question you were a little bit quiet, there, but around the costs.
Around assets and then potential insurance recovery, if that's correct I can frame that up is that is that right. Yeah. Yeah. Okay. Yeah. So.
I think as far as the Hurricane goes the minimal repair costs to our assets and our assets held up very well.
As you know the impact to our business was associated with the damage on West Delta 143, and those while we operate in man those assets, we do not own them. They are owned by our affiliate and so the cost to repair those will be born.
By our our affiliate.
Just just to plug I don't see any lasting damage for our assets and im extraordinarily proud of the team and how they dealt with this in fact, bringing.
Platform C up in October and platform.
Mid November to get the flows going back through through March corridor system, Sean do you want to talk about the insurance sure. Thanks, Steve So Doug I think with regards to insurance we have.
Steve highlights minimal in terms of property damage.
<unk> is the only asset that we would qualify under the 60 day.
The waiting period for the business interruption insurance today and that date as.
As we highlighted earlier, we expect that that platform to return in the relatively near future and so so we will see what the claims might be I'm, not making any predictions. However.
Shouldnt expect them to be significant.
It comes up quickly.
Okay. That's helpful. Thanks.
And then I think you'd previously guided to to kind of expected maintenance costs throughout the second half of the year.
And you mentioned some of that might have been pushed out from <unk>.
Is that baked into the $10 million to $15 million.
<unk> impact you've talked about or is there going to be some incremental maintenance on top of that in the fourth quarter, yes. So Doug I mean, we always have maintenance every quarter.
$10 million to $15 million almost all related to revenue.
Which is just lost production.
And our.
From a capital standpoint.
Right now we have about we're about $5 million short for the entire year.
Maintenance capital just because these were projects that were delayed.
Due to the hurricanes over just cancelled due to more efficiency.
So overall I think we're relatively on track with our maintenance, but we pushed a little bit of activity over to the new year.
Okay. That's all for me thanks.
Your next question comes from the line of Derek Walker from Bofa. Your line is open.
Hey, good morning, guys.
Morning, Peter.
I apologize if you guys have said this my call dropped during your formal remarks, but.
I know, you've previously talked about $30 million to $40 million sort of cost reductions by the end of this year.
I guess thanks.
What are the impacts related to whether I guess, how are you guys looking at the cost structure do you see any opportunities in 2022.
A further reduce costs.
Yes.
As we've talked about in the past that $30 million to $40 million run rate as we exit 2021 was our objective and what we had guided towards and I'm happy to say that we are on target to meet that leaving 2021.
Those are those are structural and sustainable elements.
Elements, where we take advantage to optimize what we do in the marketplace different procurement strategies and we see that those are sustaining and last thing, but we don't stop there. We continue to as we talked about focus on our competitiveness and our position in the marketplace and we'll continue to look for opportunities to optimize and keep a lid on costs as well as our cost of capital.
<unk> as we move forward.
Got it thanks and then.
I know.
Perhaps.
And immediately.
Just on the on the Dropdowns.
I mean, you talked about potentially evaluating buybacks I think in the past you've talked about.
Buybacks would be sort of incremental interest on assets aerie own.
Yes.
Have you had recent discussions I guess is there anything there that has evolved.
I guess on the dropdown front and sort of your funding strategy around that.
Yes, I mean so.
One of them one of the benefits of being linked and having access to <unk>.
<unk> <unk> associated with the sponsors having access to those.
Assets that could make sense in a drop structure, if and when it made sense.
<unk>.
We would entertain doing that at this point, we don't think it makes sense currently.
As far as the best value and growing growing value in the name.
Just to build on Steve's comment.
We have no intention to issue new equity, particularly in these markets.
Expenses and so as we move forward, whether we do it through our balance sheet or through cash on hand.
We'll look to leverage some of our excess cash to take advantage of all the opportunities, which will include organic growth and the southern slate of options that we reviewed both returning cash to unitholders as well as possibly drug dropdown.
But that's a longer term issue.
Got it and then maybe just a quick one on the on the Auger opportunity I think you've mentioned.
In 2022.
Thanks.
How does that opportunity to develop and I guess or anything any other data points that kind of point to you before that happens.
Hi, This is Sean.
Thanks for the question and what I would say about the auger opportunity is.
It continues to show the continued investment in the belief that we have in the Gulf of Mexico is one of the most resilient.
Based in the United States.
The basin that actually over the last couple of cycles that had gone through some quite some difficulty but it has come out very much ahead and we've seen.
Producers want to continue the investment there and our desire to go to expand that system, we see that very similar to the margin expansion that will be able to provide the necessary.
Produces solution that will allow the export.
Those Gulf of America Gulf of Mexico barrel.
<unk> will play a vital role in delivery of cash in terms of the process going forward as we get more through our own internal valuation process will come back to the market with a bit more detail at a later time.
Got it that's helpful. I appreciate it guys. Thanks very much.
Thank you we have no further questions I will now turn the call back over to Mr. Jamie Parker.
Thanks, Jeff. Thank you very much for your interest in shell Midstream partners. If you have any additional follow up questions. Following today's presentation. Please feel free to call me directly my contact information can be found on the presentation materials as well as on our website shell midstream partners Dot com.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yes.
Okay.
[music].
Yes.
Sure.
[music].
Okay.
Yes.
Okay.
[music].
Yes.
Yes.
[music].
Yeah.
Uh huh.
[music].
Yes.
Yes.
[music].
Yeah.
[music].
Yes.
[music].
Yeah.
Yes.
[music].
Okay.
Yes.
Yes.
Yes.
Yes.
[music].
Okay.
Okay.
Right.
[music].
Okay.
[music].
Yes.
Yes.
Yeah.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yeah.
[music].
Yes.
Okay.
[music].
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Sure.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
[music].
Okay.
Yes.
[music].
Yes.
Yes.
Right.
Yes.
Okay.
Okay.
Sure.
Yes.
Yeah.
Yes.
Yes.
Okay.
Yes.
[music].
Thanks.
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Yes.
Thanks.
Yes.
[music].
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Thanks.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
[music].
Yeah.
Okay.
Okay.
Okay.
Yeah.
[music].
Yeah.
Yes.
Yeah.
[music].
Yes.
Yes.
[music].