Q4 2021 Genesis Energy LP Earnings Call
[music].
Hello, and welcome to the Genesis Energy fourth quarter 2021 earnings call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Duane Morley Vice President of Investor Relations. Please go ahead Duane.
Thank you good morning.
Welcome to the 2021 fourth quarter conference call for Genesis Energy Genesis has four business segments. The offshore pipeline transportation segment is engaged in providing the critical infrastructure to move oil produced.
On the long lived world class reservoirs from the deepwater Gulf of Mexico to onshore refining centers.
The sodium minerals and sulfur services segment includes trona and trona based exploring mining processing, producing marketing and selling activities as well as the processing of sour gas streams to remove sulfur at refining operations.
The onshore facilities and transportation segment is engaged in the transportation handling blending storage and supply of energy products, including crude oil and refined products. The marine transportation segment is engaged in the maritime transportation.
Merrily refined petroleum product.
Genesis operations are primarily located in Wyoming, the Gulf Coast States and the Gulf of Mexico.
During this conference call management may be making forward looking statements within the meaning of the Securities Act of $19 33, and the Securities Exchange Act of $19 34.
The law provides safe harbor provisions to encourage companies to provide forward looking information.
<unk> intends to avail itself of those safe Harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission.
We also encourage you to visit our website at Genesis energy Dot Com, where a copy of the press release, we issued today is located.
Press release also presents a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures.
At this time I would like to introduce grant Sims CEO of Genesis Energy L. P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer, and Ryan Sims, Senior Vice President Finance and corporate development.
Yes.
Thanks, Dwayne and good morning.
As we stated in our earnings release. This morning, 2021 was expected to be a year of transition as our businesses recovered from the impacts of the COVID-19 pandemic and the unprecedented hurricane season of 2020.
We did in fact see our businesses begin to recover and our financial performance for the fourth quarter and all of 2021 was in line with our expectations.
As we look forward to 2022, we're very excited about the continuing recovery in the future trajectory of our businesses.
Our two largest businesses meaningfully improve as we move through 2021 and that momentum is expected to accelerate as we move through 'twenty two.
Because of the increasingly tight conditions in the world soda Ash market, we expect our weighted average price this year to be at or above what we realized in 2019 or before any of the effects of the pandemic.
This recovery in pricing is at least one year ahead of schedule based upon our previous expectations and taking into account the caps and collars, we have in place for a significant percentage of our sales contracts.
We're also excited because we expect that 2022 will be a year of dramatically increasing volumes out of the deepwater Gulf of Mexico is king's key in Argos began ramping production.
Together. These two projects represent some $12 billion to $15 billion of capital invested over the last several years in the deepwater Gulf of Mexico, one of the lowest if not the lowest carbon footprint crude oil basins in the world.
As we look forward and not backwards, we're rolling out initial guidance for 2022 total segment margin expected in the $620 to $640 million range and adjusted EBITDA within the $5 65 to $5 85 range.
These ranges reflect zero payments from our legacy <unk> pipeline business, which totaled $70 million in 2021.
Although it was 64% interest in chops for the entire year and no add backs or pro forma adjustments as explicitly allowed under our senior secured credit facility to determined covenant compliance under our pricing around.
This segment margin and adjusted EBITDA expectations for 2022 are both higher by more than 15% year over year adjust.
Adjusting 2021 for the $70 million, we received from <unk> and even though we own color chart for some general and a half months last year.
I'll now focus on our individual business segments.
During the quarter, our offshore pipeline transportation business performed in line with our expectations, notably we made the strategic decision decision to sell a 36% equity interest in our chops pipeline for gross proceeds of approximately $418 million.
We felt this transaction helps us accomplish three main objectives. The first of which was taking any perceived covenant risk off the table.
We used the proceeds to pay down 100% of our term loan with the remainder being used to reduce the amounts outstanding under our senior secured revolving credit facility, which contributed to us having a leverage ratio under five times as calculated pursuant to our senior secured credit facility for the first time in almost two five.
Years.
The transaction provided us with ample liquidity to fund the remaining capital associated with our Granger expansion project.
With more cost efficient dollars, which we estimate will save us over $10 million annually in the coming years versus drawing additional funds under the alkali asset level preferred.
Finally, the transaction based on eight eight <unk> valuation of $1 6 billion and an estimated earnings range with chops of around 110 to 100.
100, 200 in 2023 and cloud a multiple of roughly 11 times forward earnings for chops.
We believe this is a tangible recent and real valuation marker, which should help the investment community, whether you're on the buy side or the sell side quote unquote reprice, our entire offshore segment and your sum of the parts valuation models.
If one were to apply this multiple to our 2022 segment margin guidance for offshore.
$345 million, which by the way will be even higher in 2023, one can derive a standalone valuation for just this part of our business has some $3 8 billion.
As we said in our release, our two large upstream developments are now just months away from achieving first production.
Most of the Argos and King's Quay floating production systems have been anchored in place in the Gulf of Mexico, and both are working to achieve first production soon.
We anticipate them ramping production to their design capacities of some 80000 barrels a day and 140000 barrels a day, respectively. As we move through 'twenty, two and enter 2023.
Activity levels in and around our assets continue to be exciting in terms of future opportunities to provide midstream services to the upstream community in the Gulf of Mexico.
As they continue to spend billions and billions and billions of dollars in one of the most prolific profitable and the lowest carbon footprint crude oil basins in the world.
Now turning to our sodium minerals and sulfur services segment.
As we mentioned in our earnings release, the demand for soda Ash continues to improve through a combination of a recovery in global economic activity.
Along with the various tailwind associated with the energy transition and specifically its application for both solar panels and lithium batteries.
This rapidly increasing demand coupled with as a practical matter a net decrease in supply provided a favorable environment for price re determination for our volumes to be sold in 2022.
As such we anticipate our weighted average realized price in 2022.
Even after taking into account the caps and collars under a significant percentage of our multiyear sales agreements to actually exceed the weighted average price we received in 2019.
This favorable environment also afforded genesys and <unk> the opportunity to continue to optimize contract terms to not only take advantage of current prices, but also to further reduce our exposure to any significant fluctuations.
And energy prices in bulk shipping rates.
As of today, approximately 50% of our domestic sales contracts and 75% of our international sales contracts by a handset contained provisions that allow us to pass along certain increases in energy costs directly to our customers as.
As contracts terms allow we will look to include similar provisions in all of our remaining contracts and.
In the case of an SAP a fuel surcharge for increases in bunker fuel related to its cost of maritime transportation has now been implemented for 100% of its contracts.
The range in the guidance. We provided today reflects these improvements in our soda ash contracts, which are ultimately designed to limit our exposure to volatility in natural gas prices and marine transportation costs.
While domestic markets continued to recovery to recover we've.
We've seen demand in Latin America recover too.
At or above pre pandemic levels demand in Asia outside of China remained slightly below pre pandemic levels, but including China total demand across Asia is now above pre pandemic levels, even as the market deals with the temporary reduction in economic activity associated with the Chinese new year and hosting it.
The Olympic games.
Any effects of this temporary lagging demand in Asia should be more than offset with supply rationalizations <unk>.
<unk>, a closure of a $1 3 million ton per year synthetic soda ash facilities in China just in December of last year as well as the increase in cost structure of synthetic producers in China and across the globe as a result of higher energy input cost stricter environmental regulations and increasing.
Container shipping rates for export volumes.
Chinese exports remained below historical averages as Chinese exports continued to supply the domestic market, which ultimately reduces the amount of soda ash available to markets in Asia outside of China.
While on the topic of Chinese soda ash.
Want to touch briefly on the assessment of physical spot prices Fob China.
Reported by certain financial news service to which many folks subscribe.
No matter, what the reported <unk> Chinese prices. It is important to note that neither Genesis <unk>, so any volumes directly into the spot market for which those prices at all relevant.
Primarily because of the lengthy supply chain from Green River, Wyoming to Asian markets as well as the fact that each distinct geographic market has its own supply and demand dynamics driven in large part by the existence or nonexistence of local synthetic production and.
And the transportation costs from other exporting regions.
I'm not 100% sure in fact that this reported prices ever been mentioned in any of our pricing discussions with any of our customers.
If we were to try and sell significant volumes into China's domestic market.
We would face tariffs and substantial intra China transportation expenses.
This reported price or maybe even just its movements is reasonably relevant for the supply demand balance inside China.
It is also indicative and reflective of the increased cost base by Chinese synthetic producers.
To compete internationally those synthetic producers, but also face transportation expense to get to an export point and container freight expense on top of this price to get the other markets.
It's just not that simple to translate or calculate its absolute relevance to our or any other U S producers financial results this quarter or even this year given the structure of our contracts.
Having said that it clearly ran up through most of 'twenty. One then dipped slightly in anticipation of the events I mentioned earlier and now has reversed and is increasing again.
Directionally, that's a good thing.
It's a quantum shift to the upside over the last year or so one could surmise that there is ample room for prices <unk> Green River, Wyoming to increase in coming years beyond the increases we will already realized in 2022.
As we look forward, we do not see anything on the horizon to significantly alter this higher price environment.
Demand growth with flat supply will always drive prices higher.
As we have discussed the costs associated with synthetic producers have dramatically increase providing a constructive backdrop for soda ash prices.
If the current supply and demand dynamic and other macroeconomic conditions hold all else being equal and even after taking into account the caps and collars and our multiyear contracts.
Our weighted average realized price in 'twenty, three could easily move higher by more than $10 per ton across all of the $3 5 million tonnes, we sell just from our Westlake Coke production facilities.
Based on current and our expectation of future market conditions. We have made the decision to restart our original Granger production facility and its roughly 550000 tons of annual production in the first quarter of 2023.
The Granger expansion, representing an incremental 750000 tons or so of annual production remains on schedule and importantly on budget for first production in the third quarter of 2023.
This sacramental production both from the restart and the expansion of the Granger facility will further increase our produced tons to primarily serve rapidly growing demand in our export markets.
When fully expanded in online in the third quarter of 2023, the Granger expansion will be the first global expansion of soda ash in over four years, and we would expect to ramp to its design capacity of one 3 million tons per year over the subsequent nine to 12 months period.
The Grainger design is based upon our patented <unk> alkaline right Bryan based technology, which we have been operating for more than 25 years.
Interestingly export prices F. O BYOB are expected to be some $20 per ton higher in 2022 and may be more in 'twenty three and beyond then knows that we were receiving when we originally sanctioned the granger expansion in the third quarter of 2019.
At that time, we indicated the expansion was around a six or seven times deal.
<unk> $350 million investment.
If export prices and market conditions hold.
Granger expansion can turn out to be more like a four five times deal once fully ramped and online.
Our Granger expansion appears very very attractive and the remaining capital to be spent represents the lion's share of the several hundred millions of growth capital, we expect to spend this year.
Okay.
Also of note during the fourth quarter, we saw Cc Cam a multinational glass and chemicals manufacturer out of Europe acquire a controlling stake in one of our neighbors in Green River Wyoming.
The consideration paid implied a transaction value of roughly $530 per ton of existing production capacity.
This recent data point.
If applied to our fully expanded $4 8 million tons of production capacity would imply valuation of over $2 5 billion for our soda ash business by itself.
CC cans published investment presentation laid out their investment rationale and highlighted some key topics.
The first was the global demand for soda Ash is going to continue to grow by approximately 3% per annum at least through 2028 due to the resiliency of end markets and the tailwind associated with various screen initiatives.
I will note that this growth forecast was also recently confirmed.
By IHS on a call hosted by sell side research just within the last couple of weeks.
Starting from a base worldwide market, including China of around 60 million tonnes. That's dramatic in terms of the incremental supply required to meet that demand.
Furthermore, <unk> mentioned ESG considerations was leading a structural shift in natural soda ash sources due to its lower emissions and more environmentally benign footprint when comparable synthetic production alternative.
They concluded by suggesting they believe there is significant upside potential for future soda ash prices, primarily driven by this increasing demand.
Rising cost of synthetic production and ESG considerations.
It is reasonable to say this transaction further reinforces and validates our original investment thesis of natural soda ash being structurally advantaged on the global market versus synthetic alternative.
Or a combination of lower production costs, lower energy input costs, and a lower carbon footprint.
We are confident this thesis will continue to provide the framework for continuing improving results from this segment over the years ahead.
Our legacy refinery services business continues to perform in line with our expectations. We continue to see steady demand from our copper mining customers as copper prices remain at or near an all time high given its important role in the energy transition.
Along with being one of the most environmentally friendly methods to handle sulfur and trained in the crude oil consumed the refinery we continue to see utility in other manufacturing customers use our sulfur removal broad product to help them reduce harmful emissions and their respective operations.
This business has been remarkably resilient and steady financial contributor over the 15 plus years that we've owned it and over the decades before prepayment involved we would argue this is legacy refinery or sulfur service business is deserving of a low double digit multiple given that history of.
Just a financial performance across multiple economic cycles.
One were to agree with that premise and then one word to add to the recent market valuation of our soda Ash operations mentioned earlier, one can come up with a valuation of our total sodium minerals and sulfur services segment of north of $3 billion.
Again for those interested in actually analyzing and deriving a sum of the parts valuation of our businesses.
Moving on.
Overall market conditions in our Marine transportation segment continue to improve.
We've seen utilization rates on our equipment steadily increase as refinery utilization continues to recover.
In light heavy differentials returned to historical norms.
More importantly, the industry has been disciplined with little to no equipment being built over the last several years.
This when combined with the continued retirement of older equipment is continued contributed to a net reduction in overall supply marine tonnage across all classes of Jones Act vessels.
We believe this macro theme should provide the backdrop for increasing utilization and day rates as we move through 2022 and beyond.
As a result, we expect the segment margin for marine.
As we have historically presented it with a significant portion of maintenance capital will be in expense as a practical matter in our presentation with segment margin to be approximately $50 million at the midpoint of our expectation for 2022.
In our onshore facilities and transportation segment.
We expect increase in volume activity in and around our assets in the Baton Rouge corridor as we move through the year.
We would also expect volumes and utilization of our terminals and pipelines in Texas City in South Louisiana to improve this year as we see volume ramp from the offshore.
Make their way to our increasingly integrated onshore facilities for further distribution to refining centers or other infrastructure along the Gulf coast.
As a result, we would expect the mid point of segment margin for onshore facilities and transportation segment to total approximately $25 million in 2022, which will start out relatively small on a quarterly basis, but accelerate through the year.
In summary, as we get 2021 and 2020.
In our rearview mirror, we remain very excited.
With the expected improving financial results of our market, leading businesses and continue to have an increasingly clearer line of sight of $700 million to $800 million of annual adjusted EBITDA in coming years, even after the sale of a minority interest in shops.
This outlook highlights the resiliency of our businesses and demonstrates the tremendous operating leverage we have the overall improving market conditions.
The management team and board of directors remains steadfast in our commitment to build long term value for all of our stakeholders.
And we believe the decisions we are making reflect this commitment and our confidence in Genesis moving forward.
I would like to once again recognize our entire workforce and especially our miners Mariners and offshore personnel.
For their efforts and unwavering commitment to safe and responsible operations.
I am proud to be associated with each and every one of them.
With that I'll turn it back to the moderator for any questions.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad one moment, please while we poll for questions.
First question today is coming from Michael Bluhm from Wells Fargo. Your line is now live.
Thanks, Good morning, everyone.
If you have a 2022 growth and maintenance capital number in any kind of large projects or large buckets you could you could highlight there.
Generally speaking I think that our.
Expectation for maintenance capital in 2020, twos in the $50 million to $60 million range, which is consistent with.
Our historical run rate.
Okay.
Listen with them with a lot with a lot of excuse me, Michael with alliance here being associated with.
Our.
Rash operations as it usually is.
Okay any estimate on growth capital.
As I said earlier.
A couple of hundred million the lion's share again.
The remaining capital.
Associated with the Granger expansion, which is a very very attractive opportunity for us.
Okay, Great and then.
Apologize if I missed this but did you do you have a expectation or our forecast for soda ash volumes in 2022.
Well we are we're.
Basically we are sold out which is.
It includes all of the three and a half to three six.
Millions of tons that we must make it the westvaco facility not all of that is obviously sold as bulk soda ash sales.
Also included is the soda ash that we use for our specialty products as well as.
The soda ash that we used to make synthetic caustic soda, which in turn we use the lion's share of that in our.
Refinery services business, but we will be sold out.
Just as we were actually sold out.
2021, that's the way the market works low cost suppliers to low cost producers, such as natural producers and certainly us or our base loaded again the world's market.
Okay, Great and then my last question, just on Argos and King King's Quay.
So I confirm what I heard in your comments that it.
It sounds like you think you'll hit kind of run rate volumes by 2023 is that right.
Correct, we went in.
Anticipated.
A fairly dramatic rapid ramp.
And it's in the public domain, but.
Because it's recorded on.
On bone websites and other places, but there are 14 wells that are pre drilled and completed.
At Argos and I think the numbers either eight or nine that are drilled and completed.
At King's key so it's a matter of picking.
Picking them up if you will which is more.
More or less a two week to four week process per well.
As opposed to <unk>.
Drilling them, which could be four to six months. So we would anticipate a fairly rapid rate ramp.
Production once.
Once the commission to start hooking up the wells.
Okay, great. Thank you so much.
Okay. Thanks, Michael.
Next question today is coming from Kyle May from capital One Securities. Your line is now live.
Hi, good morning, everyone.
Grant maybe following along with the discussion on the Gulf of Mexico in the past I believe you all have talked about maybe some longer longer dated.
Potential developments, maybe in the 'twenty four 'twenty five timeframe can you give us any updates on these projects and then also maybe any other thoughts about the Gulf of Mexico production over the next few years.
Yeah, we're still in active discussions.
Not at a position yet to.
It's evolved to divulge so some of the things that we've talked about in the 'twenty four 'twenty five type timeframe, we continue to see.
Very active.
Levels.
Activity in and around our assets with.
No.
Folks actually.
Thank the Transocean, just announced kind of an extension of some of their drilling activities. In fact, returning some of your vessels.
And to the Gulf deepwater Gulf of Mexico through further activity so.
We see that those those lumpy if you will new fields to come on in 2020 core obviously in.
2025.
We believe we will have ramping volumes.
Yeah.
Talk about out of Argos and King's key ramping in latter part of 'twenty two 'twenty three and then what we don't normally kind of.
A highlight but there's a tremendous amount of what I would call infill drilling or subsea tie backs and in and around a lot of our existing production hubs, which where the.
The exclusive provider of the downstream transportation so.
We believe that that level of.
Yeah.
Development activity, either additional infill drilling <unk> subsea satellite tie backs to the existing hubs at that more or less.
Addresses any of that decline or makes up for any of the actual decline one would expect out of the reservoirs and so that these new incremental.
<unk> facilities are.
Basically they are net increase.
In terms of total throughput so.
A very good things happening.
Nicole.
Got it that's helpful. I appreciate that.
And another question maybe following on the previous Capex comments.
I know you all have talked about.
I believe you described it as cost effective.
Use of capital from Crane or can you give us any more details around the I guess the split of spending between 2022 and 2023.
Uh huh.
I don't have that.
At my Fingertips at this point.
We will probably.
We'll file the K a.
Greater and probably have a little bit more detail, but.
Basically.
A.
Large portion of the remaining capital to be spent on the Granger expansion, that's going to hit in <unk> and.
In 'twenty two.
So we can get that for you at a later date.
Have it right in front of me at this point.
Okay understood.
Appreciate the time this morning.
Okay. Thank you.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Karl Blunden from Goldman Sachs. Your line is now live.
Hi, good morning, Thanks for the time.
Let's get to see the pricing upside that you guided to on the soda Ash business. I was just curious if you could provide a bit more color on two things one.
When you think about the contract resets.
At this point in time in your guidance does that reflect most of your contracts, having a reset higher or is there a good proportion that still need a reset to current supply demand dynamics and maybe an extension of that is if.
If current conditions hold into 2023.
Do you get material upside from caps and collars rolling off or are those going to continue to impede the upside going forward.
Okay. That's a good question basically all of our contracts.
The vast majority of our contracts had been determined for 2022.
So we do have a.
A portion of our.
International sales contracts, which are crew and sock, which are.
Determined on a quarterly basis, but.
Basically all of domestic.
Contracts in Latin.
Latin America contracts and a portion of that.
The Asian contracts are known and fixed for for 'twenty. Two so the volatility if you will which we would again given the <unk>.
Current market conditions.
The exposure if you will to soda ash prices, which we believe should be up rather than down is.
And the Asian markets or that portion of that to be re determined on a quarterly basis as we go through 2022.
I made reference in the.
In the prepared remarks, as we enter into 2023.
Have a.
Certain portion I don't have that right off the top of my head.
Both domestic term contracts as well as some of the.
And sac longer dated contracts will be.
Available to reset if you will it.
At upper markets, and then even taking into account the caps and colors that we have on the remaining that so.
Domestic contracts announced contracts, which extend beyond 'twenty.
'twenty three if we would anticipate getting.
Again under current market conditions, we would anticipate pricing at the high end, if not being limited by.
The caps that we have in those agreements that we could easily see our weighted average price.
Yeah.
In 2023 go up in excess of $10, a ton and taking into account that the overall dynamics of resets as well as the restrictions associated with the having caps and collars and a significant portion of our.
Of our contract portfolio.
Helpful framing.
With regard to the guidance that you gave in now specifically on offshore and had been as you alluded to in your remarks.
Yes, I mean, it's been more impact from from weather disruptions or are you know hurricane activity. What is what are you baking in there for 2022, I'm just trying to figure out if.
What kind of allowance.
Yes.
Yeah. Good question historically, we are as we've prepared our own internal.
Our budgets.
We have we have baked in in the third quarter. The third quarter is basically an 84 day quarter.
Is that a 90 twos.
Excuse me 85 day Southern 92, so we've taken a full seven days worth of aggregate anticipated.
<unk> historically, we have done that we've been in.
2020 in 2021 has been Uh huh.
Unprecedented in terms of the.
Our way to the right till the end of a normal distribution.
Of hurricane activity and its effect on the offshore so in the guidance that we gave we we acted as the or we put together our budget and our plan, but anticipated, but the third quarter was actually an 82 day quarter instead of a 92 day quarter. So we baked in to that Andrew.
Our guidance.
Our full 10 days on me.
Aggregate.
In essence, a zero revenue out of the Gulf of Mexico as opposed to our historical norm of Bally baking in seven days.
We've tried to be a little bit more cautious on.
On the approach.
Based upon the last two years actively.
Activity levels.
As I said is historically <unk> seem to be the right number.
Okay. Thanks, very much I appreciate that.
Okay.
We reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
Okay, well, we appreciate everybody's time as usual and we look forward to visiting with you either as a group or individually over the next 90 days. So thanks, everyone for participating.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.