Q1 2022 Genesis Energy LP Earnings Call
Yes.
Greetings and welcome to the Genesis Energy L. P. First quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the.
Conference over to your host Duane Morley, Vice President Investor Relations for Genesis Energy. Thank you you may begin.
Good morning welcome.
Welcome to the 2022 first quarter conference call for Genesis Energy Genesis Energy has four business segments. The offshore pipeline transportation segment is engaged in providing the critical infrastructure to move oil produced from 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 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 of primarily refined petroleum products.
Genesis has 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 30 for the law provides safe Harbor protection to encourage companies to provide forward looking information.
Genesis intends to avail itself of those safe Harbor provisions and directs you to its most recently filed and future filings with the Securities 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 non-GAAP financial measures to the most comparable GAAP financial measures at.
At this time I would like to introduce grant Sims CEO of Genesis Energy LP.
Mr. Sims will be joined by Bob Deere, Chief Financial Officer, and Ryan Sims, Senior Vice President Finance and corporate development.
Thanks, Brian and good morning to everyone and thanks for listening in as.
As we stated in our earnings release. This morning in the first quarter of 2022 was an exciting quarter for Genesis is the performance of our market leading businesses exceeded our internal expectations.
Strong demand for soda ash drove increased prices in all of our markets, especially the export market and we're starting to see activity levels in the Gulf of Mexico begin to ramp with first production for Murphy's King's key starting last month.
And first volumes from Argos just around the corner.
We continue to see fundamentally driven momentum in our soda ash business, which when combined with expected ramp in volumes on our Gulf of Mexico infrastructure will continue to drive earnings growth and improving leverage metrics over the remainder of 2022 and into the years ahead.
I wanted to take this opportunity to provide an update on the new opportunities in the Gulf of Mexico that we have mentioned over the past several quarters.
Today I'm excited to announce that we have entered into definitive agreements to provide gathering and transportation services for 100% of the crude oil production associated with two brand new Standalone deepwater upstream developments with a combined production handling capacity of some 160000 barrels of oil per day.
With first oil from both expected in the late 2024 or early to mid 2025 timeframe.
In conjunction with these new upstream developments, we expect to spend approximately $500 million net to our ownership interest spread out over the next three years expanding the capacity of the chop system as well as building a new 100% owned approximately 105 mile Twentyish die.
<unk> pipeline.
While we call the sink pipeline.
One of the upstream developments to our existing footprint.
Both of these new upstream developments include a life of lease dedications to our assets.
Additionally, they both include long term take or pay arrangements that represent a roughly five times build multiple on a combined basis, which multiple would be closer to four times. If the producers hit just 75% of our expected production profiles.
It's important to recognize that these calculated multiples assume absolutely zero other production or additional developments ever being tied into sinker chops, which is totally unrealistic.
In fact, we are already in early discussions with the operators of several additional new opportunities representing potentially sub 150000 barrels a day of incremental production, which more likely than not we will seek to access at least a portion of this new capacity starting as early as 2024.
These volumes are newly identified subsea tie backs or secondary recovery operations like waterflood projects designed by the operator to increase and extend the production handling at existing standalone developments already connected to or that can otherwise access our pipelines to shore.
We're also currently aware of at least one new Standalone development that if ultimately sanctioned could potentially come our way.
Our new 100% on St pipeline will connect to the Walker Ridge area of the Gulf of Mexico directly to the chops system and the garden back 72 platform with the Shenandoah development, serving as the anchored production facility.
The Shenandoah project operated by exploration and production is located in Walker Ridge blocks, 50, 152 and 53.
We have production handling capacity of approximately 100000 barrels per day with first deliveries of oil.
Anticipated in late 2020 for early 2025.
And we will be further transported to shore through our 64% owned chops pipeline.
The second upstream development Salamanca is operated by log and located across multiple blocks in the deepwater area of Keathley Canyon with an expected production handling capacity of approximately 60000 barrels per day and first deliveries of oil anticipate in early to mid 2000.
25.
The solar market development will be directly connected into our 100% owned Psycho pipeline for further transportation downstream through our existing pipeline footprint.
As we alluded to in our release, we have also entered into an agreement with log to sell our idled independence hub platform to serve as the floating production system for the solid market development.
The repurposed hub, we will not only accelerate the data first oil and reduce the total development cost, but will also reduce the environmental footprint of this development relative to the option of constructing a new deepwater production facility a.
A win win situation for the producers and us.
The sale of the independence hub platform for gross proceeds of $40 million will result in a gain and a cash distribution of $32 million net to our 80% ownership interest.
These proceeds when combined with the gross proceeds of approximately $418 million, we received from the seller by 36% minority interest in the chops system have effectively allowed us to pre fund the vast majority of the capital required to expand the capacity of chops and construct the St pipeline.
We would expect to use increasing cash flow and availability under our senior secured credit facility to fund the capital expenditures over the next few years. In addition, we will receive project completion credit associated with the capital we spend over the next several years under our calculated leverage ratio for bank compliance purposes.
These two new upstream developments, along with the St pipeline and chops expansion represent a tremendous opportunity for Genesis.
We were able to deploy capital at an extremely attractive multiple that is underpinned by life of lease dedications and creditworthy take or pay arrangements much the same as our very successful Saco pipeline, which was constructed some eight years ago and that quite frankly has already contracted to additional fields that were unknown at that time.
By extending our reach geographically in the central Gulf of Mexico.
And adding capacity to the chops system, both of which have effectively been underwritten by these two anchor development <unk>.
Genesis is well positioned to attract high margin incremental volumes to our industry, leading network of offshore pipelines at little to no future capital ever required.
I'd also point out that the realized margins per barrel, both on our laterals and on the Poseidon R. Chop systems are increasing as we facilitate the gathering and transportation to shore from the very active central Gulf of Mexico deepwater areas as pipeline capacity becomes a dramatically more scarce.
Commodity.
We believe and have demonstrated that time and time again that these types of investments will provide long term value to all of our stakeholders for many many decades to come.
Now I'll touch briefly on our individual business segments.
As we mentioned in our earnings release, the first quarter was challenging and our offshore business from an operational and mechanical point of view and.
In fact relative to our expectations, we would estimate the quarterly margin in the first quarter was negatively affected by some $8 million.
Most if not all of the issues, we experienced assessment rectified in the second quarter. So far is reflective of more normal and expected operations.
There is no doubt that the rest of 2022 will be exciting for us in the offshore.
On April 12, Murphy and asset they achieved first oil at King's Quay floating production system, which is supporting their khaleesi <unk> and samurai field developments in the deepwater Gulf of Mexico.
We have started to receive these volumes on our pipelines.
Volumes from King's key are expected to ramp to its designed capacity of some 85000 barrels per day, and 100 million cubic feet of gas per day as incremental wells are connected in the coming months.
As a reminder, we will handle these molecules some four times with all of the oil produced.
Being gathered through our 100% owned <unk> lateral and then split evenly between $2 64 per cent of on chops system, and our 64% owned Poseidon system for transportation to shore.
In addition, all of the associated gas production will flow on our 100% owner in the kind of gas gathering system and then on our 26% owned Nautilus gas system for ultimate transportation to shore.
Yeah.
The second major project, we expect to come online. This year is bp's Argos floating production system, which is supporting their mad dog two development remains on track for.
First oil in the third quarter.
With a large number of wells <unk> drilled volumes from Argos are expected to ramp to its named nameplate design capacity of 140000 barrels per day over the subsequent six months or so after the date of first production.
King's key in argo's, combined with Shenandoah Salamanca, and the newly identified opportunities I referenced earlier, all coming on within the next four or five years represent a tremendous runway of additional growth in volumes and importantly, significant incremental financial performance that we <unk>.
To see from our Gulf of Mexico franchise in the coming years.
Turning to our sodium minerals and sulfur services segment, we continue to see robust demand for soda ash across the globe and specifically in our export markets.
The market for soda ash worldwide remains very tight and is leading to strong soda ash pricing and all of our markets.
We're starting to see the real effects of strong demand in soda ash supply being impacted by a net decrease in global supply we mentioned last quarter.
One 3 million tons synthetic production facility in China close at the end of 2021.
According to our analyses as well as third party reports for the global supply and demand of soda ash to balance the market requires China's installed synthetic production capacity to operate at a roughly 95% 96% rate.
Historically, China has already operated around a 90% rate in.
In January and February of 2020 to.
Chinese operating rates dropped to some 83% and 84% respectively.
As a result, the worldwide market is even tighter than what we would've otherwise expected.
I'd also note that the situation in Ukraine is not overly relevant to the world soda ash market and we have no direct exposure to such terribly unfortunate situation.
We do however continue to monitor geopolitical events and recognize there could be a slowdown in economic activity worldwide, especially as measured against recent periods, where the world was recovering from the policy decisions made during the height of the Covid Covid pandemic.
However, it is our view that it would take a heretofore unidentified black Swan event to significantly much less materially.
The current and forecasted supply and demand dynamics for soda ash.
These fundamentally driven market conditions, coupled with the rise in energy input costs and increasing awareness of the environmental footprint of synthetic production provide we believe a very constructive backdrop for soda ash pricing for the remainder of this year.
We would expect these conditions to continue over the near to intermediate term and importantly still be in place as we discuss re determinations for 2023 prices towards the end of this year.
Should these conditions hold.
And as I said earlier, we believe it's more likely than not that they will.
Would reasonably expect to see prices increase another 10 to $15 per ton across all of the tons, we sell even after taking into account our multiyear arrangements that often contain caps on annual increases.
We remain very excited to restart our original Granger production facility and its roughly 500000 tons.
Annual production in the first quarter of 2023.
Furthermore, our Granger expansion project.
Presenting an incremental 750000 tons or so of annual production.
It remains on schedule and on budget for first production in the third quarter of 2023.
We continue to believe the expanded Granger facility and an incremental one two to $1 3 million tonnes per year will be the most significant addition of new natural base load supply to the market for several years to come.
Assuming prices remain at least where they are today or quite frankly, even if they pull back. So we would expect that the Grainger project will exceed our original forecast for incremental segment margin once fully ramped and online.
On the cost side, we have a fair amount of tools already in place to be able to largely maintain our margins per ton sold.
Approximately 75% of our existing contracts have a natural gas surcharge already in place and we will move to 100% as contracts allow and are reopening.
We have also hedged a significant amount of our fuel requirements for at least 2022 that arent already covered by such contractual surcharges.
100% of our export sales have a bunker fuel surcharge.
Through <unk>, we have a very high percentage of our Drybulk transportation cost contracted under favorable terms for the next year or so and all of our competitors face. The same increases we will ultimately face all of which will ultimately be passed onto and paid by the retail consumer.
Our historical refinery services business exceeded our expectations as the demand for our software based products was quite strong as copper and corrugated paper markets remain robust.
Both our marine and onshore facilities and transportation segments continued to show improvements.
Market conditions in our Marine transportation segment continued to improve across all classes of vessels as the volatility in crude oil and refined product imports creates opportunities at the same time. There is continued tightening in overall supply and demand of both the blue and brown water fleets.
We remain excited with the trajectory of our marine business and would expect market conditions to continue to improve throughout the remainder of 2022 and into 2023 as the industry deals with net tonnage retirements and rapidly inflating replacement cost.
We continue to see expect to see increasing volumes at our onshore terminals and pipelines in both Texas and Louisiana over the remainder of the year as new volumes in the Gulf of Mexico from both King skin Argos come online.
I need to be further transported to refineries in demand market demand centers, along the Gulf coast.
In addition to new developments, we announced this morning with an expected first oil in late 2024 and into 2025, we will potentially add volume growth to these onshore assets in the years ahead.
During the quarter. We were also successful in extending our agreements with our main customer in and around our Baton Rouge terminal.
The agreements provide a framework for future activity, which further reinforces the integration of our assets into their future operations and plan.
The robust look outlook for Genesis over the remainder of the year remains unchanged as our businesses continue to demonstrate their resiliency.
New volumes in the Gulf of Mexico, combined with strong pricing in our soda ash business and a recovery in our marine segment highlights the tremendous operating leverage we have to overall improving market conditions.
As we sit here today, we would reasonably expect our 2022 financial performance to come in towards the high end of our previously announced segment margin and adjusted EBITDA guidance range of $6 1 million to $6 40, and $5 65 to $5 85 billion respectively.
Even after the challenging first quarter in our offshore operations discussed earlier.
Furthermore, our guidance does not include the gain and cash distribution proceeds from the sale of our interest in the independence hub platform as discussed earlier.
That $32 million gain will be additive to both segment margin and adjusted EBITDA in the second quarter of 2022 and will be included in our bank leverage ratio as calculated in accordance with our senior secured credit agreement.
As a matter of fact had we completed the sale of the independence hub platform by March 31.
Our calculated bank leverage ratio would have been $4 seven nine times.
Or some three tenths of a turn lower than what we recorded for the quarter.
In any event. This gain will be included in our financial results next quarter, and we will stick with us for both covenant compliance and pricing purposes under our senior secured revolving facility through the first quarter of 2023.
Yes.
The management team and board of directors remains steadfast in our commitment to building 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 once again like to recognize our entire workforce for their efforts and importantly, their unwavering commitment to safe and responsible operations I am proud to be associated with each and every one of you.
With that I'll turn it back to the moderator for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Yeah.
Our first question comes from the line of.
Kyle May with capital one Securities. Please proceed with your question.
Hi, good morning, everyone.
Okay.
I appreciate it.
I appreciate all the prepared remarks about the current state of the business and maybe just to start things off you indicated that Genesis is trending towards the high end of your guidance for the year.
Just wondering if you can provide any additional insight into maybe which aspects of the business are performing better than expected and kind of where you are you seeing an outperformance shaking out.
Yeah.
Well I think clearly the.
Soda ash business.
Massively outperformed our expectations in the first quarter and I think that.
Certainly given our prepared remarks around our view of what pricing is for second quarter and the rest of the year based upon fundamentals in the worldwide marketplace that we would expect that to continue.
I mean, if you just look at.
If you just annualize the first quarter result, I think you can get to $575 million or so and again, let's make sure that we're at.
Excludes the $32 million gain but.
As we continue to see the ramp in the Gulf Gulf of Mexico and get the.
The operational and mechanical hiccups behind us I think that it's more likely than not.
When we visit with you from 90 days from now that will it will.
Widen the range.
And increase the range as we proceed.
Through the year so.
Think that quite frankly, all of the businesses.
Even after the operational mechanical hiccups in the first quarter in the offshore.
We're exceeding our internal expectations, and we hope to be able to share that with everyone. As we progress through 2022.
That's helpful.
And you also mentioned I guess looking more specifically at the offshore business that.
Roughly the impact you noticed in the first quarter was about $8 million or so.
Yes, I think that would have put you closer to $80 million with segment margin in the first quarter.
How should we think about that cadence going forward through the balance of the year with the.
I guess can you provide any more granular detail about the cadence with those new projects coming on.
Well that's.
Again I think.
Your.
The analysis is correct that on a normalized basis.
Prior to King's key in prior to Argos that we kind of.
Anticipated about an $80 million a quarter run rate.
As a normal normalized base.
Basis, and then obviously, we cut that back a little bit in the third quarter to take into account.
Potential interruptions from from weather related events in the Gulf of Mexico. So.
With that we have.
As we said on April 12, Murphy achieved first oil I think thats out in the public domain and in our Investor presentation and earnings release that the first two wells are doing about 30000 barrels a day.
90% of which 89% of which is oil.
Remember, we get all of that because we take all of the gas also there is another.
Well eminent to come on and then.
<unk> and cadence too.
Come on every 40 days 35 days or so I think again based upon their public announcements. This morning. So you can do a little bit of the cadence of arithmetic associated with that.
As it ramps up.
In the prepared remarks, we tried to.
Explaining the value chain.
We get 100% on the <unk> lateral in it.
It's split evenly.
Between decided and chops on the oil side and then we go to a 100% of the gas through Anaconda and 26% as it goes to shore in round terms on the Navajo system. So.
That's a very important.
Ramp for us.
Throughout the year and we're very excited about it and at this point I think it's.
Can't speak for Murphy, but it's meeting our expectations.
The ramp.
And then Argos Argos is a lot of wells <unk> drilled.
The data first delivery is we're not 100% certain that's a better question for BP, but.
Given that the pre drilled all of the wells I think that we would anticipate a very rapid.
Very rapid ramp in that.
And as we said.
Potentially even achieving design capacity within six months once.
Whats first over a restart, but that's a little bit of an amorphous date.
We'll see when it all kind of shakes out and I would certainly think that.
The second quarter call, we'll have a better idea of what the expected first data is and can you give a little bit more.
Granularity around that.
Okay.
Okay, Great I appreciate the additional color there I'll turn it back.
Okay.
Thank you. Our next question comes from the line of T. J Schultz with RBC capital markets. Please proceed with your question.
Great.
Yes.
For the chocolate expansion in zinc pipeline, what's the.
The cadence on the $500 million spend and when does the take or pay again.
Uh huh.
The cadence is.
There'll be a little bit.
Frontloaded in terms of win.
It's kind of a bimodal spa.
Spin T J, because it'll be a little bit of capital in the front end as you acquire the materials, but the installation itself will occur towards the end of the construction period and the late 'twenty three 'twenty four type time frame so.
It's not necessarily linear, but a little bit lumpy, a little bit more upfront and a little bit back loaded in the take or pays basically begin.
Late 'twenty four type time frame.
But under our credit agreement or a discussion with the banks we get.
Project completion credit relative to that amount of take or pay that we have so in other words.
If the point that we spin 10% of the.
$501 million, we get 10% of.
The value of the take or pay.
Coming in as.
Pro forma EBITDA so to speak.
In terms of calculating our compliance and where we are on the pricing grid under the senior secured facility.
Okay makes sense and then.
On soda Ash you mentioned the market is tighter than you expected given in part.
The fact that China capacity it was running I think 80, 384%.
At the beginning of the year. So is the expectation that that continues to run lower than.
Call it the 90% range heading into your reader.
Redetermination and Thats supporting the view on the 10 to $15 per ton improvements.
I guess I'm, just really looking for what is mainly driving the outlet.
No.
The market to remain tight as is it more supply contraction or is it that demand growth.
Thanks.
Yeah, I mean, it's a little combination of both and as we said even with the <unk>.
Slight reduction or a reduction in economic activity in the back half of the year. We think that it's really primarily a supply story that it's extremely tight inventories have been depleted theres been.
A couple of.
Force majeure events.
Some of the domestic producers in the first half of the first four five months of the year.
Again reduced.
Available inventories.
And so we think it's really primarily.
Driven on a supply basis.
Things are extremely extremely tight and.
As a result.
We we believe that things are going to grind tighter and that these conditions will stay around and it really the 10 to 15.
Dollars a ton in 2023 that reflects the fact that we have a number of multiyear contracts that quote unquote can't go up more than $5 or $10.
Any annual Redetermination period, so I mean, if everything we're able to reprice.
Current market or spot market than it would be even more significant.
Increase across all of our tons.
Okay.
Makes sense, if I can squeeze one more in just on marine really quickly.
We did see the refining cracks really materialize.
Higher late in the first quarter.
Clearly as you noted a lot of focus to move products into the east coast.
We think about your fleet and.
The ability to capture this tighter market should we expect some time.
Type of step change higher than what the segment can contribute or.
With the first quarter, a pretty good indication of our run rate there.
Yes, that's a very good question and I would say that.
At least internally, we're looking at the potential of a step change.
And it really is being driven by the.
The market dynamics in large part that you.
You pointed out the are these vis vis Gulf coast, and mid Atlantic and especially in New York Harbor.
Refined products has blown out given a lot of geopolitical events as well as.
The behavior of.
And demand for transportation fuels out of Gulf Coast Refiners to go to Latin America.
Primarily is.
Really opened up dramatically.
Dramatically increase the demand for.
Ocean going vessels capable of moving refined products from U S GC to mid Atlantic.
So we are.
Were clearly at 100% utilization.
We are seeing rates that are above what we saw in 2015 on day rate basis.
And that business and then.
So.
We anticipate that continuing we don't see what's fundamentally going to change that for quite some time.
I think that.
We're also seeing even demand within our inland fleet again.
Of the refinery.
Utilization and pad III in pad two trying to take advantage of these crack spreads.
The refiners are seen as all practical matters, we're at or close to a 100% on the on our inland fleet, we are seeing rates.
Do the arithmetic real quick.
Some 30% up over the spot rates.
Up over the last three or four months, so I think quite frankly that.
Marine is.
It could be very additive to it.
Helping us achieve and exceed the previously provided guidance.
Okay. Thanks, Greg.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad will pause a moment to allow for any other questions.
Okay.
Yeah.
Okay.
It seems there are no other questions at this time I will turn the floor back to Mr. Thomas for any final comments.
Thanks, very much and again, thanks, everyone for dialing in.
We look forward to visiting with you.
In another 90 days or so so thanks very much.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.