Q1 2022 CorEnergy Infrastructure Trust Inc Earnings Call

Yeah.

Hello, and welcome to CT Energy's conference call to discuss.

2022 results I would now like to turn the call over to Matt Kreps, Investor and Investor Relations for CT Energy. Please go ahead.

Thank you everyone for joining today's core energy infrastructure Trust's conference call with me today are Dave Shull, CEO , John Greer, CFO and Robert Walgren CFO .

Earlier. This morning, we published a press release announcing the first quarter results for 2022.

We expect to file our Form 10-Q. This afternoon. You can also access a webcast replay of this call on the investors section of the company website at core energy Dot REIT.

Typically he thinks is available within a couple of hours I've called AD.

I would like to remind everyone that the statements made during the course of this presentation that are not purely historical may be forward looking statements and are subject to the safe Harbor protection available under the applicable securities laws.

Important factors that could cause actual results to differ materially from those in the forward looking statements are discussed in our filings with the SEC. These documents are available on the Investor Relations section of our website, we do not.

Our forward looking statements during.

During this call we will make reference to certain forward looking non-GAAP metrics, which will be reconciled and subsequent filings as part of our results reporting we encourage all of you to review our complete disclosures risk factors GAAP financial numbers and those non-GAAP metrics with the related reconciliations and with that I would like to now turn the.

Call over to Dave <unk>. Please go ahead.

Good morning.

Everyone. After I discuss our current operations, John Greer will discuss core energy's strategic position and a lower carbon economy.

And then turn the call over to Robert for financial commentary and our company story is relatively simple with regulated oil and gas revenue structures mitigating volume risk and a longer term opportunity to repurpose assets into lower carbon service in California with Mo gas, we have a very stable natural gas.

Transmission and distribution asset in the central United States.

These assets operate under long term contracts with take or pay characteristics supporting growing residential commercial and industrial markets.

Natural gas is expected to continue to be used by our shippers for basic utility needs for a very long time.

With Crimson, we of a crude oil gathering and transmission asset in California.

These assets also provide service under fixed fees for volumes transported with long term investment grade customers we.

We have successfully integrated various pipelines.

And as necessary in any mature industry. We believe we are in the best position to manage network cost and reliability for the benefit of our customers.

However, since our assets primarily generate revenue based on our cost of service model, we can and will continue to mitigate the impact of any longer term volume declines with periodic tariff rate increases to the extent necessary.

We are reviewing our tariff structure in preparation for our next filing to potentially also reduce quarterly revenue fluctuations.

And over the medium term, California transportation system.

Now we own will benefit from Phillips 66 plans to convert the rodeo refinery to renewable diesel production and no longer process crude oil by 2024.

Those crude volumes are expected to continue to be produced in the state, but we'll need a path to different refineries such as the Crimson pipelines among other possible routes.

I'll now turn the call over to John Greer, Our Chief operating officer, and the founder of Crimson midstream to discuss our position in a lower carbon future John .

Thanks, Dave.

Our pipelines remain a critical remain critical to California's global leading lower carbon energy economy if.

If we are successful our pipelines will also be important to its future carbon reduction efforts.

As we outlined outlined in our inaugural ESG report our pipelines are the most carbon efficient means of transporting large volumes in the market today.

Every barrel of oil Californians consume that is not produced in state is either imported by ships were transported by rail this incurs a far higher carbon footprint versus our more efficient pipelines.

Hips waiting to offload in the port of L, a or long beach or San Francisco.

Vernon estimated four tons 4 million tons of fuel a day.

More winning transit.

Meeting C O two into the air throughout the journey, including a significant amount into the communities we serve.

Additionally, California oil is produced under the strictest environmental and most rigorous regulatory rules in the world.

The carbon emissions from California producers are among the lowest in the global oil industry and its refineries produce the cleanest burning.

Formulation of gasoline in the world by virtue of being a highly efficient transportation system connecting in state production to instate refining we already helped provide the greenest barrel of oil and transportation fuels in the world.

But we can do more and we're taking steps to do so as the global economy transit transitions to a lower carbon future.

We have an important and significant opportunity in our California footprint to help reduce greenhouse gas releases through carbon capture and sequestration or Ccs.

The commercial case for C. O two capture is better in California than in most other states, which provides us with longer term growth potential as part of the network connecting in emissions with storage in fact, California Air Resources Board or Carb released their revised climb.

Emmett plan yesterday, which indicated Ccs will be a necessary and significant contributor to the state meeting its climate goals.

We believe we are in the best position to participate due to our expertise in operating pipelines in this state in our available inventory of physical assets, including the easements and rights of way to accelerate development timelines and minimize overall costs of these.

Projects.

We have spoken about our potential for engaging with project developers and have begun working on specific mandates to enable the transportation of Cotwo.

I am happy to announce that we signed our first non binding Mou with a carbon sequestration project developer too.

To provide a transportation solution from origin to destination.

With several opportunities to expand both in reach and volume.

The company is in further discussion with other developers for the transportation of C. O two and we believe this contract will be the first of many.

The Mou and these discussions put us on the doorstep of project scoping and participation with shippers.

And contracting Parker parties with that I'll turn it over to Robert to address the financials.

Thanks, John .

Looking at looking at the results first quarter revenue was $32 9 million with steady performance from Mo gas and Omega and lower overall volumes in California, reflecting the continued temporary closure of the onshore offshore amplify pipeline and the continued delay of new drilling.

Mitch that wood.

Bolster production volumes potentially ship shipped out our line.

We do see near term opportunities ahead, and transportation volumes at these two situations or remedies.

We anticipate the return this fall of the amplify offshore production volumes that feed into our system. As a reminder, these barrels were lost late last year due to an underwater pipeline break.

In the third party system not owned by the company prior to the break the pipeline accounted for $1 2 million barrels of annual volume and a sizable boost to our cash flow of approximately $1 billion.

Digging into the permitting issue a bit more.

In October 2021.

Court ruled at current count it may not issued new drilling permits under our recently revised.

Higher metal impact report until a legal challenges ruled on by the court.

State could issue new permits needed to maintain production, but has slowed issuance significantly.

The hearing on the IR challenge has been delayed until late this month, but we're optimistic permits.

We will begin being issued by the county wants that hearing takes place.

Adding pressure large producers in the state have sued for relief from this lack of permitting.

Producers have expressed the desire to increase production should permitting issues be resolved as oil pricing is at levels that provide attractive returns for new wells.

As to dividend coverage for the three months ended March 31, 2022, we had a we had adjusted EBITDA of $12 million adjusted net income of $4 7 million and after providing for maintenance capital and debt amortization.

Adjusted cash available for distribution of our adjusted <unk> of $2 5 million, resulting in a robust three three times common dividend coverage.

The company's board declared dividends on all preferred obligations during the first quarter and a <unk> <unk> per share dividend on our common stock no dividend was declared on class B common stock will only begin pain at class B dividend. Once we are confident the class the dividend can be maintained in the foreseeable future at the minimum.

125 required coverage ratio for all common and class B.

As a reminder, the class B common is owned by management and feature subordinated dividend rights that are specifically designed designed to prioritize the dividend to our external shareholders.

As a potential added benefit to our investors in 2022, we expect to characterize at least seven percentage of our dividend return of capital due to our losses from 2020.

Which may provide favorable tax circumstances for many of you.

Reviewing our 2022 outlook, we are revising our target range from $44 million to $46 million and adjusted EBITDA down to <unk> 42 to 44.

We still expect $8 million to $9 million of maintenance capital expenditures.

These expectations are revised to accommodate the previously mentioned delayed return of the amplify it offshore volumes and a softer volume outlook, primarily due to the delay in court proceedings around drilling permits.

There will be some quarterly variability and dividend coverage due to timing of maintenance spend which is expected to be higher in Q2, and Q3 than Q1 and Q4 based on our current maintenance schedule.

On page 15 of our 10-Q to be filed later today, we have provided a table of quarterly expected maintenance capital expenditures for the remainder of 2022 to help in understanding of this variability.

Our board takes this into consideration these quarter and evaluating our dividend declaration.

I also want to remind everyone of the prospective forward looking capitalization table located on page 54 of our 10-Q to be filed later today.

We maintain this table because we believe it combined with our GAAP financial information provides further insight into the noncontrolling interest reflected on our balance sheet.

We finished the quarter with liquidity of approximately $37 million, including cash of $13 3 million and $24 million of Undrawn revolver availability.

We took the opportunity of fixed to floating rates on our bank debt through November to mitigate.

The risk of further interest rate increases.

We are presently looking at sequestration projects opportunities with a target of five to seven build cost on investment as a hurdle rate we.

We do not anticipate the need for external equity to fund the investment required for the carbon sequestration project John previously mentioned.

At this time, we will take questions from our covering analysts or institutional stockholders before closing the call. Thank you.

Certainly the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question. Please pickup your handset listing on speaker phone to provide optimum sound quality. Please hold just a few moments while we poll for questions.

Your first question is coming from Greg <unk> with Stifel. Please proceed your question. Your line is now live.

Hey, good morning.

Just wondering about the amplify pipeline I know you guys.

It's coming on this fall or expect to come on this fall I was just wondering as far as the volume picture looks on that should we expect kind of similar volumes going forward as you had historically.

Robert can you answer that.

Okay.

It's hard to know exactly what they have been doing so.

It's hard to speculate but.

Based on where it was producing prior.

It was just a little under 5000 a day.

Okay. Thank you that's helpful.

Going to the <unk>.

Carbon sequestration Mou I'm just.

And I'm wondering as far as next step goes kind of what we should be looking out for.

To come through as far as announcements goes and if you could kind of maybe put some goalposts around when we can expect some kind of announcement if it's too early yeah I understand but then also going off of that.

Just kind of looking at your existing pipelines I know you said you can utilize right away, which is good I was just kind of wondering if you could kind of comment a little bit more on the transition of pipelines in the transportation and kind of what that looks like for costs.

Yeah, John why don't you talk about sort of next steps and then Robert if you need to follow up with financial implications Thats great.

Sure. Thanks, Dave.

But the timing on that is that there is a there is a project that is ongoing in which there is a continuing.

There is a project that makes good sense for us in terms of what has been signed up so far and it continues.

It is apt to increase in size and scope as I mentioned.

And so theres a good project going forward there are permits that need to be obtained in order to move the project forward and the next thing for us to look for is.

Announcements of filings and permits and things that go along those nature.

In the.

In the sense of.

Theyre being future projects, we're talking to other companies and I think there is progress that we will make I will say that we have been hesitant to make an announcement until we had something sort of more solid in our hands and so we do have assigned Mou.

And we have sort of held off on that but relative to the other pipelines and rights of way that we owned yes. They are in good places.

That allow us to to use our rights of way and we're in discussions about that moving those forward as well.

Yes that answered your question.

Hey, John maybe I'll, just add a couple of things too.

A directed to CRC I think theyre probably the.

Probably the leader.

Out in front of everyone in California, right now.

You can look at their disclosure when they expect.

This is regarding timeline when they expect to bring projects online.

I think their first injection is 2025 and they are expanding that.

2027, so thats.

Obviously, you have to have the reservoirs.

Permitted and functioning before you can.

The pipelines and the capture piece, so that probably dictate the timeline and then just on the economics.

You mentioned in the call.

We target at.

Hurdle rate of five to seven seven times. So these are pretty attractive.

Projects for us and the thing that really.

Maybe is overlooked is.

Debt.

Utilizing an existing rider player not only reduces cost, but also I think.

It reduces uncertainty around some of the permitting and securing the rights of way compared to a Greenfield project.

Got it thank you yeah.

Really helpful commentary.

I appreciate it.

Then I guess lastly.

Just wondering if you have anything youre seeing more on the traditional.

Asset sides.

As far as acquisitions of assets go kind of if you could just talk about how the market looks as far as pricing and such.

So I think that question was deemed it yes I guess my question was aimed at me.

We are.

We're primarily engaged in what are more negotiated transaction opportunities, we do try to stay engaged with marketed processes.

Many of those include assets that are not good REIT qualifying assets, but they do give us insight.

As to activity levels.

And valuation multiples.

We've been in a pretty favorable interest rate environment, but banks generally have been pulling back on availability in our sector. So there needs to be more equity or more creativity around the.

Consideration received by the sellers in these transactions.

And so.

Sellers are open to longer term exit potential, including taking equity or retaining equity.

In the company that they are selling those are the things, where we think we have an opportunity where.

The structure, we have is has.

A competitive advantage.

We have as a <unk>.

Read to know inside tax.

As a as a 10 99 security we have good.

Access to capital and potentially better liquidity than than an MLP structure in the company of our size.

Multiples have they've looked to be coming.

Coming coming down.

Because of now higher interest rates and still hesitancy around around banks.

Lending and.

At our current trading value there is accretion potential we won't we won't move forward.

Great. Thanks, that's it for me.

Thank you.

There appear to be no further questions in queue. At this time I would now like to turn the floor back over to Dave <unk> for any closing remarks.

Under any version of energy transition plans that we've seen our company is poised to serve customers and our nation's critical needs for decades.

The California economy itself as one of the largest economies in the world and we're committed to doing things the right way, ensuring that we're operating in a safe and efficient manner at all times.

In our disclosure policy matches that will be circumspect about making announcements until we feel that there is some.

Firms substance.

And we are able to participate in a meaningful way.

Thanks, everyone for joining us today on the call will be hosting meetings at the upcoming <unk>.

Conference next week.

Please contact our IR team, if you'd like to meet with us at that event or arranged an alternative meeting time or call. Thanks and have a great day.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

Yeah.