Q2 2022 Genesis Energy LP Earnings Call
[music].
Greetings and welcome to the Genesis Energy L. P second quarter 2022 earnings conference 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'd now like to turn the conference over to your host Duane Morley Vice President of Investor Relations.
Okay.
Good morning, welcome to the 2022 second 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 from the long lived world class reservoirs from the deepwater Gulf of Mexico to onshore refining centers with sodium minerals and sulfur.
Our services segment includes China, 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 of primarily refined products.
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 1934. The law provides safe Harbor provisions 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 in the press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP fill.
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Tom 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 Senior Vice President Finance and corporate development.
Good morning, everyone and thanks for listening in.
The second quarter was a great quarter for Genesis is our market leading businesses exceeded our internal expectations setting the stage for what we believe has significant growth and improving financial performance over the coming quarters and years. These results.
We're largely driven by a return to normal operations and increase in volumes in our offshore segment relative to the first quarter.
As well as sequential quarterly growth in each of our other segments, which is reflective of a constructive backdrop for each of our specific businesses.
Because of our financial performance in the first half and our expectations for the remainder of 2022, where today raising our full year guidance for adjusted EBIT.
To a range of $670 to $680 million.
Which includes the 37 million of nonrecurring benefits in the second quarter, we outlined in our release importantly.
Importantly.
We fully expect to exit 2022 with a leverage ratio.
As calculated by our senior secured lenders at or below four five times.
Which by the way is the only relevant leverage covenant anywhere in our capital structure and only calculation that I think is worth analyzing I'm talking about.
As we mentioned in the release this quarter. Just ended is the first time, we've reported a leverage ratio under four five times since the fourth quarter of 2014.
As we look ahead to 2023, we expect sequential growth in our full year financial results driven primarily by visible growing volumes out of the Gulf of Mexico, as well as increased volumes of soda ash as we restart our granger facility in January and bring the full expansion online in the third quarter.
Given the fixed cost economics in the Gulf of Mexico, and the structural under supply in a worldwide soda ash market. It's our view as we sit here today that virtually any sort of quote unquote normal policy, driven economic slowdown or recession, we will have a limited if not negligible impact on the upward.
Trajectory of our businesses.
Accordingly, we do not see any reasonably likely scenario, where we do not generate adjusted EBITDA next year in the low to mid $700 million range and we would expect to exit 2023 with a leverage ratio again as calculated by our senior secured lenders near or potentially even below.
No.
Four times.
Pretty remarkable given the challenges of the last several years, but in our view it is reflective of the recent credit enhancing transactions we've undertaken.
The operating leverage of our existing assets and our identified growth projects.
Now I'll touch briefly on our individual business segments as we mentioned in our earnings release, our offshore pipeline transportation segment benefited from a return to normal operations for our base business in the second quarter.
Along with increasing volumes from Murphy's King's key development, which by the way it continues to meet or even exceed our pre production expectations. We.
Look forward to King's key continuing to ramp to its design capacity of 85000 barrels of oil and 100 million cubic feet a day.
Over the remainder of the year.
In addition in June we started to receive volumes from logs ruminants field development, which is the two new two well subsea tie back development located in Union Bank blocks 877 at 921 that is currently producing approximately 15000 barrels of oil per day.
As a frame of reference the Spruance development achieved first production in less than three years. After initial exploratory discovery well was drilled.
This is yet another example of an experienced operator, leveraging existing infrastructure, including production platforms and pipelines in the Gulf of Mexico to develop nearby reservoirs on existing and valid leases on an accelerated schedule.
This will continue to be a common theme in the Gulf of Mexico moving forward over the remainder of 2022 and then the many years and decades ahead.
Bp's operated Argos floating production system is expected to achieve first oil later this year, although we are awaiting an update on when that might be.
Nonetheless, with 14 wells pre drilled at the Mad Dog two field, we continue to expect volumes to ramp to its nameplate capacity of 140000 barrels of oil per day over the subsequent nine to 12 months after first production.
In addition to Argos, we have knowledge of and actually have contracts in place for another five and possibly six.
Infield or subsea tieback wells, they will initiate production over the coming months.
Cumulatively, representing approximately 50000 barrels of oil per day of additional production that will flow through our pipelines, including in all cases through a 100% Genesis owned lateral prior transportation to shore through either of our 64% owned and operated precise in her chops pipeline system.
As the case may be.
It is important to point out that the operators of these developments and our partners have already spent hundreds of millions if not billions.
On constructing and start installing these existing deepwater production facilities and drilling and completing the original wells and these new development wells.
No broader economic slowdown or precipitous plunge in oil prices is going to affect the progression of these developments, including the sub 160000 barrels of oil per day, we expect in late 2024, and early 2025 from a recently contracted developments Shenandoah and solid marker, which we announced last quarter.
[laughter].
Also of interest were in various stages of commercial discussions with multiple incremental opportunities.
Representing upwards of 200000 barrels of oil per day in total that we believe have a high probability of turning into new volumes to be moved through one or more of our pipelines over the next few years.
Given this contracting and identified runway of new developments, we could not be more excited about the coming years and decades in the central Gulf of Mexico.
This is especially true given the gulfs importance to secure domestic oil production its proximity to the Gulf coast refinery complexes and deep back. It has the absolute lowest carbon footprint of any barrel of oil produced refined and consumed in the United States.
Okay.
Turning now to our sodium minerals and sulfur services segment the.
The market for soda ash is structurally short of supply.
Just no other way to describe it or get around that fact.
This tightness is fundamentally the result of some 2 million tons a year of supply haven't been taken offline since 2019.
The supply shortage has been exacerbated by multiple production disruptions and force majeure events experienced in declared by other natural producers in the United States over the last five or six months at the same time that demand is exceeding 2019 levels.
This is extremely robust demand, especially considering that the automobile manufacturing business worldwide has been in a recession as a practical matter having produced millions of fewer cars over each of the last several years, primarily because of the lack of computer chips.
This supply shortfall in soda ash means prices must rise to allocate scarce tons and ultimately solicit incremental high cost synthetic production to balance the market at the margin.
All at a time when the synthetic producers cost have increased dramatically.
Primarily to rising energy and other input costs.
[noise] fundamentally Genesis alkali as a major supplier into a soda ash market that is roughly a $35 million a ton.
35 million ton a year market, excluding China that has a long term normalized growth of around two or 3% per annum or some 700000 to 1 million tons per year.
This normally expected growth is in fact before the 500000 or so.
<unk> tons, a year of incremental demand that has been projected by third parties, specifically from solar panel in lithium battery battery manufacturers that hasnt existed at least to this degree and previous years.
The soda ash market currently finds itself in a spot where a worldwide inventories are approaching historical levels lows and have never been so low immediately prior to entering a potential policy induced cyclical slowdown.
By way of example, it has been reported that at the end of 2021.
Chinese inventory levels were approximately $1 8 million metric tons.
And today, they are approaching 300000 metric tons, which is more than an 80% drop in just six months.
This provides in part the answer to the question of how has China's rolling shutdowns to manage COVID-19 affected soda ash demand and supply dynamics within China.
It's fairly obvious to us the net negative effect has been on the supply side of the equation, meaning even fewer tons to potentially seek markets outside of China.
All of this has contributed to the fact that our contracted soda ash prices for the third quarter of 2022 will be higher than those in the second quarter.
And this isn't a macro environment, where technically at least in the EU and the United States. Maybe are already are in a recession.
We fully expect the structural tightness in corresponding high price environment to continue to exist.
And large heart independent of changes in broader economic conditions as.
As we discussed price redetermination for our non contracted sales volumes in 2023 later this year.
We spent a lot of time analyzing the last 15 to 20 years of soda ash supply and demand.
The primary difference between what we're experiencing now and what we experienced in previous economic slowdowns, including the great recession of 2008, and 2019 and the pandemic in 2020 was that heading into those economic cycles.
Dash market was very well supplied and.
And thus any significant reduction in demand triggered a corresponding and somewhat immediate price or spots, albeit short term.
As we pointed out above market conditions today reflect a very different story with a market that is structurally short of supply.
Just as the world is experiencing in the crude oil market.
Just isn't any real meaningful incremental supply sitting on the sidelines just waiting to be turned on and drive prices lower.
We believe any pullback in demand would only help further balance the market and not cause any significant downward pressure on prices.
In fact.
Current spot market clearing prices today.
Could fall, some 20% to 30% or more heading into next year and we would still expect our total weighted average realized price to be higher in 2023, then it will turn out to be in 2022.
For the full year, we expect our soda ash business to contribute around $200 million of segment margin to Genesis in 2022.
This compares to approximately $183 million in 2018, which was the best year since we owned it as well as its best year ever in 2012 of $192 million. When it was owned by FMC Corp.
It should be pointed out that legacy Grainger capacity was online.
And contributor at around 500000 tons of soda ash sales in each of 2012 and 2018, while it will effectively contribute zero volumes here in 2022.
Given that context, we are very pleased that our granger expansion continues to be on schedule and on budget.
We expect to be mechanically complete with the expansion facilities by the end of this year.
This should allow us to bring our original Granger facility back online.
As early as in January and being positioned to have first production from the expansion facilities in the third quarter of 2003.
Once expanded Grainger will join our Westvaco facility is one of the lowest cost soda ash production facilities in the world.
When Grainger comes online Genesis alkali will be the only U S soda ash producer with multiple production sites, along with an unrivaled supply chain network from resource in the ground to the customer.
We see no other meaningful expansion of production capacity in the ex China market over the next three or four years other than possibly some modest expansion to serve localized markets.
Okay.
It is important to note that even if economic activity were to slow down and expected normalized annual growth I mentioned earlier did not occur otherwise simply delay we would not be at risk of not being able to place the Grainger times.
At worst we would displace high cost synthetic production in the marketplace and given our competitive cost structure would still realize very attractive netback values and margins for the granger tons.
Assuming soda ash prices remain in the ZIP code of where they are today and as we have argued we believe there is biased even higher prices at least certainly for the next three or four years, we would expect that the Granger expansion project could meaningfully exceed our original forecast for incremental segment margin once fully ramped and online.
Yes.
Our legacy refinery services business once again exceeded our expectations.
While we were able to capitalize on certain spot volumes during the second quarter due to our geographic Lee diverse supply and terminals sites. The same competitive advantages will help us absorb and manage certain planned supply reductions over the next quarters.
All of our host refineries go through major turnarounds.
Regardless of any potential softening in demand in the short term the long term outlook for both copper and corrugated paper markets is robust and we remain confident in our ability to continue to benefit from and capitalize on the long term fundamentals supporting these end markets.
This is especially true in the mining and processing of copper the largest market for our sulfur based products given koppers critical importance in the Green energy Revolution that is rapidly unfolding.
Our marine transportation segment exceeded.
We exceeded our expectations and appears poised to continue its recovery off the cyclical low coming out of the Covid shutdowns.
Utilization is at or near 100% across our entire fleet.
And in some cases, we are seeing day rates approaching those we commanded back in 2015.
There appears to be a growing structural supply shortage and marine equipment, given the net equipment retirements over the last few years, along with the increasing cost of steel and extended timeline to building vessels.
At the same time demand for marine equipment is increasing across the board.
We do not believe a reduction in demand due to the compression of crack spreads or other demand responses to a broader economic slowdown or recession will cause a meaningful change in the current supply and demand balance for marine tonnage in the aggregate.
Thus, we believe we remain well positioned to benefit from this dynamic across our relatively young fleet in the coming years quarters and years ahead.
Our onshore terminals and pipelines in both Texas, and Louisiana remains well positioned to benefit from the tremendous volume growth expected from the Gulf of Mexico over the years ahead, and like I said earlier.
None of which will be impacted by any broader economic slowdown or a precipitous drop or volatility in crude oil prices.
The last two and a half years have been both interesting and challenging however, as we sit here today I've never been more excited about the future of Genesis.
Continued performance of our market, leading businesses combined with our contracted growth projects in the Gulf of Mexico, and our Granger expansion have positioned the company for increasing financial performance in the coming years.
This expected growth in earnings and in increasing amounts of cash generated by our businesses will provide us with the flexibility and liquidity to comfortably fund.
Our remaining growth capital expenditures as well as the flexibility to manage and further simplify our capital structure in the coming years.
The management team and board of directors remain 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 once again to recognize our entire workforce for their efforts and unwavering commitment to safe and responsible operations.
I'm proud to be associated with each and every one of you.
With that I'll turn it back to the moderator for any questions.
Thank you.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the queue.
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Before passing to Stark East one moment, please while we poll for questions.
Our first question is from Karl Blunden with Goldman Sachs. Please proceed.
Hi, good morning.
Congrats on the strong results.
I had a question just on the on the breaking news on the climate spending deal.
Solar stocks are up materially today I'd be interested in your thoughts is there a way to quantify the potential benefit to your business any any context, you can provide around that would be helpful.
But again I think that there's we've tried to emphasize the soda ash business.
Intimately involved in the energy transition.
It is unnecessary and absolute necessary.
Basic building block of glass glass to be used specifically in silver panels. So we anticipate getting the tailwind associated with that also it's also important to note that.
Soda ash provides the carbonate and lithium carbonate, which is the fundamental building block.
Batteries that will go into electric vehicles as well as battery farms for.
Maintaining them.
This routine as needed.
Power.
Power in the future from that is generated from solar and.
And wind power and other applications. So we remain very excited about the incremental demand and as I said in her prepared remarks.
Normally.
Demand for soda ash kind of increases with industrial production and so that's such a little bit of that as potentially.
At least the growth could be affected by a slowdown in.
And <unk>.
Economic activity, but in concert with this impetus and the tailwind associated with the green initiatives and the transition to a low carbon.
Marketplace, we feel very well.
About our businesses and how they are positioned to benefit from that.
Alright.
Just one on the balance sheet to take a look at how your bonds are traded they've really performed really well over the last couple.
A couple of weeks.
With inside of 10% yields even the longer dated bonds as you think about your priorities over the next year or so for potentially maturity extensions, how should we think about you're approaching that.
The 'twenty 'twenty four maturities.
Well I think that we're looking at a variety of obviously, that's the near term maturity in the stack.
Also because of that maturity.
Uh huh.
Our senior secured facility.
As of 10 or just inside that.
I don't want to be outside of the maturity of an unsecured note. So.
Clearly, it's our focus so we think that we have.
Ample ways to to deal with it, especially in the environment of an increasing.
Performance across our businesses.
Even if you look back.
A year and a half ago all of our banks that are proportional.
Position and a term loan a of.
Order of magnitude $350 million, which is pretty much the same amount as the 24. So we feel we have lots of arrows in our quivers in especially in a no.
Given the trajectory of our businesses that we have lots of financial flexibility to deal with the 20 fours and by dealing with the 24 is then also extend the senior secured facility out into 25 or 26 with a springing maturity depending upon when we.
Alan when we take care of the 25 so.
We feel very good about where we are.
Thanks for the time.
Yep. Thank you.
Yes.
Our next question comes from TJ Schultz with RBC. Please proceed.
Great.
Good morning, Thanks for all the details on soda ash.
As it relates to.
The outlook on 2023 EBITDA.
In the low to mid $700 million range.
I guess all else equal grant you throughout that 20%, 30% number and sort of a proxy.
How maybe elevated prices are right now versus what is contracted so Andrew.
So you think about that 2023 EBITDA is that assuming.
Average soda ash pricing, 20%, 30% higher next year or is there upside to that just any context, you can provide data up quantify some of the pricing improvements youre expecting to realize next year, maybe some impacts.
These recent force majeure events have had on prices and how we should kind of think price prices trending over the next few months.
It's a good question T. J I've tried to the force majeure events, which have occurred in an already tight market, obviously required spot prices to increase significantly.
Our guidance range that we gave.
We are being in.
At least our view reasonably conservative in how we view how the pricing discussions are going to turn out.
For 2023, we do not expect our overall prices to go up but just to current market clearing prices simply because of the nature of our contracts with the caps and collars, but importantly, my point was is that.
We could have even at the margin we could have a significant pullback in the current pricing and our overall pricing are still going to go up so the dynamics are all set in place.
To have price.
Price increases I think that the range, we will be able to tighten up probably on the.
Third quarter call and certainly the fourth quarter call.
23.
Price discovery and negotiations are all set in stone, but.
And then.
There is a distinct possibility that that overall range could go up depending upon if the if the market stays where its at but.
Again, we tried to get the.
At the at least the structural drivers of what's leading to things amendments are really a matter of how we how we work through our portfolio of bladder and contracts which are.
As we've publicly said.
Contained caps and collars, which limited our ability to move everything up but.
It's a very favorable environment as we sit here today.
Okay. It makes sense and then <unk>.
Structurally short as the marketing I guess, it's a little surprising to me that we have.
<unk> seen more.
Are some of these other kind of natural soda ash expansion projects.
Coming online similar to the Granger expansion is there an outlook that some of those.
Are there other kind of natural soda ash expansion that you would expect a minor or whats the soonest that some other expansions can occur.
It's our view just evaluating publicly available information.
Both from SEC documentation as well as other investor presentation term.
That are available out there in the public domain that we see little chance.
Anything of substance being on before as a practical matter.
As we said.
2025, and probably 2026, I mean, there could be several hundred thousand tons here or there that could possibly be on.
A year or so tied to that so in 'twenty four but nothing of significance. So.
You know again Lee fill that.
You know the dynamics are such that ultimately the.
The market signals are going to be more natural production is going to be wanted by the marketplace, but the reality.
Ality.
The time, especially on Greenfield developments.
Is kind of five or six years.
It's pretty aggressive in terms of just permitting and getting all of this done plus the fact that.
This is we've seen dramatic.
Increases in obviously in construction costs.
Good thing about Grainger was is that we locked all of our costs in prior to the inflationary pressures.
Coming so even the natural.
Natural expansions in order to earn a that could possibly occur.
Going to need a.
The prices at or above current levels in order to justify that investment given the underlying inflation is.
Associated with.
The construction so the timing on AR.
In one sense the timing on Grainger, given that we have I need it.
Five months in front.
Covid, which nobody saw.
But it allowed us to.
Lock in our prices.
Then we delayed it for a year, but a re initiated and finalize all of our other installation contracts.
In early 2021 prior to the inflationary pressures.
We think it was very fortuitous, especially what it would cost in today's dollars, which every other natural expansion is going to face today's dollars not the grainger kind of parameters. So.
Okay makes sense. Thank you.
Thank you.
Yeah.
And as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
There are no further questions at this time I would like to turn the call back to grant Sims for any closing remarks.
Okay, well again I appreciate everybody's participation.
Participation I know, it's a busy.
Busy week with.
Macro news as well as other earnings and so a lot of people are going to listen to.
The tape, but but again I appreciate everybody's interest and we look forward to talking with everybody again in 90 days or so thanks very much.
This concludes today's conference. Thank you for your participation you may now disconnect.