Q3 2022 USD Partners LP Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP third quarter 2022 results conference call. At this time, all participants have been placed in a listen only mode. The floor will be opened for your.
Following their prepared remarks, if you would like to ask a question at that time. Please press star one if at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.
When asking a question we ask that you. Please pick up your handset to allow optimal sound quality lastly, if you should require operator assistance. Please press star zero and it is now my pleasure to turn the call over to Jennifer Waller Senior director of financial reporting and Investor Relations for opening remarks.
Please go ahead.
Thank you Tobey.
And thank you for joining US welcome to our third quarter 2022 earnings call with me today are Dan Borgen, Our Chief Executive Officer, Adam <unk>, Our Chief Financial Officer, Brad Sanders, Our Chief Commercial Officer, Josh Ruple, our Chief operating officer as well as several other members of our senior management team.
Yesterday evening, we issued a press release announcing results for the three and nine months ended September 32022.
Would like a copy of the press release, you can find one on our website at USD partners Dotcom.
Before we proceed please note that the safe Harbor disclosure statement regarding forward looking statements in last Night's press release applies to the statements of management on this call.
Also please note that information presented on today's call speaks only as of today November 2nd 2022, any time sensitive information may no longer be accurate at the time of any webcast replay or reading of the transcript.
Finally, today's call will include discussion of non-GAAP financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures and with that I'll turn the call over to Dan Borgen. Thank you Jennifer good morning, and thank you for joining us on the call today and for your continued support of the partnership.
Obviously, we are seeing a fair amount of volatility in the global crude markets and as always we are constantly updating our market point of view on where crude oil markets are today, but also where markets are headed in the future we.
We do our best to rely on facts and observable market indicators as we monitor the western Canadian macro we continue to see future heavy crude oil production exceeding the availability of existing egress alternatives and we believe that the partnerships strategically located assets will be well positioned to offer long term.
<unk> to address that imbalance.
We did have some contracts reached maturity in June of this year, but as Brad will discuss in greater detail later on the call. We're fully engaged with our existing customers and potential new customers to renew extend or replace those agreements. We are highly confident in the coming market demand events that will drive highest value for our renewing existing contracts.
As a reminder, we have historical experience with similar market conditions that led to the historical renewals at existing or premium rates.
We believe that the western Canadian crude oil markets will be in what we call rail parity when incentives support the use of rail egress solutions at some point in the first half of 2023, which should benefit our existing drip. It by rail network, which of course includes the partnership's Hardisty terminal.
In addition, we continue to have detailed discussions regarding our drill bit by rail network with our existing group a customer conocophillips as well as new customers to provide safer and economically beneficial Canadian crude transportation options during.
During the third quarter, our terminals performed safely and reliably and we are very pleased with our performance at both the sponsors D. R U and port Arthur terminals, we've given out the performance and continued to exceed expectations at both facilities.
Facilities, we're delivering significant value to our <unk> customers.
As always we look forward to sharing future announcements with the market about the next phase of growth at the D. R U and our USD clean fuels initiatives before the end of this year, we continue to be confident that our assets are strategically located to benefit our customers as certain martin's market signals begin to reveal that.
Potential for increased demand for our services.
Next Adam is going to give an update on the partnership's latest financial results and our liquidity position then we'll jump back into the recent market and commercial developments Adam. Please go ahead.
You, Dan and thank you for joining us on the call. This morning yesterday afternoon, we issued our third quarter earnings release, which included the details of our operating and financial results for the third quarter and we plan to issue our 10-Q with additional details after close of market today.
The partnership reported a net loss of $69 4 million due primarily to a noncash impairment of the partnership's intangible and long lived assets associated with the Casper terminal net cash provided by operating activities of $13 5 million.
Adjusted EBITDA of $12 3 million and distributable cash flow of $9 6 million.
As a brief reminder, because of our acquisition of harvest T cell, which occurred in the second quarter of 2022 represented a business combination between entities under common control. The partnership's financial statements have been retrospectively recast to include the pre acquisition results of the hardest yourself terminal.
And now for the details on the quarter.
The partnership's revenues for the third quarter of 2022 relative to the same quarter in 2021 were lower primarily due to lower revenues at the combined hardesty terminal due to a reduction in contracted capacity at both the legacy Hardesty and harvest who sell terminals.
Revenues were also lowered the hardest of terminal due to an unfavorable variance in the Canadian exchange rate on the partnership's Canadian dollar denominated contracts during the third quarter of 2022 as compared to the third quarter of 2021.
Coupled with the deferral of revenues in the current quarter associated with the makeup right options the partnership granted to its customers with no similar occurrence in 2021.
Revenue was also lower at the Stroud terminal due.
Due to the conclusion of the partnership's Terminalling services contracts with the sole customer effective July one 2022.
The partnership also had lower storage revenue generated at the Casper terminal associated with the end of one of its customer contracts that occurred in September 2021.
Partially offsetting these decreases.
With higher revenue at the Partnership's West Colton terminal, resulting from the commencement of the renewable diesel contracts in 2021.
The partnership experienced higher operating costs during the third quarter of 2022 as compared to the third quarter of 2021, primarily attributable to the noncash impairment of the intangible and long lived assets associated with the Casper terminal recognized in the third quarter. This year.
Partially offsetting the increases in operating costs already discussed was a decrease in the partnership's SG&A costs associated with a harsh yourself entities.
Third quarter 2021, SG&A cost include service fees paid by <unk> to our sponsor related to a services agreement that was in place with our sponsor prior to the partnership's acquisition of Rx yourself.
On the partnerships acquisition of Odyssey, South and services agreement between the acquired entities from the partnership sponsor was terminated and a similar agreement was established between those entities and the partnership.
This results in.
And the service fee income being allocated to the partnership and therefore offsetting the expense in harsh yourself for periods subsequent to the acquisition date of April one of this year.
Partnership also experienced lower pipeline expense, which is directly attributable to the associated decrease in the combined Harsha terminal revenues previously discussed as compared to the third quarter of 2021.
In addition, subcontracted rail service costs were lower due to decreased throughput at the terminals.
Net income decreased to a net loss in the third quarter of this year as compared to the third quarter of 2021, primarily because of the operating factors already discussed.
Pulled with higher interest expense incurred during the third quarter of this year, resulting from higher interest rates and higher balance of debt outstanding during the quarter.
Partially offset by a decrease in commitment fees as compared to the third quarter of 2021.
Partially offsetting the decrease was a higher gain associated with the partnerships interest rate derivatives recognized in the third quarter of 2022 that included the cash proceeds from the settlement of the partnership's interest rate derivative that occurred in July of this year.
Net cash provided by operating activities for the quarter increased 53% relative to the third quarter of 2021 the.
The decrease in the partnership's operating cash flows, resulting from the conclusion of some of the partnerships.
Terminalling agreements was offset by the previously mentioned cash settlement of the partnerships interest rate derivatives that occurred in July of 2022.
Net cash provided by operating activities was also impacted by the general timing of receipts and payments of accounts receivable accounts payable.
And deferred revenue balances.
Adjusted EBITDA was slightly lower than the prior period, while distributable cash flow decreased 11% for the current quarter relative to the third quarter of 2021.
The slight decrease in adjusted EBITDA and decrease in DCF was primarily result of the factors already discussed. Additionally.
Additionally, DCF was impacted by higher cash paid for interest during the quarter, partially offset by lower maintenance capital expenditures.
As of September 30, the partnership had approximately $5 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $53 million on its $275 million senior secured credit facility.
Subject to the partnership's continued compliance with financial covenants.
As of the end of the third quarter of 2022, the partnership had borrowings of $222 million outstanding under its revolver revolving credit facility.
The partnership was in compliance with its financial covenants as of September 30 of this year.
The partnership's acquisition of Odyssey, South is treated as a material acquisition under the terms of its senior secured credit facility.
As a result, the available borrowings are limited to five times. The partnership's 12 months trailing consolidated EBITDA through December 31 of this year at which point it will revert back to four five times, the partnership's 12 months trailing consolidated EBITDA.
As such the borrowing capacity and available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $58 million as of September 30.
Subsequent to the quarter end on October 12, the partnership settled its existing interest rate swap for proceeds of approximately $9 million. The partnership plans to use the proceeds from this settlement to pay down outstanding debt on our senior secured credit facility and fund ongoing working capital needs.
The partnership simultaneously entered into a new interest rate swap that was made effective as of October 17.
The new interest rate swap is a fit as a five year contract with the same notional value that fixes the secured overnight financing rate or sofa to approximately $3, 96% for the notional value of the swap agreed agreement instead of the variable rate that the partnership pays of the partnership's credit agreement.
Partnership senior secured credit facility expires on November <unk> 2023 partnership is in active discussions with the administrative agent and other banks within our lending group as well as other potential financing sources regarding the possible extension renewal or replacement of the senior secured credit facility and any amendments or waivers that maybe.
I'm required prior to maturity.
On October 20th the partnership declared a quarterly cash distribution of $12 35 per unit or <unk> $49 <unk> per unit on an annualized basis. The same as the amount distributed in the prior quarter the.
The distribution is payable on November 14th to unitholders of record at the close of business on November 2nd.
Partnerships board determined to keep the distribution unchanged from the prior quarter and to evaluate the distribution on a quarterly basis going forward and will take into consideration updated commercial progress, including the partnership's ability to renew extend or replace its customer agreements at the hardisty and Stroud terminals current market conditions and managements.
Expectations regarding future performance as.
As Dan mentioned, we are extremely focused on extending or renewing our commercial agreements at our terminals as well as our current growth initiatives at the <unk> and USD clean fuels and we look forward to sharing more updates with you in the future with that I would now like to turn the call back over to Dan.
Adam I'll ask Brad to give us a detailed update on the Western Canada select market recent market events and an update on our commercial activities Brett. Thank you, Dan let's start with pricing at Hardisty.
Two critical drivers, which determined price at hardisty versus is what's happening from a competing alternative in the Gulf coast ultimately harvest. The heavy sour barrels are shipped to the Gulf coast and have to compete with Gulf Coast alternatives and then secondly, we will get into.
The drivers that are unique to the Canadian macro.
So starting with Gulf Coast drivers, we've talked about this in the past the recent SBR releases, which have been material have.
<unk> negatively impacted prices simply by increasing competing alternatives and the Gulf coast. So as these supplies are released in the Gulf coast than the.
Heavy sour crudes from Canada are burdened with competing with those alternatives. Fortunately the SPR releases at lease as planned today will end at the end of the year and we should see significant improvements on.
At that point. In addition to this supplier that there've been a couple of other things that have driven values uniquely lower in the Gulf coast.
There has been.
Unaccounted for unplanned turnarounds, both in the mid continent, and the Gulf Coast here late in the year and both of those events.
Naturally decreased demand, which has a negative impact on price as well of course this is.
Demand this refinery demand will return.
After the first of the year and get things back.
Back into balance and then finally higher Nat gas prices and high hydrogen prices.
Feedstocks that helped with the required with the upgrading of heavy sour crude are very very high and that is cause heavy sour crudes globally to discount relative to sweet crudes to take.
<unk> account.
The extra cost extra burden upgrading heavy sour crudes.
Finally, the critical key driver the second critical key driver of course is the balance is unique to Canada itself.
As Dan alluded to in his opening remarks Canadian crude balances are in transition. So let's take a step back and talk a little bit about that as a reminder, Canadian supply today is greater than pre COVID-19 levels.
That's significant because compared to the U S, which is currently still a million barrels a day.
Low production levels. Prior to 2020, Canada has responded Canadian producers have responded aggressively and supply is.
Currently greater than pre Covid levels and estimated for the balance of this year and into 2000 22023 to grow materially so we're transitioning.
Up in Canada too.
Two a macro story where supply.
We will likely be greater than egress capabilities.
And that will drive prices to where incentives will return.
To move heavy sour by rail.
As a check to that we naturally look at that.
What are <unk>.
Producing customers.
<unk>.
Providing in terms of guidance in terms of production and we also look at.
What the current curves of what the forward market is telling us.
The forward market is nothing more than a curve that reflects producers.
<unk> their ideas of what values will be in the future as a function of their ideas of what they think the macro story will be naturally if you'd look at that forward curve. You can see two things you can see the front end of the curve improving as the SPR impact is remove the <unk>.
<unk> impact is removed from the marketplace and then.
You will see that starting in the second quarter of 2023.
The curve on a forward basis show WCS prices at Hardisty, discounting, 18% to $20 a barrel relative to <unk>.
That would indicate that the marketplace is assuming that balances later in 2023, starting in second quarter of 2023 that there will be demand for crude by rail.
At that time.
So theres a lot of factual support related to the supply story and there is naturally a lot of factual support from a market standing reflecting these changes that are occurring up in Canada.
As we think about what that means to our business and our assets I wanted to remind our listeners.
About the.
Industrial logic of both Hardisty and Stroud asset.
And when we talk about heavy sour production growing in Canada.
Then naturally.
Most of that production is produced and gathered into hardesty and.
In addition, all the egress pipes.
Effectively originate at Hardisty, and then finally, the USD rail asset is the owned is only rail asset at Hardisty and it's the only asset of such scale that provides an industry solution for Canadian producers sooner.
Naturally as the industry transitions to a supply greater than pipe egress capability and demand for.
Rail takeaway grows hardesty is where that occurs in our asset is uniquely positioned to benefit from that.
Is it as we talk about our network and specifically to Stroud.
Stroud as well.
Located adjacent to the Cushing hub, which is the largest hub in the world for crude oil that means it's got more tanks and connectivity.
Then than any other hub related too.
Crude support.
It provides access to mid continent, and U S Gulf.
Most refineries and as a reminder, the majority of WCS as refined in the U S is refined in the mid continent, and then secondly, the pipelines that service the U S. Gulf coast from Cushing have excess pipe capacity and provide advantage.
<unk> <unk>.
Transportation costs should you use the Cushing hub as your solution. So we think our two critical assets are uniquely positioned to benefit from this.
Transition up in Canada that we think will occur first half of 2023.
Okay.
So, let's talk a little bit about our D. R. U commercialization update naturally the things I just talked about would be a tailwind.
For for our D. R U commercialization commercialization.
Efforts, but as a reminder.
What the key drivers are where they are most important to our customers is the cost competitiveness of the.
<unk>.
Drew bid by rail solution versus <unk> alternatives.
It's driven primarily by the deal you would savings said that the.
The value chain.
Experiences also has to do with the critical railroad partnerships that we have that provide competitive rates to ensure the competitiveness of the solution.
The assets scalability is critical.
In the sense that it <unk>.
Our customers to rightsize their investment, which ultimately leads to a capital.
Competitive advantage versus the egress alternative.
And then given the product quality.
The EHS environmental and ESG.
Advantages are significant relative to the egress alternative as well.
Finally, we have network value advantages, given our port Arthur pairing, which provides custom blending alternatives distribution.
Vantages too heavy sour refiners in the Gulf Coast and access to export alternatives that are unique to port Arthur.
So given these advantages and again, we're not sensitive to the macro story because these advantages make.
<unk> solution driven by rail solution advantage at all times relative degree eat gristle.
It is.
We are in strong discussions with our existing and potentially new customers.
Very purpose discussions and hope to be able to announce something.
Soon on our phase two and maybe more.
<unk>.
Supporting this egress solution.
Finally, I would like to comment briefly on our clean fuels initiatives.
The opportunity set in this space is very broad.
We are specific specifically focused on downstream biofuels destination terminals.
An example of that would be our existing asset west Colton, and California, where we are through putting.
Not only renewable diesel but.
Low ci ethanol into.
Into the California markets.
In addition, we're focused on feedstock gathering treatment and terminalling opportunities as these refiners transition from traditional refining businesses.
Two things like R&D production renewable diesel production and the infrastructure required to support that to support bringing in feedstocks from things like veg oil.
Our required and so we're in the business.
Supporting that and have very specific discussions ongoing discussions with potential customers there.
Finally, there are naturally unintended comps consequences to policy.
One of those being the demand for veg oil driving crushing facilities.
And creating a byproduct with the crushing meal.
And.
We're very focused on creating export options for those folks.
Facilities.
And refiners, who who need that feedstock.
Naturally critical to our success here like in everything that we do is our partnering with the railroads.
And we work closely with them in creating focus.
Priorities.
We're we're collectively.
Two.
Hi.
To follow our policy and incentives drive our development opportunities and today that includes California, Pac northwest and minimally Canada. So we look forward to.
During with U successes, we have in this space soon.
And with that I'll pass it back to you. Thank you, Brad and with that we'll open the call up for any additional questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
Remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question.
We'll take our first question from Steve <unk> with Sidoti.
Good morning, everyone. Appreciate all the color on the call.
First question is.
Quick one the settlement of the interest rates swap post the end of the quarter. So is there a timing issue with that wasn't subtle in third quarter or am I mistaken.
Yeah actually there's two days, Steve it's Adam.
So theres actually been to unwinding, we did one in queue.
Q2.
And that settled and then we also did one and actually sorry, we didn't want in Q3 and then we did one in Q4 after the quarter settled as well.
So that's another one that's.
Exactly right. The one that we did in Q3 was in July and that was about $7 7 million of proceeds and that that we use those cash proceeds to pay down debt. The one that we exercised after the end of Q3, which will be reflected in Q4 was for $9 million of proceeds and those proceeds will be used.
Pay down debt as well.
Okay great.
When I'm thinking about.
So distribution I know that support decision.
Given that we wouldn't expect to see substantial volume pickups in the next couple of quarters.
Or are you thinking about the distribution cash usage at least in the near term before we see a pick up.
Sure and we run through several scenarios and do a lot of analysis every quarter. When we talked about this with the board its going to really depend on market conditions, our expectations of future growth.
The activity at Hardisty and Stroud.
And our discussions around the D argue with that with that customer, which I'll, let Brad speak David He mentioned that.
We're very much engaged with that customer so it'll be based on all of that information and we'll evaluate it.
With respect to Q4 as well.
Okay.
I think about.
Essentially no volume through strong and Casper right now are there costs associated.
So operating there and how do you think about those two markets longer term.
Sure.
And we've got our CEO in the room, but I'll go ahead and answer that I mean, we do.
We have a nomination process, we do kind of go through that as well and we evaluate the costs associated with projected volumes and we tried to do the best we could to optimize that.
Sure.
With regard to Q3, I think we've done a reasonable job on optimizing that so that's probably reflected in the numbers today.
Are some costs of those assets to physically maintain capabilities, but to Adam's point, we rationalize those costs.
And they are very small at both locations.
Steve.
Okay.
Steve Real quick just Brad Sanders as it relates to Casper in particular.
We do have relationships with customers that are occupying or attempting to occupy all six tanks and we run two trains this past month.
Through the facility and our plan is to grow that to potentially four trains through the balance of the year.
Okay. That's helpful. Thank you.
In terms of expecting to rebuild volume at Hardesty and certainly it makes sense that youll see more activity and more demand into the earlier part or at least later part of the first half of next year, but with Trans mountain coming in that additional <unk>.
I see from that expansion.
Are you going to have customers seeking shorter term agreements rather than your typical three year agreements and how will you deal with that.
Well I think the elephant in the room is is the development of <unk> and I think the question is does it get done number one and then number two if it does get done.
When does it get done.
And then number three what's the cost.
Of the project and ultimately that will lead to tariffs that potentially are uncompetitive relative to Gulf coast alternatives.
Right now it's been estimated that that tariffs will triple what was originally planned.
And that only gets you to the west coast that doesn't get you on a boat and that doesn't get the boat to where it needs to go.
So there's a lot of uncertainty as it relates to to the competing pipe alternative we've always dealt with those.
So, we'll we'll see what it what the market's like win win this supply comes on and incentives to say we have to move by rail.
Where the leverage sits but it is mostly points out how critical our D. R. U development is as a competitive alternative that's sustainable no matter what <unk> is doing no matter what other pipes are doing simply because of the cost and value advantage is it.
Create so we're very purpose about transitioning as much.
As possible if not all of our activity.
To those longer term sustainable solutions that drive longer term sustainable contracts with our customers.
Steve is a follow up Dan here how are you.
The.
As we think about our D are you just as a as a fact point we've already moved over 22 million barrels through our <unk> platform.
And.
That's proven.
Tenacity of the of the asset that's on both ends Thats proved the underlying support.
The rail ability of it.
The desire for their refining community to take it so it's.
And be able to blend it to their spec. So it's it's a proven system and and Thats why we have aggressive discussions with expanding that with.
Obviously, our key customer in COPD as well as other so as we and we've made no bones about it.
Our plan is to convert all of the.
All of our hardesty assets to <unk>.
Format and be able to bring all of that over long term, which obviously.
Takes the underlying rail assets at the partnership and extends it.
You know at similar.
Similar levels so.
Okay Fair enough alright appreciate the color everyone. Thanks for your time today.
<unk>.
Okay.
Thank you we'll take our next question from John <unk> with <unk> partners.
Good morning, gentlemen, and thank you for taking my question.
Yes.
It has to do with the Casper.
Terminal and the write downs that <unk> taken there and I'm. Just wondering is there much remaining book value that.
Thats left.
In our.
Yes, whats your extended deadly gross asset value going in have you written down.
Second part of that is there are there any.
Implications for your distribution given agreement with your lenders.
Sure Hey, it's Adam I'll start here.
So with regard to Kasper.
We historically have tested for impairments to goodwill in July we did that a couple of years ago with Casper. We did I think it was kind of I think it was after Q1 of Covid in March of 2020, we wrote down the goodwill associated with Casper. This in particular this impairment was a result of <unk>.
<unk> is not.
Coming to fruition based on different market conditions and as a result, we wrote down the intangible and long lived assets.
So youll see that on the balance sheet with regard to comparative comparable periods.
But there is still value on the balance sheet associated with the PP&E at Casper keep in mind, it's a.
Operating <unk>.
Rail terminal with six tanks. So there is significant <unk> and <unk>.
But with regard to percentage I couldn't tell you the exact percentage, but a large percentage of get majority.
Yes.
The value has been impaired.
And then with regard to distributions.
We.
We evaluate that every quarter there is no agreement with our lenders with regard to the distributions right now we are in constant discussions with our lenders.
And we're very much engaged with them with regard to market conditions and what's going on at the company right now.
But it's still up to the board's discretion to whether or not we make distributions going forward.
Of course, but I think in the.
The past there was a time where.
Kasper write down.
Necessitated that a decrease in the distributions is isn't that right yet.
No that's it.
That's actually interact I'd say that.
The impairment is a noncash impairment so it doesn't have an impact on our available cash our distributable cash.
So in our credit agreement right now, we don't have any language that ties.
Noncash impairments to our distribution policy simply.
Simply based on the partnership agreement and how we view available cash and then are going concerns going forward going kind of requirements for capital going forward.
Okay, great. Thanks.
Okay. Thank you we'll take our next question from Jason Gammel Lynskey with Ellington.
Hey, good morning, Hey, good morning, Thanks for taking the question.
I guess one question is just around re contracting.
Where are you I guess.
Where are you add on re contracting because I think some of the language today was.
Very very similar to on the last call.
And I'm curious sort of.
How things are going on the re contracting front given differentials.
Having gone from $12 at the time of the Hardesty South acquisition to nearly $30 today.
Thank you for the question this is Brad Sanders so.
Regarding your first point.
The discussion appears to be similar to previous calls it is but it's.
It is based on mental models that that are consistent as to when and why the.
The marketplace will demand our assets and it has to do simply with the macro story in and win the Canadian supply reveals itself and when the Canadian supply is sufficient to be greater than the pipe egress. So we can't predict that.
From a exact timing standpoint, that's impossible to do the marketplace is very fragmented and we can't know all things being considered by producers, but directionally we can.
Deal with facts, we can deal with our customer dialogue, we can deal with guidance that is public information and deal with smarter people than us who are in that industry as consultants and see that debt.
Come as is as such that supply is growing and the eventual.
Imbalance between supply and demand will occur.
That is is is happening we just simply can't predict when that's going to happen precisely.
To your second point, the differentials have changed and what I tried to explain earlier and it's a difficult difficult subject.
But the price remember the Canadian heavy sour is produced transported to the Gulf Coast and competes with Gulf Coast alternatives.
So the price of Canadian the differential for Canadian heavy sour at origin.
Is impacted by two things one is the competing alternatives in the Gulf Coast and that is what is currently driving the prices lower.
And we referenced the SBR releases, specifically is probably the biggest driver for that.
That release added a 180 million barrels of which the majority of it is Canadian sour over the past year and to the Gulf Coast market.
This heavy sour had to compete with so that just brought down all values for WCS.
Once the Gulf Coast price goes down then you just adjust for the transportation cost into <unk>.
We're up to.
Hardesty, so until the imbalance at Hardisty is is as I described uniquely for Canada.
Is supply is greater than egress, only then will.
Canadian prices do the work to discount to ensure rail costs are in the money and demand for.
Gross by rail occurs.
And it's a difficult subject I apologize for that and I apologize for the long winded answer, but happy maybe offline to discuss it more at some point just to further add Dan here.
Obviously, a great question.
Historically as Brad said the discounts in the Gulf.
On a delivered basis historically, it's been about $2 four a WCS delivered barrel.
Today, we're seeing discounts because of the SPR release in the local market golf market, we're seeing anywhere from 10 to $15 discounts.
So obviously it has to compete with that so if the gross spread between the two and what you see topline is call. It 30, and there's a 15 dollar discount in the local market because of SPR release in that market.
Of our other heavy sour now youre going to see the net differential of being 15 right. It was 27, it's 12, if it's so that that's.
That's what the that's what the rail.
Competes with from my <unk> competes with <unk>.
From a.
From a true netback model as it relates to the SPR release, and the discounts that you get so.
Like I say, it's always it's the net spread that matters.
And as Brad said it depends upon first of all the supply we're seeing apportionment growing on the pipelines, which is something that we always watch and so as that happens that simply means the pipes are full and it's got to seek alternative means and this is for traditional dilbeck right.
Things that flow and pipe or <unk> barrel is not affected by that that's why we're converting everything true to our Dru bet.
And therefore, not being subject to these kind of these.
When does the core political manipulation, that's in the marketplace today, so as as but as we see the pipes full.
See demand growing which we're seeing today.
And we expect to see further of that.
And a.
And announced stoppage of the SBR excuse me SPR releases and just the opposite.
The administration U S administration has has talked about buying back barrels into that.
And to replace the SPR.
Then we have not factored that in but if that occurs then youll see kind of a whipsaw, where you get a premium should expect a premium that market not discount so all of those things strengthening.
You know, our it's Brad called it our mental model or a macro model around why these renewal cycles and this what we call demand on event is going to.
We feel pretty bullish about keep in mind, we've been through these cycles two times before on renewal.
<unk> always followed the same trends I've always followed the same models that we follow and.
Growing to growing supply not enough takeaway.
And the blow out spreads and that.
That we see today.
We would be in full.
Full utilization based upon the facts historic facts that we have seen had it not been for the items that we've mentioned the political.
Wall Street Journal called that day.
A political manipulation of of strategic reserves for political gain so.
We would we don't like any government involvement in three markets, we think the free market should figure it out on their own.
And when that occurs we would.
Historically would have been four today and obviously, that's when we like.
Like to to discuss renewal contracts.
When they come up would we would we have liked for that to be today, absolutely we would have.
But are we panicked by that not at all.
And we believe that events coming and we've got customers at the table right now knowing that that's coming and aligning with us in discussions for renewal.
Hope that add some clarity and some color.
Got it so youre, saying that the SBR is causing sour to trade in the <unk> in our local markets. Our it would be at a call it $15 discount to suite and so you back that out.
$27 discount and you still have.
$12.
Yes that sounds great.
We were in March.
Well done.
That's exactly right, Okay, but then I mean, just you mentioned that.
You would be at full utilization if not for the SPR release, but if not for the SPR release.
Would we okay.
We would still be at.
Yes.
Or at least where would we be WCS diff would it still be at 27, I mean wouldn't that also then something.
WCS dip back to 12.
Yeah.
Great question. So if I commented that on that on the call that we.
We rely on just looking at forward curves, which.
As I discussed is is nothing more than producers and consumers.
Transacting at what each think value is on a go forward basis. If you look at starting in second quarter.
2023, after the SBR releases have gone away and the inventory problems have have fix themselves. The marketplace is saying the differential at hardesty will be 18 to $20 and as Dan says.
When replacement costs or when the <unk>.
Global balances become quote unquote normal again, because SBR is now gone and then our expectation is that values in the Gulf coast will be somewhere between zero and $2 discounted not 15% to $20 discounted.
The $18 at 18 to 20, Ed hardest Steve versus the zero to two.
At the.
The U S Gulf coast indicates a different somewhere between 15 and $18.
The marketplace is effectively saying through their actions that we think we're going to be a crude by rail parity starting in the second quarter of 2023.
Okay. So to your point will the twenty-seven stay know the marketplace is saying it will go to <unk>.
To 'twenty.
Okay.
We've seen and we've seen it as high as we've seen it in the thirties before.
Uniquely but.
On a conservative basis, we're looking at you know.
More of that 18 to 20, just because we can see it on the curves.
Alright, Okay and in 18 to 20, when you're saying, you're saying hardesty would be at full utilization.
Is it just hardesty or is there.
Thank you.
Or were you, saying the whole company.
I'm, assuming that's not Casper stroud or what's called.
The way I would respond to that is if we're at at differentials that incent crude by rail.
Egress options.
Then we would be the most advantaged asset to participate in that given our location and the design of our facility and our relationship with the railroads.
But CCR and Stroud Casper and Stroud both benefit.
When we move into that cycle, because they unique police casper uniquely used in off take option.
Rail and by truck and Stroud as as a catcher's Mitt a destination that sits in the biggest hub in the world and we expect that to be advantage and participate.
When.
Harvest these busy Casper will be busy so we'll style.
Okay.
And then one question.
Around the D R U.
Sort of JV.
The structure I mean I think.
The older Dax, you had through and show them that in 'twenty three you would anticipate.
A lot of it's on page 12.
Some customers a one <unk> starting in 'twenty three.
And then if you can.
We look at.
I believe it.
Page 25.
I'm curious when you're presumably those conversations are ongoing now in order to start up in 'twenty three.
How do you manage those commercial negotiations.
Given the.
The JV the Hardesty drew D argue JV is partially owned by USDA, partially owned by Gibson.
The loading terminal at Hardisty is owned by USD P.
And the unloading facility at Port Arthur is owned by U S. D. G from a customer's perspective, it's presumably one tariff how do you split up that tariff across those three things.
Three parts of the value chain, particularly given your different stay.
Stakeholders, our shareholders our unit holder whatever limited partners.
Between the SPG and USB PD.
I'll take a crack at this and then I'll probably pass it to Brad.
I appreciate your diving into the details.
When you think about it.
Every I would say we look at those kind of deals holistically to make sure the customer is getting the netback.
And the money for them, we work with railroads on that as well.
But there are different groups that support each.
Right I would say in the volume and the terms.
With regard to the partnership I can speak to the fact that we are always mindful.
Making sure that it's a.
That is fair and then it's treated as it kind of a third party transaction, we have a conflicts committee in place and engaged to do those kind of things.
But with regard to getting to the actual.
Right, that's a commercial discussion and I think it's really based arquebus market based competitive we have to be sustainable with.
With competing alternatives, so it's 100% market base, regardless of how things are structured.
So Dan here, let me, let me try it first of all our stated intent is to convert all of the I'll call. The partnership's underlying assets at Hardisty to a long term drew bet and that may include trap as well to convert it to a.
Hey drew bit hub.
As well so that's our stated intent for all the reasons that we know right.
It is not has not.
Non flammable it reduces the carbon intensity by over 30%.
It's just the right thing to do it gives the refiner and the producer all of what they want so it's the real kind of industrial solution here that we like so given that.
Both both Gibson and USD are committed to doing that so there is competitive pressure. If you will on dill bit right two to convert to droop. It because that's where we're headed and that's where we're driving that takes us out of the pipeline basically comparisons that we find.
Today, whether <unk> gets built whether or not it doesn't it doesn't matter because it's more sustainable and competitive on a full netback basis.
So as we then discuss the the commercial terms around that as we previously did.
With the underlying assets on our existing drew bid deal. It was a long term, taking three to five year agreements and converting them to 10 plus year agreements.
It was a positive netback to the partnership for that and are.
Our commitment is it would it would be a continue to be a positive netback for the partnership for any of the renewals.
That we do or the conversion of <unk> to <unk> and so as we discussed and negotiate with drill bit customers.
We're open and honest with them of look you may not have you feel bit capacity remaining at either hardesty or stroud as it relates to.
Because we're going to we're going to convert that into drew bid and longer term and more sustainable and more profitable business for both the partnership and USD Jee and so and Gibson for that matter. So we're all on the same page about that and so we like that that if you will but competitive.
Tension. So every time a deal bit customer set another way every time a deal that customer comes to the table. We first look can we support our our drew but continue to support our <unk> program.
For the benefit of the partnership a long dated contracts and more sustainable revenue.
For the for the partnership.
We always weigh that into the commercial discussions, but it's been.
To date, it's been a positive development for the partnership in terms of both term and.
You know on its on its face term and the commercial.
The viability of that of the commercial agreements because that makes sense.
Totally I was just trying to better understand that just for purely illustrative purposes, right sort of total dollar per barrel.
Tariff to you for the whole value chain was $15. How do you split that between the Dru facility. The Hardesty terminal in the Port Arthur terminal and like I know you mentioned sort of market, but if you look at page 19 of the deck like Theres no.
One doesn't work without the other right there was no the dru facility can't access that's right.
And that access it without going through the hardest the terminal.
And so like.
In theory the artist the terminal has a monopoly on the group facility, but there. So just I don't know what market means in that and that sort of scenario and so how that 15 again illustrated number would be split across those.
Those three legs of the value chain.
Yeah, It's great again, great question, and obviously that that's always the challenge between the sponsor and the partnership right, but our fiduciary responsibility to protect the partnership and to make sure that it's a positive.
Commercial impact on the on the partnerships just as we've done with the <unk> agreement. It was a net positive to that do does it all have to come into consideration and be a fair and balanced absolutely do we then present that to the conflicts committee, who looks at that independently and.
And weighs in on that.
That's how we that's kind of a check and balance that we try to use there to make sure that it's.
That it's sustainable.
Sustainable commercially.
For both sides can can I give you more detail around that I, probably can't but but just as we've done historically.
It's been a positive.
Dollar based commercial agreement and term obviously with with the.
With the partnerships assets.
And I would say with respect to placement.
Respectfully, that's our strength as a developer.
Is that we have strategic alignment with railroads strategic alignment with with Terminalling companies, where it's appropriate to support an all in solution and.
Ultimately, it's got to be competitive relative to the competing alternatives and the story.
And it's got to meet our return thresholds for each one of those pieces of the puzzle right end of story.
I think you had another question.
Yeah, that'd be our last questioner was just okay.
You had talked about sort of I think it was 14% to 18 or something in that context of 2023 EBITDA for hardest yourself.
I just was curious what your latest thoughts were.
There.
And sort of maybe what I don't know if its even more.
It makes any sense to say what is sort of EBITDA today on a.
Run rate basis, given some of the contract exploration, but that was baked in.
Earlier, this year or not but what is sort of your 'twenty.
Where's your head at now.
Previous thoughts.
Surround Jake this is Adam.
It's a good question so that I think that that was guidance that we gave when we did this and when they did the dropdown for Hardisty South.
We haven't updated that guidance.
And I would say considering its 2023 guidance.
There's a lot of factors that have changed since we issued that with regard to.
Ukraine, SBR market volatility around crude oil discounts in the Gulf. So I'd say, we haven't given updated guidance on that.
Say, its probably fair to say, we've come off that right now and that we we still expect.
<unk> utilization at Hardisty, and hardest yourself and the D are you and Stroud around blending opportunities in the first half of next year. So we still are optimistic about cash flow in 2023, but I'd say, we probably come up that guidance.
But why would you come off the guidance is the difference only gotten wider even taking into account that salary.
Howard.
Yeah, so totally understand what you're asking and I totally agree with you and actually we do have obviously a ton of work around those things just timing timing when when the contracts get signed.
Okay, Alright cool. Thank you very much I appreciate it I'll appreciate it great questions. Thanks.
Thank you we'll take our next question from break the knit with probably the ups or he's a private investor.
Hi, Greg Hi, Greg Hey.
Don.
Or is that something that would be in better hands.
And the asset that you would.
Great great great.
Yeah, Great question, Greg we.
Would we consider.
Casper to be a key component of our transition and growth.
You know like I always like to say, we're transitioning from black Brown bays to grain now all of that said, it's got to be long term investment grade Counterparties you know all the things that.
That we discuss on this call, which is the cornerstone of what's made us successful through the downturns and all of that in the economy.
As it relates to Kasper.
Would we entertain would we look at at auctions, absolutely, we would and is it strategic to us and our.
Our future growth as I just mentioned it is not the most strategic asset that we have for our future growth.
Given that though we will obviously look to optimize that and we currently have.
The trains running out of there today and growing demand for that asset. So we like we like the.
The market demand model, that's happening we would we would be open and and look at our if it could be in better hands to third parties have we had some interest in that.
We have.
And are there ongoing discussions around that there are so but it would be something that would be.
Obviously, we weigh that against the value for the partnership.
As an ongoing asset as well.
Yes.
A comment on that we're constantly in discussions with customers existing customers and new customers with regard to commercial developments and potential other alternatives as well.
This has to do with the tax question because when you are limited partners get their K, one you've taken a write down of $60 million I don't think I was a partner. The last time, you took a write down on that but yes.
Is that something that flows through.
I mean, it's rich.
A reduction of capital I would think there do you know how that works.
Yeah.
It's different I mean, it's different for every unit holder, who has different basis, but I would say generally speaking.
There are GAAP books, and their tax books and so.
Have to dig into that a little bit more and then probably get back to you but.
It wouldn't be dollar for dollar obviously, because they're just different different sets of books.
But probably in the end I would imagine it's probably a positive for unitholders, but I can't I can't I can't issue tax advice on this call. So I'd have to look into that now.
Hi.
So let me just ask something that has been.
And then Mike Carlson harvest himself deal.
For several years.
Always.
You've always talked about dropping down assets that general partner dropping down assets that have been derisked.
<unk>.
I don't know if you're bored listening to this call or not but.
My impression is hardest in south.
Not really.
And you are limited partners have taken on $75 million of debt.
Theres been carriers that have been.
Uh huh.
He cares that have been granted to the general partner for this to buy this asset, but this asset more risky today than it was in July or whenever you did it.
Could you could.
Could you explain why.
The hardest yourself was a great acquisition for the limited partners.
At the time why you didn't wait until it was derisked.
Yes, it's a great question and a great comment obviously, the Dan speaking here.
The intent of the dropdown was to try to.
One <unk>.
Further simplify our growth for the for the Dru Bad business right. So as we expand the group at the underlying assets with the contracts that we had in place. The partnership would have difficulty supporting the expansion of the <unk> business right to do that right. So they needed the underlying some.
Poor they needed the underlying rail to do that we've had several questions from investors about can we simplify that can we shift that over to where the partnership can have more.
Of that of that asset base to support the <unk> model until obviously, we can.
We can at a time in the future start to look to transfer some of the <unk> business over into the partnership with the simplest things be to have the <unk> business and all of that under under one house absolutely. It what are we trying to get to that point absolutely. We are so as we looked at transferring <unk>.
To see south.
Into the partnership with sustainable.
Customers that we had.
And that we believe will renew in the Mark for all the market demand reasons that we said that the partnership will be happy that they have those assets and and again, we've tried to always at USD make mid to long term.
Strategic decisions or not but not be kind of blown by the shorter term wins given that we're doing.
10, plus year contracts with with with our commercial customers. So as we look at that I mean, I get it I get the question and I get the concern, but that was what the driver was of why we felt like it made sense to move that over half the partnership be able to benefit from the longer term.
<unk> that we're getting from our dru beds.
And as the previous question was you can't do one without the other right. So we wanted to put that benefit over to the partnership.
Which we hope to be able to share some very positive news around that in the shorter term. So hopefully that gives you some color on it.
Did we anticipate that the there'd be continued.
SBR releases and all of that when we did all of that early in the year No did we.
So the impact of that is is obviously concerning and it's frustrating.
But.
As we've said, we do believe that the market demand will come back on and and we.
Totally agree with the with kind of the concern there.
Okay. Thanks, a lot you bet hopefully we'll have some good news you bet we are.
Thank you.
Thanks for the questions thanks for being a vessel.
Are there any further.
Questions.
At this time, we have no further questions in queue I would like to turn the call back to Dan Borgen for any additional or closing remarks.
Alright, So we've had really great robust questions and really appreciate that and obviously, thanks, so much for everybody being on the call and the support.
Obviously, as we stated just to wrap it up and I'll just be a bit redundant here.
We believe the we're coming into an demand on Mama just as we have as a reminder.
As we have before as a reminder, we've been through these renewal cycles before we.
We generally haven't missed much on timing maybe.
Maybe 30 to 60 days something like that when there's demand moments com.
It's a comes immediately in terms of.
The phone ringing off the hook literally four four capacity.
The customers need simply because the spreads around that market demand is on and that is obviously when we.
Prefer to negotiate and renew our mid to long term agreements.
Historically, we've had customers come and say Hey look would you take a discount today too.
To renew and we've looked at the market and made a strategic decision to say no. We won't do that because it's not in the best.
A benefit to the partnership we will renew that when the.
When the market demand is on those facts are aligning similarly, we've been through that too to previous cycles, and we have always renewed and extended at four at premiums for at those at those market demands all of the facts that we have shared today support that that is coming.
Would we have been in that position today earlier. This year, we absolutely would have been had we not had some of the I'll say the manipulative things that have occurred in the market.
So.
I want us all to route to remind that and that's what keeps us focused on our business. Obviously, we've got very good in depth discussions going on with customers remember our customers have railcars that are sitting that want to move our customers have product that needs to move growth initiatives from them look at what's happening in Canada today, we have.
The bigger ones getting bigger for the most part consolidating so every new barrel growth theyre going to take some synergistic benefits of RBC with a <unk>.
Binding.
Those activities, but.
They're doing that because they have a growth model and plan, they're going to grow every new every new barrel that they bring on creates a better netback for them because it absorbs more of the fixed costs.
So these are very focused large scale.
Producers in the market that are that are our customers.
And so they are.
<unk> or long term. These are non declining assets. If you will producing assets. These are sustainable assets that as they bring them on they produce.
Flatline, a until they bring another train of equipment on and another expansion. So that's what we like about Canada from a long term barrel perspective versus a shale barrel, who you have to almost replace yourself almost annually there and obviously, we're seeing some of that occur and some of the wins.
And the headwinds that are blowing against.
Some of the shale production in West, Texas production, whereas Canada continues to be.
A growth and a and it's and there's aligned growth and therefore continued.
Development of reserves in that market.
Again, our <unk> business.
I think it's proven it's it's sustainability in the market.
It's with over 22 million barrels moved.
You wouldn't have customers like we have.
Looking at that strategic alternative to better control their growth and where their production is going to head and why they're going to do it are they in center by the low carbon netback, absolutely why because Canada is pushing for more of a zero tolerance around around the carbonization in that market does this possibly be.
Fit to that yes does the we just had an independent third party come back and say the condensate return that we provide is the lowest condensate from a carbon intensity standpoint back in the market does that play well for for the customers in that market.
That are that are needing to reduce their carbon intensity. It absolutely does so is it the right thing from an industrial solution not only do we say it but our customers say it by their commitments and what they're doing from a political standpoint from a government standpoint, we're seeing.
Support for that not only in I can I'll paraphrase it but a a hyatt place a politician and are in the local market. There said not only does it give us drew bit network give us new egress, but it it's developed a new market for our product.
So you know we like we like where we're headed we like the market demand that's coming we liked the demand for the <unk> barrel and we look forward to sharing more about that and delivering on that.
In the in the near term. So we appreciate obviously all of our investors we appreciate.
The support and we will continue to do our jobs to create the best.
Netback that we can for everyone. Thank you.
Yeah.
This does conclude today's call. We thank you for your participation you may disconnect at any time.
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Okay.
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