Q4 2022 USD Partners LP Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the USD Partners L. P fourth quarter 2022 results conference call.
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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.
Good morning, and thank you for joining US welcome to our fourth 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.
You and your management team.
Yesterday evening, we issued a press release announcing results for the three months and year ended December 31 2022.
If you would like a copy of the press release, you can find one on our website at USD partners Dot com.
Before we proceed please note that the safe Harbor disclosure statement regarding forward looking statements in last Night's press release prior to the statements of management on this call.
Also please note that information presented on today's call speaks only as of today March 2nd 2023.
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 and good morning, and thank you all for joining us on the call today and for your continued support of the partnership with.
The partnership had a challenging year in 2022, due primarily to market conditions surrounding the Canadian heavy crude oil macro.
However, despite the challenging macro story, the underlying economics for moving drew bit from Hardisty to the Gulf Coast were positive and full year 2022, and improved significantly in the fourth quarter of 2022.
The positive and improving economics for <unk> as evidenced by the Dr. Yu operating above nameplate capacity and are drooping customer continued to exceed its minimum volume commitment at the partnerships Hardesty rail terminal.
To date, we've moved over 20 million barrels to our group it by rail network, which includes the hardest the rail terminal.
As a reminder, given the challenges of all transportation modes are drew good network offers a unique competitive reliable and safer mattson of delivering heavier barrels to destination markets.
Andrew made creates new markets blending opportunities and better netback opportunities, where our customers with a lower carbon footprint.
Drew bid as non hazardous and non flammable, which allows the partnership to be further aligned with its customers as it pertains to safety and reliability and we are pleased to see the debate by rail network benefit the communities our customers and rail partners serve.
We continue to have detailed discussions with new and existing customers to provide safer and economically beneficial Canadian crude transportation options.
And we remain focused on converting the partnership's dill bit capacity to our longer term sustainable drew bed program, which as a reminder, and supported by longer tenor with 10 year contracts.
As always we are constantly updating our market point of view on where crude oil markets are today, but.
But also where crude markets are headed in the future and we do our best to rely on facts and observable market indicators to help drive strategy and priorities.
We remain focused on growing our core business and are always evaluating options to maximize the values that our strategic network provides to our customers and unit holders.
With Canadian storage utilization levels currently at the high end of the historical averages and the industry's expectations around production growth in Canadian oil Sands in 2023 and 2024.
We continue to see the potential for future heavy crude oil production exceeding the availability of existing egress alternative is driving the need for egress by rail.
As previously announced in order to support the partnership's liquidity position during this re contracting cycle.
Partnership sponsor decided to waive its right to the fourth quarter distribution on a $17 3 million units without impacting the distribution to the remaining unit holders.
Management believes this was the prudent thing to do given recent momentum around expanding our <unk> program as well as recent discussions we are having around our Stroud terminal.
Next Adam is going to give an update on the partnership's latest financial results and our liquidity position.
We'll jump back into the recent market and commercial developments Adam. Please go ahead.
Thank you Dan and thank you for joining us on the call. This morning yesterday afternoon, we issued our fourth quarter earnings release, which included the details of our operating and financial results for the fourth quarter and full year 2022, and we plan to issue. Our 2022 10-K additional detail sometime in the next few days.
Partnership reported a net loss of $3 2 million net cash provided by operating activities of $8 3 million adjusted EBITDA of $13 3 million and distributable cash of $9 6 million.
As a brief reminder, hardesty South terminal acquisition.
It occurred in the second quarter of 2022 represented a business combination between entities under common control.
As a result, the partnerships financial statements have been retrospectively recast to include the pre acquisition results of Odyssey South.
And now for details from the quarter.
Partnerships revenues for the fourth quarter of 2022 relative to the same quarter in 2021 were lower primarily due to a reduction in contracted capacity at Hardisty terminal that was effective July one 2022.
Revenues were also lower the hardest your terminal due to an unfavorable variance in the Canadian exchange rate on the partnership's Canadian dollar denominated contracts during the fourth quarter of 2022 as compared to the fourth quarter of 2021.
Revenue was lower at the Stroud terminal due to the conclusion of the partnership's Terminalling contracts service contracts with its sole customer effective July one 2022.
Also impacting the variance in revenues at the Stroud terminal was the deferral of revenues associated with makeup right options that occurred during the fourth quarter of 2021 with no similar occurrence in the fourth quarter of 2022.
Partnership also had lower revenue generated at the Casper terminal associated with lower throughput volumes.
Partially offsetting these decreases in revenue with higher revenue at the partnership's West Colton terminal, resulting from the commencement of the renewable diesel contract in December 2021.
Partnership experienced lower operating costs during the fourth quarter of 2022 as compared to the fourth quarter of 2021.
The partnership experienced lower pipeline fee expense, which is directly attributable to the associated decrease in Hardesty terminal revenues previously discussed.
As compared to the fourth quarter of 2021 in.
In addition, subcontracted rail service costs were lower due to decreased throughput at the terminals.
Depreciation and amortization expenses were lower in the fourth quarter of 2022, primarily due to the decrease in the carrying value of the assets of the Casper terminal, resulting from the impairment that was recognized in September 2022.
The partnership had a net loss of $3 2 million in the fourth quarter of 2022 as compared.
The net income of $4 3 million in the fourth quarter of 2021.
The decrease is primarily due to operating factors already discussed coupled with higher interest expense incurred during the fourth quarter of 2022, resulting from higher interest rates and higher debt balance outstanding during the quarter.
Partially offset by a decrease in commitment fees as compared to the fourth quarter of 2021.
Partnership also had higher non cash losses associated with the partnerships interest rate derivatives recognized in the fourth quarter of 2022 that were partially offset by the cash proceeds from the settlement of the partnership's interest rate derivatives October 2022.
Net cash provided by operating activities for the quarter decreased 33% relative to the fourth quarter of 2021.
The decrease in the partnership's operating cash flow, resulting from the conclusion.
Some of the partnerships Terminalling agreements was partially offset by the previously mentioned cash settlement of the partnership's interest rate derivatives in October .
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 for the fourth quarter of 2022 increased by 12% when compared to the same period in 2021 and includes the impact of the aforementioned settlement of the partnership's interest rate derivative that occurred in October .
Distributable cash flow decreased by 10% for the current quarter relative to the fourth quarter of 2021 due to higher cash paid for interest and taxes during the quarter.
As of December 31, 2022.
Partnership had approximately $2 5 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $60 million on a $275 million senior.
Senior secured credit facility subject to the partnership's continued compliance with financial covenants.
As of the end of the fourth quarter of 2022.
<unk> had borrowings of $215 million outstanding under its revolving credit facility.
The borrowing capacity and available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $55 5 million.
At December 31.
Partnership was in compliance with its financial covenants as of December 31, 2022.
In January 2023, the partnership entered into an amendment to its senior secured credit facility. Among other things. The amendment provides the partnership with relief from compliance with.
With the senior secured credit facilities maximum consolidated leverage ratio and minimum consolidated coverage ratio.
Senior secured credit facilities current maturity date.
As management works to obtain renewals extensions or replacement of commercial agreements.
Additional details regarding the amendment are included in the partnerships current report on form 8-K filed on February 6th of this year.
Partnership senior secured credit facility expires on November <unk> 2023, and.
And the partnership is in active discussions with the administrative agent and other banks within our lender group as well as other potential financing financing sources regarding the possible extension renewal or replacement of the senior secured credit facility.
On January 26, the partnership declared a quarterly cash distribution of $12 35.
Per unit or <unk> $49 <unk> per unit on an annualized basis.
The same is the amount distributed in the prior quarter.
The distribution was paid on February 17th to unit holders of record at the close of business on February eight.
Partnerships board determined to keep the distribution unchanged from the prior quarter and to evaluate the distribution on a quarterly basis going forward, we will take into consideration updated commercial progress, including the partnership's ability to renew or replace as customer agreements at the hardest Dean Stroud terminals.
Current market conditions, and managements expectations regarding future performance.
As Dan mentioned, we remain focused on converting the partnership's dilbeck capacity, so our longer term sustainable through that program.
As always we look forward to sharing more updates with you on that in the future.
With that I would now like to turn the call back over to Dan.
Thanks, Adam now I'll ask Brad to give us a detailed update on the WC SB market recent market events and an update on our commercial activities Brad.
Thank you Dan let me start with a brief market update.
Canadian inventories finished the year at the higher end of the range and specifically heavy sour inventories.
Finished at approximately 35 million barrels, which if you look at history represent state tank tops. So that is a significant event that happened at year end. The key driver was simply the shutdown of the Keystone pipeline was shut down for.
Proximately, two weeks and significantly de rated for an additional week simply to repair some operational issues. This led to stranded barrels at origin and ultimately the need to build into the boys. So why does this matter as we've discussed previously on this call.
And in our discussions with potential investors the single biggest driver for the Canadian market to transition to a need for <unk>.
<unk> by rail is simply inventories that tank tops with no incremental capacity to build this ultimately drives demand for rail egress.
As Dan mentioned in his opening remarks Canadian production is expected to grow year on year, So higher in 2023 versus 2022 and given these current inventory levels.
This growth in production could be the catalyst to transition to higher demand for rail egress.
As we think about our hardest seeing stroud assets specifically both of these assets will benefit from this transition and therefore, we remain in constant contact with producers refiners and railroads.
In anticipation of this potential transition and demand for origin and destination rail assets.
Let's transition now to our D. R. <unk> growth plans are phase II commercialization efforts.
First and foremost as a reminder, the day are you development is not dependent on the Canadian macro story as I just described.
Stead, given its cost competitiveness.
Its low carbon footprint and safety features and unique value creation opportunities that destinations things like custom blend day access to all Gulf coast domestic refiners and the ability to export it is the most advantaged egress.
Solution for producers and refiners.
And therefore naturally we are purpose to transition all our current business towards Dr solution.
And are confident in our ability to commercialize our phase to give.
Our current discussions and negotiations in fact, we look forward to updating you soon on its progress.
Finally, I'd like to transition to an update on our clean fuels efforts.
As a reminder in January of this year.
USD clean fuels announced its intention to build a new biofuels terminal in National City, California.
That will have the capability to trans load renewable diesel biodiesel ethanol can sustainable aviation fuel.
Terminal will be served by the BNS railroad and give us access to.
To Midwest and U S Gulf Coast origin advance clean fuels.
And our expectation is that the terminal will become operational by early 2024.
This terminal will be the second terminal, but growing network of clean fuels terminals that you.
USD clean fuels anticipates will ultimately include California, Oregon, Washington, Canada, and the Texas Gulf Coast.
Solely based on strong customer and railroad interests.
These terminals are expected to provide needed infrastructure that would make the downstream, but just takes of advanced biofuel production and feedstocks more efficient. So we're very excited about the progress we've made.
We're excited about the potential in this space and again look forward to providing updates as appropriate.
Dan.
Thank you, Brad and with that we'll open up the call for any additional questions.
Thank you.
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And we will take our first question from Steve Farris Zani with Sidoti.
Good morning, everyone I appreciate the detail on the call I know youre maneuvering through some challenging conditions right now.
I don't know if you can give me a lot of color on this but I'll start with it anyway, because I think it's on everyone's minds in terms of the.
The credit agreement and your ability to refinance.
Now again sort of a wait and see mode in terms of.
Your ability to refinance is really dependent on your ability to announce a.
Newark rail agreements.
Hey, Steve It's Adam.
Were constantly in contact with the banks, having a lot of discussions with them.
They've been very supportive as evidenced by the credit agreement Amendment they.
They understand where we are in the macro and where we are with our story.
And also we're obviously always looking at strategic alternatives.
To manage our ability to manage our liquidity.
One thing that I would I would add is.
As Youll see in our 10-K as it comes out.
Next day or two.
We did get board approval to sell our Casper terminal.
And so that's a potential.
Source of liquidity and that'll be a subsequent event in our 10-K that youll see so.
I wouldn't say, we're in wait and see I would say, we're more kind of directly communicating with our customers and our banks.
Being as proactive as possible.
Understood Sir.
In terms of the covenants now do you think you've gotten enough relief to get you through I mean is there anything pending do you think you'd violations in the next couple of quarters barring additional agreements or is there at least enough on the covenants.
We're always looking at our projections and in this set of covenants was.
What we negotiated with the banks really to address our near term liquidity.
As well as just kind of the commercial negotiations and.
And to really get us through this re contracting period.
Okay in terms of.
The expectations.
Western Canadian production is rising.
You talked about the obviously lack of at least in the next several feed this year additional egress options, where are you in terms of agreements and how much closely will that tie to <unk>.
The ramping of production as well as the threat of additional SPR releases, which was a problem last year.
I'm going to let Dan and Brad take that that question. That's a commercial question.
Yes, I'm happy to to.
Respond and Dan you can add.
If it makes sense I think at the end of the day as you just look at.
The period when we built these assets and then grew those those assets five years later as five years go.
The catalyst for all of that was.
The market going into what we call CBR parity, which means the prices actually did all the work.
And the producers who are feeling the pain.
And then within a very short period in time contracts were lined up signed and.
<unk>.
Activity began so I think it's just.
It's they're very reactive and in this regard we're aware of that.
So our benefit.
Then just be.
As well.
Trying to step in early and create incentives for people to participate too early as his long term likely not a good thing for for us and our investors. So at this point, we're actually pretty comfortable and realize that the market has to do the work and our expectations are.
The production reveals itself like we expect and the facts say it should.
And that that there's a high potential for that year. So so.
C band here consistent with what Brad said, we've been through these cycles before.
When the window.
With the arb when the Arb is there and.
The egress is limited and production grows.
It is.
Very responsive customers are very responsive to the needs customers understand.
On a fact based scenario, but it's coming.
Obviously, that's why we've had good discussions with the banks because this is fact based right. This is.
Adam Subtraction, if you will in terms of the production builds egress, what's going on obviously if SBR.
Hadn't occurred.
Wouldn't have had some of the deep discounting and the golf so.
Kind of a complete political manipulation of the market, which I don't think it's good for anybody personal opinion, but.
But it's.
Certainly we look forward been here before look forward to re upping it as Brad.
We are in the contracts as Brad further said the.
Our <unk> program is.
It really has nothing to do with that market dynamic it's more about just the netback, but it's a very large commitment.
And you're plus coming yet.
But we are excited about.
We hope to be able to give a fact based detailed announcement later this month.
On our <unk> expansion program. So we're very bullish about that.
Excellent.
Over 'twenty looks forward to look forward.
Look forward to the update on that Dan.
Okay.
We're two months into Q1.
Can you give in terms of operationally what do you expect to see anything significantly different.
In Q1 versus Q4, I mean, when I'm looking at cash flow. This quarter, obviously the settlement of the interest rate derivative was the primary driver of cash flow anything that should be significantly different Q4 to Q1, excluding the settlement.
No nothing.
No no extreme weather or anything like that we would have reported any any kind of anomalies like that but I guess I would just say, we're still in pretty heavy negotiations at hardisty and Stroud.
But operationally it's been pretty smooth.
Was there any thought.
To sponsor wave.
Right. So the distribution had there been any thought to suspending the distribution now.
This is something we look at every quarter and we've done that.
Pretty significant amount of analysis around that and we do every quarter with the board.
Taking it up to a lot of different things when we make those decisions.
Always looking at.
The commercial activity.
The market the macro the heavy crude oil macro and where we are three contracting so I would say, we're always evaluating that.
Through the same lens in it with a lot of variables.
I guess is my best answer for that because that decision is really subject to the board.
Of course understood. Okay. Thanks, everyone I appreciate the responses on the call. This morning.
Thank you.
And it appears that we have no further questions at this time I will now turn the program back over to Dan Borgen for closing remarks.
Thank you obviously, we appreciate the support and.
Dialing in this morning.
As you've heard us discuss where we're focused on the renewal we've been here before.
We're focused on the growth of the <unk>, which takes the underlying assets long term.
The underlying rail assets as well and puts them into investment grade hands takes the cyclical nature.
Eight out of the business, which has been our purpose.
Since we started the day are you in one of the benefits of the deal are you in a store and tuned as I said earlier to convert all of our deal bit capacity limited capacity to 70 30 capacity to debate.
We're moving further along that we look forward as I said two.
A detailed announcement around that.
It is.
Hopefully issues that we've been talking about so.
With that I'll say, thanks again, we appreciate the support we're working hard to two.
Grow this business for so long.
We look forward to future announcements. Thank you.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
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Yes.
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