Genesis Energy L.P. Q1 2023 Earnings Call
Greetings and welcome to the Genesis Energy first quarter 2023 earnings conference call at.
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Please note that this conference is being recorded.
I will now turn the conference over to your host Duane Morgan Vice President of Investor Relations. Thank you you may begin.
Good morning, welcome to the 2023 first 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.
And sulfur services segment includes trona in trend based exploring mining processing, producing marketing and selling activities as well as the processing of sour gas streams turbine 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 petroleum 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 $19 30 for.
The law provides safe harbor protection to encourage companies to provide forward looking information.
Genesis intends to avail itself of those safe Harbor provisions and directs you to its most recently filed and future filings with 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.
The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.
At this time I would like to introduce grant Sims CEO of Genesis Energy L. P. Mr. Sims will be joined by Chris <unk>, Chief Financial Officer, and Chief Legal Officer, Brian <unk>, President and Chief Commercial Officer, and Louis Nickel Chief Accounting Officer.
Good morning to everyone and thanks for listening in as.
As we mentioned in our earnings release. This morning, our financial results for the first quarter were generally in line and consistent with our annual guidance. They did end up below our internal expectations for reasons well beyond our control.
Most notably our soda ash business was negatively impacted by the coldest first quarter in the last two three years in southwest Wyoming.
Which challenged our operations and significantly impacted rail service, which in turn reduced our production and sales volumes during the quarter.
We only have storage onsite for about five days worth of production.
With loaded railcars arent pool and empty cars arent returned on a timely basis, we have no choice, but to curtail production.
As a result, we estimate that we suffered a reduction in realized segment margin and adjusted EBITDA of approximately $15 million for the first quarter and fiscal year.
Unfortunately, these weather and third party service related headwinds in our soda ash operations masks to the over performance in our offshore and our marine segments during the quarter.
Despite these challenges we are reaffirming our previously announced guidance range for adjusted EBITDA of $780 million to $810 million for the full year and still expect to exit the year with a leverage ratio as calculated by our banks below four times.
So here, we are having delivered on our targeted leverage ratio.
You should now hopefully be cleared with the actions we've taken over the last several years along with the underlying resilience of our market leading businesses has positioned us with ample liquidity and significant financial flexibility going forward.
As we look ahead to the remainder of 2023, the fundamentals and macro conditions across our business segments continue to appear strong.
The central Gulf of Mexico is really hitting its stride with tremendous oil and gas producer activity around our existing and soon to be expanded midstream footprint.
We continue to see robust volumes from KSP Spruance and other developments throughout our network of offshore infrastructure.
Additionally, we can confirm we have in fact started to receive new volumes from Bp's Argos production facility, which supports their mad dog two field development.
The soda ash market feels like it's settling down some.
Moving from an extremely tight to perhaps a more balanced global market.
We believe the pace of China's reopening and the lost tonnage from natural producers in Wyoming. During the first quarter is not yet quite filtered its way through the global system and could and really should help support prices in the back half of the year to.
To be conservative we have taken into account on our annual guidance the possibility of some potential softening for soda ash prices to the extent demand weakens more than we anticipate as we move throughout the remainder of the year.
In our Marine Transportation segment, we are continuing to see full utilization as a practical matter for all classes of our Jones Act vessels.
Which is affording us the opportunity to drive dayrates for spot and contract charters to their highest levels in the last decade.
Regardless of any potential impacts of a slowing economy. We continue to believe that Genesis is well positioned now and in the future for increasing amounts of free cash flow financial flexibility and opportunities to continue to build long term value for all of our stakeholders.
Now I'll touch briefly on our individual business segments.
Our offshore pipeline transportation segment performed in line with if not slightly ahead of our internal expectations and importantly demonstrated a more normalized level of activity and earnings capability.
While we do expect some regularly scheduled maintenance downtime at one of our major host fields in the second quarter, which will impact volumes or margins.
It is clear that volumes from our existing fields combined with steady volumes for Murphy Oil's operated King's key development logs operated Spruance development and the number of subsea tieback and development wells from last year continued to drive strong and steady performance in our offshore segment.
In mid April we started to receive first oil from Bp's operated Argos floating production facility, which is supporting the 14 wells pre drilled and completed at Bp's operated Mad dog two field.
Based on Bp's recent public disclosures, we would expect volumes from Argos to ramp over the remainder of 2023 with 100% of the volume is flowing through our 64% owned and operated chops pipeline for ultimate delivery to shore.
As many of you know Argos as a second major.
New production facility to come online is connected to our system in as many years.
It is important to remember that these types of projects for years and sometimes decades in there Mike.
And we currently have contracts in place for two more of these deepwater production facilities at Shenandoah and salad market developments, which are expected to come online in late 2004, and early 2005, respectively.
To provide some additional context.
The combination of these four new production facilities <unk> Shenandoah in Salamanca represents roughly 400000 barrels per day of incremental production handling to be connected to our integrated pipeline infrastructure.
Based on the latest data from the EIA at full utilization this incremental 400000 barrels a day would be roughly the equivalent of approximately 7% of the Permian basins total current production.
Our approximately 35% of the Bakken total.
The volumes from these four new facilities are 100% dedicated to our system for the life of the fields in useful life of the production platform, which in most cases is 30 to 40 plus years or longer.
The initial reservoirs to be exploited represents hundreds of millions of barrels of already identified recoverable reserves and perhaps multiples of that to be discovered developed and ultimately handled across these deepwater production facilities and transported through our pipelines for decades to come.
The sheer size and scale of the deepwater is underappreciated, I say, especially when compared to the onshore shale plays.
Can we repeat notwithstanding the five to 600000 barrels of oil. We currently touch every day at full utilization. These four new production facilities alone.
Represent new business opportunities for Genesis equal to approximately 7% of the total production coming out of the Permian today.
35% of the total coming out of the Bakken and around 35% of the total production coming out of the Eagle Ford shale today.
I would also point out that our fees per barrel transport are going up not down as it is as is being experienced in a number of onshore basins.
As we look out past 2025.
Would be remiss to not mention the results of the bones recent lease sale number 259, which was held on March 29, consistent with the requirements laid out at the inflation reduction Act.
The results of the lease so would indicate there is still significant long term interest in the geographies of the central Gulf of Mexico, where our existing pipeline infrastructure seems to be the most competitive alternative to get new production to shore.
The lease sell raised approximately $264 million and high bids for 313 tracks covering roughly $1 6 million acres in federal waters of the Gulf of Mexico.
Excuse me if you dig into the results a little further you will see that approximately 715000 acres or approximately 40% of the total lease. So was located in the central Gulf of Mexico with most of that activity being in the vicinity of.
Which is the only existing pipeline and Keathley Canyon as well as our new sink pipeline, which extends from our chops pipeline through garden banks across the southwest portion of the Green Canyon and into the Walker Ridge area in the Gulf of Mexico.
Finally, the list of companies, who participated in the lease sale was a whose food and investment grade integrated and independent operators.
On with other private and well capitalized tenants that have a long track record of success in the Gulf of Mexico.
Most of these operators have opportunities onshore.
But are continuing to spend billions of dollars in the Gulf of Mexico.
While the deepwater is more capital intensive and a longer cycle investments when compared to onshore shale plays. We believe this continuing allocation of significant capital confirms that the ultimate returns on investment are at least equal if not better than onshore shale plays and has the added benefit of being sick.
<unk> less carbon intensive.
Turning now to our soda and sulfur services segment.
The near term macro story for soda has softened somewhat since last quarter and seems to be moving from an extremely tight market to a more well balanced global market.
Which I would characterize as a more normal and healthier environment from a longer term perspective.
As we mentioned in our release, we are starting to hear from some of our distributors and direct customers primarily in our export markets that they are starting to see some slowdown in demand downstream and thus are managing their supply chains and inventory levels accordingly.
Nonetheless.
We did in fact see prices for UN contracted export volumes increase in the second quarter when compared to the first quarter.
Price to exceed weighted average price we received in 2022.
Near term, we continue to monitor the reopening of China and its economy with early indications, suggesting their economy recently grew at its fastest pace since first quarter of 2022, and certainly more than it did during the Covid lockdown periods, which would be constructive to our worldwide supply demand balances in.
Soda ash prices as we move through the rest of the year.
Current projected soda ash demand growth within China bolstered by their tremendous solar glass production expansions would likely absorbed most of China's existing synthetic soda ash production and any new natural production within the region when and if it comes online later this year.
We estimate that approximately 300000 tons, if not more of soda ash did not and will not make its way into the supply chain or ultimate end use market for soda Ash. This way without question result in tighter suppliers worldwide over the next several quarters everything else aside.
In the intermediate and longer term soda ash demand has tracked well with industrial production over longer periods with annual growth rates of approximately 2% to 3% per year over time.
On top of industrial production driven demand growth. The recent demand for soda ash associated with the green transition and specifically lithium batteries and solar panels is expected to accelerate overall demand.
In response to the estimated demand growth globally over the next decade and the market has seen a few smaller natural brownfield expansions announced including our Granger expansion that.
And that will help build the expected supply demand gap in the short term.
Even with these expansions the supply demand forecast for soda ash, which suggests there needs to be much larger natural greenfield expansions to help fill the gap towards the end of the decade.
The cost to build these large greenfield expansions is very high both on an absolute dollar and a per ton basis and the implications for existing soda ash producers should be positive over time.
Based on public meetings and industry data.
A new natural Greenfield development in Green River, Wyoming in today's World is estimated to cost anywhere between one to $200 per ton of capacity installed.
In order to justify and finance these capital expenditures.
We believe one would have to be convinced they would comfortably make at least 100 to $120 per ton net margins Oh.
Over a cycle to simply make a minimally adequate return.
If these margins were in fact achievable and necessary to balance the market in future periods.
Our roughly $4 8 million tons of production capacity per year.
Pro forma for the Granger expansion would be capable of generating upwards of $500 million of segment margin annually.
Whether future incremental demand is supplied by new natural Greenfield soda ash production or higher cost synthetic production, we believe soda ash prices and margins over the long term.
We will trend higher to help justify these capital and operating costs.
Regardless of how the remainder of 2023 looks or whether there is a broader economic slowdown next year. We believe we are well positioned to benefit from this broader trend overtime and as a result, the value of our existing operations should continue to rise over the years and decades ahead.
Our legacy refinery service business continues to be a steady contributor for Genesis. We continued to utilize our proprietary technology to provide the most environmentally benign services to remove sulfur at our host refineries.
The largest end market for our sulfur based products remains copper mining.
Given what seems to be the globe's insatiable appetite for copper over the coming decades, given its importance as a fundamental building block of the global economy and importantly, its vital role in the Green energy Revolution in the electrification of our economies in a low carbon world. We continue to believe we are well positioned to see steady.
Earnings from this business many many years to come.
Our Marine Transportation segment continues to exceed our expectations as market conditions and demand fundamentals continue to support activity levels at or near 100% utilization for all classes of our vessels.
While there continues to be reasonably robust refinery utilization rates the increase in demand for marine equipment.
Move renewable diesel to the West coast has effectively reduced the practical supply of marine equipment on the Gulf Coast and the East Coast.
This practical reduction in supply combined with the continuing retirement of older tonnage.
The increase maintenance cycle that as a result of all of the new equipment that was built five to 10 years ago and.
And practically zero construction of new equipment over the last couple of years has resulted in an effective structural shortage of Jones Act vessels.
This market dynamic is driven spot day rates and longer term contract rates across our various asset classes to their highest levels in the last decade.
Given the increased cost of steel and long lead time.
To build new equipment, which in some cases up to three to four years for the larger vessels, we believe that day rates today still do not support the construction of new equipment.
In fact, we believe day rates would need to increase significantly from today's rates and we maintained over a cycle to justify the construction of new equipment.
This general sentiment has recently been echoed by our peers.
And we believe this should continue to drive our realized average day rates higher as each of our existing spot and term charter contracts come up for renewal.
Like our soda ash business, if day rates went back to continue to rise to support new construction.
Would undoubtedly be the beneficiary of such a rise in the value of our existing fleet quote unquote underwater.
Should continue to increase over time.
In our estimation this macro environment should support strong financial performance from our Marine segment for the foreseeable future and certainly over the next few years.
Touching briefly on our balance sheet, we continue to expect to spend between 400 $450 million net to Genesis and growth capital expenditures. This year to complete our Granger soda ash expansion project and make meaningful progress on our offshore growth projects.
We remain extremely focused on finalizing these projects at the same time, not losing focus on our leverage ratio.
We remain well positioned to complete our capital program in the next 12 months to 18 months and then we will be able to begin harvesting the increasing amounts of free cash flow.
Continuing.
<unk> simplifying our capital structure and to create increasing value for everyone in our capital structure.
All while maintaining and strengthening our financial flexibility.
I would like to make a few comments on the senior management changes, we recently announced.
The reality is it will be business as usual at Genesis and these promotions reflect the contributions Kristen Ryan and Louie have been making over the past several years.
They along with their respective teams have been running the corporate functions on a day to day basis and have been intimately involved in addition to our business unit leaders and all of our hardworking and dedicated employees and achieving the results we are starting to see.
The board and I are confident they are the right people in the right positions at the right time and represented a new generation of leaders to continue building long term value for all of our stakeholders in the years to come.
I'm also today pleased to say that we have published our inaugural ESG report and posted it on our website.
This report should provide some additional disclosures and information that is often requested by our stakeholders.
We will endeavor to provide additional disclosures as we move forward and we would expect to release, our 2020 to report in the third or fourth quarter later this year.
We have also posted a new earnings supplement presentation to our website that details the key takeaways on highlights from our first quarter earnings.
And I would encourage everyone listening to the call to read it to the extent that you have time.
Finally, I would like to say the management team and board of directors remain steadfast in our commitment to building long term value for all of our stakeholders and we believe the decisions we are making reflect this commitment and our confidence in Genesis moving forward.
I'd once again like to recognize our entire workforce for their individual efforts and unwavering commitment to safe and responsible operations.
With that I'll turn it back to the moderator for questions.
Thank you.
And ladies and gentlemen at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Just wanted to start with.
The first quarter the railroad issues I'm. Just wondering is there any do you have any recourse with the railroads and is there anything you can do to mitigate.
To mitigate this come sorry.
No I mean, I think unfortunately, there is nothing that we can do for the operating conditions, which existed in the first quarter and quite frankly.
Yes.
Bruce the level.
Commercial service that we have for a very important product that is made.
We've never experienced this type of thing.
In essence empty cars and services.
Storage, if we can get them in but we werent able to get them in.
And pulled the whole cars on a timely basis.
I think that.
Work with the railroads is something we've been in this business in this location for 75 years now.
This is the first time in our most.
The most serious operating.
Issues that are caused by a third party service provider, but we think that we have.
Path to get it fixed at this point.
Okay, great. Thanks for that and then.
I just wanted to clarify that your comments are better understand your comments on the soda ash.
Are you seeing that.
Yes, just kind of caught up with demand. So it's more balanced or are you actually seeing.
Demand impact.
Economic slowdown there or something like that.
Yeah.
We as we said, we're starting to hear from some of our distributor customers as well as direct customers primarily in the export markets that they are seeing.
A slowdown in demand.
Anything else the same the demand side is bringing the.
The market back into balance where is certainly over the last several periods has been.
Supply constrained in that there wasn't enough supply to meet the demand. So that's the demand side slowing somewhat again, primarily in the export markets.
Domestic markets, which are.
Which is bringing the market back into balance.
Near term.
Okay got it and then if I could just squeeze one more in on the on the soda ash market. So you.
You have 90% of your pricing locked in for this year.
Yes.
Can you just see a softening in that market on the demand side this year.
Would that mean you come in and kind of at the low end of guidance you think are coming.
Come in below that and are pretty locked in.
<unk>.
Again.
Come to that range of guidance, we built in.
Into our.
A reaffirmation of that guidance range, we built in anticipation of some amount.
Softening at the midpoint.
Over the remainder of the year the softening occurs and is greater than what we expected we would tend towards the low end of the range.
The softening does not occur.
Then, we'd probably get to the high end of the range if not exceed.
And if it doesn't occur.
Great. Thank you so much.
Thank you and just a reminder to the audience to ask a question press star one on your telephone keypad share moving stuff from the queue Press Star two.
Our next question comes from T J Schultz with RBC.
Question.
Okay.
Hey, just a follow up on that.
So the 300000 tonnes that have.
I'm off that you've cited our volume still being curtailed just trying to understand if that grows as we think about.
Kind of to Mike's point balancing a bit.
Supply and demand going forward through this year.
Thank you.
Basically everything was resolved.
Back to the operator normal operations in April .
So we think that the cumulative effect the out of trona patch.
Rain River.
Cumulative across all of.
Ourselves as well as our three neighbors has totaled a little over 300000 tons, which did not get produced and unfortunately can't really be made up because it is thought that it was stored on site. There just wasn't produced so ultimately that.
Supply shock.
Quibbling.
Force matures.
Occurring.
Our old Valley marrow are Solvay last year for production upsets, which should probably cumulatively took 200000 tons off the market. This is actually a bigger event and ultimately we believe given the travel times.
To the various markets.
Ultimately this miss.
Missing 300000 is going to be felt as a supply constraint in the market and which will tend to.
In our opinion offset any potential.
Demand weakening that we've talked about in the previous.
Previous question.
Okay.
<unk>.
The second one for me just any outlook on.
Potential asset sales that would accelerate your.
Deleveraging plans, including I suppose even soda ash, just given the comps on Greenfield newbuild cost or are you comfortable with the current mix of assets in your portfolio. Thanks.
Well I mean, we're comfortable with what we have we think the fundamentals are very good I mean at the end of the day.
Almost anythings for sale at the right price.
I think that.
The fundamentals of our businesses the macro fundamentals are very good we like the position we're in and we like the.
The intermediate and longer term outlook for all of the businesses. So we're pretty comfortable with where we're at.
Yes.
That's not to say that if the right opportunity came along and we've demonstrated it over the last couple of years have been an opportunistic.
Seller.
Of assets to accelerate things, but I mean, we're at four times so.
Under four times I don't know that we have a lot more.
Need to accelerate things.
All the financial flexibility that we need to.
Finish up for our growth projects start.
Start harvesting as we like to say the hundreds of millions of dollars a year of incremental cash that's going to come out of these set of projects as well as the strong fundamentals of our underlying business. So we're very comfortable about the position that we're currently at.
Okay. Thank you.
Thank you there are no further questions at this time I'll hand, the floor back for closing remarks.
Well again, thanks, everyone for joining and listening in on a delayed basis, but we appreciate your interest and we look forward to our visit.
Visiting with you again in the near future. So thanks very much.
Thank you and this concludes today's conference all parties may disconnect have a great day.