USD Partners LP Q1 2023 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP first quarter 2023 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 first quarter 2023 earnings call with me today are Dan Borgen, Our Chief Executive Officer, Adam <unk>, 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 months ended March 31 2023.
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 applies to the statements of management on this call.
Also please note that information presented on today's call speaks only as of today may four 2023, any time sensitive information provided 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 everyone for joining us on the call today.
During the quarter the partnership continued to see challenging market conditions surrounding the Canadian heavy crude oil macro.
Short term market for <unk> has continued to be difficult and volatile.
While we are still working to secure business to fill current and near term capacity at the artist terminal.
We remain primarily focused on transitioning from trans loading deal bit to trans loading longer term more sustainable drew bet at the hardest to terminals through expansions to our sponsor's diluent recovery unit joint venture.
Over the years, we've experienced fluctuations in the demand for our drill bit by rail egress solutions during similar cycles within the industry.
As a reference examples of this include the lower volumes trans loaded at our hardest your term loan both 2016 and 2020, respectively. When market conditions were also challenging.
However, we recovered and renewed our volumes and life to date, we have translated to approximately 158 million barrels of crude oil at the hardest terminal and we remain confident in the value that the hardest C terminal has to offer to the industry.
We've progressed, our discussions with multiple potential customers regarding the expansion of our <unk> by rail network and remain encouraged that these discussions could lead to additional long term take or pay commitments that will benefit the partnership.
The successful completion of the first phase of our sponsor's hardest <unk> joint venture project enhance the sustainability and quality of the partnership's cash flows by significantly increasing the average tenor of a portion of the terminal services agreements at the Partnership's Hardisty terminal.
As a reminder, droob it creates enhanced blending and netback opportunities for our customers with a lower carbon footprint and offers an egret solution that moves a safer non hazardous non flammable product to new end markets.
We remain encouraged and are pleased with the great customer that we have that helped pioneer this program.
To date, we've moved approximately 22 million barrels of drew bid to the Hardisty terminal.
Pending our successful planned 50000 barrel a day expansion of the D argue.
We'd be handling approximately 30 million barrels of drew bid per year through the hardest terminal.
Brad will talk more about the <unk> terminal in a moment, but I would just like to remind everyone that we handle approximately 48 million barrels of crude oil at the terminal since we acquired it in 2017.
Stroud terminal has more than paid for itself during our ownership, but we're not done there.
Like at Hardesty discussion with potential customers are underway to transition the Stroud terminal to heavier.
To handle the sorry heavier grades of crude oil.
As we continue to navigate the re contracting cycle. The board of directors of the partnerships general partner made the difficult decision to suspend the partnership's quarterly distribution to utilize free cash flow to support the partnership's operations and to potentially pay down debt.
Given all of this we believe this proactive measure coupled with management's review of strategic alternatives was the prudent thing to do and we will be best position. The partnership for both re contracting for refinancing or replacement of our senior secured credit facility before it matures later this year.
This wasn't a decision.
Made lightly by any means as a reminder, the sponsor currently owns approximately 51% of the partnership and is very aligned with other unit holders. Both in seeing the partnership continued to return cash to unitholders as well as more importantly, and seeing the partnership achieve long term sustainable success.
While this was a difficult decision we remain steadfast in our commitment to providing value to our unit holders as we have in the past and are hopeful that we will be able to restore our distribution in the future if.
If we were able to renew or replace customer agreements at our terminals.
Next Adam is going to give an update on the partnership's financial results and our liquidity position and then we'll jump back and Brad will talk about recent market and commercial developments Adam.
Thank you Dan and thank you for joining us on the call. This morning.
Yesterday afternoon, we issued our first quarter earnings release, which included the details of our operating and financial results for the first quarter of 2023, and we plan to issue our first quarter 10-Q with additional details after market closed today.
The partnership reported net income of $2 million net cash used in operating activities of 600000, adjusted EBITDA of $3 3 million and distributable cash flow of negative $1 6 million.
Adjusted EBITDA included the impact of approximately $1 9 million of transaction costs associated with the sale of the Casper terminal.
We successfully closed on the sale of get Casper terminal for $33 million on March 31.
It was the first phase of our plan to strengthen the partnership's balance sheet and liquidity position during this re contracting cycle.
Dan mentioned the board of directors of the partnerships General partner approved the suspension of the partnership's quarterly distribution and the utilization of free cash flow to support the partnership's operations and to potentially pay down debt.
As we consider strategic alternatives.
The board of Directors also approved the engagement of financial advisors and counsel to assist the board and senior management with evaluating and pursue pursuing strategic options and alternative financing sources. We believe in the long term viability of the partnership's assets as key components of our sponsors D argue network and clean fuels initiative and we are.
Committed to rationalizing our capital structure and securing long term financing as we grow these next phases of the partnerships business.
Look forward to sharing more updates on this in the coming months.
And now for the details from the quarter.
Partnerships revenues for the first quarter of 2023 relative to the same quarter in 2022.
Lower primarily as a result of lower revenues at the Hardesty terminal due to a reduction in contracted capacity.
Revenues were also lowered hardesty due to an unfavorable variance in the Canadian exchange rate on the partnership's Canadian dollar denominated contracts during the first quarter of 2023 as compared to the first quarter of 2022.
Revenue was lower the Stroud terminal due to the conclusion of the partnership's Terminalling services contracts with its sole customer.
Effective July one 2022.
Partially offsetting this decrease was a slight increase in revenues at the partnership's Casper terminal due to an increase in throughput in the current period as compared to the prior year period.
The partnership achieved lower operating costs during the first quarter of 2022 as compared to the first quarter of 2022.
SG&A costs.
Pipeline fees associated with the Partnership's Hardisty terminal were lower which is directly attributable to the associated decrease in Hardisty terminal revenues already mentioned as compared to the first quarter of 2022 and.
In addition, subcontracted rail services costs were lower due to decreased throughput at the partnership's terminals.
Depreciation and amortization expenses were also lower in the first quarter of 2023, primarily associated with the decrease in the carrying value of the assets at the Casper terminal, resulting from the impairment that was recognized in September 2022, and.
In addition, the partnership discontinue the depreciation and amortization, it's Casper terminal assets during the quarter.
The assets were classified as held for sale in January of this year.
Partially offsetting the decrease in SG&A costs were transaction costs incurred during the first quarter of 2023 related to the partnership's divestiture of the Casper terminal.
Partially offset by expenses incurred in the first quarter of 2022 associated with the <unk> acquisition with no acquisition expenses incurred in 2023.
The partnership generated net income of $2 million in the first quarter of 2023 as compared to net income of $7 5 million in the first quarter of 2022.
Decrease is primarily due to the factors already discussed coupled with higher interest expense incurred during the first quarter of 2023, resulting from higher interest rates and higher balance of debt outstanding as compared to the first quarter of this year.
The partnership also had noncash loss associated with the partnerships interest rate derivatives recognized in the first quarter this year as compared to a noncash gain during the comparative period.
Partially offsetting this reduction in net income the partnership recognized a lower foreign currency transaction loss in the first quarter of this year as compared to the first quarter of 2022.
The partnership had net cash used in operating activities of 600000 for the three months ended March 31, as compared to net cash provided by operating activities of $9 2 million for the prior year period.
The decrease in the partnership's operating cash flow resulted from the factors already discussed.
Net cash used in 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 first quarter decreased by 67% when compared to the same period in 2022.
Primarily to factors already discussed.
Distributable cash flow decreased to negative $1 6 million for the current quarter and also includes the impact of higher cash paid for interest and taxes when compared to the prior year.
As of March 31, the partnership had approximately $11 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of approximately $60 million on its $275 million senior secured credit facility subject to the partnership's continued compliance with financial covenants and borrowings of $215 million.
Per the terms of the amended credit agreement with <unk>.
Partnerships available borrowings was limited to five five times its 12 month 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 $41 million as of March 31.
In April of 2023 partnership used approximately $19 million of the net proceeds.
From the sale of the Casper terminal to repay borrowings under our senior secured credit facility and retained the remaining proceeds to support general partnership purposes as of April 30, the partnership had borrowings of approximately $196 million under its senior secured credit facilities and unrestricted cash and cash equivalents of approximately $9 million.
Partnership was in compliance with its financial covenants as of March 31.
And lastly, as Dan mentioned, we are encouraged by and remain focused on converting the partnership's existing deal that capacity to our longer term sustainable drove it by rail program as always we look forward to sharing more updates with you on that in the future.
And with that I'd like to now turn the call back over to Dan.
Thank you Adam Al I appreciate the update there we'll pitch it over to Brad for the commercial update Brad. Thank you Dan excuse me as you mentioned in your opening dialogue the Canadian macro conditions continue to be challenging.
<unk> between Canada, and the U S. Gulf Coast continue to price at or near pipeline economics. This indicates Canadian supply is equal to or less than pipe egress capacity as we've stated though on previous calls it is projected that 2023 Canadian <unk>.
<unk> growth should be sufficient enough to transition this macro environment to one where supply should.
<unk> pipe egress capacity.
Biggest unknown of course is not only does the production show up but win.
Given the current high Canadian inventory levels should this growth materialize and it now appears to be more likely in the second half of 2000.
And the market has the potential to return to crude by rail parity. Therefore, given these conditions and timing issues renewing contracts in our traditional <unk> business remains challenged and our ability to possibly commercialize our hardest seat capacity is more likely in the second half of 2000.
23.
Let me give a quick update on Dr. Yu.
Effectively there is really nothing.
To add to what Dan message earlier, so let me simply restate what is critical one.
We continue to have advanced discussions with potential customers and are encouraged with the momentum and progress and two we are purpose and committed to transitioning our business to a more competitive and sustainable drew bit by rail solution.
Now I'd like to ask Josh to provide an update regarding our operating performance at the <unk>.
Thanks, Brad in regards to Tru operations that unit operated by our partner Gibson is performing quite well our rate ability run rates percentages are for plan yields for both <unk> and condensate are also perfect per plan, both on volume and spec.
I'd also like to mention aligned with our commercial efforts. We've recently completed a test on an alternative feed.
Alternative feed that test was successful.
And proved our goal of designing and operating a <unk> unit that was flexible to handle multiple range up until that feedstocks. So overall, we're quite happy with the <unk> unit and it's doing what we expected and planned for it to do I'll hand, it back to you Brad Thanks, Josh.
Great News great update I appreciate it finally I'd like to provide a quick update on our Cushing rail asset the scribe rail terminal as a reminder, Cushing is the largest crude hub in North America, providing.
<unk> advantaged connectivity and tankage capacity for both producers and refiners and more importantly, our Stroud terminal is the only real asset supporting the hub.
As the largest hub in the U S. Cushing provides access to tankage blend stocks refiners in the Midwest and the U S Gulf Coast.
Our rail connectivity then provides advantaged access to Cushing markets during both Microsoft or I'm, sorry macro cycles as Dan mentioned in his opening statement, but also and more importantly, advantaged access for unique production that does not have access to <unk> at origin and relies on the.
Rail <unk> and market access.
In that vein beginning in the third quarter of 'twenty three we expect to begin through putting waxy crude from the Uinta basin as part of the new and scalable destinations solution for this growing production base.
The basins growth ability is primarily constrained by access to rail logistics as destinations at.
At Cushing via our rail assets the market access is ratable and unlimited. So we're excited about this initial new business startup and its potential and look forward to providing updates and next steps, but Dan I'll pass it back to you.
Thank you Brad with that we'll open the call up for any questions. Thank you.
Thank you.
I would like to ask a question. Please press star one.
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And our first question will come from Kyle May with Sidoti <unk> Company. Your line is open.
Hi, good morning, everyone.
Good morning, good morning.
I was wondering if we could start with the the distribution and just wondering if you could maybe provide some color around when you would potentially plan on reinstating that.
Maybe just what it take progress on their contracts refinancing any additional details would be great.
Sure Kyle happy to address that obviously.
We never liked doing but we felt like it was prudent given the recycle state that we're in with.
The renewals so clearly as we see.
Hopefully soon.
The renew and extension of existing contracts and or our new Drupelet extension, both of which one being drew but one being <unk>.
That.
We would look that we would have increase our distributable cash flow and look then to be able to.
To get our distribution back up to speed so.
I think this year not only do we have the recycling of the of the season the market seasons here, but we also have our long term our revolver up for renewal at the end of the year and so we kind of have a double this year that were just trying to be prudent about.
And.
But as soon as we can see.
The highlights of.
The renewals and then we would look to increasing and Adam flat for yes, no I think that's exactly right. I mean, we did it to preserve our liquidity position reduce our net debt and as Dan said get us through this re contracting cycle and just as a reminder, this is something that is evaluated every quarter by our board.
And we'll obviously continue to do that every quarter.
Okay.
Does that help Kyle or do you need further calls.
No. That's very helpful. I appreciate it sure and then for the next question.
You definitely touched on some of the.
The conversations that you're having about the drill bit terminal network and just wondering if you can maybe talk and give us a little bit more detail about kind.
Kind of what Youre seeing in those recent discussions.
Maybe your confidence in winning new agreements just any more details would be really helpful.
Yes, I would say and then I'll ask Brad to jump in a final cover it completely but I would say we remain very confident.
We have when we say we have active discussions.
We're having weekly discussions on that with existing customer.
As well as new customers.
To increase their.
<unk> size and volume.
And we wish obviously it would happen faster.
Anticipated that it would happen faster, but we believe will we will see a result of that.
Very soon.
Sure.
And we look forward to being able to share that news.
As quickly as we can.
Hey, Kyle this spread I would say the most important maybe messaging and feedback would be that that one is our customer is happy with our performance and reliability.
I would say that that overall theyre happy with performance financially as well so the two of those things.
A really critical and what we can't control is is their decision process and authority process and how they get things across the line and what Theyre competing capital challenges are so that obviously impacts timing.
But I think from a performance and validation of a sustainability and being competitive which is what's most critical to us.
We're really pleased with those type of discussions and therefore, that's what gives us the.
Confidence that we think we can.
Grow our capacity and grow our relationship not only with existing customers.
Okay with over 22 million barrels already handled to that facility and growing every day. It continues to prove its importance in the industry and giving the additional as one of the.
Elected officials and Canada said, not only does it give us additional egress, but it gives us a new market destinations, which has also been proven.
Not only as an origination play coming out of Canada, but it has established a new market destination that that gives our customers customer and customers.
Better net backs and and more competitive alternatives again, with a lower carbon footprint and obviously with the SEC.
With the GHT greenhouse gas emissions and Canada being a pressure point for most producers.
Those are important pieces of that as we lower that over 30% relative to two other means of transportation all of that adds up to positive impacts for the customer that's why.
Multiple customers are at the table, that's why we feel good about.
Renewing and and as Brad said, the proven right of building success of the program is evident.
Okay, Great I appreciate the additional color.
Sure. Thanks, Scott.
Thank you.
At this time, we have no further questions. So I would like to turn the call back over to Dan Borgen for additional and closing remarks.
Thanks, everybody I know, it's a tough call in but.
No.
As your partner as Youre, roughly 50% partner here, we are committed to.
To see this thing produce get back to strong production of cash flow.
That's our intent both for all of us on the phone and we appreciate the patience obviously.
We have to remind ourselves that.
Quite often that as Brad said, the customers and customers move in different approval processes, but they are highly engaged and again, we feel good about about that happening.
I think with the volumes that we shared today just as a reminder, these assets are important to the industry. They serve a need they will continue to serve a need.
And we look forward to being able to share that evidenced by some of the commitments that we've been talking about.
As we continue to grow and transition our business into a safer and cleaner.
<unk> of heavy crude through our <unk> program.
It's the right long term strategy for the partnership.
Transitions tough.
But.
It is the right thing to do to assure long term sustainability with was cleaner transportation and safer transportation methods.
So with that we'll look forward to sharing additional updates with you.
We don't think it'll be too far in the future.
And we look forward to being able to share that exciting news with you. Thanks again for being on the call.
Thank you ladies and gentlemen, this concludes today's call and we appreciate your participation you may disconnect at any time.
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