Q2 2023 Adams Resources & Energy Inc Earnings Call

Good morning, everyone welcome to the Adams resources and energy second quarter 2023 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

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As a reminder, this call is being recorded.

Now I will turn the call over to John B flare Investor Relations at three card advisors. Please go ahead.

Thank you and good morning, everyone welcome to the Adams resources and energy second quarter 2023 conference call.

Joining me on the call today are atoms resources, and energy President and CEO , Kevin Rick Rouse.

And the company's EVP and CFO Tracy Omar <unk>.

Additionally, Greg Mills, President of both Mark asset Holdings, and White Harrison President of surface Transport company.

I'll be joining us for the Q&A session at the end of the call.

This call is also being webcast it can be accessed through the audio link on the Investor Relations page at Adams resources Dot com.

Today's call, including the Q&A session will be recorded.

Please be advised that any time sensitive information may no longer be accurate as of the date of any replay or transcript reading.

I would also like to remind you that the statements made in today's discussions that are not historical facts, including statements of our expectations or future events or future financial performance are forward looking statements and are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Forward looking statements by their nature are uncertain and outside of the company's control.

Actual results may differ materially from those expressed or implied please.

Please refer to the earnings press release that was issued yesterday for our disclosures on forward looking statements.

These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission.

Adams resources and energy assumes no obligation to publicly update or revise any forward looking statement.

Management will refer to non-GAAP measures, including adjusted EBITDA free cash flow return on an adjusted net income and earnings per share.

Reconciliations to the nearest GAAP measures can be found at the end of the earnings release.

Finally, the earnings press release issued yesterday. It is posted on the Investor Relations section of the website Adams resources Dot com.

A copy of the release has also been included in an 8-K submitted to the SEC.

Now I would like to turn the call over to the company's President and CEO , Kevin Roy Crouse, Kevin. Please go ahead.

Thank you John and good morning, everyone.

I will begin today's call with some color on the quarter before turning it over to Tracy for a deeper dive into the financials.

I will then close the prepared remarks by discussing the outlook for Q3 and beyond.

Myself Tracey and our division presidents will be available for your questions at the conclusion of the prepared remarks.

I am pleased with the improved sequential quarter over quarter performance of the company.

Adam sorry, adjusted cash flow rise from just over $5 million in Q1 to just over 7 million in Q2 of this year an increase of 50%.

Adjusted net income also improved by 800000 over the same time period.

These results were largely driven by the improved performance of our Gulfport Energy Division.

These improvements were achieved despite continued market challenges. These challenges included sticky inflation depressed chemical manufacturing falling crude oil prices oil production declines in our primary basins and even a weather event that first Gulfport Energy's largest refining customer to declare force majeure, where they had to shut down there.

Production on them.

Extremely proud of the entire team for the resilience to fight through these challenges and to deliver these positive results.

As previously mentioned Gulfport energy as performance was a significant driver of our improved Q2 results.

Although we saw lower volume in Q2 golf market successfully executing its plan to improve margins on our buy sell contracts and reduce expenses for the quarter Gulfport legacy volumes were 92152 barrels per day.

As I touched on earlier Gulfport largest refinery market was forced to shut down operations in due in June due to a lightning strike that caused a fire at the plant.

Lately, destroying one of their primary product product storage units.

The marketing team at Gulf Mark showed amazing agility by finding alternate markets to place june's already purchased barrels.

The ability to place these barrels on very short notice and to do so a comparable margin really shows the resilience of the team and the business overall.

Gulfport is Red River area in Oklahoma, and North, Texas showed volume growth as a new customer came onboard mid quarter, giving a boost to our results.

In this area. The volume grew from 26005 barrels per day in Q1 to 26139 barrels per day in Q2.

The vex pipeline and storage assets saw volumes dropped quarter over quarter, largely due to the force majeure at the previously mentioned refinery.

Which was affected by product markets feeding the supply.

Q1 barrels per day on backs, where 10088 versus 8560 barrels per day for Q2.

On a positive note the drop in volume was partially offset by the asset gaining new third party customer revenue for storage embargoes activity large barge loading activity in the quarter.

Two additional new customers were secure furnace business.

With one of the new customers, having signed a one year commitment to utilize the asset storage and barge loading facilities.

As mentioned on our previous earnings call the connection with Max Midstream Max Midstream is complete.

However, commercial in service has been delayed due to the connecting pipeline needing additional labor repairs before it becomes operational.

And the third full quarter under the items umbrella the acquisition of Phoenix soil and Firebird bulk carriers produced just over $1 million in cash flow for the quarter.

Phoenix, all margin pressures as commodity prices fell in the quarter. However, the business saw improved results improve as in June that's the commodity prices began to rise.

Firebirds hauling volumes remained steady at around 25000 barrels hold per day.

We are pleased with the progress regarding the integration of these acquisitions as we saw a significant increase in intercompany business through load sharing and customer crossover opportunities.

In the quarter the company closed on the on land in Dayton, Texas, So it'll be the future home of Phoenix soil, we expect to break ground on the rail spur later this year.

Turning to service transport company, our over the road chemical hauling division.

<unk> results were largely flat quarter over quarter, delivering approximately $2 4 million in cash flow for the company.

Continued soft chemical manufacturing environment.

As leading to excess hauling capacity in the market pressing shippers to bid out business and efforts to drive down rates.

The positive side of this bidding activity is that it affords S T see the opportunity to add new customers to its recently expanded footprint.

Setting up this division for a strong rebound when the market strengthens.

I will touch on Q3 and future outlook later in the call, but I am confident the company is well positioned for strong performance when the market conditions improve.

I will now turn the call over to Tracy for a deeper dive into the financials.

Thank you Kevin and good morning, everyone total revenue for the second quarter of 2023 with $624 $8 million compared to $992 1 million in the prior year quarter. The decline was primarily driven by lower revenues in our crude oil marketing segment, which are directly tied to the price of oil and were partially offset.

Set by revenues related to our acquisition of Firebird bulk carriers and Phoenix soil last August .

Now, let's look at the quarter by individual segments.

Second quarter revenues for our marketing segment were $585 $3 million compared to $962 5 million in the prior year quarter. The decrease is primarily due to a 34% decrease in the price of crude oil over the past year and a 3% decrease in daily volume.

Operating income for the marketing segment was $3 $4 million compared to $5 1 million in the second quarter of 2020 to the.

The decrease was due to an inventory valuation loss of $1 million in this year's second quarter versus a loss of $1 5 million in the second quarter of last year as well as higher operating expenses, reflecting cost pressures across the business.

Our transportation segment recorded $24 $5 million of revenue in the second quarter compared to $29 5 million in the prior year quarter.

Operating income was $1 1 billion versus $2 9 million for the second quarter of 2022.

The decrease was primarily due to lower fixed cost coverage brought about by reduced transportation rates and higher depreciation and maintenance expenses.

Our logistics and Repurposing segment, which consists of our burden Phoenix that was acquired in August of 2022 added $14 $8 million in revenue for the second quarter of 'twenty three.

The segment reported a loss of $133000 for the quarter, which includes the allocation of corporate overhead.

General and administrative expenses decreased by $2 $5 million from the second quarter of 2022 to $1 7 million this quarter.

The decrease is related to the reversal of an accrual related to the contingent purchase price consideration from the acquisition of Firebird and Phoenix without this accrual the G&A expenses were mostly in line with last year's expenses.

Interest expense increased to $800000. This year versus 100000 in last year's second quarter, primarily due to the term loan we put in place to finance a part of the repurchase of approximately one 9 million shares of stock from KSA last year.

Net income for the quarter was $827000 or 32 cents per diluted share compared to net income of $2 5 million or 56 cents per diluted share in the second quarter of 2022.

For the quarter cash used in operating activities was $27 $3 million, primarily driven by the timing of payments and receipts from crude oil customers and changes in inventory due to fluctuations in crude oil pricing and barrels held.

Capital expenditures for the quarter totaled $4 million, which includes the $1 8 million for the purchase of the land for the Phoenix relocation and expansion.

Our available cash and cash equivalents as of June 32023 totaled $9 million compared to $20 5 million on December 31 2022.

Total liquidity as of June 30 was $48 $6 million, which includes $39 6 million available under our $60 million credit agreement.

Now I'll turn the call back over to Kevin for some final remarks, Kevin.

Thank you Tracy I wanted to touch on Q3, and the outlook for the remainder of 2023.

It appears we will be facing challenges of continued higher costs lower oil production and a soft chemical manufacturing environment in Q3, and most likely for the balance of the year.

This will continue to make growing our oil purchasing volumes in chemical shipment volumes difficult.

As well as put continued pressure on margins.

On a positive note. It appears things are not getting worse.

We're seeing incremental improvements as the year progresses, but we may be range bound until market conditions improve.

Our large shippers are projecting flat production for the remainder of the year before growth returns in 2024.

During this time, we will continue to execute our plans are to reduce costs and grow volumes and margins where possible.

So far this plant has produced positive results as we have seen sequential quarter over quarter improvement for the last two quarters.

There are many signals point to higher commodity prices in the back half of the year and we have seen a jump in these prices early in the third quarter.

This should significantly help margins at our Phoenix, Phoenix oil division and hopefully spur additional drilling activity in the Gulf Mark and Firebird basins.

Also the refiner affected by the Lightning strike is expected to restart limited production late in the third quarter.

Since this company was founded in 1947 items, there's always overcome the challenges of a very volatile industry. Today, we are better positioned than ever to face these challenges and truly flourish when the market conditions improve.

With that I would like to open the line for questions operator.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

To the first question is from Liam Burke of B. Riley. Please go ahead. Thank you and good morning, Kevin Good morning Tracy.

Liam.

On operating expenses driver costs are a key component in there.

Are you seeing any relief there or do you anticipate any relief.

Still only from the perspective that most of our drivers are paid by the load so.

Doing fewer loads. So I think the natural expense of the drivers of it will come down, but reducing driver pay directly is not a strategy that we look to implement I think we want to be prepared to be able to.

Quickly react to customer demand when when the demand returns.

Changing driver pay what it certainly have a negative effect on that group. So we will reduce expenses just through fewer loads, but not by cutting the pay itself.

Fair enough.

I know in the refinery shut down it's vastly stopped your progression of higher barrels transported every quarter.

You talked about the <unk>.

Binary possibly opening at the end of the third quarter would you anticipate the trend of growing.

Farrell.

Shipments are getting back on trend in the fourth quarter.

I'll turn that over to Greg Mills, our president of Gulf Clark William So he can answer that question Hi, Greg.

Good morning.

I think with that refiner coming back online in September .

That does give us.

Another outlet however, I'll point out that we continued to move all the volumes most all of the volumes that we are.

Typically move in that market.

And we're easily we're able to place and pay it.

Hats off to our marketing group, but they did a great job of using our other markets.

To move the crude to on in the middle of the month, which is very good.

Not routine in the crude oil business, we do our business a month in advance usually so.

As far as that goes we will continue to grow volumes, where we can make money.

And some of the volume drop off is.

Related to some of our lower margin business that.

We do in our trading business.

Liam I'll I'll add this is Kevin again.

It's really a buy side restriction, so theres, a fine that because of the lack of production and lack of drilling in the area Theres a theres a buy side limitation to us. So we have a finite number of barrels we can purchase so when the new rate new refiner comes back online that will allow us to probably.

Divert some of those barrels back we'll continue to supply some of the new opportunities, we have but until drilling activity really increases and we see more production out of the area.

We'll be able to then buy more barrels and therefore sell more barrels on the other side got it okay, great and finally on VIX.

Third party revenue you had a little bit there that wasn't Max midstream.

Outside of Max Midstream, which will eventually come online do you see third party opportunities to actually move the revenue needle here.

Yes very much.

We're working on a number of activities they have.

Outside of the Max connection.

Which would include potential shippers on the <unk> pipeline, but especially in opportunities you do an increased amount of an.

An increased volume of Terminalling.

Our Victoria terminal, so that that business activity has actually busier than it's been in the last year and we see some good opportunities there to independently of the Max business to bring on some new.

Revenue there.

And I'll also say that with respect to the Max business I think we've got some good good targets there that will add some good value to us and bring some volume.

Great positive.

Yeah.

Great. Thank you very much.

Thank you Larry I appreciate it.

Okay and if you have a question. Please press Star then one the next question is from Chris Sakai of singular research. Please go ahead.

Yes, hi, good morning.

Hi, Chris Good morning, just a question on <unk>.

The next pipeline wanted to get your sense of Av.

Uh huh.

Barrels per day for the remainder of the year, how should we be looking at next this quarter and next quarter four barrels per day from <unk>.

I think we're going to be a little better than we've been in the last several months, we had some you know.

When you change your demand structure you changed your supply.

Rerouted some barrels around backs I see.

With the market coming back on in September that we will see an increase in VIX volume just just within our normal business routine in the next several months, so and we're actually.

Since we closed the second quarter were up a bit already from there by almost 1000 barrels a day.

So I see I see it returning to kind of where we were in the beginning of the year.

Okay sounds good and then.

For Firebird and Phoenix can you comment on.

How these these had a positive impact on quarterly cash flow.

Yeah. This is Tracy we generate a little excess of a million dollars of cash flow for the quarter again not meeting what our original expectations are but you know when we acquired it and set up our expectations the price of crude oil was substantially higher now.

As price of crude oil goes up we expect to see that the cash flow generated continued to improve this is Kevin I'll I'll add that late in the quarter when commodity prices did start to rise we saw better performance out of Phoenix and we've seen some of that continue in two.

July and August so we're bullish on that as long as commodity prices continue to move in the right direction.

Okay, Great and then can you.

Can you comment on driver attention how was that this quarter.

Yeah, maybe I'll turn it to Wade Wade would you like to talk about the drivers of retention, what you're seeing on the surface transport side.

Sure on the surface transport side, we actually recorded a pretty close to identical numbers to 2022 running a pretty much a year to date number of around 35% or so drivers we did add some driver movement, particularly.

Larry on the contractor side not so much on the company driver side.

The opportunities are fairly slim in the chemical market right now a lot of a lot of companies similar to us or it's kind of a reduced their hiring strategies based on current volumes and so I think it's limited the opportunities for drivers to move around as much as they have in the past and thats kind of help with our retention.

Most companies are kind of cut back on their hiring as we have due to volume and so it's kind of help drive or stay put which is help reduce our training and hiring costs.

Yeah, I'll, just say, okay, great sorry, Chris during this time I think we see drivers tend to flock to stable companies I believe we're one of those stable companies they're fair.

Last week announced a freight recession out there and so drivers are are looking for solid homes. So we've been able to really maintain our driver base and increase it in areas, where we can without as Wade mentioned, having much advertising expense at all of those drivers are generally just coming to us and applying.

Touch on the surface I mean Gulf market Firebird, it's pretty young.

Gulfport and Firebird have always had consistent their drivers are home every day and in some remote or areas. We don't have turnover issues like you do with the over the road fleet and the the slowdown we've seen since the beginning of the year has not really affected our turnover at all.

Okay, great. Thanks for the answers.

Thank you Chris I appreciate the interest.

This concludes our question and answer session I would like to turn the conference back over to Kevin Rudd craft for closing remarks.

Thank you Kate and thank you everyone for your continued interest in our company, we will be participating in the three part advisors idea ideas conference in Chicago on August 23rd and we look forward to providing you an update on our progress when we report third quarter results in November .

Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.