Q3 2023 Adams Resources & Energy Inc Earnings Call
Speaker 1: Interest expense increased to $1 million this year versus $119,000 in last year's third quarter, primarily due to the higher interest expense related to borrowings under the revolving credit agreement and our outstanding term loan.
Speaker 1: As Kevin previously stated, our net income for the quarter was $2.3 million, or 88 cents per diluted share, compared to net income of $2.2 million, or 50 cents per diluted share, in the third quarter of 2022.
Speaker 1: The main difference in earnings per share is the result of less shares outstanding currently because of the buyout in 2022 of the KSA and related family member shares.
Speaker 1: For the quarter, cash provided from operating activities was $11.4 million, primarily driven by changes in our working capital accounts.
Speaker 1: Capital expenditures for the quarter total $3 million, primarily for the purchase of 10 tractors, 8 trailers, and other field equipment as noted in our earnings release that was issued yesterday.
Speaker 1: Our available cash and cash equivalents as of September 30, 2023, total $16.3 million compared to $9 million at the end of the second quarter and $20.5 million on December 31, 2022.
Speaker 1: Total liquidity as of September 30th was $55.9 million.
Speaker 1: which includes $39.6 million available under our $60 million credit agreement.
Speaker 1: Now I'll turn the call back over to Kevin for some final comments. Kevin?
Speaker 2: Thank you, Tracy.
Speaker 2: I wanted to touch base on the outlook for the remainder of 2023 and into next year. It appears we will be facing challenging market conditions for the remainder of the year and potentially into Q1 of 2024.
Speaker 2: We do not see market fundamentals that point to a quick turnaround in the current environment.
Speaker 1: While we anticipate the market's eventual rebound, it is crucial for our divisions to manage items that we can control, like safety, cost reductions, service, operational excellence, and employee retention.
Speaker 1: At Gulfmark specifically, we will focus on improving margins through reducing expenses, customer negotiations, and more efficient operations.
Speaker 1: I also wanted to touch on Gulfmark's future plans for its Red River operations in Oklahoma and North Texas.
Speaker 1: This trucking operation was acquired in 2018 to provide exclusive oil transportation services to the owners of the Red River Pipeline system.
Speaker 1: Through no fault of their own, the operators of this line were unable to maintain the initial volume levels from 2018, let alone significantly grow the volumes as they expected.
Speaker 1: In fact, volumes today are down more than 50% from 2018 levels.
Speaker 1: Because of this, Gulfmark's history with this Red River system was one of continually revamping and right-sizing the trucking operations, just a struggle to do much better than break even with this operation.
Speaker 1: In October of this year, the ownership structure on this business changed and our 2018 contract was up for renewal.
Speaker 2: The new owners of this system were seeking significant transportation rate reductions, but Gulfmark required great increases to make this operation viable long term.
Speaker 2: Ultimately, we were unable to come up with a contract agreement and Gulfmark made the decision to shut operations in the Red River area.
Speaker 1: Effective November 10th, 2023.
Speaker 1: Gulfmark had approximately 60 drivers and 19 support personnel dedicated to this operation.
Speaker 1: There's unfortunate for the hardworking team in the Red River area, as they did everything within their control to provide excellent service, a safe working environment, and effectively manage costs to make this business as successful as it could be.
Speaker 1: I am thankful for their efforts and their dedication over the years.
Speaker 1: As a result of this closure, Gulfmark will see an overall volume reduction beginning in Q4.
Speaker 1: However, the impact of net income in EBITDA should be minimal over the long term.
Speaker 1: In fact, our ability to sell off the older assets and redeploy the newer Red River equipment into the Gulfmark and Firebird operations.
Speaker 1: will help us improve our cash position and nearly eliminate the need for 2024 maintenance cat-backs in these operations.
Speaker 1: Turning to our Phoenix and Firebird businesses.
Speaker 1: Phoenix will look to continue to improve margins and add customers.
Speaker 1: Firebird's priorities are continued volume growth and improving quality of revenue.
Speaker 1: We are seeing broader intercompany cooperation as service transport halls for Phoenix and Firebird Halls for Gulfmore.
Speaker 1: as our businesses.
Speaker 1: We'll continue to work together on developing new customers and projects as well as reducing our dependence on unrelated third-party haulers.
Speaker 1: We must continue to be patient with the VEX pipeline, as we are seeing some progress from MAX towards being ready to begin shipping on the line. We are still very bullish on the long-term future of VEX, particularly when drilling activity in the Eagleford and surrounding basins improves.
Speaker 1: Although they will be facing headwinds in 2024, service transport is well positioned for success when the market conditions improve.
Speaker 1: Customer feedback points to the status quo through Q1 of 2024 before improving in late Q2 of next year.
Speaker 1: In closing, our primary focus for the fourth quarter and into 2024 will be operating safely and efficiently, adding new customers, and reducing costs.
Speaker 1: I believe Adam's overall near-term results will likely be similar to our third quarter performance until market conditions improve, which we believe will begin in the first half of next year.
Speaker 1: Finally, we will continue to be proactive in looking for the incremental wins that still exist even in this challenging environment.
Speaker 1: With that, I would like you to open the line for questions. Operator?
Speaker 3: Thank you. We will now begin the question and answer session.
Speaker 3: To ask a question, you may press star 1 on your touch-tone phone.
Speaker 3: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker 3: To withdraw your question, please press star then 2.
Speaker 3: At this time, we will pause momentarily to assemble our roster.
Speaker 4: I.
Speaker 4: you
Speaker 3: Our first question comes from Liam Burke with B Riley security, please go ahead
Speaker 5: Yes, thank you so much, operator, and good morning, everyone. This is actually Nick Giles asking a question on behalf of Liam. My first question might be for Greg, and I apologize if I missed this in the prepared remarks. As Gulfmark's largest refinery customer, have they resumed operations, and if so, how should we think about the cadence of those volumes returning?
Speaker 5: Thank you very much.
Speaker 6: Yes, they have returned to operating pretty much as they were before. I would not expect any major changes going forward with respect to how we serve that refinery. In addition, we picked up a new high value customer as well during the period of time that they shut down. We've continued to service those guys as well. This overlining is we diversified and we found another high margin customer for Gulfmark.
Speaker 1: Yeah, the challenge is, this is Kevin, I'll just add, the challenge on that is because of the struggles to getting all the barrels we need to buy, we'll probably see that volume split between...
Speaker 7: the previous customer who went down coming back and the new customer we gained, we elected to split that volume between the two customers. As drilling improves in the area, we'd like to increase volumes to both of those customers as our ability to buy oil improves.
Speaker 5: Thank you, thank you both. That's helpful. I know the marketing team was really, really agile and that averting those barrels elsewhere, so that's good to hear. You touched on this a little, but maybe on Phoenix, you know, would you say the Phoenix and Firebird integration has that been progressing as expected? And when would you begin to really start to see the benefit of the overlap in Gulf Mark sites?
Speaker 7: Yeah, we're starting to see that now. You know, I think it will continually be a work in progress. You know, when we purchased those acquisitions, I don't think it's progressing as we hoped it would. The market softened shortly after we bought both of them. But that being said, I think we're seeing positive movements both in Phoenix and Firebird. Phoenix from, largely from commodity prices improving over the last quarter, them adding new customers. But we've also seen service transport become a significant hauler for Phoenix. And then Firebird is in the top.
Speaker 7: Firebird is one of the top haulers for Gulfmark. So we're seeing great progress with that. We mentioned the closure of the Red River area. We're taking that shop equipment out of that location and opening up a new location for Gulfmark. And Firebird combined in Victoria, Texas, will have a shared shop in that area and really have very little expense to get that up since that equipment will be moving down.
Speaker 7: So it's still a work in progress. I expect some more integration between the operations as 2024 progresses. Some of that needs to happen through technology and getting on the same computer platforms.
Speaker 7: From an accounting standpoint, we moved Firebird and Phoenix over to our Great Plains accounting system. We did that in the beginning of the fourth quarter. Third quarter. Beginning of third quarter, sorry. So we're making progress in all those areas. It'll just be a continual work through 2024.
Speaker 5: Got it. Well, that's good to hear. I really appreciate all that color. Maybe just one last one for me. I wanted to turn just to the chemical market. Obviously it's been soft there, and I think I heard you mention that this could likely carry into Q1. What do you think would be the main drivers of seeing a turnaround there?
Speaker 7: Maybe I'll comment first and then I'll let Wade comment as well. I think if you look at large chemical shippers, Dow, BASF, and their results that they've recently released, you get a feel for their current environment. They're really the largest drivers of what the chemical shipment market could potentially see. So when we see them start to rebound and their projections on when they're seeing orders pick up and them needing to refill inventories, I think you'll begin to see the rebound and service transport roll.
Speaker 7: Definitely benefit from that way. Do you have any additional comments?
Speaker 6: Yeah, a couple of comments. So there's been a large amount of RFP activity going on in the latter half of this year, and we've been aggressively pursuing some additional business. A lot of this business is slated to start January 1 type scenarios. And so far, preliminary feedback is we've enjoyed some success with some of these exercises.
Speaker 6: And so while we wait for, I guess, kind of our normal packages of business to come back.
Speaker 6: with our major customers, we should see some ancillary benefits from some of these new customers in their RFP packages. So I think we'll probably see the same type of sluggages through Q4. And then Q1, I think we'll see a little bit of a boost just from new areas that we're going to dive into. And then most of the larger guys are telling us Q2-ish is when their volumes will start to normalize, and so we'll see another bump then. So we're pretty well, we're somewhat optimistic about what things are to come. We've just got to get through Q4.
Speaker 5: That's clear to me. Thanks for that, Wade. That's all for me now. Thanks so much, guys, and continue best of luck.
Speaker 2: Thank you, Nick. Thank you, Nick.
Speaker 3: Our next question comes from Chris.
Speaker 3: Okay with singular research, please go ahead
Speaker 1: Hi, good morning. Just a question on ZEC's pipeline system. What was the reason for the drop in terminal end volumes for the quarter?
Speaker 6: The reason for the drop in the terminal volume is primarily some lower volume from our affiliate golf market as a shipper. And then also because that plays into terminal and VEX pipeline volume. We also had two third party customers.
Speaker 6: I think through 2Q following kind of tapering off into 3Q just based on one was a spot deal that didn't get extended and the other was a customer lost some product supply that they were counting on. And so they're having to go back and regroup and plan on coming back with more volume in the first quarter next year. But they are still a customer and doing some smaller and large volumes right now.
Speaker 7: Yeah, I'll just come and I think the customers that we've had in the terminal business on VEX have the same struggles
Speaker 7: we do purchasing the necessary barrels. So it's a tight market as far as barrels that are available out there, very competitive.
Speaker 7: And I think that's part of the reason, as Greg mentioned, they just couldn't get the barrels to lift as many barges as they would like. But we're hopeful they have some more success into next year.
Speaker 8: And on the upside, business development, we're working with several folks for some new terminally business opportunities for Victoria, Gulfmark terminals, Victoria. And we're also working with some folks who may be potential third party VEX shippers as well. So aside from hoping that Max Midstream kicks off the joint tariff opportunity, we have a good amount of deal flow, if you will, around that business.
Speaker 1: Okay, thanks for that. Can you talk about capital expenditures? Do you see any major ones in the fourth quarter, and do you have a general goal for 2024 with that?
Speaker 7: For fourth quarter we still have some tractors and trailers that are rolling in.
Speaker 7: We were early in the year optimistic. We were going to be able to spend invest money on the Dayton
Speaker 7: expansion project. Unfortunately with
Speaker 7: The engineers and the developer and the city of Dayton, it's taken a lot longer to get all the details necessary to move forward with that spending. I don't anticipate much spending in the fourth quarter on the Dayton project. Again, we have just some tractors and trailers, few things that we'd ordered well over a year ago that are still kind of rolling in. Then as we move into next year, we do expect we should be able to be in a better position just by changing the
Speaker 7: to work on the date and expansion project. And service transport will still continue to replace some of their tractors and some of their trailers. But from a Firebird and Phoenix perspective, very, very little, if any, capital expenditure is going to be necessary.
Speaker 7: So nothing significant. Yeah, and same with Gulf Mark II. So with us moving those Red River assets, those are 60 tractors, half of those.
Speaker 7: Generally, half of those will be sold or in the process of being sold right now. The newer equipment, the later model equipment will move into Gulfmark and Firebird, replacing some older equipment there that will also be sold and really eliminate the need for any tractor or trailer purchases for Phoenix, or sorry, for Firebird or Gulfmark in 2024. So, some significant savings there.
Speaker 9: Okay, can you talk about –
Speaker 1: Driver Attention at Service Transport, how was that this quarter?
Speaker 7: Wait, I'll let you take that one.
Speaker 6: Yeah, so we actually performed very well during Q3 with driver retention.
I guess it's.
It's a positive and it's a negative for the guys. You know, despite our lack of work, they really, quite frankly, didn't have anywhere to go.
You know, our terminals did a good job of spreading the work around as best that they could. We actually relaxed our hiring. Normally it's hire, hire, hire. And we didn't put a freeze in place, but we were very, very selective.
on who we did bring in. We wanted to make sure we kept the wages as high as we could.
And we actually saw quite a benefit of that. We've already reached our year-to-date, our highest referral count that we saw all of last year.
We're doing a good job with the volumes that we have and it's showing up in our turnover. So we're on track to beat last year's turnover, assuming Pew 4 goes as planned.
We do expect to bring on some additional guys during the fourth quarter just to boost up our numbers based on the additional volumes we expect to see come January . We may see a little bit of a turnover through that, but for the most part we're actually doing pretty good.
I'll just touch on I think an important key to that is we do try to hang on to the driver base even in the slower times because we've seen these cycles before need to be ready to react when the markets return. Those with capacity will benefit and we want to have that capacity but also our drivers on both sides at Gulfmark, all three sides, Firebird and service transport are paid either by the mile or by the load. So when there's fewer miles and fewer loads, they take a natural pay reduction. So there is some savings from that correlated to the levels of business.
Great, thanks for the answers.
You're welcome, Chris.
Again, if you'd like to ask a question, please press star, then 1 at this time.
Our next question comes from...
Jason Ercener with
Bumbershoot Holdings, please go ahead.
Hi Kevin and Tracy. Nice to see the recovery from last quarter with some solid results and thanks for taking a couple of questions.
Just on the Gulfmark business, do you have a way to better characterize the value-added sales and gross margin in that business?
or maybe talk about how much of the underlying crude.
that your marketing is a pass-through kind of spread business because I think one of the knocks
that you've gotten is revenue bounces around.
with a lot of volatility and if you look at the gross margin, the report...
It's pretty low.
if you're including that underlying product but as a spread.
volume business, I think the quality and the margin profile is a much more attractive sustainable level. I don't know if you have a way to kind of characterize that better.
It's challenging I'll say that in some terms not from an investor perspective from a business perspective we keep the that margin a little gray because we're providing you know we're negotiating on both the buy side and the sell side we're providing transportation services you know to move the oil either from you know from the field to the pipeline or the field to a storage location and then eventually on to the barges and then we provide the barging service you know the loading for the barging service
So
One of the reasons we don't really release what that margin is because we have to, we have.
you know, we don't really put out there because we want it a little...
flexible to be able to, if we need to reduce transportation costs to improve the ability to buy or sell the oil, we do keep that intentionally gray. So it's very difficult to really report the margin piece. I don't know if you have any piece on that, Greg, or what advantage that gives to it. I mean, we monitor kind of our internal view of the margin continually, and obviously to ensure that we are understanding what the cost is to transport from the buy to the sell side. And then ensuring that, and that gives us, I guess, the weight I'd say is an ability to understand the competitive market. And we're competing with a lot of folks that really just kind of buy on a volume basis. They're feeding you.
either a refinery or a pipeline. And our business model is different just because we are buying from a lot of long-time relationship operators. We provide a higher level of service and consistency, and then we're negotiating with the end users, processors of the oil, and even to the extent that we'll put together specific distillation curves that each of the processors are looking for. So it's a lot, I would view it not as a volume, just for the lower margin business, but it's a higher margin service related business. That also probably limits us in terms of the total number of barrels that we can purchase and sell.
I don't know if that was helpful.
It is, but I guess maybe putting it in another way. I guess when I look at the gross margin being very low, I think that kind of brings up a lot of risks as things swing negative versus as kind of a service business where it's a value added sale. It's a different characteristic so I guess maybe without getting into the margin which I understand what you're saying from a business perspective, I don't want to keep you that great.
I guess is there a way to characterize the risk in that business? How long are you holding it versus almost all the barrels that you're marketing?
Are they already kind of spoken for by the time you already have, you know?
Yeah, we don't hold. In fact, we try to keep our inventory as lean as possible, and we effectively sell everything that we buy each month. And to the extent that we go a little long or a little short, just based on normal market imbalances or barge timing, that type of thing, there's some of that. But sometimes that does show up in a, say, a carryover of inventory into the next month, just based on barge schedules. So there's some volatility there. But in general, we're not trying to play the market at all. We're buy and sell and clear barrels as efficiently as we can. Yeah, we're not projecting or we're not going out and buying as much oil as possible and hoping we have a sale for it generally.
the refiners are committing to us how many barrels they need.
and then we go out and purchase, attempt to purchase as many barrels as we can supply them to meet those needs. So it turns quickly, and like Greg say, when we see swings in inventory, it's generally because a barge has pushed either for weather or a refinery going down, or an issue like that, rather than us intentionally speculating on and holding oil. And then sometimes if those barge get pushed because of weather, so if they're scheduled to pick it up on the 29th of the month and they don't pick it up till the first or second, in most instances, Greg, you can confirm this, the refiner will go ahead and price it in the month that was scheduled for delivery, so there's no price risk carrying from one month to the next month. That's correct, and we're just not reporting.
revenue until it's list next month, but we're recording the saving the value of that deal in our inventory.