Q2 2019 Earnings Call
Thank you Chuck good morning, everyone.
Our call today will be hosted by Carlin Conner, our CEO and Bob Fitzgerald, our CFO .
Forward looking statements and certain non-GAAP financial measures.
With that I will turn it over to karla.
Thank you Kate Jake and good morning, everyone.
We appreciate your interest in our second quarter financial report and look forward to providing an update on our strategic initiatives.
Second quarter earnings were generally in line with expectations.
Primarily driven by the strong performance of our Canadian segment.
As volumes continued ramping at our newly commissioned Waveny plant.
And recently acquired Patterson Creek facility.
This growth in Canada, along with the investment to expand our Houston terminal contributed year over year earnings growth.
Bob will provide more color on our second quarter financials in a moment.
But first I would like to provide an update on our balance sheet goals and highlight some success on the commercial front as we continue to execute our long term strategy.
2019 continues to play out as a pivotal year as we manage the tension between come pleading key growth projects, while also working toward our de leveraging goal.
We have made significant progress, but recognize there is more work to be done to improve our financial flexibility.
Based on the strength of our contracted asset dependent cash flows we are setting our longer term target for consolidated leverage at 4.5 times or lower.
As we commit to this lower leverage goal, we continue to evaluate a number of options to strengthen the balance sheet, while maintaining growth optionality.
This de leveraging strategy remains the top priority and we expect to provide more details.
When appropriate but prior to year end.
From a commercial perspective, it was a successful quarter.
In Canada.
Our recently announced liquids pipeline joint venture caps received additional shipper commitments and is now 70% contracted.
This liquids takeaway pipeline development, coupled with the growth in our gas processing system underscores our view that our Canadian footprint will continue to provide organic growth optionality.
The outlook is strong as we remain very active in our U.S. liquid segment.
In the DJ Basin, we're pleased to announce that we have secured a five year contract for 20000 barrels per day on our white cliffs crude line.
Additionally, we have increased our committed rate by 25% to $2.20 per barrel, which went into effect July onest.
Demand remains strong for transportation service out of the basin.
And pipe capacity remains tight which will support our re contracting efforts.
One of our key de risking projects. This year the conversion of one of the white cliffs crude lines to NGL service.
Remains on track to come online late in the fourth quarter.
We recently completed an open season for this line due to additional shipper interest in based on ongoing discussions continue to believe demand for NGL service out of the DJ will remain strong.
Also in the DJ we continue to improve the quality of our cash flows with the execution of a long term refinery facing contract to deliver crude from apply bill hub to the local suncor refinery system.
This demand driven low multiple project enhances our platteville crude hobby position and supports our capital discipline focus.
The pipeline is expected to be completed in the third quarter of 2020.
To be clear. This capital project is included in our 2019 capital guidance.
On the Gulf Coast or more road pipeline remains on track to come online later this year.
This critical project has long term implications as it will expand and improve existing access to and from our Houston terminal, resulting in higher system throughput.
As implementation of IMO 2020 approaches.
Heated storage demand remains high for our tankage.
Since the regulation was first announced we have maintained 100% commercial utilization and have upgraded a number of our contracts with major refiners that have a long term interest in these assets.
This re contracting success highlights the stability and value of our heated oil storage.
And from an infrastructure.
I would now like to spend the next two slides the visiting our strategy.
Slide five depicts our north American liquids strategy.
Our goal is to develop a competitively advantaged integrated system that drives barrels from the top north American basins to our assets in the DJ the mid con and the Gulf Coast.
We have been very deliberate in executing our strategy over the last three to four years by divesting non core assets selectively growing our footprint and responding to customer needs. While most importantly, capturing a game changing foothold on the Gulf coast.
This strategic asset.
As the ever changing cruel landscape continues to drive volumes towards the Gulf Coast.
As a map illustrates we are uniquely positioned to provide transportation and storage services to every major crude production base in North America.
It is not only the Rockies and Permian barrels seeking access to the Gulf coast market.
Growing Canadian crude supplies will also be landing on the coast.
The common need for the market players that control. These barrels is that is they want the optionality to be delivered to multiple markets, including local refineries and exports.
The bottom line is that our Houston terminal.
We have secured the most critical piece to unlock value throughout our portfolio.
I'm excited about the capital efficient growth to follow that will further enhance our strategic investment and create long term shareholder value.
Turning to our Canadian operations on slide six.
We have had a very eventful two years that a lot of development around our Alberta footprint, which stretches approximately 300 miles from Grand Prairie and the north to Edmonton in the South.
Our legacy system is creating organic demand driven opportunities as Canadian producers ramped production of condensate and liquids driven by the current oil sands need for diluent.
The massive resource potential in Canada supports our goal to build a fully integrated midstream company.
Our strategic partnership with KKR as well as the JV with key era to build the caps liquids pipeline.
Demonstrate capital efficient de risking solutions to allow us to grow our position.
We look to leverage our existing competitive advantages to capture additional service offerings offerings, along the full midstream value chain.
Turning to slide seven.
This slide illustrates how our portfolio transformation has positioned us with an asset mix that is generating an increase an increasing amount of secure contracted cash flows.
We are a very different company than we were three years ago.
More than 95% of our total gross margin comes from fee based cash flows are contracted take or pay percentage is close to 60%.
What's driving this the focus growth of our U.S. liquid segment.
Which is 80%, 87% take or pay cash flows.
This stability along with continued execution on the commercial front gives us the confidence to continue our strategy.
Extracting additional value out of these assets as we capture additional contracted demand driven opportunities.
With that I'll hand, it over to Bob to provide more detail on our second quarter financial results.
Thanks Carl.
Starting on slide eight with our second quarter 2019 consolidated results.
Semgroup reported a net loss of $12.9 million in the second quarter.
Over $9 million less than the prior quarter due to impairments recorded in our U.S. gas segment.
Second quarter, adjusted EBITDA was $105.5 million compared to $103 million in the first quarter of 2019.
Our cash available for dividends was $43.7 million for the quarter, resulting in a 1.2 times coverage ratio.
Turning to slide nine for segment profit results.
Total segment profit was up slightly from the first quarter as increased earnings in Canada, and crude marketing were somewhat offset by lower crude transportation volumes and gas margins.
Slide 10 provides highlights for our U.S. liquid segment, which reported segment profit of $85.2 million for the quarter, a decrease of 5% compared to the first quarter.
However, when normalizing the result for a onetime item related to an insurance claim recovery in the first quarter.
And the timing of increased property tax accrual in the second quarter. The sequential performance was slightly favorable.
Our marketing business contributed to our U.S. liquids segment profit during the quarter, partially related to inventory timing, which will flow into the third quarter.
Overall, we continue to expect marketing to be breakeven or come in slightly positive for the year.
Glenn inspections at the Cushing terminal drove lower storage volumes for the quarter, resulting in total utilization of 90%. However, it should be noted that available storage capacity remained 100% leased.
White cliffs transportation volumes were down quarter over quarter, reflecting the planned conversion of one of the two white cliffs pipeline to NGL service.
That project began in May and is expected to be commissioned in the fourth quarter.
For us gas segment.
On Slide 11, we reported segment profit of $11 million down $1 million from the previous quarter.
Reflecting lower margins due to NGL and residue prices.
Overall volumes increased with expected improvements in stack volumes somewhat mitigated by lower Mississippi lime volumes.
Recent developments in our us gas and liquids segments include the sale of two small non core assets.
During July we signed agreements to sell our Sherman, Texas gas plant and our South Texas crude trucking business.
The combined sales generated approximately $11 million and net cash proceeds.
On Slide 12 segment profit at our Canadian business was $29.7 million for the quarter.
Up 31% compared to the previous period.
This increase was due to full quarter contributions from our Patterson Creek and Wap any plans along with ramping volumes.
In summary, looking at the full year, we are maintaining our original financial guidance published earlier this year.
As the first half results were in line with expectations and we expect second half improvements to be driven primarily by growing Canadian volumes.
Now I'll turn the call back over to Carlin for some closing comments.
Thanks, Bob in closing I want to thank our teams in the us and Canada for a good quarter of operations and for their continued commitment to safe reliable and embark environmentally responsible service.
With that I will now turn the call over for questions operator.
We will now begin the question and answer session to actually 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 your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
The first question comes from Tristan Richardson with Suntrust. Please go ahead.
Hey, good morning, guys. Appreciate the update on the strategic priorities and then the long term leverage target.
It seems as though Youve got some things percolating that could materialize. This year would you characterize that.
Divestiture program or or things that you're looking at is something that can be transformational from a leverage perspective or more of a modest streamlining of the portfolio similar to the.
The recent businesses you sold in the current quarter.
Thanks, Chris and this is carlin.
I believe we are working on several levers and I think they could run the gamut from transformational to more modest.
But the most important thing is that we are.
Attacking it and we hope to have an update fairly soon.
Helpful. And then your comments on strong demand for NGL service out of the DJ.
Just to clarify the open season is that contemplating the expansion from the initial 90 day to 120 potential you've talked about in the past and then is it possible or feasible on the existing pipe to go above a 120 type of capacity.
Justin This is Bob right now our focus is to control.
Currently fill up to the 90, so it's not it's not going to be an expansion of that at this stage, although we're certainly working through the commercial aspects of it.
What we've been able to do is locked up on affirm de risk basis, some additional commitments onto the pipe and that that process is ongoing even though the open season closes there's still a lot of quite a bit of interest out there.
Helpful. Appreciate it thank you guys very much.
The next question comes from Kyle May with capital One Securities. Please go ahead.
Good morning on the on the.
Yes crude pipeline can you walk us through the contracts that are rolling off in the second half of the year and how we should think about the mix between contracted and walk up volumes and the rate going forward.
Okay, Calluses, Bob with regard to the contract timing.
We are in the middle of commercial negotiations right now so we don't want to be specific on exactly what's going on as you know we have 72000 barrels a day that had been committed to the pipeline.
For a number of years going onto the four or five years right now.
Some of that is going to be rolling off this year, and we did as we announced.
Re contract part of that goal for the 20000 barrels a day.
There is going to be another chunk that comes off late next year third fourth quarter of 2020.
And we will be working on those concurrently the rate structure itself as you pointed out in your note actually this morning. The current agreement that we have posted with the FERC is for 20000 to 30000 barrels a day.
At $2 a barrel.
So anybody that's wanting to sign up for that is eligible to do that during this open season, we will likely follow up with some additional may be tearing structures into the future so that option still available to us.
Got it that's helpful.
And maybe looking at the U.S. gas segment can you give us an update on what you're seeing in the mid con and thoughts about us gas for the remainder of the year.
Sure Yeah, we're continuing to monitor producer activity in the Mississippi lime and the stack. We have good line of sight to increasing volumes in our stack position, but we have less volatility and visibility in the in the Mississippi lime play.
Now as you May know amplify completed their merger of Midstates petroleum earlier. This week. So it's still early days for us to get a good read.
On what if any incremental drilling amplify may do during the second half, but at this point, we're assuming that there will be some additional drilling workover drilling in particular going on.
Mako Darla Big Mississippi Lime player. There also continued drilling during the quarter.
But given given where we're at right now we do see that.
The stack volumes will be increasing going into the second half.
That's that's pretty clear for us right now.
But it's just a little unclear to us exactly how much incremental drilling we will see how the Mississippi lime.
And that provides a little bit of headwind into our forecast for the year for gas.
Okay got it thanks, I'll jump back in queue.
The next question comes from Shneur Gershuni with UBI. Please go ahead.
Hi, good morning, everyone.
I was just wondering if we can start off on the levers that you can pull for ban on bringing down leverage to achieving your goals.
Yes, first if you can talk about how the board is considering the dividend.
Clearly that's a lever that that can be pulled back and certainly avoid equity or reduce any equity needs over time.
And just wondering if people hired any advice.
Hi engineer.
Was that the end of it you fell off at the end Yeah, I think he Hong Kong piece no longer in the queue.
Okay.
I would like to again, if you have a question. Please press Star then one.
Well, let me go ahead and answer generics question Okay.
So meaning is listening.
Yes, so with respect to the dividend leverage interplay.
Let me first address that.
We regularly assess the policy the dividend policy and we'll continue to do that throughout the remainder of the year.
Given the current dividend yield and market trends, we understand the scrutiny of our policy.
While the implied cost of the capital is high.
And it is a very important consideration there are also a number of factors that we look at.
We hope to provide some more clarity as soon as appropriate on on those capital allocation priorities.
As far as.
How we deal with the leverage.
We continue to look at opportunities.
That we've we've been identifying now for over two years, we feel like that there is a there is opportunity to.
To transact and execute around.
Those ideas that we've already shared.
Numerous times with respect to an adviser.
We've had advisors working for us for over two years working on capital raise initiatives and.
We continue to have that good support and we appreciate their hard work.
The next question comes from Josh Golden.
With JP Morgan. Please go ahead.
Unfortunately, Josh has also left the question queue.
We have mr. schnorr back with Us Schnorr Shawnee.
Yes.
Please go ahead.
Hi, sorry about that guys.
I'm not even sure if you caught my question before we got disconnected.
My question was really about how the board is length of the dividend on a go forward basis as as a lever.
And whether that is hired any advisors to help you with this process of achieving.
The leverage targets that you've outlined.
Yes, we did answer your question, maybe you didn't hear it.
Well, let me let me think.
Kind of clean it up a bit we have hired advisers, but weve had advisors for over two years working with us on capital raising this initiatives.
And and the management team in the board clearly understand the interplay between between the dividend and leverage and we will continue to.
To monitor.
Our developments and hopefully we'll have some clarity on our capital allocation priorities real soon.
Okay.
As a follow up one of your peers I believe next year partner DCP noted on its recent call that is embarking on a significant cost reduction exercise. Some group looking to do something similar is participated review process that you're looking at right now.
Ongoing.
Observation of.
Our DNA in our cost structure.
Is is something that.
We we obviously manage.
I would say with.
Capital allocation and really trying to figure out how we work through some of the challenges we have.
Ongoing it clearly becomes a an area that we have to be very focused on.
Okay.
And one final question is different data timeline on the IPO Canadian business.
I think you had said earlier in the year that.
You would you like to.
So you know this business has that been accelerating delays at all.
Well, we're really excited about the developments in Canada continues to develop as we had hoped.
What we have said previously is that the business itself probably wasn't.
Wasn't quite seasoned enough to be an IPO candidate and we also do not believe the Canadian equity markets or.
They level yet to us. So we continue to work hard creating the secured cash flows that we think will be highly valuable.
For an IPO sometime in the future I think we said 12 to 36 months and we're probably in month six.
Got it all right. Thank you very much I appreciate the color today.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Carlin Conner for any closing remarks. Please go ahead.
Thank you all very much for joining us today. We appreciate your continued interest and support have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.