SEMG Q2 2018 Earnings Call
Operator: Good morning, ladies and gentlemen. And welcome to SemGroup's Second Quarter 2018 Earnings Conference Call. As a reminder, this call is being recorded. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the call over to SemGroup's Head of Investor Relations, Alisa Perkins. Please go ahead.
Alisa Perkins: Thank you, Danielle. Good morning, everyone. Before we begin today, I would like to remind you that our earnings release and presentation for today's call include projections, forward-looking statements and certain non-GAAP financial measures. We encourage you to read our full disclosures and our latest press release, slide presentation and SEC filings for a discussion of those items, including reconciliations to GAAP financial measures. Hosting the call today is Carlin Conner, our CEO and Bob Fitzgerald, our CFO. With that, let me turn the call over to Carlin.
Carlin Conner: Thank you, Alisa, and good morning, everyone. We are pleased to be here today to review SemGroup's financial performance for the second quarter and provide a business update We continue to make progress with our strategic transformation, and I’m pleased with the results so far. We have streamlined our portfolio and integrated our new terminal on the Houston Ship Channel. From an asset and cash flow perspective, we are a much different company than a year ago. We now enjoy a much stronger downstream facing position with nearly half of our earnings coming from demand for customer. The increase in more secure commodity shielded cash flows provide balance to our upstream facing business. At the same time, we continued to leverage our existing assets with projects like the STACK gas expansion and the announced conversion of one of our White Cliffs Pipeline to NGL service. In the second quarter, adjusted EBITDA grew 6% over the previous quarter, providing quarterly dividend coverage of 1.4 times. We are on track to finish the year within our guidance range of $385 million to $415 million, up significantly from last year. Importantly, we have increased our Take-or-Pay Cash Flow to almost 60% by transforming our portfolio. From a balance sheet perspective, our most pressing priority is to continue our capital raise initiatives that would allow us to reach our leverage goals. We have raised over $800 million to-date and we are pursuing other financial transactions to be announced. We remain focused on disciplined CapEx spending. At mid-point 2018 we have spent about 60% of the $350 million we are guiding too for the year. We continue to execute on projects in key regions while optimizing and adapting our assets to serve changing market demands. On the Gulf Coast, our fifth deep-water ship dock was completed in June as well as an additional 1.45 million barrels of contracted crude storage, which began generating revenues in the third quarter. HFOTCO continues to position us to serve customers and market segments in many different ways, and to be an active participant in the growing export market. Projects around our sour gas footprint in Canada are progressing. The Wapiti plant is on track for start up in early 2019, which we expect to have fully committed by the end of this year. In addition, Smoke Lake will be coming online in late 2019. In the Mid-Continent we are making progress on the conversion of one of the White Cliff lines to NGL service. The converted line will move Y-grade from the DJ Basin to Cushing, and then onto Mont Belvieu via DCPs Southern Hills pipeline and is expected to be in service in fourth quarter of 2019. Overall, during the second quarter, we improve results and cash flows. We focused on prudent capital spending and continued to advance financing transactions designed to reduce leverage. All of this was achieved while staying extremely proactive on the commercial front focusing on high returns, strategic opportunities. For a closer look at our second quarter results, I will hand the call over to Bob.
Bob Fitzgerald: Thank you, Carlin. Yesterday SemGroup reported a net loss of $2.7 million in the second quarter, compared to a net loss of $33 million in the prior quarter. The improvement is primarily due to lower income tax and interest expense pertaining to non-recurring items recognized during the first quarter. Second quarter adjusted EBITDA was $99 million compared to $93.4 million in the first quarter. The 6% increase was due to stronger crude volumes and margins, as well as the absence of a one-time insurance claim write-off recognized during the first quarter. We declared our quarterly dividend yesterday, and Carlin noted, our coverage is 1.4 times. We ended the quarter, with a total consolidated net leverage ratio of 5.6 time and consolidated available liquidity of nearly $652 million. Our consolidated leverage increased quarter-over-quarter, resulting from the final HFOTCO acquisition payment in April and our ongoing growth project in the Gulf Coast in Canada. With our current plan, we believe, we can achieve our leverage target of five times by the end of 2019 without the issuance of common equity. During June, we successfully refinanced HFOTCO term loan B which lowered the interest rate margin by 75 basis point and extended maturity to 2025. Concurrent with this refinancing, we repaid and terminated HFOTCO revolving credit facility. HFOTCO current debt is now covenant like and remains independent at SemGroup’s corporate credit facility. Turning to segment profit, second quarter results improved over first quarter and all but one of our operating business units. Crude Transportation's second quarter segment profit was $38 million compared to $34 million during the previous quarter. The increase was driven primarily by higher White Cliff’s Pipeline volumes, which averaged 135,000 barrels per day for the quarter, reflecting the success of our incentive rate structure to attract uncommitted barrels in the basin. During the second quarter, we were able to capture additional uncommitted barrels that we don't expect to retain in the third quarter as they migrated to the LOS market. Crude facilities reported second quarter profit of $10 million, a slight increase from last quarter as storage and throughput volumes remained relatively flat with the first quarter. Crude supply and logistics recorded a $4 million improvement from first quarter $6 million loss due to improved basis differentials. Looking forward, we expect continued market volatility in the near term and maintain our initial guidance of negative $10 million to $15 million segment profit for the full year. HFOTCO posted second quarter profit of $35 million essentially the same as the first quarter profit when adjusting for the $4 million write-off of an insurance claim. We expect HFOTCO to increase in the third quarter, the ship dock 5 in the related crude storage facilities begin contribute cash flow. Turning to SemGas, second quarter segment profit was over $15 million, the increase over the previous quarter was due primarily to higher STACK volume. Kind in mind, STACK volumes are at a lower overall margin when compared to Mississippi Lime contracts which included a gathering fee in addition to the processing fee. SemCAMS results were flat as lower processing revenue from the KA plant turnaround was offset by higher cost recoveries and favorable timing issues. The plant was down for 31 days during the quarter and has been back and running since June. Corporate and other was down due to the absence of SemLogistics and SemMexico earning as these businesses were previously sold. I'll now turn the call back over to Carlin for closing comments.
Carlin Conner: Thanks Bob. I'd like to close by thanking our employees for their steadfast execution against our well-defined strategy. Our commitment to our goals has never wavered even if it meant adapting tactics to changing market conditions. We power through and have reposition the company while reducing risk, growing absolute cash flows and gaining a foothold on the Gulf Coast. For the back half of 2018, we are focused on four priorities. Executing projects on time and on budget, delivering strong financial results, achieving our balance sheet goals while executing on low multiple growth in and around our footprint. Above all and as always we commit to our core value of operating and growing our business in a safe and responsible manner. With that I like to thank you for your time this morning and now I'll turn the call over for questions.
Operator: [Operator Instructions] The first question comes from Elvira Scotto of RBC Capital Markets. Please go ahead.
Elvira Scotto: Hey. Good morning everyone. Can you give us an update on the White Cliffs, the NGL conversion, any additional interest from third parties? Also any concerns around initiative 97 potentially being on the ballot in Colorado?
Carlin Conner: Hello, Elvira. This is Carlin. Let me take the first part and then I'll hit the initiatives 97 question. On the open season, we accomplished where we had hope to accomplish in conducting the open season. We went out and by having the open season we discovered barrels that needed to flow and we now have the lot of barrels either committed to a marketing partner, our partner in the pipeline are potentially will be shipping on their own. So we feel like the open season was successful. The feeling we have at this point in time and I think our partner expressed this yesterday as well in their call is that the original economics of the project we definitely we'll be exceeding those going forward. As far as the initiative 97, clearly that is a major issue for our Colorado customers and ultimately the Midstream space. We think of this issue is something that is ongoing. There still a lot to be determined. I think at this point in time we do anticipate that the signatures will be ratified so that the initiative will hit the ballot. Having said that, we also recognize that the oil and gas industry in Colorado is massive, and the upwards of $20 billion to $30 billion in GDP is generated per year by the oil and gas industry. I think I've read over 200,000 jobs are impacted potentially by this initiative or generated by the oil and gas industry with those large majority would be potentially at risk if this initiative passed. So we're paying very close attention to this. I think it's going to be a story that's going to kind of unwind itself over the next couple of months, but it's something to pay attention to.
Elvira Scotto: Thanks for that. So moving over to supply and logistics, I know you haven't change the 2018 guidance, but shouldn't supply and logistics benefit from some of these -- the various differentials. And then maybe can you talk about how supply and logistics can work with HFOTCO to maybe capture incremental margins?
Carlin Conner: Yes. Let me take the HFOTCO piece and I'll let Bob answer the first half of the S&L question which is more about the Mid-Con. We definitely believe and that HFOTCO is an asset that with a strong strategy around Gulf Coast having that position should provide opportunities for us to nibble around the edges and make some money around that asset, optimize that asset. When we bought HFOTCO we had considered that there would be potential some corporate earnings that would fall in the S&L bucket that would be generated by the ownership of that asset. We're still working through that. We really haven't seen any of that yet. We're getting our strategy in place and we're also the staff, they needed to execute around the asset. Bob, do you want to answer the Mid-Con question.
Bob Fitzgerald: Sure. If you think about 2018, Elvira, and what we're looking at from the second quarter reading through to second half. The second quarter benefited from stronger blending margins which are largely going to be related to quality in crude differentials in market that feed into Cushing where we do all our blending. So it's a fairly limited footprint and it's really driven by what those differential look like coming into Cushing. And we also had benefited from a widening location spread relative to North Dakota. And that help us to recover some of our take-or-pay commitments we've had on dapple. We still that still contracting a little bit this year, so that's why we reaffirmed our guidance. We don't see it really blowing out beyond that. We think we're still low within our range.
Elvira Scotto: Helpful. Thank you. And then just the last one from me for now. Can you talk about the dynamics around Cushing storage? Any updated thoughts giving backwardation and your contracts rolling off next year. Maybe remind us what percent of the capacity is contacted by customers that use that storage for operational purposes versus contango trades [ph]?
Carlin Conner: Yes. This is Carlin. Clearly the market is softening a little bit in Cushing and as we are moving into renewal discussions we see a little bit of softness relative to $0.33 per shale barrel average. However we are being a little more creative on the releasing of those assets and at least maybe lower numbers and trying to create mechanisms for us to capture some upside as the market returns. We do believe that at some point contango will pull it back in and that storage will be valued. So – but in the mean time as we've re-contract we are thinking about Tanner and we're thinking about ways to mitigate downside pricing that we put on the on the tankage today. So we feel pretty comfortable with where we are. There's quite a bit of tankage as you know that is coming on and off, and we'll continue to execute on the re-contracting.
Elvira Scotto: And so, just to follow-up on that, so the rates that you're seeing now versus the $0.33, I mean, are we talking mid to high 20s?
Carlin Conner: Well, we are in the middle of negotiating. So we really don't want to share too much. But I think I would like to kind of leave it at, it's less than our average $0.33 rate.
Elvira Scotto: Okay, great. Thanks a lot.
Operator: The next question comes from Tristan Richardson of SunTrust. Please go ahead.
Bronson Fleig: Hey. Good morning, guys. This is actually Bronson Fleig filling in Tristan. Looking at the leverage outlook and the target of five times, by the year in 2019, just curious on the assumptions for project add backs there? The disclosure you offered was helpful on the 50 million and project add backs for the quarter. Should we expect that add back number to increase in 2019 as you approach completion of many of these large projects that are yet to be contributing?
Bob Fitzgerald: Hi, Bronson, this is Bob, I'll take that. As we see these projects, I think you're referring to the material project adjustment that we outlined, the reconciliation. Those will – once those projects come on line their add back will get reduced and our actual start flowing through there. So we will go ahead and lower what those projects add backs are for any specific project as we start seeing and realizing the actual EBITDA coming on board. As those new projects come on there some possibility that that continue to evolve over time. And we effectively just follow the same methodology that we employ in the senior secured credit facility at SemGroup in terms of material project add back.
Bronson Fleig: Okay. Great. That's very helpful. And then one last one for us on SemCAMS, just acknowledging in the quarter was impacted by the KA plant turnaround. We were wondering if you could guys could just touch on the outlook for the balance of the year and from initial 2018 volume guidance is still relatively intact following the quarter?
Bob Fitzgerald: It's Bob, again. Yes, we still feel pretty confident about our volumes coming through. As I mentioned earlier the plant was down during pretty much the month of May then up and running since early June. So everything is working as we expected today. And even that downturn or excuse me, the plant down -- turnaround was factored into our guidance. So we look at steady flows going through this year obviously until we see the big step up which will happen early 2019 when we bring on Wapiti. And then as Carlin noted in his comments at the end of 2019 we'll also have the benefit of Smoke Lake. So 2019 will be a pretty big step year for us.
Bronson Fleig: Okay, good. Thanks guys.
Operator: The next question comes from Justin Jenkins of Raymond James. Please go ahead.
Justin Jenkins: Great. Thanks. Good morning everybody. I guess if I could start on the guidance front. Carlin, could you maybe frame the different aspects of the forecast that might push us towards the high-end or the low end of the 2018 guidance?
Carlin Conner: Yes. So we reaffirmed and therefore we still believe our forecast is right around that midpoint, the things that we were paying attention to, obviously our White Cliffs volumes going forward. As we mentioned we had a really strong second quarter that was -- we do not believe we will repeat, therefore we need to make sure we understand that. We still believe we'll going to handle more barrels and White Cliffs than take-or-pays, but there's some room there to flex one way or the other. And then I think S&L, S&L has always been the most difficult portion of our portfolio to tag, mainly because the market gives us what we can do there. And as differentials move around we hope to continue to maybe beat our forecast so there could be some upside, but at the same time we could see differentials go in the other direction that could create more tension to the downside. So we felt it was comfortable for us to kind of keep the range where it is at this point in time. We'll learn more obviously in the third quarter.
Justin Jenkins: Perfect. Thanks for that. And then I guess moving on to the new projects. How we think about the EBITDA ramp from that timeframe perspective with the new HFOTCO assets and service and also maybe the same question for the Wapiti plant in early 2019?
Carlin Conner: Yes. So the HFOTCO crude expansion, it is now in earning service, right. So we're going to see the impact of that in the second and – third and fourth quarter. The Wapiti plant, that's a 2019 event, so it will not impact us at all. From a CapEx spend, we are right on target of 350, 350 is our guide for CapEx in 2018 and with both of those projects ongoing, one being essentially complete and the other still ongoing, we sill forecasting that. We'll hit that number on the capital side.
Justin Jenkins: Perfect. Thanks Carlin.
Operator: This concludes our question and answer session. I would now like to turn the conference back over to Carlin Conner for closing remarks.
Carlin Conner: Thank you all very much for joining us today. We appreciate your continued interest and support. Have a great day.