Blueknight Energy Partners, L.P. (BKEP) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is Carl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Blueknight Earnings Conference Call for the First Quarter 2021. All lines have been placed on mute to prevent any background noise. I would now like to turn the call over to Matt Lewis, Blueknight's Chief Financial Officer. Please go ahead, sir.
Matt Lewis: Thank you, and good morning. We are pleased to welcome you to Blueknight's conference call where we will discuss financial and operating results for the first quarter ended March 31, 2021. After our prepared remarks today, we will open the lines to address any of your questions. As a reminder, the earnings release, which can be found on our website, includes financial disclosures and reconciliations for non-GAAP financial measures that should help you analyze results. Comments and answers to questions during the call today may include forward-looking statements that refer to management's expectations or future predictions. These statements are made as of the date of this call, and management is under no obligation to update these forward-looking statements in the future. They are subject to risks and uncertainties that could cause actual results to differ from management's expectations.
Andy Woodward: Thanks, Matt. Good morning to everyone who dialed in? On today's call, I will walk you through highlights during the first quarter and update you on our growth strategy and then Matt will provide additional details on our financial results and key metrics. I will also like to encourage our investors to go back and listen to our year-end 2020 call just a few months ago, since it is our intent once a year to provide a more thorough update on our strategy, business and where we are in our journey of transforming Blueknight into a leading pure-play infrastructure terminalling company. Now turning back to our first quarter highlights. As mentioned our last call, we successfully closed our crude oil business transactions during the first quarter. Post this sale, we now have a much cleaner story and more focused strategy along with a healthier and more supportive balance sheet to manage and grow the business going forward. It also gives me great pleasure to report a solid first quarter from continuing operations. Matt will go into this in more detail, but I'm very encouraged to see our business outperform last year and distributable cash flow up 11% year-over-year. Furthermore, even despite our earnings tending to be at its lowest level in the first quarter due to seasonality, we maintained top-tier financial metrics with common distribution coverage of approximately 1.6x and leverage of 2.1x. Operationally, during the first quarter, our sites remain fully contracted and we've made considerable progress on our contract renewals for the year. As of today, our facilities storage levels are modestly full driven by customer perceptions of pricing and anticipated future supply prior to the summer construction season. We are seeing more favorable macroeconomic dynamics as the economy reopens further and refineries continue to increase utilization back to pre-pandemic levels to meet this demand. We are also encouraged by both the federal and state attention and funding proposals to maintain and improve our nation's roadways. Many States are directing unexpected budget surpluses to much needed infrastructure projects, and we believe the current White House Bill similar to prior proposals would potentially represent a 30% to 40% increase in annual federal spending. Although many details of the bills are under debate, the need for roadway improvement remains as one in five miles of roads are considered in poor condition. With that said, it's too early in our season to know the impact of these factors on this year versus our more bullish view over the next five years. So as a result, our outlook for 2021 remains unchanged and in line with the prior year.
Matt Lewis: Thanks, Andy. Yesterday, we reported financial results for the first quarter ended March 31, 2021. As a reminder, with the sale of the crude oil business, which closed during the quarter, these segments are presented as discontinued operations. Certain metrics may include both continuing and discontinued operations. However, please note that all references to non-GAAP measures, such as adjusted EBITDA, distributable cash flow, recovered ratios reflect continuing operations, which we believe is the more appropriate comparison for the business on a go-forward basis. Reconciliations of such measures to net income are explained in our earnings release issued yesterday, in the section labeled non-GAAP financial measures. Additional information regarding the partnership's results of operations will be provided in our quarterly report on Form 10-Q, which we expect to be filed later this afternoon with the SEC available on our website. Now looking at Blueknight’s financial results. First quarter 2021 net income was $81.7 million and included a $75.1 million gain related to the sale of our crude oil business. This amount was calculated based on the difference between our net book value and estimated net proceeds from the sale agreements. If you recall, during fourth quarter 2020, we reported an approximate $39 million loss related to our crude oil trucking and pipeline segments, that were previously classified as assets held for sale. Losses are recognized when the impairment is identified and gains are recognized when the transaction closes. First quarter of 2021 adjusted EBITDA from continuing operations was $11.4 million, up to $0.4 million or 3% compared to the prior year. Excluded from adjusted EBITDA was $0.8 million of transaction fees, severance, and other costs related to the sale of our crude oil business. Distributable cash flow from continuing operations was $9.0 million for the first quarter of 2021, up $0.9 million or a 11% compared to the prior year.
Operator: Thank you. We will now begin the question-and-answer session. The first question comes from Jeff Bailey from Beach Capital. Please go ahead.
Jeff Bailey: Hey, Andy and Matt, another great quarter. My first couple of questions are for Matt. Matt, I’m wondering, if there’s any ranges around the preferred buyback as far as dollar amount or number of shares.
Matt Lewis: Good morning, Jeff. Appreciate that. In terms of kind of how we communicated the preferred buybacks, even on the last quarter, I mean, we use the term opportunistic and that’s due in part to how we think about capital allocation. I mean, first we always -- we think about that. We feel like we’ve checked that box now being at 2.1 times. Then thereafter, I mean, we think about – clearly, how do we grow the business. And so redeploying that capital into high returning projects on a risk adjusted basis. And so absent that would you think about, opportunistically, repurchasing preferred units, which is what we did. And so it’s not part of kind of necessarily a broader program and I think we want to maintain that flexibility. We’ve got that flexibility in our credit agreement. And so that’s something that we want to continue to preserve and protect on a go-forward basis. But I’d say somewhat of a moving target where we think about just, to the extent, like in this scenario, we were able to lift up pretty significant kind of tranche of shares at one time, we went ahead and took action.
Jeff Bailey: Okay. So it’s fair to say that dependent on price, you all may be in the market at any given time. And also you may – investor should give you a call if they have a block they want to sell price dependent, of course. Is that fair to say it’s ongoing?
Matt Lewis: Yes. That’s totally fair.
Jeff Bailey: Okay. Matt, my second question, concerns inflation, obviously, the CPI numbers are coming out really subdued and a lot of our monetary officials are making optimistic comments, but there’s all sorts of anecdotes of some pretty wild inflation, especially in raw materials markets. Anecdotally, are you seeing a lot of inflation in the different corners of the business that you operate?
Matt Lewis: No. Maybe I’ll kind of let Andy add to it as well. But we really haven’t seen a lot of inflation necessarily in the business. I mean, I think it’s a fair comment, look at some of the other commodities out there, lumber and certainly kind of see that it’s maybe different from what we’re hearing kind of from higher levels. But I would say we really haven’t seen that impact necessarily on our end yet.
Andy Woodward: Yes. Big question, Jeff, and clearly, like you said, this is a very hot topic right now from a U.S. economy standpoint. And like Matt said, we aren’t seeing it impact our business. And I think one of the benefits of our model is, we don’t take title to inventory. And so it’s truly a almost tolling type arrangement at our sites. And so the impacts that we see directly from any inflationary standpoint is minimized, I think by that as well. Now, obviously we are spending capital and clearly that could lead us to be buying equipment. But again, we’re not seeing any high inflationary measures impacting that as well.
Jeff Bailey: Yes. And that was – that kind of addresses my follow-up. And so just to really narrow it down. The 10-K makes clear that a lot of the contracts are at least loosely index to the CPI. So is there any danger to the margins from strong inflation, we know you don’t take entitled inventory and a lot of the costs are reimbursed. But is there any danger to the margins either from other expenditures besides maybe CapEx that our HIPAA inflation or is there any basis risk where you have contracts that are tied to in the CPI, but other costs may not be so closely linked to CPI that could affect margins.
Andy Woodward: Again, Jeff, I think the way our model and contracts are structured is a very minimal impact to the downside from the impacts of inflation. Matt had mentioned in his statements that just this quarter we were 99% take or pay and that excludes variable reimbursement revenue. And so things that we pass-through – that are passed through that show up both in revenue and OpEx for us are things like utility costs. And that's probably one of the biggest expenses out there related to our activity. But again, it's a pass-through cost directly to our customers. So we don't feel that expense directly.
Unidentified Analyst: Okay. And then Andy, my last question is kind of a broader kind of more philosophical question. You all are adopting really a lot of corporate best practices and thinking long-term and the philosophy is very unit holder oriented. So as you sort of blaze a kind of a new trial here for an MLP, how should investors evaluate your success? Historically, they've looked a lot to distribution growth and capital. The appreciation of the unit price hasn't been so prominent, but as you look at how investors should measure your progress over the next several years, what metrics are front and center for you?
Andy Woodward: Yes, Jeff that's a good question. And probably a question we can spend a lot of time around. I think and I've said this before. I think I said this on the last call. What we're focused on here is a strategy that I would almost characterize as a more corporate like strategy to run this business and create value over the long-term in a very sustainable manner for our investors. And so the metrics that will drive that we will care about are, total return values, meaning not just distribution and yield but a total return to our investors. It's going to be looking at DCF per unit, accretion year-over-year, which we will take into consideration any units that we issued to the market which again we plan to minimize and self-fund this business as much as possible as we pursue our growth plans. And so, again we are not driven by the MLP structure first or a distribution policy first. This is about creating as much value over the long-term in a very sustainable manner for all of our investors going forward.
Unidentified Analyst: Okay. So it's fair to say, you're looking at really the superior corporate metrics from a return on invested capital and the amount of economic value created with a charge for equity, implicit charge for equity, what we've learned the best corporations do is that fair to say, Andy?
Andy Woodward: No, that's exactly right. Jeff, I'm a big student and a big believer on return on invested capital. So those are the exact type of measures that we think end up generating a lot of thought, the most value for our investors over the long-term.
Unidentified Analyst: Okay. That's all my questions. Thanks Andy and Matt.
Matt Lewis: Thanks Jeff.
Andy Woodward: Appreciate it Jeff.
Operator: The next question comes from Steve Chick with Yucaipa. Please go ahead.
Steve Chick: Hey guys. Good quarter and good start to 2021 here. I guess my first question is, Matt it looks like the asphalt business had a little bit of an acceleration versus what you reported last quarter the fourth, and I'm looking at that kind of the 5% year-over-year growth in asphalt margin and you did call out the change of the contract and renewal, which also was in place last quarter. So I'm just kind of wondering if that's – if I'm reading – if I'm seeing that right, that there might be a – I don't know if that's better execution or what, but if the business did kind of have a bit of an uptick as we had in for the first quarter here.
Matt Lewis: Yeah, thanks Steve. When we look at this quarter, the fixed nature of it to kind of year-over-year, a lot of that is a function of the new contracts that we have in place. And what was renewed kind of in the second half of last year, which again, is kind of a nice baseline to think about on a go-forward basis. And then, really the variability that we talk about that we had a nice year, last year from a variable revenue standpoint. We had great weather and a lot of activity kind of at the beginning of the year and that extended, I think, through the second half of the year as well. And in certain areas like the Rockies, for example, that we just saw a lot of activity. And so, that's really kind of, once we get to the third and fourth quarters this year, you should see kind of that increment above the base. But yes, we did see some improvement this year-over-year as a function of the contracts we renewed.
Steve Chick: Okay. And I know, it's small, but within revenue for this quarter, you had a bit of a contribution from the variable throughput and that that's a line item. I think seasonally, we don't normally see additive this early. I don't know if that's kind of indicative of more what that we can see as year goes on. And again, I know it's small, it looks like it's about 120,000, but it's given to the high margin of that line item typically it's it kind of just stood out to me. Is there anything to speak to that or?
Andy Woodward: Yes, Steve, this is Andy. Not really, I wouldn't look into that too much in the first quarter because we tend to have those types of variable revenues that small amount show up in the first quarter in most years that we’ve been in business. What I would say is, and I think we said this a few times on our prepared remarks is it's very early in our season. First quarter is our lowest earnings quarter out of the year. And we start to get a lot better visibility next quarter, really June timeframe when a lot of these projects and construction projects at the various areas that we have sites start to get underway. And so we tend to have a much better read at that point in time of how the rest of the year might look from a variable revenue standpoint.
Steve Chick: Okay. That's helpful. And then second, Andy, just if you could just talk to the, I know you told people to be patient and that's good. I'm wondering if you could speak to kind of the – some of the conversations broadly that you're having on the M&A front. We talked a little bit last quarter on – whether they be singles and doubles or something more sizable, and relative to your comments, your last comments on the landscape, kind of how you feeling, how the conversations going and what's your confidence level and doing something that could be pretty interesting over the course of say the next year or two?
Andy Woodward: A good question, Steve. And I will say going back to those comments, it's really literally almost two months ago. So not that long ago is we're very excited about. Since then, the progress we're making in those areas that we're pursuing from a growth standpoint. And what I will say is, my confidence in that is very high. I think we're in a very conducive market right now especially within asphalt for potential organic growth at our existing sites as our customers prepare for potentially a stronger infrastructure spend over the next five years. I think we're in a great market from a M&A standpoint from the standpoint that a lot of companies similar to ourselves last year are re-evaluating their portfolios and looking at opportunities to potentially monetize non-core assets that don't fit within their overall strategy, but fit really well with what we're trying to do. And just over the last couple of months in discussions we're having and most of them I would say are us proactively seeking them out is that thesis is bringing true now. I'm a big believer that you need a lot of these ideas for because the probability of any one of them working out is low. And so that's what we're most focused on right now is generating a lot of these ideas and then being in a position to really start to prioritize and rank to decide what exactly we think is best for us going forward. And I think a big part of my job here, we call it 80% of my job is deciding what not to do, and really focusing our efforts on that 20% of what we should do that then drive the most value for our investors going forward into the business.
Steve Chick: Okay. Alright. Thanks, Andy. We'll put. Thanks.
Operator: The next question comes from William Smith from William Smith & Co. Please go ahead.
William Smith: Hi. My question is around your growth optimism that you have and the buyback for the preferred shares were $5.2 million. It doesn't seem compelling if you're saving $0.5 million a year then $5.2 million, which could take 10 years to recover your capital versus your optimistic comments about growth organic and otherwise. Could you comment on that?
Matt Lewis: Sure. Yes. 750 units is about 9.5% yield I think is when we transacted back in March and you're right. I mean, I think in the sense that we certainly feel like our best use of capital long-term and what will be most accretive to unit holders will growing the business. And so I think that's to Andy's comment is making sure that we balance preserving liquidity for that growth, but also at the same time, it's a cost of capital decision as well, where we're also thinking about leverage and you've got a credit facility, for example, that's a little over 2%. So as you think about kind of future excess cash flow, whether or not you pay down 2% debt or you repurchase preferred units, that's really just going to be a function of – of what's available to us at that time. So that's why we want to keep that flexibility, and you're right though we were certainly focused on how do we grow?
William Smith: But is that a 10-year payout? Am I thinking about it correctly? Is that a 10-year payout on the $5.2 million?
Matt Lewis: Yes. I think that's kind of fair math on it.
William Smith: So if you compare that to other opportunities that's a better opportunity than what else you're seeing based on your optimistic comments?
Andy Woodward: Again, this is Andy. What we're doing William is we're taking a blended approach to how we allocate capital. And I would almost argue today, we're significantly under levered standpoint versus what this business really could support, due to the take or pay arrangements and the high quality stability of our cash flows. As Matt mentioned when we have excess availability and we're still evaluating opportunity sets and deciding where to grow. And that as I mentioned previously with Steve, that's going to take some time. It might be this year; it might be those opportunities by presenting themselves next year. And so during that time, we're going to continuously optimize our allocation of capital, where instead of holding cash on the balance sheet or paying off bad debt maybe gives us a 2% return we may opportunistically if the price is right, and the return is right, look at some incremental purchases of the preferred, but again you're absolutely right. Our highest return, our best net back on a risk adjusted basis is going to be finding really good projects that will generate significant return for us in the future.
William Smith: Was Ergon the seller of those shares?
Andy Woodward: No. In the prepared comments we mentioned that it was a third-party institutional investor.
William Smith: So not Ergon or any of their affiliates?
Andy Woodward: Correct.
William Smith: Okay. Thank you.
Andy Woodward: Yes. Thank you.
Operator: There are no more questions on the phones. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Andy Woodward for any closing remarks.
Andy Woodward: Thanks, Carl. Thanks again everybody for participating in today's call. We appreciate your continuous support and interest Blueknight. We will be at a number of conferences this month that will be listed on our website. And so we certainly look forward to speaking too many of you at those conferences, but in the meantime please feel free to reach out with any questions. And we ask you to just to have a good rest of your week. And thanks again for all the support.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
