USD Partners LP (USDP) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP First Quarter 2021 Results Conference Call. At this time, all participants have been placed in a listen only mode. The floor will be open for your questions following the prepared remarks. It is now my pleasure to hand the call over to Jennifer Waller, Director of Financial Reporting and Investor Relations for opening remarks. Please, go ahead.
Jennifer Waller: Good morning and thank you for joining us. Welcome to our first quarter 2021 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; Josh Ruple our Chief Operating Officer; as well as several other members of our senior management team.
Dan Borgen: Thank you, Jennifer, and good morning, everyone. And thank you for joining us on the call this morning. We are pleased to report a strong start to the year of the partnership and are excited to update our distribution guidance with our intent to resume growing the partnerships quarterly distribution. Our strategically located terminals continue to perform well and our recommendation to the Board to increase our quarterly distribution by approximately 2.3% relative to the fourth quarter of 2020 was reinforced by the improved outlook for our business, along with our enhanced liquidity position, which Adam will discuss in more details in just a few minutes. Our long-term take-or-pay contracts with our strong investment grade customer base continue to produce strong financial results for the partnership and continue to provide the foundation for our business. As Adam will discuss, our efforts to strengthen our liquidity position over the last 12 months have resulted in a net leverage ratio of 3.2 times and trending lower. And even with the updated distribution guidance for the quarter and 2021, management expects to continue to see the partnership generate a significant amount of free cash flow for the remainder of the year. We also continue to make progress on and are very excited about our sponsors previously announced Diluent Recovery Unit, or DRU project, in destination terminal in Port Arthur, Texas. We expect construction of the DRU and Port Arthur terminals will reach substantial completion in July, ramping into full capacity in August. And we look forward to that announcement. As a reminder, while the DRU project is at the sponsor, the longer-term contracts at the DRU benefit the partnership, because those contracts will be matched up with the terminalling services agreements at the partnership's Hardisty Terminal, converting 50,000 barrels a day of capacity at the partnership to a 10 year take-or-pay contract with ConocoPhillips.
Adam Altsuler: Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon we issued our first quarter earnings release, which included the details of our operating and financial results for the first quarter of 2021. We plan to issue our first quarter 10-Q with additional details after closing market today. With our take-or-pay contracts and primarily investment grade customers, the partnership had another strong quarter. For the quarter, we reported net income was $7.3 million, net cash provided by operating activities of $12.6 million, adjusted EBITDA of $14.6 million and distributable cash flow of $12.5 million. Our efforts to strengthen our balance sheet over the last 12 months continue to produce results and we've paid down almost $40 million our revolving credit facility, just the first quarter of 2020, which is significantly higher than our previous extended guidance. Notably, the partnership net leverage ratio is currently 3.2 times and trending lower. Management's improved outlook for our business along with the partnerships enhanced liquidity position, supported our recommendation to the Board to increase our quarterly distribution by 2.3%, relative to the fourth quarter of 2020. We're excited to resume growing the distribution and have also announced our intention to recommend to the Board to increase our quarterly distribution by an additional $0.0025 per quarter for the second, third and fourth quarters of 2021. This is obviously subject to the Board's approval, and we will continue to keep the market updated on these increases. Even with the distribution increases quarter, as Dan mentioned, the partnership is projected to generate a significant amount of free cash flow, as evidenced by our strong DCF coverage of approximately four times during the quarter. Management expects to continue to have strong distribution coverage for the remainder of the year. And now, I'll go into the details from the quarter. The partnership's operating results from the first quarter of 2021 relative to the same quarter in 2020 were primarily influenced by higher revenue on its Stroud terminal due to higher rates that are based on crude oil index pricing differentials, which is partially offset by revenue that was deferred in the first quarter of 2021 in connection with make-up right options that the partnership granted to its customers. Additionally, revenue of Hardisty Terminal was slightly lower in the first quarter relative in the first quarter of 2020 resulting from the recognition in the first quarter of 20 of revenue that was deferred in 2019. This decrease in Hardisty revenues was partially offset by a favorable variance resulting from the chain and the Canadian exchange rate associated with the partnerships Canadian dollar denominated contracts as well as increased rates on certain of the partnership Hardisty agreements when compared to the first quarter of 2020.
Dan Borgen: Thank you, Adam. Great quarter, appreciate your leadership on that. Josh -- we'll turn to Josh now and have him give us a project update Josh.
Josh Ruple: Thanks, Dan. Let me start first with our joint DRU project in Hardisty with our partner Gibsons. This is a lot of work by our joint project team. I'm happy to report that the development activities at Hardisty are progressing extremely well. Most of the major construction efforts are nearing completion, and we're in process right now per plan in handing off those construction activities to our operational teams for commissioning. The DRU project as a whole in Hardisty is on time and on budget. Now regarding USD's Port Arthur rail destination hub or what we often refer to as PAT, again, we have a similar positive story regarding execution. At PAT our terminal development activities are progressing per plan and we're making extremely good progress as a whole on the project towards our execution goals. Our rail facilities, marine infrastructure, terminal tankage and local pipeline connectivity are all on schedule and on budget. Overall, given the scale of this project both at Hardisty and Port Arthur, the weather challenges we faced, the specific pandemic related hurdles we've had to overcome, I'm very proud of our collective team and happy to echo Dan's earlier comments regarding our expectations that the construction of the DRU project as a whole, again Hardisty and Port Arthur will reach substantial completion in July of this year and ramp to full capacity shortly thereafter in August aligned with our commercial expectations. And with that, Dan, I'll hand it back to you.
Dan Borgen: Thank you, Josh. Another great report. Appreciate all the effort there to keep us on track on the project, so appreciate that. We'll now turn to Brad and get a market and commercial update. Brad.
Brad Sanders: Thanks, Dan. Let's start with some good news given efforts to reopen the economy, the accelerated rollout of vaccination and the resumption of economic activity, demand for transportation fuels continue to trend higher. And this of course is supporting the strengthening of crude prices. As of this week, US crude prices as represented by the West Texas Intermediate price index or WTI are at or near $66 a barrel. At these price levels, specific to Canada, the industry has aggressively responded to bring back shut-in production and are focused on new spending to increase production in 2021. All of this has led to Canadian production returning to levels greater than those in pre-COVID days. We have a very strong and supportive supply story for Western Canadian crudes. As discussed in previous calls, this higher supply has led to higher competition for export pipe egress capacity, which ultimately drives apportionment levels higher. Current apportionment levels are at the higher end of history and have been recording levels of 43% to 53% over the recent past. These apportionment levels naturally leave stranded barrels at origin and drive inventory levels higher. This in fact is happening in inventory levels are trending to historical levels as well. Finally, they higher inventory levels will ultimately drive prices to correct to a level that ensures barrels can egress by rail profitably. We are in early stages of this happening and once 2Q upgrade turnarounds and in late 2Q early 3Q, our expectations are that pricing and Canada will trend towards levels that will send egress by rail and drive utilization through rail terminals higher. At USD's origin terminals, both Hardisty and CCR, we are experiencing this increase in demand today. Finally, we mentioned in our last earnings call, a little bit of the macro story at Cushing and the potential impact to USD's business. Bottom line, Cushing is in need of incremental supply and is pricing at a premium in an attempt to attract barrels to fill egress pipes and refining demand in the Mid-Continent. This is evident by the rate of reductions in inventory currently occurring and it is our point of view that this will continue and Cushing will need to price to attract incremental supply in the future excuse me. Naturally this is supportive of our Stroud asset and supportive of our efforts to renew and extend contracts there. So at a high level, we have Canadian production returning to levels greater than pre-COVID levels, environmental and regulatory headwinds and therefore risks remain high for alternatives egress options and Cushing strength continues due to struggles to find incremental supply. Given these market conditions then our priorities going forward are first and foremost, commercially service our contracted customers in anticipation of our demand growing from here. Second of all, identify opportunities to fully commercialize incremental capacity both on the spot and or term basis at Hardisty, Casper, Stroud and Port Arthur given the changing market conditions as I just described. And then finally to commercialize DRU and Port Arthur phases 2 and 3 given not only the market conditions we just discussed, but more importantly, as an egress alternative or as an egress solution, it provides competitive safety and ESG alternatives. It's cost competitive and actually on a bitumen related basis, it's cheaper than alternative egress solutions and this advantage is growing given current risks and growing costs relative to alternative egress solutions. It has in addition value drivers that benefit producers, railroads and refiners. And as we've talked about previously on calls, it has scalability advantages where you can time appropriately your volume and egress needs and provide a solution to your balance sheet that is that advantage relative to alternatives. So we stay focused on our commercialization efforts at DRU and Port Arthur and we're excited about the potential of being successful in both. Finally, I'd like to talk briefly about our clean transportation fields initiatives that Dan mentioned. As we know transportation fuels in the United States is in a state of transition and as a result of societal norms in corresponding policy. Given these greenhouse gas concerns and focus, our priorities for cleaning fields include first and foremost grow our current business in the ethanol space. As we've talked about in previous calls, we believe that the call on octane and ultimately ethanol could grow and there's a potential for the blend wall to expand from E10 to E15. As Dan mentioned, we're focused on building a renewable diesel network working with fragmented producers and blenders to ensure that new supply gets to where the demand is. Currently, in California, for sure given their status as a leader in the LCFS regulatory requirements, but also in the growing LCFS demand that we're seeing not only in a number of new states, but also in Canada and in other locations. And then finally, we're working hard to identify other value propositions that work toward putting fuel solutions supporting our communities things like fuel blending and LNG fueling. So, these are key focus areas for us. In closing I'd like to talk briefly about our Texas Deepwater priorities. In support of this discussion, we just went through on clean fuels, we are specifically working on fuel blending opportunities and LNG fueling opportunities that support our Houston community and business model. Additionally, we're working continue to work with existing businesses and businesses that are in need of change to ensure that they can compete with the fragmented current conditions and the need to consolidate and create solutions that meet global requirements things that fall into the specialty chemicals space are an example of this. So, we're working hard on identifying what those opportunities are and working with those existing customers to provide competitive solutions. Then as Dan mentioned we're leveraging our advantage rail capability to create advantage networks meeting supply by rail. And the example of that of course is like products that Dan mentioned in Mexico and the potential for things like propane in Mexico so we stay pretty focused on that. So, we're excited about where we are at Texas Deepwater and the things that we're working on and certainly the potential that it could provide. So, at this time, I'd like to pass the discussion over to Josh Ruple and ask him to provide updates on our commercial rail development initiatives he's leading supporting first-mile last-mile solutions for our potential customers. Josh?
Josh Ruple: Thanks Brad. Regarding our commercial wealth development efforts as Brad just mentioned we often also call it first and last mile or storage and transit initiatives. We're starting to see some really good progress currently with our railroad partners. As the railroads collectively implement a more focused or precise operational service plan think Precision Scheduled Railroading or PSR as we've all been reading in the headlines for almost a couple of years now. And as the global logistics change evolve, the need for new and improved rail infrastructure is growing. Specifically tied to rail transported commodities, things like storage, staging, transloading, and warehousing all again tied to rail service are growing and shifting in demand regionally. USD is currently working directly with several class ones both east west and in Canada and are joint and new customers collectively to develop a network of assets to service these exact needs. Our focus is to provide the railroads with a more efficient and cost-effective option to directly service these customers and for the customer specifically a tailor-made solution that provides them the service flexibility that they need by rail to maximize their businesses as a whole. We're making good progress as I mentioned earlier and looking forward to share a bit more detail as we continue to work collectively with the railroads and have specifics to share publicly. And with that, Dan, I'll hand it back to you.
Dan Borgen: Thank you, Josh and the rest of the team great reports. With that we'll open up the call for any additional questions.
Operator:
Dan Borgen: Thank you very much and as always, we appreciate your support and are really excited about our future as we enter into the next phase of the partnership growth story around the day one recovery unit. We feel like the steps we've taken to bolster our growth prospects and enhance our liquidity position have positioned as well to support the projected increase in activity as a marker returns to pre-COVID levels later this year. We want to thank you again for dialing into the call this morning. We'll continue to keep you updated and look forward to additional announcements regarding our progress on the DRU and Port Arthur and potentially, other initiatives we have in the future. Thanks again and have a great day.
