USD Partners LP (USDP) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP Second Quarter 2021 Results Conference Call. At this time all participants have been placed in a listen-only mode. The floor will be opened for your questions following the prepared remarks. It is now my pleasure to turn 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 second 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. Yesterday evening, we issued a press release announcing results for the three and six months ended June 30, 2021. If you would like a copy of the press release, you can find one on our website at usdpartners.com. Before we proceed, please note that the Safe Harbor disclosure statement regarding forward-looking statements and last night's press release applies to the statements of management on this call. Also, please note information presented on today's call speaks only of today, August 05, 2021. Any time sensitive information may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today's call will include discussion of non-GAAP financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures. And with that, I'll turn the call over to Dan Borgen.
Dan Borgen: Thank you, Jennifer, and good morning, and thank you for joining us on the call this morning. We are pleased to report another strong quarter at the partnership and are excited to provide an update on our DRUbit by Rail program. The partnership's business continues to generate a significant amount of free cash flow and our recommendation to the board to increase our quarterly distribution by approximately 2.2% relative to the first quarter of 2021 was in line with our previously announced distribution guidance. Also as intended, our liquidity position continues to improve as a result of our efforts to delever over the last 12 months. The partnership's net leverage was 2.9 times as of June 30th. Now here's a quick update on the status of our DRUbit by Rail program. Construction of our sponsors, DRU was completed in July, both on time and within budget. The DRU is now in the start-up phase, which we expect to be completed and the facility placed into service during the third quarter of this year. In addition, construction of all major items at our sponsor's destination facility at Port Arthur, Texas necessary to receive DRUbit by Rail and blend and ship product by pipe is complete and start-up on the new terminal has begun as we work to complete the Marine loading and unloading terminal. As a reminder, our DRUbit by Rail network also benefits the partnership by providing longer term take or pay revenues at its Hardisty terminal while providing transportation safety and environmental benefits to its customers. Specifically, the partnership's existing take-or-pay contract with ConocoPhillips at its Hardisty terminal converted to a 10 year contract affective for August, which will account for approximately 32% of Hardesty terminal's capacity. Obviously, this enhances the sustainability and predictability of the partnerships cash flows and provides a solid baseline for growth. USD and our partner Gibson are in meaningful commercial discussions with other potential producer and refine our customers to secure additional long-term take-or-pay agreements to support future expansions of capacity at the DRU and extend the associated contracted cash flows at the partnership's Hardisty terminal. Additionally, our DRUbit by Rail network is a critical part of our sustainability and ESG initiative, which remain a key focus of our business as we continue to deliver innovative solutions for our customers. The DRUbit got our customers attend to transport is considered a non-regulated and non-hazardous commodity as it does not fall under the U.S. DoT Hazardous Materials Regulation and Canada's Transport of Dangerous Goods regulations. During the second quarter, the partnership also announced a new terminalling services agreement at its West Colton terminal that is supported by a minimum throughput commitment to USD clean fuels from an investment grade rated refining customer. The new terminalling services agreement has an initial term of five years with a target commencement date of December 1, 2021. And we are currently in the process of modifying the West Colton terminal so that it will have the capability to transload renewable diesel in addition to the ethanol that it is currently handling. USD clean fuels is a newly created entity formed by our sponsor to focus on providing production and logistics solutions to the growing market for clean energy transportation fuels. We believe our terminalling assets are strategically located to address a portion of the expansion needs in the clean fuels transition and we believe our relationships in the industry, including with the railroads, uniquely positioned the partnership as well as our sponsor to be a strong player in this sector going forward. We look forward to keeping the market updated on these developments. Lastly, we continue to grow our presence in the storage and transit industry by working with the railroads and our customers to develop strategic logistic assets and infrastructure at our sponsor as well as develop our refined products program out of Texas Deepwater and servicing the demand pull from Mexico. As some of these assets are potential drop down candidates for the partnership, we look forward to keeping the market updated on our progress. Adam is going to start us off with an update on the partnership's latest financial results and our liquidity position. Then we'll jump back into the recent market and commercial developments, Adam, please go ahead.
Adam Altsuler: Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our second quarter earnings release, which included the details of our operating and financial results for the second quarter of 2021 and we plan to issue our second quarter 10-Q with additional details after close of market today. The partnership had another strong quarter reporting net income of $6.7 million net cash provided by operating activities of $14.1 million, adjusted EBITDA of $16.3 million and distributable cash flow of $14.4 million. Our efforts to enhance our liquidity continue to produce results as we have paid down $45 million on our revolving credit facility since the first quarter of 2020. Notably, the partnership's net leverage ratio is currently 2.9 times and trending lower. Management's improved outlook for our business along with the partnership's enhanced liquidity position supported our recommendation to the board to increase our quarterly distribution by 2.2% relative to the first quarter of 2021, which is in line with our previous guidance. The second quarter distribution is payable on August 13th to unit holders of record at the close of business on August 4. Our take-or-pay contracts continue to support strong free cash flow generation at the partnership, as evidenced by our strong DCF coverage of greater than four times for the second quarter. As previously mentioned, management expects to continue to have strong distribution coverage for the remainder of the year. And now, I will go into the details from the quarter. The partnership's operating results for the second quarter of 2021 relative to the same quarter in 2020 were primarily influenced by higher revenue at its Stroud terminal due to higher rates that are based on crude oil index pricing differentials. Also during the quarter, the partnership recognized revenue that was previously deferred at the Stroud terminal during the first quarter of 2021 associated with the make-up right options that are granted to the partnership's customers. Additionally, revenue at the Hardisty terminal in the second quarter of 2021 relative to the second quarter of 2020 was higher due to a favorable variance resulting from the change in the Canadian exchange rate associated with the partnership's Canadian dollar denominated contract and increased rates on certain of the partnership's Hardisty agreements. The partnership experienced higher operating costs during the second quarter of 2021 as compared to the second quarter of 2020. This increase was primarily attributable to an increase in subcontracted rail service costs and pipeline fees associated with higher throughput, partially offset by lower selling, general and administrative costs. Net income increased in the second quarter of 2021 as compared to the second quarter of 2020 primarily because of the operating factors already discussed, coupled with lower interest expense incurred during the 2021 period resulting from lower interest rates and a lower weighted average balance of debt outstanding. The partnership also recognized a small non-cash foreign currency transaction gain in the second quarter of 2021 as compared to the non-cash loss recognized in the same quarter of 2020. Partially offsetting was a higher non-cash loss associated with the partnership's interest rate derivatives during the second quarter of 2021. Net cash provided by operating activities for the quarter increased 160% relative to the second quarter of 2020, primarily due to the operating factors already discussed, and the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances. Adjusted EBITDA and distributable cash flow increased by 28% and 48% respectively for the quarter relative to the second quarter of 2020. The increase in adjusted EBITDA was primarily results of the operating factors already discussed. ECF was also positively impacted by a decrease in the cash paid for interest during the quarter partially offset by an increase in cash paid for income taxes and higher maintenance capital expenditures incurred during the current quarter, which included technology upgrades and safety maintenance at the partnership's Hardisty and Stroud terminals. As of June 30th, the partnership had approximately $3 million of unrestricted cash and cash equivalents, and undrawn borrowing capacity of $206 million on a $385 million senior secured credit facility, subject to the partnership's continued compliance with financial covenants. As of the end of the second quarter of 2021, the partnership had borrowings of $179 million outstanding under the revolving credit facility. Pursuant to the terms of the partnership's credit agreement, the partnership's borrowing capacity is currently limited to 4.5 times its trailing 12 month consolidated EBITDA as defined in the credit agreement. As such the partnership's available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $100 million as of June 30. THE partnership was in compliance with its financial covenant as of June 30, 2021. Given our successful debt reduction efforts, our new growth project at West Colton and the updates you will hear from Dan and the rest of the team regarding our sponsor's growth projects at the DRU and Port Arthur, and the associated benefit to the partnership, we continue to be very excited about our future. And as always, we continue to be focused on enhancing the long-term value for our unit holders. With that I would now like to turn the call back over to Dan.
Dan Borgen: Thanks, Adam. I appreciate that great update. I'll ask Josh to give us a further update on the DRUbit by Rail program. Josh?
Josh Ruple: Thanks, Dan. Let's start first with DRU. Jointly with our partner, Gibson Energy, we have completed construction on schedule and within budget for all DRU and related assets. This was a great effort by the team considering the challenges that we faced during COVID. Currently, we're in startup phase and are ramping up operational throughput and to date; we are near nameplate capacity of 50,000 barrels a day. As we've shared in the past, we expect to be in-service fully in Q3 per plan. At this point, we're running start-up trains to support our customers' commercial needs as well support final commissioning efforts at Hardisty and Port Arthur. Now for USD's destination and blending hub and Port Arthur, or PAT as we call it, we have also completed construction of all major terminalling assets on time and within budget, again a strong showing by the team. Our commissioning activity at PAT are nearing completion, enabling us to receive trains, steam and offload those trains, blend and ship outbound by pipeline. Project closeout will progress the back end of this month per plan with some additional marine modifications to further improve the terminals and marine based capabilities at Port Arthur. And in closing, I'd just like to thank our customer, ConocoPhillips and our railroad partner, CP and the KCS, for the support that they've provided during the project execution phase. And with that, I'll hand the call back over to you, Dan.
Dan Borgen: Thank you, Josh. Now I'll ask Brad to give us a more detailed update on the Western Canadian Select market, the impact of recent market events and an update on our commercial activities. Brad?
Brad Sanders: Thank you, Dan, and thank you, Josh and congratulations to you and your team. Regarding the great progress you guys have made. That's awesome news. As we moved into summer, demand continues to return to normal and in fact gasoline and diesel are near or at pre-COVID levels. Naturally this provides continued support for prices. Today, prices for West Texas intermediate or WTI is approximately $70 a barrel but has been as high as $75 to $80 a barrel. So significant improvement in prices. These higher prices naturally drive efforts to restore production and pursue incremental production investments. Specific to Canadian producers, they have responded and have achieved both and are currently at pre-COVID production levels. And our expectation is that their production will trend higher for the balance of the year. Additionally, there are a number of significant events happening in late 3Q and in the fourth quarter, which will materially impact the Canadian supply story. The first is Enbridge's efforts on their egress pipe at Hardisty. It's called the Express Pipe. Their efforts to improve and increase capacity by adding a drag-reducing agent should provide an additional 15,000 barrels a day of supply egress in the month of September. Additionally, in September, Suncor and CNRL upgrader turnarounds will be over and that supply will return anywhere from 350,000 to 400,000 barrels a day of supply through the month of September. And finally, the industry, given the calendar and the trend to colder weather, we'll switch to winter blends, which effectively means they have to blend more diluent to higher percent of diluent into their deal bit. This alone could increase supply by 125,000 to 175,000 barrels a day. So in September, we expect – and certainly going into fourth quarter, we expect the supply picture to swell by as much as $500,000 barrels a day. Naturally, given these market conditions, our expectations are that prices – Canadian prices will have to adjust to ensure egress by rail, is profitable in late 3Q, 4Q. Given these conditions, then our expectations are that demand for terminalling services and activity in all our assets will grow in late 3Q, 4Q. Specific to Stroud, which is unique because given the U.S. producers have been slower to respond to improved prices and production has not returned to pre-COVID type levels, Cushing continues to trade at a premium relative to the U.S. Gulf Coast and that's primarily driven by its continued inventory draws. Therefore, needless to say, this helps our commercial discussions going forward in negotiations with current customers and others to retain and/or attain control of capacity and access to Cushing are ongoing and very positive. Specific to CCR, we are currently handling two to four trains per month and that is a function of, again, the increased supply on Express, early days on DRA application by Enbridge. Our expectation is that this will grow heading into the fourth quarter given our market update point of view that I just provided. And the fact that the volumes on Express will grow in incremental 7,000 to 9,000 barrels a day in the month of September. So we are excited about where we are as it relates from a market standpoint. Our expectations are that CBR will play a growing role as we move into late 3Q and into the fourth quarter. Given the progress that Josh has just provided on the DRU and PAT, and as we work through our start-up period for these two assets, we expect our negotiations with current customers and potential new customers to accelerate and become more purposed. As a reminder, these assets provide real value for Canadian producers, the railroads, the refiners to consume this product and the communities we serve. At a high level, the DRU solution provides the lowest cost egress alternative from a bitumen related basis. It provides secondarily significant value to condensate and diluent customers as well as refiners, given the unique qualities of the bitumen. It's an improved sustainability and ESG egress solution. And from a scalability standpoint, it provides our customers the ability to right-size and right-time their egress investments consistent with their unique needs. So as we work through our start-up period and these value propositions validate themselves, we're excited about not only discussions with our current customers but new customers as it relates to the second 50 for the DRU and Port Arthur. Let's talk a little bit quickly on clean fuels. As Dan mentioned, with our newly created entity, USD Clean Fuels, we are uniquely poised to pursue production and logistics solutions for clean energy transportation fuels. Dan mentioned, and starting with our recently announced project at our West Colton rail terminal facility, it uniquely will provide much-needed renewable diesel supply by rail into the Southern California market to meet our customers' low carbon fuel standard requirements. Additionally, given the fragmentation of renewable diesel production and the growing low carbon fuel standard driven demand in California, we continue to work with our current and new customers and the servicing railroads to create origin and destination pairings to meet this growing demand. So in that sense, our West Colton announcement and efforts there as an example of what I would call more to come. Finally, as LCFS type regulations continue to spread to the PAC Northwest, to Canada, to the Northeast, et cetera, and working with our railroad's partners and appropriate customers, we expect to identify and provide solutions to these new markets early days in their transition to cleaner fuels. So we have a strong vision for this space. We have working relationships with all the necessary counterparties and most importantly, the railroads to identify, not only what the opportunities are today, but what do the opportunities need to be given the changing landscape. Finally, I'll move on to Texas Deepwater and just give a quick update there and also effectively staying with this clean fuels theme. We are uniquely working on clean fuel solutions to meet demand in bunker refueling business, things like LNG refueling, things like fuel blending opportunities that provide IMOs that fuel alternatives, both of these are unique to the Houston area. And both of those are uniquely benefit from Texas Deepwater's location within the Houston Ship channel, it's current and potential connectivity options and access to customers and service providers. So we're excited about both of these opportunities. The industrial logic of clean fuels is real. We know that and LNG and IML compliant fuel are two growing markets. And so we're excited to advance these and tell more to – in the future on how these progress. And finally, Dan mentioned this. And additionally, Texas Deepwater is positioned to work with the appropriate customers and railroads and counterparties to meet Mexico's growing demand by creating a bill boat and origin solutions that are advantaged and sustainable in meeting that growing demand in rural Mexico by rail. Now there are always challenges in this. But we're – the logic of Houston as a supplier and the logic of rail as the mode of transportation is significant and logical makes a lot of sense. So we are excited about those opportunities and poised to pursue those when it makes sense. With that, I'll pass the call back off to Josh and let him update us on some of our rail development opportunities. Josh?
Josh Ruple: Thanks Brad. On the commercial rail development front, just echoing some of the comments that Dan made earlier, we continue to make good progress with our railroad partners in regards to projects aimed at reducing congestion, forward CIP positions, optimizing the logistics chain and providing better first and last mile optionality for our customers as well as providing solutions that have the opportunity to improve transportation logistics from a cost basis. With several different class I railroads, both in the U.S. and Canada, we are very close on three projects in both the U.S. and Canada, and hope to be able to announce those projects soon. And with that, Dan, I'll hand the call back to you.
Dan Borgen: Thank you, Josh. And with that we will open up the call for any additional questions.
Operator: And your first question is from the line of Paul Berghaus .
Paul Berghaus: My question is with all this good news, what would be the prospects of increasing your dividend distributions at an even greater percentage than you've already indicated?
Dan Borgen: Thanks, Paul. I appreciate the question and we'll have Adam address that. Adam, go ahead.
Adam Altsuler: Hey, Paul. This is Adam. Thanks for the question. Yes. No, this is something we address every quarter. I think for the last 12 months, we've been focused on paying down debt, reducing our leverage as we go into every financial period. But we're very pleased to see that our efforts have been successful in paying down debt and we're happy to see the low leverage level and the high distribution coverage. So these are definitely topics we'll be discussing in the next board meeting. And obviously, those decisions are subject to the Board's approval as well.
Dan Borgen: Okay. Great. Thank you very much.
Operator: Your next question is from the line of Glenn Gardipee with Northern Systems.
Glenn Gardipee: Good morning. I have a question on your Port Arthur facilities. Does the sponsor eventually intend to transfer that facility to the partnership? Is that the long-term plan?
Dan Borgen: Yes. Glenn, great question and with all the assets that we built at the sponsor, we look for the opportunity to drop them in as appropriate into the MLP with all of the right market conditions in place. So it's certainly a qualifying asset and we would – we're certainly not ruling that out, and that's what we look to do again as the market and will strongly consider that as the market can accept it.
Glenn Gardipee: Okay. And I have one other question. Regarding your customers in Canada, let's take, for example, Conoco. What were the criteria that the customer used to evaluate going to the Drew, using the Drew facility. And is it both a profitability and safety factor? Can you explain that a little more?
Dan Borgen: Certainly. Let me address and then I'll ask both Brad and Josh to jump in and as needed. But it was – I would say, to say it wasn't exhaustive. It would be really being light on the answer to that. The customer, as they should be, was exhaustive in their analysis of the entire DRUbit technology and capability. Many of the things that they looked at were certainly will it work? Two, is it – does it meet the needs of – from them as a producer standpoint? Does it meet the needs for their refining customers? Does it create a better netback? And certainly and probably foremost, is it – how does it – how is it transported? Is it transported in a safer way? And when we set out to design the DRU that was one of our objectives, to make it a safer move, to make it a more cost-advantaged versus alternative means of transportation, to create a better netback to the producer and/or the refining customer, and then to create just better efficiency and long-term controllability around our customers' needs. They – it's scalable. They can go to it. I think one of the things that customers like is they can commit to 50,000 barrels a day. They pay for 50,000 barrels a day as they want to go to more than that. We can scale it up quickly and they'll pay for that and they run that. So it's not necessarily like in certain other alternative transportation means where they have to commit to something and grow into it. This scales along with them readably, which creates more efficiency in the cost structure as well as planning where as they bring on a different production levels from the upstream side. So I think, many, many things went into consideration for this. This is obviously a sizeable, I'll call it, investment from a contractual commercial relationship with our customers. And so, it goes, in many cases, all the way up to the board for approval. So to say that again that it was very thoroughly looked at to check all the boxes for our customers is something that one we're proud of that we got through that that was our intent. And we feel like that we are delivering the product that – in the overall DRUbit rail program that the customer has wanted. Brad, Josh anything further?
Brad Sanders: No, that was good, Dan. Thank you.
Josh Ruple: Yes, I think you covered it.
Dan Borgen : All right. Glenn, any other – did that help you with that?
Glenn Gardipee: Yes, that's it, Dan. It was very inclusive.
Dan Borgen : Okay. Thank you, Glenn. Appreciate it. Thanks for the question. It's a great.
Operator: Ladies and gentlemen that concludes our Q&A portion. I would like to turn the call back over to Dan Borgen for closing remarks.
Dan Borgen: Thank you folks for the questions. We appreciate that. And first, let me say thank you to our USD team, what a tremendous job they've done. I couldn't be more proud of them. Obviously, we all know the environment that we've been in over the last year and a half, two years, and to be able to get this up and running through a very difficult period. I couldn't be more proud again of the effort and the outcome that we're experiencing. So – and certainly, I want to say thank you to our partners at Gibson, Canadian Pacific, Kansas City Southern and certainly utmost are our great partner at ConocoPhillips. So appreciate all of the efforts from all of them to make this a reality. As always, we appreciate your support and are excited about our future. As we enter into the next phase of the partnership's growth story around the DRU and our clean fuels initiatives. We're right in the middle of launching our DRUbit by Rail program and believe our strategically located terminals are well positioned to support a safe and sustainable growth story or transporting heavy crude out of Western Canada. In addition, the steps we have taken to increase our liquidity position have positioned the partnership well to support the projected increasing in our commercial activity as the market continues to grow into pre-COVID levels. With that, I'll say thank you again for dialing into the call this morning, and we'll continue to keep you updated on all of the exciting achievements that your USD Partners is getting. Thank you so much.
Operator: Thank you, ladies and gentlemen. This concludes today's conference call. We now expect to disconnect your lines.
