USD Partners LP (USDP) on Q3 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP Third 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 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 third 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 3 and 9 months ended September 30, 2021. If you’d like a copy of the press release, you can find one on our website at USDPartners.com. Before you proceed, please note that the safe harbor disclosure statement regarding forward-looking statements in last night’s press release applies to the statements of management on this call. Also, please note that information presented on today’s call speaks only as of today, November 3, 2021. Any time-sensitive information provided 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. Good morning, everyone. Thank you for joining us today. Before Adam takes us through the Partnership’s third quarter results, I would like to start off by covering some of our key developments during the quarter. For the quarter, the partnership increased its quarterly distribution by approximately 2.2% relative to the second quarter of 2021, which was in line with our previously announced distribution guidance. Additionally, subsequent to the end of the third quarter, the partnership amended and extended its existing revolving credit agreement, extending the maturity date by 1 year to November 2023, which Adam will discuss in more detail in a moment. I’d like to give you a quick update on the status of our DRUbit by Rail network, which Josh and Brad will elaborate more on later in the call. As a reminder, our DRUbit by Rail network consists of the DRU and the Port Arthur Destination Terminal or PAT. The DRU was constructed along with USD’s strong JV partner, Gibson, and is located adjacent to the Partnership’s Hardisty terminal. Construction of both the DRU and PAT projects is complete, and both are now operating in the startup phase. And throughput volumes are consistent with contractual obligations and our customers’ expectations. PAT is currently capable of receiving product by rail and diluent, C5 blend stocks, from the newly constructed pipeline as well as by barge at the terminal. The terminal can facilitate the blending of the products on site through newly constructed storage tanks and deliver the blended product back through the pipeline or via barge through the marine facility to U.S. Gulf Coast refineries. Additionally, 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 effective for August, which accounts for approximately 32% of the Hardisty terminal’s capacity today. This enhances the sustainability and predictability of the Partnership’s cash flows and provides a solid baseline for growth. Today, USD and our partner Gibson are very focused on commercial discussions with our potential producer and refiner customers to secure additional long-term take-or-pay agreements to support future expansions of capacity at the DRU, and further extend the associated contracted cash flows at the partnership’s Hardisty terminal. And we look forward to sharing future announcements with the market about the next phase of growth at the DRU. As previously discussed, our DRUbit by Rail network remains a critical part of our sustainability and ESG initiative, which are key focus of our business as we continue to deliver innovative and sustainable industry solutions to our customers. As discussed last quarter, 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. During the second quarter, the Partnership announced a new 5-year 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, commencing December 1 of this year. The process of modifying the West Colton terminal is substantially complete and the terminal now has the capability to transload renewable diesel in addition to the ethanol that it is currently handling. Finally, as previously announced, the Partnership’s sponsor is also making progress on its project to expand the downstream connectivity at the Stroud terminal by adding a pipeline connection to a second storage tank at a third-party facility at the Cushing crude oil hub. The expanded connectivity is expected to facilitate incremental rail-to-pipeline shipments of crude oil to the Cushing hub, by giving the terminal better capability to service multiple customers and/or multiple grades of crude oil simultaneously. The expansion is expected to be completed in the first quarter of 2022 and will be paid for by the sponsor pursuant to its development rights at Stroud, and we look forward to keeping you updated on its progress. Next, Adam is going to give 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 third quarter earnings release, which included the details of our operating and financial results for the third quarter of 2021. And we plan to issue our third quarter 10-Q with additional details after close of market today. The Partnership had a good quarter. reporting net income of $3.8 million, net cash provided by operating activities of $11 million, adjusted EBITDA of $12.3 million, and distributable cash flow of $10.7 million. At the end of the first quarter of 2020, the Partnership has reduced the outstanding balance of its revolving credit facility by $50 million, as of September 30, 2021. 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 second quarter of 2021, which is in line with our previous guidance. The third quarter distribution is payable on November 12, the unit holders of record at the close of business on November 3. 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 3.0 times for the third quarter. As previously mentioned, 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 for the third quarter of 2021 relative to the same quarter in 2020 were primarily influenced by lower revenue at the Stroud terminal associated with the existing DRU customer, electing to reduce its contracted volume commitments by one-third of their previous commitment, effective August 2021. This was primarily driven by the successful commencement of the DRU. These factors were partially offset by slightly higher revenue at the Hardisty terminal in the third quarter of 2021 relative to the third quarter of 2020 due to a favorable variance from resulting from the change in the Canadian foreign exchange rate associated with the Partnership’s Canadian dollar denominated contracts. The Partnership experienced higher operating costs during the third quarter of 2021 relative to the third quarter of 2020 primarily attributable to an increase in subcontracted rail services costs due to increase throughput. Net income decreased in the third quarter of 2021 as compared to the third quarter of 2020 primarily because of the operating factors already discussed coupled with a non-cash foreign currency transaction loss in the third quarter of 2021. Partially offsetting was lower interest expense incurred during the comparative 2021 period resulting from lower interest rates and a lower weighted average balance of debt outstanding and a small non-cash gain associated with the Partnership’s interest rate derivatives during the third quarter of 2021. Net cash provided by operating activities for the quarter decreased 34% relative to the third quarter of 2020 primarily due to the same factors already mentioned, and the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances. Adjusted EBITDA and distributable cash flow decreased by 21% and 24%, respectively, for the quarter relative to the third quarter of 2020. The decrease in adjusted EBITDA was primarily a result of the operating factors already discussed, and DCF was also impacted by an increase in cash paid for income taxes and higher maintenance capital expenditures incurred during the quarter, which included technology upgrades, and safety maintenance at the Partnership’s Hardisty and Stroud terminals. Partially offsetting was a decrease in cash paid for interest during the quarter. As of September 30, the Partnership had approximately $4.4 million of unrestricted cash and cash equivalents, and undrawn borrowing capacity of $211 million on its $385 million senior secured credit facility, subject to the Partnership’s continued compliance with financial covenants. As of the end of the third quarter of 2021, the Partnership had borrowings of $174 million outstanding under the revolving credit facility and was in compliance with its financial covenants. On October 29, the Partnership entered into an amendment and extended its credit agreement with its bank group. Among other things, the amendment extends the maturity date by 1-year to November 2, 2023, and decreases the aggregate revolving commitments of the lender group from $385 million to $275 million. After giving effect to the amendment, the Partnership has the ability to request 1 additional 1-year maturity date extension, subject to the satisfaction of certain conditions. The terms and conditions of the amendment and extension are substantially similar to the previous credit agreement, with the minor exception that the amended credit agreement sets forth provisions for replacing LIBOR with an alternative benchmark rate. Pursuant to the terms of our extended credit agreement, the Partnership’s borrowing capacity continues to be limited to 4.5 times our trailing 12-month consolidated EBITDA, which equated to approximately $87 million of borrowing capacity available at September 30, 2021. The success of our extension was largely due to our supportive bank group, our strong contracted cash flows and conservative leverage position, and the positive market outlook for our strategically located assets. We are excited to work with our bank group in the future to grow the Partnership around some of our and our sponsors’ new growth initiatives. Specifically, we’re very focused on the growth prospects that currently exist around our sponsors DRU and Port Arthur projects, as well as the USD Clean Fuels initiatives. And as always, we continue to be focused on enhancing the long-term value for our unit holders. And, with that, I would now like to turn the call back over to Dan.
Dan Borgen: Thanks, Adam. Now, I will ask, Josh, to give us a further update on the DRUbit™ by Rail program. And then, Brad will give us a detailed update on the Western Canada select blend market, recent market events and an update on our commercial activities. Josh?
Josh Ruple: Thanks, Dan. Echoing your earlier comments in regards to construction activities that DRU and Port Arthur, I’m proud to report that we are complete with the projects. We’ve been in operations since third quarter – early third quarter of this year, and our operational throughput activities are meeting expectations. Currently, our work teams are closing out the project activities and the paperwork associated with project closeout. And we continue to optimize our operations at both origin and destination with our customer, COP, our partner Gibson and the CP Railroad. As we sit right now, the team is transitioning all of their efforts towards growth activities, as both Dan and Brad mentioned, and I just would remind this group that we’re fully permitted for the next phase of development for DRU and facilities at Port Arthur. And with that, I’ll hand it over to you Brad for commercial.
Brad Sanders: Josh, thank you, and congratulations again to you and your team for the great work that you’ve just reported on, and it’s greatly appreciate it. I will give a brief market update given that it’s very similar to updates we’ve provided in the past and start with the demand story, demand continues to trend higher and trending towards pre-COVID levels. The one exception and surprise has been the demand growth and return to normal, the pace of play internationally has been surprising. And given the fact that the level of CapEx spending in our space has been low, this has driven prices in the energy space higher. With higher prices, we’ve also seen higher prices in the spot market or the frontend of the market relative to the backend of the market, this is a price curve that is considered or described as backward, which is very indicative of supply being less than demand overall. And we’re seeing that kind of price relationship in crude, light products in NGLs, nat-gas. So clearly, we have a dislocation growing from the pace of demand returning relative to the pace of supply returning. Naturally with higher prices than U.S. and Canadian producers are responding accordingly and announcing CapEx spend to grow production across the value chain. Specific to Canada, Canadian producer responded pretty quickly to higher prices and better netbacks and have returned to minimally pre-COVID levels from a production standpoint and are poised to grow in 2022. With this growth, and given the current situation in Canada, we still see inventory levels growing and at the higher end of the range. We still see a portion that levels as people attempt to get control of pipe space, so that they can ship their supply from Canada to consuming markets. We see those levels high in the historical high levels both continue to indicate that supply is greater than pipeline takeaway capacity. So our expectations are that given the growth story that I shared with you earlier that we’re going to see demand for crude by rail egress in 2022 to grow. From a commercialization update, I’m going to focus on DRUbit and Port Arthur first. And as Dan and Josh had mentioned, our startup transition is moving forward nicely. From a commercialization standpoint, naturally the industry is poised to see how the kit performs, to see if the assumed values that come with the DRUbit solution or DRU solution in the Port Arthur destination are realized. And at a high level throughput has exceeded our contract obligations and customer expectations, which is a significant accomplishment. And from a value standpoint, our thesis on value for are being validated. Even though, we’re only in effectively month 3 in operating the asset, we’re seeing benefits as a function of quality reveal themselves. We’ve seen the blend value as a function of DRUbit as a neat blend component and the ability to custom blend. We’re seeing benefits for that or from that activity that are exceeding expectations. And finally, we’re seeing the benefit that Port Arthur provides as a location. Its benefits are starting to reveal themselves. As we have seen demand from refiners in Houston. We’ve seen demand from refiners locally. Of course, we’ve seen demand from refiners in the lower Louisiana, Eastern Louisiana region. And finally, here recently, we’re starting to see international demand and the reason for all of that, is that the DRUbit products or product provides a custom blend option which is critical to refiners. Finally, from a Clean Fuels update. So, Dan, shared that West Colton terminal comes online in November to be able to handle renewable diesel. And we’re happy and excited to share that we’re maximizing throughput from an ethanol and renewable diesel standpoint. So this model and what we plan to pursue on a network basis both in ethanol and renewable diesel from a growth standpoint, again, it’s been validated by the – what’s happening at West Colton in the role of rail. So we’re excited about that. From a growth standpoint, then we continue to work closely with the railroads to jointly identify opportunities that are available currently in LCFS markets, in those markets that are transitioning to LCFS. So we’re excited about that railroads are critical to our value proposition and our Partnership is greatly valued. And we work hard to collectively identify what’s important and why. Ultimately, we’re not just working on demand solutions, so it sounds like we might be, we think there is opportunity in this space to participate not only in destination solutions, but origin solutions and production potential as well. And finally, not only for renewable diesel, but for improved CI ethanol and for sustainable aviation fuel as well. So we’re really excited about what the potential is in this space, and look forward to sharing more with you as things develop in the future. With that all, Josh, I’ll pass it off to you, and you can give an update on our commercial rail development initiatives. Thanks.
Josh Ruple: Thanks, Brad, on the commercial rail development front, again, for this group, we’re talking about first, last mile rail solutions with Class I and short-line rail partners. We’ve been making good commercial progress on several different initiatives. And I’ll give a brief update on those now. In Houston on company-owned land, both in the Bay Port area and north side of Houston Ship Channel, we’re making good progress on 2 warehousing opportunities. Those opportunities focus mainly on water-to-truck-to-rail, and/or rail-to-truck-to-water base moves in Houston. We’ve got a multimodal logistics hub we’re working on in Chicago. That play is very rail-to-truck centric, moving products into that region, just outside of Chicago with a short-line partner. And then, finally, I’ll mention our LPG network that we’re working on with one of the Canadian Class Is, a host of facilities in the Midwest working towards the Northeast. And we’re making really, really good progress commercially there. I’m hopeful we’ll be in position to communicate more on the commercial front within the next 2 quarters. And with that, I think that finishes up the commercial update, Dan. So, I’ll hand it back to you.
Dan Borgen: Thank you, Josh and Brad. And with that, we’ll open the call up for any additional questions.
Operator: And we will take our first question from Steve Ferazani, Sidoti. Your line is open.
Steve Ferazani: very informative. I want to get your take on timing of filling those available slots at Stroud and whether that will require the investment you’re making now in the pipeline or what you’re getting from feedback in terms of marketing the available slots for Stroud?
Dan Borgen: Great question, Steve. Thanks and appreciate…
Brad Sanders: Dan, you want me to take that?
Dan Borgen: Yeah, why don’t you take it, Brad? I’m just going to pitch it to you, so.
Brad Sanders: Okay. I’m sorry. Yeah, it is great question. And a couple of things that, I mean, the investment gives us the options to do things differently at Stroud, bringing the second customer second grade. So that’s pretty critical as we move forward. As we stated in the call, we think we’re moving into a period in time in 2022, where demand for egress by rail will be high. And then, secondly, as you probably followed and we talked about a little bit, with the market values in the front so high relative to prices in the back, that curve which I described as backward, inventory draws, particularly in Cushing have been extraordinary and have been going on now for over a year. So the values at Cushing are such that they’re trying to attract new barrels. So the combination of all of that, we feel really good about the potential and the likelihood of being able to direct barrels that want egress from Canada by rail into Cushing for better netbacks than what they would likely provide in the U.S. Gulf Coast. So we feel good about it.
Steve Ferazani: . But the investment you’re making in terms of the pipeline, in terms of getting that completed early 2022, is that really the timeline to filling those slots?
Brad Sanders: It is. And that’s also the timeline when we think – we’re actually seeing spreads blow up this month, spreads closed last night for WCS at Hardisty at a $20 discount to WTI. So we’re starting to see this imbalance reveal itself. And we’re yet to get into, return to full normal on production that was in maintenance. So, yeah, I’d say the timing from a market standpoint, and certainly a timing from a creating optionality that’s with this ability to handle second customer will happen in Q1.
Steve Ferazani: And then, on West Colton, in terms of the new customer and the ramp-up, would you think you’re at full throughput by the end of this quarter? Or how should we think about the ramp there with new customer?
Brad Sanders: They will start delivering this month, and there’ll be full delivery in December.
Steve Ferazani: Thanks so much…
Brad Sanders: So, it will be – yeah, both for ethanol and for renewable diesel.
Adam Altsuler: And, Steve, this is Adam, but the spend on that is substantially done for West Colton.
Steve Ferazani: Okay, great.
Operator: And we have no further questions on the line at this time. I will turn the program back over to Dan Borgen for any additional or closing remarks.
Dan Borgen: Thank you, Brittany. Appreciate it. Steve, great questions. I appreciate your support here. And I would first like to say, thanks to the USD team. They worked extremely hard in a pretty challenging conditions over the last year. So, it goes without saying, but we’ve accomplished a great deal, and the Partnership is seeing the benefits of that. So bringing on the DRU, obviously, getting it financed, bringing it on and seeing it at full capacity and higher demand with a product that we’re producing is a great thing. It’s a great thing for the partnership. And we look forward to further announcements again about the next customer, which we believe will be soon. As always, we appreciate the support. And we’re, as you can tell, hopefully, in my voice, we’re excited about the future, as we enter into the next phase of the Partnership’s growth story, around the DRU and Clean Fuels. Remember, we’re not only just delivering an egress out of Canada, but we’re delivering an entirely new market area. So not just an origination but a destination, new refinery connections. And that’s a wonderful thing for DRUbit coming out of Canada and helping to move more barrels out. We’re progressing on the DRUbit by Rail program, believe our strategically-located terminals are well positioned to support a safe and sustainable growth story for transporting and creating new markets for the heavy crude out of Western Canada. So I’ll say, with that, I’ll conclude and I’ll say thanks again for dialing into the call. We’ll continue to keep you updated. And I look forward to additional announcements around the success of the programs and the new platforms that we’re building. Thanks again.
Operator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.
