Genesis Energy LP Q3 FY2021 Earnings Call

Greetings, welcome to the Genesis Energy LP 3Q 2021 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Dwayne Morley, Vice President, Investor Relations. Thank you. You may begin.

Good morning. Welcome to the 2021 Third Quarter Conference Call for Genesis Energy. Genesis Energy has 4 business segments. The Offshore Pipeline Transportation segment is engaged in providing the critical infrastructure to move oil produced from the long-lived, world-class reservoirs from the deepwater Gulf of Mexico to onshore refining centers. The Sodium Minerals and Sulfur Services business includes trona and trona-based exploring, mining, processing, producing, marketing and selling activities, as well as the processing of sour gas streams to remove sulfur at refining operations. The Onshore Facilities and Transportation segment is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. The Marine Transportation segment is engaged in the maritime transportation of primarily refined petroleum products. Genesis' operations are primarily located in Wyoming, the Gulf Coast states and the Gulf of Mexico. During this call, management may be making forward-looking statements with the meanings of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those safe harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission. We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures. At this time, I would like to introduce Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Ryan Sims, Senior Vice President, Finance and Corporate Development.

Good morning. As stated in this morning's earnings release, our third quarter results largely met our expectations. More importantly, we are making consistent progress towards our objective of building long-term value for our stakeholders. Looking ahead, we anticipate increased volumes in the Gulf of Mexico during the first half of 2022 and improving market conditions in our soda ash business, supported by the ongoing global economic recovery and energy transition. We are also approaching two years until the first soda ash production from our expanded Granger facility, which is well-positioned to leverage these favorable market trends. The next 24 to 36 months will showcase the durability and strength of our infrastructure in the Gulf of Mexico, the competitive advantages of our soda ash business, and ultimately the earning potential of our leading market operations. Our Offshore Pipeline Transportation segment performed as we expected, despite ongoing maintenance from our producer customers and unexpected downtime due to Hurricane Ida. Fortunately, we did not incur damage to our assets or from our producer customers; however, the storm's path impacted several critical onshore facilities that handle offshore oil and gas production. Consequently, we faced longer-than-expected downtime during the quarter, mainly on our Poseidon pipeline, which was affected by power outages in third-party facilities and gas processing issues onshore. Once our CHOPS pipeline returns to service, we redirected some barrels from the Poseidon pipeline to the CHOPS pipeline, allowing certain producers to restart production sooner than anticipated. This demonstrates the connectivity and multiple delivery options of our offshore systems for our producer customers in the Central Gulf of Mexico. Due to equity accounting, our third quarter Poseidon results reflect financial performance from June to August. In the next quarter, we expect to see some financial impact from Poseidon being offline for early September as the fourth quarter distribution covers commercial activities for September through November. Therefore, we anticipate the fourth quarter results will be at the lower end of our previous guidance of $80 million per quarter or slightly lower. The Gulf of Mexico has shown resilience despite planned or unplanned downtime from producer maintenance or hurricanes. Activity levels remain robust as vast resources, a low carbon footprint, and economical drilling practices allow producers to explore beyond existing structures and tap into their significant reserves. Our lateral strategy is proving beneficial as producers engage in high-return, short-cycle projects by connecting subsea development wells to existing production hubs. Each deepwater production facility has only one oil export pipeline, meaning that to the extent we are tied to any such hub, all production from these additional tieback developments will likely rely on our assets for transportation. We are advancing discussions to offer midstream services utilizing our existing infrastructure, with plans to introduce new capital at low single-digit multiples for three new stand-alone deepwater developments at varying stages of sanctioning, expected to reach first oil between late 2024 and 2025. These projects could contribute around 200,000 barrels per day of additional output in the Central Gulf of Mexico, and we expect producers to make final investment decisions by the end of this year or early next year. In late August, the Department of Energy announced intentions to restart the federal oil and gas leasing program in the Gulf of Mexico, following a court order from June blocking the pause on leasing federal lands and waters. At the end of September, the Bureau of Ocean Energy Management announced an oil and gas lease sale for the Gulf of Mexico, scheduled for November 17. This will enable producers to evaluate, lease, and explore currently available blocks in the region. These opportunities for subsea tiebacks and new production hubs, together with continued leasing of new blocks and the discovery of new fields should provide us with lasting visibility and opportunities for transporting future crude oil production from the Central Gulf of Mexico to onshore refining centers. Moving on to our soda ash business, we have seen ongoing improvements in the market conditions during the third quarter. We remain positive about the supply-demand dynamics and anticipate that the market will continue to tighten as we recover from the pandemic and benefit from the various green initiatives driving demand. Currently, spot export prices from Chinese ports have been on the rise throughout the year as exporters prioritize the domestic market and respond to government production cuts related to environmental and power supply issues. Reports indicate that Chinese exports of soda ash dropped 45% through August compared to the same period last year, a remarkable decline given the overall demand surge in 2021. As previously mentioned, we typically avoid placing tons into the spot market due to long lead times and logistical challenges. Additionally, we must often adapt to seemingly irrational behaviors concerning price and volume adjustments. Nevertheless, we believe that current market conditions favor us as we advance pricing and volume negotiations for 2022. These price increases are primarily driven by a strong rebound in global demand and rising shipping costs. All soda ash producers are facing similar inflationary pressures on their energy inputs, particularly synthetic producers who encounter significantly higher energy costs compared to natural producers and thus need to raise soda ash prices to maintain margins. Further market price increases are needed for more costly synthetic ton production to meet the additional global soda ash demand. In terms of shipping costs, all producers are experiencing rising expenses. Domestic customers bear the delivery costs, although we assist them in arranging logistics. ANSAC, which typically operates on a delivered bulk basis, has leveraged its scale to manage these rising costs better than smaller exporters. Chinese exporters operating with containers face higher costs and availability constraints. Ultimately, consumers will bear the increase in costs linked to escalating shipping rates. The impact of rising energy prices on our operations is manageable; roughly one-third of our thermal energy requirements are susceptible to fluctuations in the spot price of natural gas. We aim to maintain a balanced portfolio of financial hedges for our natural gas volumes and mechanisms to mitigate significant fluctuations in energy costs. ANSAC has implemented a per ton surcharge in its contracts to offset the cost impacts of natural gas price increases above $5 per MMBtu, and most of our contracted tonnage is secured by similar provisions. Additionally, ANSAC introduced a fuel surcharge earlier this year to cover increases in bunker fuel related to marine transportation costs. Looking ahead, we continue to believe that the energy transition will drive substantial demand growth for soda ash, surpassing the projected baseline GDP growth of 2% to 3% annually. Soda ash is poised to play an increasingly important role in the energy transition, especially as global demand for solar panels and lithium-ion phosphate batteries rises. We are strategically positioned to capitalize on this market growth, and our low-cost structure, which includes the expanded Granger facility, will enable us to benefit financially from the ongoing energy transition. The Granger expansion remains on track to be the first global natural soda ash expansion in over four years, with initial production expected in the third quarter of 2023. We locked in most of our construction costs before the recent inflation surge, allowing us to anticipate that the Granger expansion will align closely with the $350 million estimate indicated in September 2019 when the project was sanctioned. We also retain the option to restart the original Granger facility, which can produce approximately 500,000 to 600,000 tons annually, potentially as soon as the first quarter of 2023, depending on market conditions and export pricing improvement throughout 2022. Our position in the soda ash market is enviable, allowing us to solidify our status as a leading low-cost supplier globally. Our Onshore Facilities and Transportation segment performed as expected. Moving forward, we expect to see increased volumes from our onshore facilities in Texas City and Raceland as incremental volumes from offshore pipelines necessitate transportation via pipeline to major refining centers on the Gulf Coast. Our Marine Transportation segment also aligned with our expectations, except for the impacts of Hurricane Ida. We sustained minor damage to 14 inland barges and three push boats, which detached from typical positions during the storm. Most costs for this damage will be covered by insurance, with a $100,000 deductible included in the third quarter results. Consequently, these assets were largely idle for September. At present, six barges remain under repair, although all push boats have resumed service. Demand for our inland black oil heater barges appears to have hit a low point but has recently rebounded, with current utilization rates in the high 90% range and spot pricing beginning to rise. This recovery is likely driven by increased refinery activity and an adjustment in light-heavy differentials, returning crude slates to historical norms. We have also noted steady activity in our blue water fleet, as the demand to transport refined products from the Gulf Coast to the East Coast remains strong due to refinery closures in the East. Additionally, a portion of blue water capacity on the East Coast has been out of commission due to financial restructuring situations. The petroleum marine sector is witnessing an accelerated retirement of older vessels and virtually no new build activity across marine asset classes, which will benefit a relatively young fleet like ours. As demand for Jones Act vessels approaches pre-pandemic figures in light of a shrinking supply, we anticipate improved financial results from our marine operations in 2022 and beyond. Now, I'll quickly share our outlook for the remainder of 2021. Genesis is positioned to generate free cash flow in the coming years, and we do not see a scenario where we cannot comfortably remain within our senior secured bank covenants. Due to unplanned downtime in our offshore and marine segments caused by Hurricane Ida, we expect adjusted consolidated EBITDA of around $620 million for all of 2021, which includes $30 million to $35 million in pro forma adjustments and is slightly below our previously stated guidance for the full year. Regardless of the 2021 results, the future looks promising and clear. We remain dedicated to creating long-term value for all stakeholders by reducing leverage and significantly growing our free cash flow and adjusted consolidated EBITDA. Our current decisions reflect this commitment and our confidence in our core businesses moving forward. I want to acknowledge our entire workforce, especially our miners, mariners, and offshore personnel, who have worked diligently during this time of social distancing. I am proud to say that we have safely operated our assets under our health and safety protocols with no adverse impact on our business partners or customers. It is a privilege to work alongside such dedicated individuals. With that, I will turn it back to the moderator for any questions.

Our first question comes from Shneur Gershuni with UBS.

Grant, I was wondering if we can start off with some of the tailwinds potentially for next year. So you sort of talked about the soda ash pricing and so forth. Also, there are PPI inflators out there as well, too. Can you remind us how many contracts are up for renewal next year on soda ash? On my math, I think it's about 60%. And then secondly, if you have any PPI inflators with respect to your offshore pipelines?

Well, we're just now kicking off in earnest, as we've said, the pricing discussions for next year. And generally speaking, a portion of our domestic sales will come due every 3 or 4 years, which will be what we would call a jump ball in terms of pricing in today's kind of price metrics on a prospective basis. The rest of our domestic sales are subject to longer-term contracts, which have annual price redetermination and are subject, generally speaking, to caps and collars. So those won't be moving up. And the vast majority of our export sales are under contracts of less than 1 year. And so those will be available for discussions. But again, a repricing in today's market. But again, we have to be mindful of costs associated with everything in terms of shipping costs and other things. But the FOB pricing back to the Green River facility should benefit substantially in '22 as we get through this pricing deal. Relative to PPI players, there are 2 major systems, and all of our laterals are under proprietary systems. So they're not typical. They are not FERC-regulated and therefore don't have the typical escalation. Although newer generation contracts do. But oftentimes, that's a capitalized negotiation at 2.5% to 3.5% per year. So we would expect some bump associated with that. Typically, those occur on an annual basis, either on the January timeframe or July timeframe in the future on the cycle of FERC regulation. So we'll get some benefit from that. But really, the story out of the Gulf of Mexico is the incremental volumes that we anticipate coming with the developments that we've talked about in the past.

Can you clarify your comments on soda ash for a moment? You mentioned that 50% is under contract for less than one year. About a quarter of the ANSAC would come up, which means approximately 62.5% should see a repricing throughout 2022?

That's a quarter of domestic prices, and domestic contracts are expected to increase. Additionally, the majority of the 50% of ANSAC sales are for one year or less in terms of volume, which means they will all be up for redetermination, with some cases being on a quarterly basis.

Perfect. And you talked about the fact that you've got fuel pass-throughs in your cost structure with certain charges and so forth. I was just wondering just on the other side of some of the inflation in terms of costs that we've been seeing. If I recall, but maybe I don't recall correctly, you do have a settled union contract, and so we should only see previously negotiated wage increases at the soda ash business? Or is this whole PPI factor going on potentially change that?

We’re in the second year at this point of a 5-year collective bargaining agreement with our union employees in the soda ash business. And I believe that has an annual escalator at 3.5% per annum in that contract. So we have some amount of cost control yet a fair bargain arrangement with the workforce.

Our next question comes from Theresa Chen with Barclays. Grant Sims, the CEO, stated that they are currently in the second year of a five-year collective bargaining agreement with union employees in the soda ash business. He mentioned that the contract includes an annual escalator of 3.5%. Therefore, there is a level of cost control while still maintaining a fair arrangement with the workforce.

Grant, I'd love to follow up on your comments about the Granger facility possibly restarting a little earlier than anticipated. Just curious, if you were to elect a restart in the first quarter 2023, at what point in 2022 would you have to make that decision? How quickly can you do it? And what would be the cost of that?

The initial costs associated with starting up will ultimately be absorbed, as the primary expense will involve hiring and training personnel for either the expanded or existing Granger facility. So it really boils down to the decision to hire. We aim to ensure that our team is well-trained and ready to move forward. Essentially, this is just an acceleration of costs we will incur regardless. Our plan includes utilizing staff from our other facilities since, in a broader sense, the setup is similar to our existing operations at the LDM facility or our Westvaco location. I believe we could achieve this within approximately 90 days once we decide to move ahead.

Got it. And then in terms of the onshore segment, I was hoping if you could provide some clarity around what the true run rate earnings power is here. And going forward, clearly, quarter-over-quarter, we saw some volumes decline. Was that a result of hurricane impacts and then nonetheless, segment margin increase quarter-over-quarter stripping out the Denbury payment? Just wanted to understand from your perspective, what is the true run rate of this segment?

Well, I think that, Theresa, we would rather — when we roll out kind of '22 guidance in our fourth quarter call, I think that we'll have a better idea of what the — or be able to communicate to everyone what the earnings power is. We've had some gains that we didn't kind of expect in the third quarter. So I'm not sure that I would necessarily use that as the arithmetic of backing out the Denbury payment to look for the fourth quarter. But I think that we're burning through some of the existing credits that were built up, and we would hope that — and we're also in the process of amending and extending the agreements with some of our customers onshore, specifically in and around the Baton Rouge area. So I think we'll have a much better idea as we get through those discussions. And hopefully, that's by the end of the year, and we'll be able to talk about that on the fourth quarter call.

Okay. I hear you on the 2022 outlook. I guess maybe just in terms of third quarter results, do you have an idea how much the gains were that were one-time in nature?

I don’t off the top of my head. We can work to get that to you. I mean order of magnitude, I would say, around $3 million.

Our next question comes from the line of Michael Blum with Wells Fargo.

I just wanted to understand a little bit better in the soda ash business your exposure to spot natural gas prices and just exactly how that works. I guess, are you saying that you leave one-third of your exposure unhedged or that you do hedge? And then of that one-third that is unhedged at least as of now, are you able to pass all of that cost increase on to your customers? Just wanted to better understand how that piece of it all works.

Yes. The basically, we directly and indirectly get some of our thermal requirements from coal under long-term fixed-price contracts. And so basically, based upon our approach to managing the overall energy input expense, that kind of one-third of the total requirements is subject to the fluctuations in the spot price – or current month price of natural gas. So within that one-third, that’s where we employ other hedging type mechanisms as well as have the mechanics in place to pass on the, at the margin, the incremental costs associated with those fluctuations directly to the customers.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Grant Sims for closing remarks.

Well, thanks, everyone, for participating. And I appreciate your time. I know it’s busy during the earnings season, but we’ll talk in 90 days, if not sooner. So thanks again.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.