Genesis Energy LP Q2 FY2022 Earnings Call

Good morning. Welcome to the 2022 Second Quarter Conference Call for Genesis Energy. Genesis has four business segments. The Offshore Pipeline Transportation segment provides essential infrastructure to transport oil from the long-lived, world-class reservoirs in the deepwater Gulf of Mexico to onshore refining centers. The Sodium Minerals and Sulfur Services segment involves exploring, mining, processing, producing, marketing, and selling activities related to trona and trona-based products, as well as processing sour gas streams to remove sulfur at refining operations. The Onshore Facilities and Transportation segment focuses on the transportation, handling, blending, storage, and supply of energy products, including crude oil and refined products. The Marine Transportation segment primarily handles the maritime transportation of refined products. Genesis operates mainly in Wyoming, the Gulf Coast states, and the Gulf of Mexico. During this call, management may make forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934. The law offers safe harbor provisions to encourage companies to share forward-looking information. Genesis intends to utilize these safe harbor provisions and directs you to its latest and future filings with the Securities and Exchange Commission. We also encourage you to visit our website at genesisenergy.com, where you can find a copy of the press release we issued today. The press release includes a reconciliation of non-GAAP financial measures to the closest GAAP financial measures.

Good morning to everyone, and thanks for listening in. The second quarter was a great quarter for Genesis as our market-leading businesses exceeded our internal expectations, setting the stage for what we believe is significant growth and improving financial performance over the coming quarters and years. These results were largely driven by a return to normal operations and increasing volumes in our offshore segment relative to the first quarter as well as sequential quarterly growth in each of our other segments, which is reflective of the constructive backdrop for each of our specific businesses. Because of our financial performance in the first half and our expectations for the remainder of 2022, we are today raising our full year guidance for adjusted EBITDA to a range of $670 million to $680 million, which includes the $37 million of nonrecurring benefits in the second quarter we outlined in our release. Importantly, we fully expect to exit 2022 with a leverage ratio as calculated by our senior secured lenders at or below 4.5x, which, by the way, is the only relevant leverage covenant anywhere in our capital structure and the only calculation that I think is worth analyzing and talking about. As we mentioned in the release, this quarter just ended is the first time we have reported a leverage ratio under 4.5x since the fourth quarter of 2014. As we look ahead to 2023, we expect sequential growth in our full year financial results, driven primarily by visible growing volumes out of the Gulf of Mexico as well as increased volumes of soda ash as we restart our Granger facility in January and bring the full expansion online in the third quarter. Given the fixed cost economics in the Gulf of Mexico and the structural undersupply in the worldwide soda ash market, it's our view, as we sit here today, that virtually any sort of 'normal' policy-driven economic slowdown or recession will have a limited, if not negligible impact, on the upward trajectory of our businesses. Accordingly, we do not see any reasonably likely scenario where we do not generate adjusted EBITDA next year in the low to mid-$700 million range, and we would expect to exit 2023 with a leverage ratio, again, as calculated by our senior secured lenders, near or potentially even below 4x, pretty remarkable given the challenges of the last several years. But in our view, it is reflective of the recent credit enhancing transactions we've undertaken, the operating leverage of our existing assets and our identified growth projects. Now I'll touch briefly on our individual business segments. As we mentioned in our earnings release, our Offshore Pipeline Transportation segment benefited from a return to normal operations for our base business in the second quarter, along with increasing volumes from Murphy's King's Quay development, which, by the way, continues to meet or even exceed our preproduction expectations. We look forward to King's Quay continuing to run to its design capacity of 85,000 barrels of oil and 100 million cubic feet a day over the remainder of the year. In addition, in June, we started to receive volumes from LLOG's Spruance, the field development, which is a new 2-well subsea tie-back development located in Ewing Bank blocks 877 and 921, that is currently producing approximately 15,000 barrels of oil per day. As a frame of reference, the Spruance development achieved first production in less than 3 years after the initial exploratory discovery well was drilled. This is yet another example of an experienced operator leveraging existing infrastructure, including production platforms and pipelines in the Gulf of Mexico, to develop nearby reservoirs on existing and valid leases on an accelerated schedule. This will continue to be a common theme in the Gulf of Mexico moving forward over the remainder of 2022 and in the many years and decades ahead. BP's operated Argos floating production system is expected to achieve first oil later this year, although we are awaiting an update on when that might be. Nonetheless, with 14 wells predrilled at the Mad Dog 2 field, we continue to expect volumes to ramp to its nameplate capacity of 140,000 barrels of oil per day over the subsequent 9 to 12 months after first production. In addition to Argos, we have knowledge of and actually have contracts in place for another 5 and possibly 6 in-field or subsea tie-back wells that will initiate production over the coming months. Cumulatively, representing approximately 50,000 barrels of oil per day of additional production that will flow through our pipelines, including in all cases, through a 100% Genesis owned lateral prior to transportation to shore through either of our 64% owned and operated Poseidon or CHOPS pipeline system, as the case may be. It is important to point out that the operators of these developments and their partners have already spent hundreds of millions, if not billions, of dollars on constructing and installing these existing deepwater production facilities and drilling and completing the original wells in these new development wells. No broader economic slowdown or precipitous plunge in oil prices is going to affect the progression of these developments, including some 160,000 barrels of oil per day we expect in late 2024 and early 2025 from our recently contracted developments, Shenandoah and Salamanca, which we announced last quarter. Also of interest, we are in various stages of commercial discussions with multiple incremental opportunities, representing upwards of 200,000 barrels of oil per day in total that we believe have a high probability of turning into new volumes to be moved through one or more of our pipelines over the next few years. Given this contracted and identified runway of new developments, we could not be more excited about the coming years and decades in the Central Gulf of Mexico. This is especially true given the Gulf's importance to secure domestic oil production, its proximity to Gulf Coast refinery complexes and the fact it has the absolute lowest carbon footprint of any barrel of oil produced, refined and consumed in the United States. Turning now to our Sodium Minerals and Sulfur Services segment. The market for soda ash is structurally short of supply. There's just no other way to describe it or get around that fact. This tightness is fundamentally the result of some 2 million tons a year of supply having been taken offline since 2019. The supply shortage has been exacerbated by multiple production disruptions and force majeure events experienced and declared by other natural producers in the United States over the last 5 or 6 months. At the same time, the demand is exceeding 2019 levels. This is extremely robust demand, especially considering that the automobile manufacturing business worldwide has been in a recession as a practical matter, having produced millions of fewer cars over each of the last several years, primarily because of the lack of computer chips. This supply shortfall in soda ash means prices must rise to allocate scarce tons and ultimately solicit incremental high-cost synthetic production to balance the market at the margin, all at a time when synthetic producers' costs have increased dramatically, owing primarily to rising energy and other input costs. Fundamentally, Genesis Alkali is a major supplier into a soda ash market that is roughly a 35 million ton a year market, excluding China, that has a long-term normalized growth of around 2% or 3% per annum or some 700,000 to 1 million tons per year. This normally expected growth is, in fact, before the 500,000-or-so tons a year of incremental demand that has been projected by third parties specifically from solar panel and lithium battery manufacturers that hasn't existed at least to this degree in previous years. The soda ash market currently finds itself in a spot where worldwide inventories are approaching historical levels low and have never been so low immediately prior to entering a potential policy-induced cyclical slowdown. By way of example, it has been reported that at the end of 2021, Chinese inventory levels were approximately 1.8 million metric tons. And today, they are approaching 300,000 metric tons, which is more than an 80% drop in just 6 months. This provides, in part, the answer to the question of how has China's rolling shutdowns to manage COVID affected soda ash demand and supply dynamics within China. It's fairly obvious to us the net negative effect has been on the supply side of the equation, meaning even fewer tons to potentially seek markets outside of China. All of this has contributed to the fact that our contracted soda ash prices for the third quarter of 2022 will be higher than those in the second quarter. And this is in a macro environment where technically at least the EU and the United States may be or already are in a recession. We fully expect the structural tightness and corresponding high price environment to continue to exist, in large part, independent of changes in broader economic conditions as we discuss price redetermination for our noncontracted sales volumes in 2023 later this year. We spent a lot of time analyzing the last 15 to 20 years of soda ash supply and demand. The primary difference between what we are experiencing now and what we experienced in previous economic slowdowns, including the Great Recession of 2008 and 2009 and the pandemic in 2020, was that heading into those economic cycles, the soda ash market was very well supplied. And thus, any significant reduction in demand triggered a corresponding and somewhat immediate price response, albeit short term. As we pointed out above, market conditions today reflect a very different story with a market that is structurally short of supply. Just as the world is experiencing in the crude oil market, there just isn't any real meaningful incremental supply sitting on the sidelines, just waiting to be turned on and drive prices lower. We believe any pullback in demand would only help further balance the market and not cause any significant downward pressure on prices. In fact, current spot market clearing prices today could fall some 20% to 30% or more heading into next year, and we would still expect our total weighted average realized price to be higher in 2023 than it will turn out to be in 2022. For the full year, we expect our soda ash business to contribute around $200 million of segment margin to Genesis in 2022. This compares to approximately $183 million in 2018, which was the best year since we owned it, as well as its best year ever in 2012 of $192 million when it was owned by FMC Corp. It should be pointed out that legacy Granger capacity was online and contributed around 500,000 tons of soda ash sales in each of 2012 and 2018, while it will effectively contribute 0 volumes here in 2022. Given that context, we are very pleased that our Granger expansion continues to be on schedule and on budget. We expect to be mechanically complete with the expansion facilities by the end of this year. This should allow us to bring our original Granger facility back online as early as January and be in position to have first production from the expansion facilities in the third quarter of '23. Once expanded, Granger will join our Westvaco facility as one of the lowest-cost soda ash production facilities in the world. When Granger comes online, Genesis Alkali will be the only U.S. soda ash producer with multiple production sites, along with an unrivaled supply chain network from the resource on the ground to the customer. We see no other meaningful expansions of production capacity in the ex-China market over the next 3 or 4 years, other than possibly some modest expansions to serve localized markets. It is important to note that even if economic activity were to slow down, and the expected normalized annual growth I mentioned earlier did not occur or otherwise simply delayed, we would not be at risk of not being able to place the Granger tons. At worst, we would displace high-cost synthetic production in the marketplace. And given our competitive cost structure, we still realize very attractive netback values and margins for the Granger tons. Assuming soda ash prices remain in the vicinity of where they are today, and as we have argued, we believe there is a bias towards even higher prices, at least certainly for the next 3 or 4 years, we would expect that the Granger expansion project could meaningfully exceed our original forecast for incremental segment margin once fully ramped and online. Our legacy refinery services business once again exceeded our expectations. While we were able to capitalize on certain spot volumes during the second quarter due to our geographically diverse supply and terminal sites, these same competitive advantages will help us absorb and manage certain planned supply reductions over the next quarters as several of our host refineries go through major turnarounds. Regardless of any potential softening in demand in the short term, the long-term outlook for both copper and corrugated paper markets is robust, and we remain confident in our ability to continue to benefit from and capitalize on the long-term fundamentals supporting these end markets. This is especially true in the mining and processing of copper, the largest market for our sulfur-based product, given copper's critical importance in the green energy revolution that is rapidly unfolding. Our Marine Transportation segment exceeded our expectations and appears poised to continue its recovery off a cyclical low coming out of the COVID shutdowns. Utilization is at or near 100% across our entire fleet. And in some cases, we are seeing day rates approaching those we commanded back in 2015. There appears to be a growing structural supply shortage of marine equipment given the net equipment retirements over the last few years, along with the increasing cost of steel and extended timelines to build new vessels. At the same time, demand for marine equipment is increasing across the board. We do not believe a reduction in demand due to the compression of crack spreads or other demand responses to a broader economic slowdown or recession will cause a meaningful change in the current supply and demand balance for marine tonnage in the aggregate. Thus, we believe we remain well positioned to benefit from this dynamic across our relatively young fleet in the coming years. Our Onshore Terminals and Pipelines in both Texas and Louisiana remain well positioned to benefit from the tremendous volume growth expected from the Gulf of Mexico over the years ahead. And like I said earlier, none of which will be impacted by any broader economic slowdown or precipitous drop or volatility in crude oil prices. The last 2.5 years have been both interesting and challenging. However, as we sit here today, I've never been more excited about the future of Genesis. The continued performance of our market-leading businesses, combined with our contracted growth projects in the Gulf of Mexico and the Granger expansion, have positioned the company for increasing financial performance in the coming years. This expected growth in earnings and increasing amounts of cash generated by our businesses will provide us with the flexibility and liquidity to comfortably fund our remaining growth capital expenditures as well as the flexibility to manage and further simplify our capital structure in the coming years. The management team and Board of Directors remain steadfast in our commitment to build long-term value for all of our stakeholders, and we believe the decisions we are making reflect this commitment and our confidence in Genesis moving forward. I would like once again to recognize our entire workforce for their efforts and unwavering commitment to safe and responsible operations. I'm proud to be associated with each and every one of you.

Our first question is from Karl Blunden with Goldman Sachs.

Congrats on the strong results. I had a question just on the breaking news on the climate spending deal. Solar stocks are up materially today. I'd be interested in your thoughts. Is there a way to quantify the potential benefit to your business? And any context you can provide around that would be helpful?

I want to emphasize that the soda ash business plays a crucial role in the energy transition. It is a fundamental building block for glass used in solar panels, so we expect to see positive effects from this trend. Additionally, soda ash is essential for producing lithium carbonate, which is key for batteries in electric vehicles and energy storage systems for solar and wind power. We are very optimistic about the increasing demand for our products. Typically, demand for soda ash rises alongside industrial production, so a slowdown in economic activity could impact growth. However, given the momentum from green initiatives and the shift towards a low-carbon economy, we are confident in our business's ability to capitalize on these developments.

Right. Just one on the balance sheet. If you take a look at how your bonds have traded, they've really performed well over the last couple of weeks and have rallied inside of 10% yields, even the longer-dated bonds. As you think about your priorities over the next year or so for potentially maturity extensions, how should we think about you approaching the 2024 maturities?

We are examining various options, particularly concerning the upcoming maturities in our stack. Given that we have a senior secured facility that aligns closely with these maturities—since banks prefer not to have maturities that extend beyond those of unsecured notes—this is clearly a priority for us. We believe we have plenty of strategies to address this situation, especially as we are seeing improved performance across our businesses. Looking back to a year and a half ago, our banks had a significant stake in a term loan A, which was around $350 million, similar to what we have coming due in 2024. We are confident that we have numerous options available to us, and given the positive trajectory of our businesses, we possess substantial financial flexibility to manage the 2024 maturities. By addressing those maturities, we can also extend the senior secured facility into 2025 or 2026, with a springing maturity contingent on how we manage the 2025 obligations. Overall, we are very optimistic about our current position.

Our next question comes from T.J. Schultz with RBC.

Thanks for all the details on soda ash. Just as it relates to the outlook on 2023 EBITDA in the low to mid-$700 million range, I guess all equal grant, you threw out that 20% to 30% number as sort of a proxy on how maybe elevated prices are right now versus what is contracted. So as we think about that 2023 EBITDA, is that assuming average soda ash pricing 20% to 30% higher next year? Or is there upside to that? Just any context you can provide to help quantify some of the pricing improvements you're expecting to realize next year. Maybe what some impacts these recent force majeure events have had on prices and how we should kind of think price is trending over the next few months?

It's a good question, T.J. The force majeure events in an already tight market have necessitated a significant increase in spot prices. In our guidance range, we believe we are being reasonably conservative regarding the outcome of pricing discussions for 2023. We do not anticipate that our overall prices will reach the current market clearing prices due to the nature of our contracts with caps and collars. However, even with a potential pullback in current pricing, our overall pricing is still projected to rise, as the dynamics are conducive to price increases. We expect to refine our range during the third quarter call and certainly by the fourth quarter once the price discovery and negotiations for 2023 are finalized. There is also a possibility that the overall range could increase if the market conditions remain stable. We aimed to outline the structural drivers affecting pricing, and it essentially comes down to how we navigate our portfolio of laddered contracts, which, as we've mentioned, include caps and collars that limit our ability to raise prices across the board, though the current environment is quite favorable.

Okay. That makes sense. Given how short the market is, I’m a bit surprised we haven't seen more natural soda ash expansions or projects coming online like the Granger expansion. Are there any other natural soda ash expansions you expect to come online soon? When do you think those extensions might occur?

We believe, based on our review of publicly available information, including SEC documentation and other investor presentations, that there is little likelihood of any significant developments occurring before 2025, and probably not until 2026. While there may be a few hundred thousand tons added here and there in 2024, nothing substantial is expected. Therefore, we think the market will eventually favor natural production that meets demand. However, the timeline for greenfield developments is typically around 5 to 6 years, which is quite ambitious considering the permitting process and other requirements. Additionally, construction costs have risen dramatically. The advantage we have at Granger is that we secured all our costs before these inflationary pressures emerged. Even any potential natural expansions would require prices to remain at or above current levels to make the investments worthwhile due to the inflation in construction costs.

There are no further questions at this time. I'd like to turn the call back to Grant Sims for any closing remarks.

Okay. Again, I appreciate everybody's participation. I know it's a busy week with macro news as well as other earnings. And so a lot of people are going to listen on to the tape. But again, appreciate everybody's interest, and we look forward to talking with everybody again in 90 days or so. So thanks very much.

This concludes today's conference. Thank you for your participation. You may now disconnect.