Genesis Energy, L.P. (GEL) Q1 2022 Earnings Report, Transcript and Summary

Greetings and welcome to the Genesis Energy L.P. First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dwayne Morley, Vice President, Investor Relations for Genesis Energy. Thank you. You may begin.

Good morning. Welcome to the 2022 first quarter conference call for Genesis Energy. Genesis has four business segments. The Offshore Pipeline Transportation segment is engaged in providing the critical infrastructure to move oil produced about the long-lived, world-class reservoirs in the deepwater Gulf of Mexico to onshore refining centers. The Sodium Minerals and Sulfur Services segment 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 conference call, management may be making forward-looking statements within the meaning 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 L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Ryan Sims, Senior Vice President, Finance and Corporate Development.

Thanks Dwayne and good morning to everyone and thanks for listening in. As we stated in our earnings release this morning, the first quarter of 2022 was an exciting quarter for Genesis as the performance of our market leading businesses exceeded our internal expectations. Strong demand for soda ash drove increased prices in all of our markets, especially the export market and we're starting to see activity levels in the Gulf of Mexico begin to ramp with first production from Murphy's King's Quay starting last month and first volumes from Argos just around the corner. We continue to see fundamentally driven momentum in our soda ash business, which when combined with expected ramp and volumes on our Gulf of Mexico infrastructure, will continue to drive earnings growth and improving leverage metrics over the remainder of 2022 and into the years ahead. I wanted to take this opportunity to provide an update on the new opportunities in the Gulf of Mexico that we've mentioned over the past several quarters. Today, I'm excited to announce that we have entered into definitive agreements to provide gathering and transportation services for 100% of the crude oil production associated with two brand new standalone deepwater upstream developments, with a combined production handling capacity of some 160,000 barrels of oil per day, with first oil from both expected in the late 2024 early to mid-2025 timeframe. In conjunction with these new upstream developments, we expect to spend approximately $500 million net to our ownership interest spread out over the next three years, expanding the capacity of the CHOP system, as well as building a new 100% owned approximately 105-mile 20-inch diameter pipeline, what we call the sink pipeline, to connect one of the upstream developments to our existing footprint. Both of these new upstream developments include a life of lease dedications to our assets. Additionally, they both include long-term take-or-pay arrangements that represent a roughly five times build multiple on a combined basis, which multiple would be closer to four times if the producers hit just 75% of expected production profiles. It's important to recognize that these calculated multiples assume absolutely zero other production or additional development ever been tied into sinker CHOPS, which is totally unrealistic. In fact, we are already in early discussions with the operators of several additional new opportunities, representing potentially some 150,000 barrels a day of incremental production, which more likely than not will seek to access at least a portion of this new capacity starting as early as 2024. These volumes are newly identified subsea tie backs or secondary recovery operations like waterflood projects, designed by the operator to increase and/or extend the production handling at existing standalone developments already connected to or that can otherwise access our pipelines to shore. We're also currently aware of at least one new standalone development, that if ultimately sanctioned, could potentially come our way. Our new 100% un-sink pipeline will connect the Walker Ridge area of the Gulf of Mexico, directly to the CHOP system and the Garden Bank 72 platform with the Shenandoah development, serving as the anchored production facility. The Shenandoah project operated by BOE exploration production is located in Walker Ridge blocks 51, 52, and 53 and will have production handling capacity of approximately 100,000 barrels per day, with first deliveries of oil anticipated in late 2024 or early 2025 and will be further transported to shore through our 64% owned CHOPS pipeline. The second upstream development, Salamanca, is operated by LLOG and located across multiple blocks in the deepwater area of Keathley Canyon, with an expected production handling capacity of approximately 60,000 barrels per day, and first deliveries of oil anticipate in early to mid-2025. The Salamanca development will be directly connected into our 100% own [indiscernible] pipeline for further transportation downstream through our existing pipeline footprint. As we alluded to in our release, we have also entered into an agreement with LLOG to sell our idled Independence Hub platform to serve as the floating production system for the Salamanca development. The repurposed hub will not only accelerate the date of first oil and reduce the total development costs, but will also reduce the environmental footprint of this development, relative to the option of constructing a new deepwater production facility, a win-win situation for the producers and us. The sale of the Independence Hub have platform for gross proceeds of $40 million will result in a gain and a cash distribution of $32 million net to our 80% ownership interest. These proceeds when combined with the gross proceeds of approximately $418 million we received from the sale of a 36%. minority interest in the CHOP system, have effectively allowed us to pre-fund the vast majority of the capital required to expand the capacity of CHOPS and construct the sink pipeline. We would expect to use increasing cash flow and availability under our senior secured credit facility to fund the capital expenditures over the next few years. In addition, we will receive project completion credit associated with the capital we spend over the next several years under our calculated leverage ratio for bank compliance purposes. These two new upstream developments along with the sink pipeline and CHOPS expansion represent a tremendous opportunity for Genesis. We were able to deploy capital and an extremely attractive multiple that is underpinned by life of lease dedications and credit worthy take-or-pay arrangements, much the same as our very successful [indiscernible] pipeline, which was constructed some eight years ago and it quite frankly, has already contracted to additional fields that were unknown at that time. By extending our reach geographically in the Central Gulf of Mexico, and adding capacity to the CHOP system, both of which have effectively been underwritten by these two anchor developments, Genesis is well-positioned to attract high margin incremental volumes to our industry-leading network of offshore pipelines at little to no future capital ever required. I'd also point out that the realized margins per barrel, both on our laterals and on the Poseidon or CHOP systems are increasing as we facilitate the gathering and transportation to shore from the very act of Central Gulf of Mexico deepwater areas, as pipeline capacity becomes a dramatically more scarce commodity. We believe and have demonstrated it time and time again that these types of investments will provide long-term value to all of our stakeholders for many, many decades to come. Now, I'll touch briefly on our individual business segments. As we mentioned in our earnings release, the first quarter was challenging in our offshore business from an operational and mechanical point of view. In fact, relative to our expectations, we would estimate the quarterly margin in the first quarter was negatively affected by some $8 million. Most, if not all, of the issues we experienced have since been rectified in the second quarter so far is reflective of more normal and expected operations. There is no doubt that the rest of 2022 will be exciting for us in the offshore. On April 12th, Murphy announced that they achieved first oil at their King's Quay floating production system, which is supporting their Khaleesi, Mormont, and Samurai field developments in the deepwater Gulf of Mexico and we have started to receive these volumes on our pipelines. Volumes from King's Quay are expected to ramp to its design capacity of some 85,000 barrels per day and 100 million cubic feet of gas per day, as incremental wells are connected in the coming months. As a reminder, we will handle these molecules some four times with all of the oil produced being gathered through our 100% owned Shenzi lateral and then split evenly between our 64% owned CHOPS system and our 64% owned Poseidon system for transportation to shore. In addition, all of the associated gas production will flow on our 100% owned Anaconda Gas Gathering System, and then on our 26% owned Nautilus Gas System for ultimate transportation to shore. The second major project we expect to come online this year is BP's Argos floating production system, which is supporting their Mad Dog 2 development and remains on track for first oil in the third quarter. With a large number of wells pre-drilled, volumes from Argos are expected to ramp to its nameplate design capacity of 140,000 barrels per day over the subsequent six months or so after the date of first production. King's Quay and Argos combined with Shenandoah, Salamanca, and the newly identified opportunities I referenced earlier, all coming on within the next four or five years represent a tremendous runway of additional growth in volumes and importantly, significant incremental financial performance that we expect to see from our Gulf of Mexico franchise in the coming years. Turning to our Sodium Minerals and Sulfur Services segment, we continue to see robust demand for soda ash across the globe and specifically in our export markets. The market for soda ash worldwide remains very tight, and is leading to strong soda ash pricing in all of our markets. We're starting to see the real effects of strong demand and soda ash supply being impacted by a net decrease in global supply we mentioned last quarter, 1.3 million tons synthetic production facility in China close at the end of 2021. According to our analyses, as well as third-party reports, for the global supply and demand of soda ash to balance, the market requires China's installed synthetic production capacity to operate at a roughly 95 to 96% rate. Historically, China has only operated around a 90% rate. In January and February of 2022, Chinese operating rates dropped to some 83% and 84% respectively. As a result, the worldwide market is even tighter than what we would have otherwise expected. I'd also note that the situation in Ukraine is not overly relevant to the world's soda ash market and we have no direct exposure to such a terribly unfortunate situation. We do, however, continue to monitor geopolitical events and recognize there could be a slowdown in economic activity worldwide, especially as measured against recent periods where the world was recovering from the policy decisions made during the height of the COVID pandemic. However, it is our view that it would take a heretofore unidentified Black Swan event to significantly, much less materially affects the current and forecasted supply and demand dynamics for soda ash. These fundamentally driven market conditions coupled with the rise in energy input cost and increase in awareness of the environmental footprint of synthetic production provide, we believe, a very constructive backdrop for soda ash pricing for the remainder of this year. We expect these conditions to continue over the near to intermediate term and importantly, still be in place, as we discussed redeterminations for 2023 prices towards the end of this year. Should these conditions hold. And as I said earlier, we believe it's more likely than not that they will, we would reasonably expect to see prices increase another $10 to $15 per ton across all the tons we sell. Even after taking into account our multiyear arrangements that often contain caps on annual increases. We remain very excited to restart our original Granger production facility and it's roughly 5000 tons of annual production in the first quarter of 2023. Furthermore, our Granger expansion projects represent an incremental 750,000 tonnes or so of annual production remains on schedule and on budget for first production in the third quarter of 2023. We continue to believe the expanded Granger facility and its incremental 1.2 million to 1.3 million tons per year will be the most significant addition of new natural baseload supply to the market for several years to come. Assuming price has remained at least where they are today, or quite frankly, even if they pull back some, we would expect that the Granger project will exceed our original forecast for incremental segment margin, once fully ramped going online. On the cost side, we have a fair amount of tools already in place to be able to largely maintain our margins for Tencel. Approximately 75% of our existing contracts have a natural gas surcharge already in place, and we will move to 100%. As contracts allow and are reopened. We have also hedged a significant amount of our fuel requirements for at least 2022 that aren't already covered by such contractual surcharges. 100% of our export sales have a bunker fuel surcharge. Through ANSAC, we have a very high percentage of our dry bulk transportation costs contracted under favorable terms over the next year or so, and all of our competitors face the same increases we will ultimately face, all of which will ultimately be passed onto and paid by the retail consumer. Our historical refinery services business exceeded our expectation as the demand for our sulfur-based products was quite strong as copper and corrugated paper markets remain robust. Both our marine and onshore facilities and transportation segments continue to show improvements. Market conditions in our marine transportation segment continue to improve across all classes of vessels. As the volatility in crude oil and refined product imports creates opportunities, at the same time, there is continued tightening and overall supply and demand of both of the blue and brown water fleets. We remain excited with their trajectory of our marine business and would expect market conditions to continue to improve throughout the remainder of 2022 and into 2023 as the industry deals with net tonnage retirements and rapidly inflating replacement costs. We continue to see -- expect to see increasing volumes that are onshore terminals and pipelines in both Texas and Louisiana over the remainder of the year, as new volumes in the Gulf of Mexico from both King's Quay and Argos come online and need to be further transported to refineries and market demand centers along the Gulf Coast. In addition, the new developments we announced this morning was expected first oil in late 2024 and into 2025 will potentially add volume growth to these onshore assets in the years ahead. During the quarter, we were also successful in extending our agreements with our main customer in around our Baton Rouge terminal. The agreements provide a framework for future activity which further reinforces the integration of our assets into their future operations and plan. The robust outlook for Genesis over the remainder of the year remains unchanged as our businesses continue to demonstrate their resiliency. New volumes in the Gulf of Mexico, combined with strong pricing in our soda ash business and a recovery in our marine segment highlight their tremendous operating leverage we have two overall improving market conditions. As we sit here today, we would reasonably expect our 2022 financial performance to come in towards the high end of our previously announced segment margin and adjusted EBITDA guidance range of $620 million to $640 million and $565 million to $585 million respectively, even after the challenging first quarter in our offshore operations discussed earlier. Furthermore, our guidance does not include the gain and cash distribution proceeds from the sale of our interest in the Independence Hub platform as discussed earlier. That $32 million gain will be additive to both segment margin and adjusted EBITDA in the second quarter of 2022 and will be included in our bank leverage ratio as calculated in accordance with our senior secured credit agreement. As a matter of fact, had we completed the sale of the Independence Hub platform by March 31st, our calculated bank leverage ratio would have been 4.79 times, or some three tenths of a turn lower than what we recorded for the quarter. In any event, this gain will be included in our financial results next quarter, and will stick with us for both covenant compliance and pricing purposes under our senior secured revolving facilities through the first quarter of 2023. The management team and Board of Directors remain steadfast in our commitment to building long-term value for all of our stakeholders, and we believe the decisions we're making reflect this commitment and our competence and Genesis moving forward. I would once again like to recognize our entire workforce for their efforts and importantly, their unwavering commitment to safe and responsible operations. I'm proud to be associated with each and every one of you. With that, I'll turn it back to the moderator for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Kyle May with Capital One Securities. Please proceed with your question.

Hi, good morning, everyone.

Hey Kyle.

Grant, I appreciate all the prepared remarks about the current state of the business. And maybe just to start things off, you indicated that Genesis is trending towards the high end of your guidance for the year. Just wondering if you can provide any additional insight into maybe which aspects of the business are performing better than expected and kind of where you were you seeing that outperformance shaking out?

I think clearly the soda ash business massively outperformed our expectations and in the first quarter and I think that certainly given our prepared remarks around our view of what pricing is for a second quarter and the rest of the year based upon fundamentals in the worldwide marketplace that we would expect that to continue. I mean, if you just look at the -- if you just annualized the first quarter results, I think you get to $575 million or so. And again, let's make sure that it excludes the $32 million gain. But as we continue to see the ramp in the Gulf of Mexico and get the operational mechanical hiccups behind this, I think that it's more likely than not, as we when we visit with you from 90 days from now, that we'll widen the range and increase the range as we proceed through the year. So, I think that, quite frankly, all of the businesses even after the operational mechanical hiccups in the first quarter in the offshore are exceeding our internal expectations and we hope to be able to share that with everyone as we progress through 2022.

That's helpful. And you also mentioned, I guess, looking more specifically at the offshore business that roughly the impact you noticed in the first quarter was about $8 million. So, yes, I think that would have put you closer to $80 million with a segment margin in the first quarter. How should we think about that cadence going forward to the balance of the year with the -- I guess, can you provide a more granular detail about the cadence with those new projects coming on?

Well, that's -- again, I think, Kyle, your analysis is correct that on a normalized basis prior to King's Quay and prior to Argos that we kind of, anticipated about an $80 million a quarter run rate as a normalized basis. And then obviously, we cut that back a little bit in the third quarter to take into account the potential interruptions from weather-related events in the Gulf of Mexico. So, with that we have, as we said, on April 12th, the Murphy achieved first oil, I think it's out in the public domain and our investor presentation and earnings release that the first two wells are doing about 30,000 barrels a day, 90%, of which 89% of which is oil. And remember, we get all of that because we take all the gas also, there's another, well eminent to come on, and then a number of oils in cadence to come on every 40 days, 45 days or so I think, again, based upon their public announcements this morning. So you can do a little bit of the cadence arithmetic associated with that, as it ramps up. And again, in the prepared remarks, we tried to explain the value chain of we get 100% on the Shenzi lateral and then it's split evenly between the sides and chops on the oil side. And then we get 100% of the gas and through Anaconda and then 26% as it goes to shore in round terms on the NATO system. So it's a -- that's a very important ramp for us throughout the year, and we're very excited about it. And at this point, I think it's I can't speak for Murphy, but it's meeting our expectations of the ramp the – then Argos. Argos has a lot of wells pre drilled. The data first delivery is we're not 100% certain, that's a better question for BP. But we -- given that they've pre drilled all of the wells, I think that we would anticipate a very rapid, very rapid ramp, and that, as we said, potentially even achieving design capacity within six months once, once, first of every start. That's a little bit of a an amorphous date. And we'll see when it all kind of shakes out and I would certainly think devise, the second quarter call will have a better idea of what the expected first date is and can give a little bit more granularity around that.

Okay, great. Appreciate the additional color there. I'll turn it back.

Thank you. Our next question comes from line of TJ Schultz with RBC Capital Markets. Please proceed with your question.

Great. Hey, Grant. For the chalk expansion and sink pipeline, what's the cadence on the $500 million spin and when does the take-or-pay begin?

The cadences, there'll be a little bit front loaded in terms of when the it's kind of a bimodal spin, TJ, because there'll be a little bit of capital in the front end as you as you acquire the materials, but the installation itself will occur, like towards the end of the construction period in the late 2023, 2024 type timeframe. So, it's not necessarily linear, but a little bit less a little bit more upfront and a little bit back loaded. And the take-or-pay is basically begin in late 2024 top timeframe. But under our credit agreement, or our discussion with the banks, we get project completion credit relative to that amount of take-or-pay that we have. So in other words, if the point that we spend 10% of the $500 million we get 10% of the value of the take-or-pay coming in is performing EBITDA so to speak, in terms of calculating or compliance and where we are on the pricing grid under this senior secured facility.

Okay. Make sense. And then, on soda ash, you mentioned the market is tighter than you expected, given in part to the fact that China capacity was running I think 83%, 84% at the beginning of the year. So is the expectation that this continues to run lower than called the 90% range heading into your redeterminations and that's supporting the view on the $10 to $15 per tonne improvements. I guess, I'm just really looking for what's mainly driving outlook on – on the market remain tight is it – is it more supply contraction or is it a demand growth story? Thanks.

Yes. I mean, it's a little combination of both. And as we said, even with a slight reduction or a reduction in economic activity in the back half of the year, we think that it's really primarily a supply story that is extremely tight, inventories have been depleted, there's been a couple of force majeure events by some of the domestic producers in the first half of the first four or five months of the year, that have, again, reduced available inventories. And so we think it's really primarily driven on a supply basis that things are extremely, extremely tight. And as a result, we believe that things are going to grind tighter and that these conditions will stay around. And it really the $10 to $15 a ton in 2023, that reflects the fact that we have a number of multi-year contracts that "can't" go up more than $5 or $10 in any annual redetermination period. So, I mean, if everything we're able to reprice to current market or spot market, then it would be even more significant increase across all of our cuts.

Okay, make sense. If I can squeeze one more in just on marine really quickly. We did see like the refining cracks really materialized higher rate in the first quarter. And there's clearly as you know, a lot of focus to move products into the East Coast. So as we think about your fleet and the ability to capture this tighter market, should we expect some type of step change higher than what the segment can contribute? Or was the first quarter a pretty good indication of a run rate there? Thanks.

Yes. That's a very good question. And I would say that, at least internally, we're looking at the potential of a step change. And it really is being driven by the market dynamics in large part that you pointed out. There are vis-à-vis Gulf Coast and mid-Atlantic and especially in New York Harbor, on refined products is blown out, given a lot of geopolitical events, as well as the behavior of demand for transportation fuels out of Gulf Coast refiners to go to Latin America, primarily is really opened up and dramatically increase the demand for ocean going vessels capable of moving refined products from USGC to mid-Atlantic. So we're clearly at 100% utilization. We are seeing rates that above what we saw in 2015 on a direct basis in that business. And then -- so we anticipate that continuing. We're not seeing what's fundamentally going to change that for quite some time. I think that we're also seeing even demand within our inland fleet, again, because of the refinery utilization in PADD 3 and PADD 2 are trying to take advantage of these crack spreads that the refiners are seeing were -- as all practical matters we're at or close to 100% on the -- on our inland fleet, we are seeing rates, do the arithmetic real quick, some 30% up over the -- spot rates up over the last three or four months. So I think quite frankly, that marine is could be very active to helping us achieve and exceed the previously provided guidance.

Okay. Thanks, Grant.

Thank you. [Operator Instructions] It seems there are no other questions at this time. I'll turn the floor back to Mr. Sims for any final comments.

Well, thanks very much. And again, thanks, everyone for dialing in and we look forward to visiting with you in another 90 days or so. So, thanks very much.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.