Earnings Transcript for NS - Q1 Fiscal Year 2022

Pam Schmidt: Good morning, and welcome to today's call. On the call today are NuStar Energy LP's President and CEO, Brad Barron, as well as other members of our management team. Before we get started, we would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties and assumptions described in our filings with the SEC. Actual results may differ materially from those described in the forward-looking statements. During the course of this call, we will also refer to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release with additional reconciliations located on the Financials page of the Investors section of our website at nustarenergy.com. With that, I will turn the call over to Brad.

Bradley Barron: Good morning, and thank you all for joining us today. Before we get started, I want to let you know that Tom is out of the office because he tested positive for COVID earlier this week. So I'll be providing you with both my overview and what would ordinarily be Tom's discussion of the details on NuStar's results for the first quarter as well as our positive outlook for the rest of 2022. I'm pleased to report that, once again, we delivered solid results that demonstrate the strength and resilience of our assets. In the first quarter, NuStar generated adjusted EBITDA of $173 million as compared to $169 million for the first quarter of '21 or about 2% higher. But when we compare our first quarter 2022 adjusted EBITDA with the EBITDA generated from those same assets in the first quarter of '21, in other words, backing out the Eastern U.S. terminals, our first quarter 2022 adjusted EBITDA was up $12 million or 7% higher than Q1 of '21. Turning to our pipeline segment. We saw strong improvement across our systems with throughput up 16% compared to the same quarter last year, which was driven primarily by strong quarter-over-quarter improvement on our crude pipeline throughputs, which were up 19% Q1 over Q1. Our pipeline segment EBITDA was $141 million, that's up $17 million or 13% when compared to the $124 million that segment generated in the first quarter of '21. Moving to our Permian Crude System. Volumes on our Permian Crude System averaged around 510,000 barrels per day for the quarter, up 27% over the same quarter last year and comparable to the fourth quarter of 2021. Although we've all heard that U.S. oil production has been slow to respond to the recent run-up in crude prices due to a variety of factors, including supply chain challenges, we continue to work closely with our top-tier producers, and we are encouraged by what they're telling us, particularly with our privately held producers are telling us about their drilling plans for the rest of 2022. Because of those conversations, along with the strong outlook for crude prices, we continue to expect to exit 2022 between 560,000 to 570,000 barrels per day or about 10% above our 2021 exit. Moving on from the Permian to our Corpus Christi Crude System. Throughputs averaged around 340,000 barrels per day. That's up about 6% over the first quarter of 2021. We continue to forecast full year 2022 revenue from our Eagle Ford and WTI commitments at slightly above our MVCs. Our refined products pipelines have also continued to deliver consistent and strong results with throughput up 11% compared to the first quarter of 2021, reflecting the strength of our assets and our position in the markets we serve across the Mid-Continent and throughout Texas. Our Northern Mexico refined product supply pipelines are also performing well with volumes now above our averages for 2021 with first quarter throughputs up 27% over the same quarter last year. Turning to our storage segment. After adjusting for the impairment associated with the sale of the Point Tupper terminal, our adjusted EBITDA was $50 million, up $4 million or 7% when compared to $46 million in Q4 last year. Compared to the first quarter of 2021, excluding the contribution of our divested Eastern U.S. terminals, our storage segment's adjusted EBITDA was about $9 million lower due to timing of customer transitions and tank maintenance at certain terminals during the quarter as well as insurance proceeds we recovered in Q1 of '21 for our Selby terminal. Moving on to our West Coast renewable fuels network. In the first quarter, our West Coast storage assets generated about 29% of our total storage segment revenue. We expect our West Coast Terminal Network revenue to continue to grow in 2022 as we complete 2 more projects at our Stockton Terminal this summer, adding renewable diesel storage capacity and expanding our ethanol transportation solutions, which will expand the significant role of NuStar plays in facilitating the West Coast transition to low carbon renewable fuels. And for our Fuels Marketing segment, EBITDA was $7 million, up $4 million from the first quarter of 2021, largely due to stronger bunker fuel margins. Beyond our solid quarterly results, I'm also pleased to report on the progress we are making in continuing to build our financial strength and flexibility and increasing our free cash flow. Last Friday, we announced closing on the divestiture of the Point Tupper terminal facility in Canada for $60 million, which we plan to utilize to continue to reduce debt. In addition, earlier this year, we kicked off an initiative to optimize our spending across our business, finding efficiencies and scrubbing every dollar with the goal of making meaningful reductions in our expenses and capital spending to increase our free cash flow in 2022 and beyond. We're still early in our optimization initiative, but we are encouraged by the progress we're making, having already identified over $50 million in reductions across this year and next. We're focused on reducing OpEx and G&A expense, and we are also working hard to high grade every dollar of our strategic capital spending. This means ensuring that we only execute projects that meet or beat our internal hurdles and they're lean, efficient and effective. So far, we've been able to reduce our planned strategic capital spending for 2022 to between $115 million to $145 million, the midpoint of which is $15 million lower than our previously announced range. Of that total strategic capital spending, we expect to allocate approximately $60 million to growing our Permian system, which is, as always, scalable with our producers' throughput volume needs, and we plan to spend about $10 million to expand our West Coast Renewable Fuels Network. In addition to the cost reductions and increased efficiency, we're realizing from our optimization initiatives, we also have an improved line of sight into every dollar spending, which is helpful as we proactively address the inflationary headwinds that we are all currently experiencing. Optimization takes focus and discipline, and our employees are demonstrating just that as we make the necessary changes to continue to enhance our financial strength and resilience and continue to build unitholder value. At the same time, though, we're keenly aware that our culture is the bedrock of NuStar's success, so we're determined to protect and nurture our core values. We will remain committed to the safety of our employees and to environmental excellence. That means we continue to expect to spend $35 million to $45 million on reliability capital in 2022. Now I'll shift gears and give some more detail about our results for the quarter. For comparability, keep in mind that our first quarter results include a noncash impairment associated with the sale of the Point Tupper terminal. Excluding that noncash impairment, first quarter adjusted net income was $57 million, up $15 million or 36% over Q1 2021's net income of $42 million. As I mentioned a few minutes ago, our adjusted EBITDA for the quarter was up 7% when compared to the first quarter of 2021. We also generated $91 million of DCF during the quarter, which is 13% higher than our first quarter of 2021 DCF of $81 million. Our distribution coverage ratio to the common limited partners was 2.06x. I'm happy to say we reduced our interest expense by $5 million for the quarter compared to the first quarter of last year as a result of the progress we've made in lowering our debt balances. And we've also continued to make substantial progress as promised in lowering our debt-to-EBITDA ratio. We ended the quarter with a debt-to-EBITDA ratio of 3.92x, which is down substantially when compared to the 4.39x at the end of the first quarter last year and also down from the 3.99x at the end of the fourth quarter. At quarter end, we had $889 million available on our $1 billion unsecured revolving credit facility. For the full year 2022, we expect to generate adjusted EBITDA in the range of $700 million to $750 million, the midpoint of which is 7% higher than our 2021 results when adjusted for the sale of the Eastern U.S. and Point Tupper terminals. Before I wrap up, we move into Q&A, I want to say that our hearts go out to the Ukrainian people, and we hear NuStar praying for peace. The consequences of the Russian invasion in late February of 2022 for the Ukraine have been tragic. Consequences for Western Europe and other parts of the world continue to unfold, but offer a stark reminder of the importance of not only energy itself, but also the critical importance of U.S. energy independence. The U.S. now exports more energy than we import, and that is thanks to the U.S. shale production. The world's population is growing and the demand for energy is increasing as well. The fact is the most energy dense affordable and reliable fuels, the fuels that we depend upon to power our homes and severe winter weather, helicopter are loved ones of the hospitals and emergencies, build our roads, keep our food supply safe and affordable for fossil fuels. Aside from nuclear energy, there is simply no other energy source that can supply anywhere near the amount of energy the world needs now, much less the additional amount of energy needed to lift the citizens of underdeveloped countries up to the level of energy security we sometimes take for granted. That isn't politics. That's just physics. Balancing the different and sometimes competing aspects of sustainability, including energy poverty, environment and energy security here in the U.S. and around the globe is and will continue to be complicated. One thing is clear. the world will continue to require fossil fuels to supply the majority of its growing energy needs now and for many decades to come. I'm proud of the part that NuStar plays in our nation's energy independence and security and the important work our employees do every day in supplying the energy that powers and protects our lives. I'm proud that we do that work safely, responsibly and sustainably. And with that, I'll open up the call to Q&A.

Operator: [Operator Instructions]. First question is from the line of Theresa Chen from Barclays.

Theresa Chen: Brad, I wanted to go back to your comments about energy security and the renewed focus on it since Russian [indiscernible] innovation of Ukraine. On the heels of your conversations with the private producers across your acreage in the Permian and their drilling plans for this year and beyond, I imagine, is there upside to your Permian exit rate for 2022? How should we think about that?

Bradley Barron: So the way I would think about 2022 is you've seen, I would say, flat to slightly increased production in the Permian in 2022, and that's mostly due to supply chain issues. And that's what we're hearing from all of our producers, I think that's been pretty consistent on everybody's calls. What I would tell you is those supply chain issues, I think, will get sorted out but it's probably a longer-term thing than the end of 2022. So I think you could see an effect maybe in the fourth quarter, but most of the effects would be in 2023. And what I'm talking about is effects above and beyond the 10% that we're predicting. And so some kind of a move on our system from 560, 570 into the -- well, into the 600s would be in 2023.

Theresa Chen: And turning to the West Coast biofuels. Following both Marathon and Phillips getting the green light for their land use permits, there seems to be huge amount of renewable diesel soon to be hitting the California market. I understand that you've been long in partnership with Neste. And given their pending finalization JV with MPC, is there an ability for your system to handle some of the volumes that can come out of Martinez? And also, can you comment on handling some of the product coming out of Rodeo potentially since you have the feedstock agreement, logistics agreement with Phillips already?

Daniel Oliver: Sure. Theresa, this is Danny. Yes, we definitely have room to grow with the lower carbon fuel standard as it's implemented and I would say 2 ways is, one, we are already handling the finished renewable diesel and renewable jet. But also in relation to P66 project at Rodeo, we are also handling the feedstocks for that facility, which now they have one train already up and running, but eventually, they'll have the entire refinery converted. So we will be able to grow with that as well. We're bringing in all the feedstocks by rail. And that will continue to grow as they finish those projects.

Theresa Chen: Got it. And then turning to the financing side. Can you talk about your plans to address the Series D that I believe are callable next year? And how you plan to refinance that issue?

Bradley Barron: Sure. So as you recall, the Series D were issued in 2018 and they have a rate that goes up over time. So this has been a top priority. And as you've seen over the last couple of years, we've been positioning ourselves to take out the Series D. So the next rate increase, I think, is in July of 2030. That's also when they become redeemable by us. And the important part is that these are redeemable in whole or in part. And so we intend to begin redeeming these as soon as we can, which is July of 2023. So question is how do we -- how do we do that? So like I say, we've been positioning ourselves for the last couple of years selling noncore assets, paying down debt and primarily increasing our free cash flow. And so maximizing our free cash flow and minimizing our debt, we should be able to take these out incrementally, again, starting in 2023 and through probably the 2025 time frame, 2025, 2026. So one other thing I would mention is in my comments, I talked about optimization. So we kicked off an optimization initiative here about 1.5 months ago. And the goal of that is to maximize our free cash flow and really make that cash available to pay down the Series Ds. I've been very encouraged by what we've seen so far. As I said in my comments, we've identified just starting $50 million worth of savings this year and next. And a lot of those savings are sustainable, and we're looking for sustainable savings over the next few years.

Theresa Chen: Got it. And Brad, clearly, cost savings, increasing free cash flow, your balance sheet, you have a variety of options. The common distribution is one of them, should you choose to reduce that. Is that on the table to solve the Series D issue?

Bradley Barron: No, it's not. And so as I mentioned, our plan is to redeem the Series D with a combination of free cash flow, maximize through optimization. We plan to maximize our free cash flow to minimize our debt and as I've said many times, we don't need to cut their distribution and we don't plan to.

Operator: We have a next question from the line of Christopher Jeffrey from Mizuho Securities.

Christopher Jeffrey: Just wanted to touch on the optimization initiatives. I'm just wondering, is this more in like optimizing on the physical system and maybe putting some CapEx into that to optimize? Or is it more cutting costs and passing on projects that don't meet kind of a hurdle rate?

Bradley Barron: I'd say it's all of that, but it's really, it's mostly the second. It's really going back, examining projects in light of new needs and really looking at all of our costs top to bottom. Capital, OpEx, G&A, everything.

Christopher Jeffrey: Got it. And then I guess looking at the West Coast, the fuels CapEx guidance went down from $25 million to $10 million. Would that kind of fall into that bucket? Or is that separate kind of video syncratic to stock in and visibility there?

Daniel Oliver: Yes, Chris, this is Danny again. That's -- it's a couple of things going on there. About half of that reduction in '22 was timing of some project costs slid out into 2023. And the other half was exactly what Brad was talking about. We've high-graded some -- our projects and hurdle rates that we're looking at. And it -- we had some projects in development that are not clearing that hurdle. So it's been removed.

Christopher Jeffrey: Got it. And then maybe just last one. It looks like fuel marketing margins have looked good for the past 2 quarters. Any kind of visibility into how long that margin sticks around at a higher level? Is it something structural or just the middle?

Daniel Oliver: Yes. It's always tough to predict those things. But most of our outperformance in that segment have been on the bunker fuel marketing group. And we've seen really strong margins since right around the end of last year. We continue to see them so far beyond the first quarter as well. And -- but really, it's hard to predict how long that will last, but it's still a very strong market for us.

Operator: Next is from the line of Dan Walk from JPMorgan.

Daniel Walk: Just a quick one for me. What are you seeing at St. James in light of cap line reversal and service in terms of, I guess, Canadian imports given the extremely strong refining market or wide crack spreads at the Gulf Coast and kind of just lights versus heavies and total volumes?

Daniel Oliver: Yes. So volumes through those kind of new channels, the reversal of cap line, and they've been really small. They started up doing about 100,000 barrels a day. I think they're doing a little less than that now. We've received some of those barrels through our system. And we collect some additional ancillary fees for handling those increased volumes, but it's not a material impact to earnings. We are starting to see now also some increased throughput from the SPR releases. But again, it's -- we're collecting some ancillary fees based on those throughputs but not making a material impact to earnings.

Operator: [Operator Instructions]. Next question is from the line of Selman Akyol from Stifel.

Selman Akyol: Two quick ones for me. First of all, you talked about inflation, and I'm just kind of wondering where are you seeing that the most? Is it employee costs? Is it CapEx? Is it...

Bradley Barron: Kind of across the board, I mean, it's like what you read in the Wall Street Journal means affecting us pretty much in the same way that it's affecting everyone. So we're watching it carefully and trying to manage it carefully. That's been a big part of the optimization initiative also is getting better line of sight into actually what these costs are. But I would say it's pretty ratable across all of our CapEx and G&A.

Daniel Oliver: And Selman, it goes hand in hand, I think, with inflation or some of the supply chain issues that the industry is seeing. And where we've been able to help ourselves, we have. We've gone out in the Permian, for example, some of the materials that we commonly use and we're starting to see delivery times move out. We've set up a warehouse of some of the more important materials that we need to finish connections, and we keep on hand some of those items so that we don't miss first flows on a project. And just kind of replace them as we use them. So we're doing everything we can to help ourselves.

Bradley Barron: Yes. And then one important thing to keep in mind is that most of our contracts are indexed to the CPI or the PPI. And so the inflationary -- inflation is built into those numbers. And we'll be seeing that through the balance of the year and into next year.

Selman Akyol: Okay. Appreciate the color. And then the other thing is, are you seeing evidence of demand destruction in particular, I'm thinking about the refined products?

Daniel Oliver: We're not seeing any of that, Selman. We're still running about 100% of prepandemic levels. We've really seen no change at all in overall demand.

Operator: No further questions. I'll turn the call back over to Ms. Pam Schmidt.

Pam Schmidt: You, May. We would once again like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar Investor Relations. Thanks again, and have a great day.

Operator: This concludes today's conference. You may now disconnect.