Earnings Transcript for NS - Q2 Fiscal Year 2022

Operator: Good day everyone, and thank you for standing by. Welcome to the NuStar Energy’s Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded. And I would now like to hand the conference call over to today’s speaker, Pam Schmidt, Vice President of Investor Relations.

Pam Schmidt: Good morning and welcome to today’s call. On the call today are NuStar Energy LP’s President and CEO, Brad Barron; and our Executive Vice President and CFO, Tom Shoaf, 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 Securities and Exchange Commission. 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 US 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.

Brad Barron: Good morning. Thank you all for joining us today. I'm pleased to report that, once again, we delivered solid results in the second quarter. After taking into account the impact of the sale of our Eastern US terminal facilities in late 2021 and the Point Tupper in April, our second quarter EBITDA was comparable to 2Q 2021 EBITDA, despite some timing and transition issues as Tom will talk about in a few minutes. Our pipeline segment EBITDA was up in the second quarter, thanks in large part to a strong performance from our Permian Crude System. We're happy to report that our Permian Systems volumes grew to a record-breaking average of 522,000 barrels per day in 2Q. That's up 16% over the same quarter last year, and up 2% for the first quarter of 2022. I want to note that June's monthly average was up nearly 535,000 barrels per day. And in July, our Permian volumes continued to grow, rising to an average of 555,000 barrels per day. While overall, US oil production face supply chain and other challenges this year, our top-tier Permian producers have continued to successfully execute on their drilling plans. Steady, strong volume growth we saw in the first half of 2022 and continued ramp up this quarter is a testament to our producers and the quality and strength of our acreage. Through, the growth we've seen so far this year and what we expect for the rest of the year, based on our producers' drilling plans, 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 refined product pipeline systems, even though some short-term operational issues at customer refineries reduced our Q2 volumes compared to Q2 2021, our refined product volumes this past quarter were up compared to the first quarter of 2022. Our volumes continue to track at pre-pandemic levels, reflecting the strength of our assets and the stability of demand in the markets we serve across the Mid-Continent and throughout Texas. Our Northern Mexico refined product system also continued to perform well, with volumes above our average for 2021 with throughput this quarter up 20% over the same quarter last year. Moving on to our West Coast renewable fuels network. We expect our West Coast region's contributions to continue to grow in the second half of 2022. That's mainly from two more renewable fuels projects we recently brought into service, which increased our renewable diesel storage capacity and augment our ethanol transportation logistics capabilities at our Stockton, California facility. Those two projects should further solidify the significant role that NuStar plays in facilitating California's transition to low carbon renewable fuels, where we already handled 5% of the state's biodiesel, 13% of ethanol, 21% of its renewable diesel and almost 90% of the sustainable aviation fuel sold in the state. Moving on to our Corpus Christi Crude System. Our throughputs averaged around 290,000 barrels per day in the second quarter, slightly below our MVCs for that system, but we've been encouraged by the rebound in July as our average volumes rose to almost 340,000 barrels per day for the month. We're also pleased to announce that we reached an agreement with Trafigura to extend the term of our contract for transportation, storage and export services on our Corpus Christi Crude System from mid-2023 through the end of 2024 with two one-year extensions. As you will recall, in 2019, we completed projects that made NuStar one of the early movers transporting Permian Basin WTI from Cactus II and Grey Oak through our systems in South Texas for Trafigura, for regional supply and for export from Corpus Christi. By extending this contract, we are building on an established relationship that facilitates production of the refined products on the Gulf Coast and provides export of the US crude oil to supply locations around the globe. And with that, I'll turn the call over to Tom for some more details on our results.

Tom Shoaf: Thanks, Brad, and good morning, everyone. As Brad mentioned, on an apples-to-apples basis, comparing the second quarter of 2022 EBITDA with the EBITDA generated from those same assets in 2Q 2021. In other words, backing out the assets we sold in 2021 and earlier this year. Our second quarter EBITDA was comparable to the second quarter of 2021. Our second quarter 2022 DCF available to common limited partners was $83 million and our distribution coverage ratio for the common limited partners was 1.88 times. Turning now to our segments. In the second quarter of 2022, our Pipeline segment generated $145 million of EBITDA, up $4 million or 3% over the second quarter of 2021 EBITDA of $142 million, largely from strong performance from our Permian Crude System, as Brad described earlier. Turning next to our Storage segment. Our EBITDA for the second quarter 2022 was $49 million, which is about $11 million lower compared to 2Q of 2021 when our adjustment for our asset sales. That decrease was due to customer transitions and required tank maintenance at our St. James terminal and the timing of MVC settlements on our Corpus Christi North Beach terminal. And for our Fuels Marketing segment, EBITDA was $7 million, up $4 million from second quarter 2021, largely due to stronger bunker fuel margins. I'm also pleased to report on our continued progress in reducing our debt and building our financial strength and flexibility. At the end of the second quarter of 2022, our debt balance was $3.1 billion, and we had over $900 million available on our $1 billion revolving credit facility. Thanks to the progress we made in lowering our debt balance, our interest expense in 2Q 2022 was $3 million lower than in 2Q 2021 despite the increase in interest rates on our variable rate debt. We ended 2Q 2022 with a debt-to-EBITDA ratio of 3.93 times, which has substantially improved compared to 4.27 times at the end of 2Q 2021 and we expect to continue that improvement in that ratio through the end of the year. For full year 2022, we continue to expect to generate adjusted EBITDA in the range of $700 million to $750 million. Moving to strategic capital. We continue to plan to spend $115 million to $145 million in 2022. We still expect to allocate about $60 million to growing our Permian system and we plan to spend about $10 million to expand our West Coast renewable fuels network. Turning to reliability capital. We continue to expect to spend between $35 million and $45 million on reliability in 2022. Now I'll turn the call back over to Brad.

Brad Barron: Thanks, Tom. One last thing I want to mention. On our calls in February and May, we talked about our initiative to optimize our spending across our business to ensure that we execute on projects and operate our assets as efficiently and effectively as possible in order to increase our free cash flow in 2022 and beyond. In May, we told you that we had identified over $50 million in reductions across 2022 and 2023, and I'm happy to report that total is now up to $60 million. We have successfully reduced our full year 2022 capital spending and expenses by almost $20 million in our 2023 spending by over $40 million. That's real progress, and we're not done yet. True optimization, which we believe means taking – making our company as financially efficient as possible, while maintaining the strong culture of safety, environmental excellence and reliability that has distinguished NuStar for over two decades, doesn't happen overnight. We will continue to advance our optimization initiatives through the rest of 2022, and each and every one of us here at NuStar is committed to continuing to scrub every penny of our spending to make sure that it is necessary, efficient and strategic. By focusing on our spending, we are mitigating the impact of inflation and increasing our free cash flows, so that NuStar is solidly positioned for the challenges and opportunities we see in 2023 and beyond. And with that, I'll open up the call for Q&A.

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Theresa Chen with Barclays. Your line is now open.

Theresa Chen: Morning team. Thank you for taking my questions. First, I wanted to ask you about your outlook for demand across your product system. Since there seems to be an overwhelmingly -- overwhelming amount of concern related to recession risk, and how the consumer is potentially resisting these higher prices? And it was great to see that your volumes are still resilient back to pre-pandemic levels or remaining a pre-pandemic, love to get your take on the outlook from here?

Danny Oliver: Yes. Theresa, this is Danny. We continue to see our volumes at pre-pandemic levels. I think in 2Q, we were about 99% pre-pandemic, and that was with refinery maintenance going on, on our system, which was not -- it would have been higher without the refinery maintenance. So we're not seeing that in our system. It kind of -- I think it's like the back in the days of the pandemic, it seems like this middle of the country just isn't seeing the same impacts that they may be seeing on the coast.

Brad Barron: I can tell you, our big customers are not seeing it either. They've reported that in their earnings calls. And then just anecdotally, several of us have made long driving trips across the state of Texas, and I can promise you there is no cutback in traffic on our interstates.

Theresa Chen: Got it. Thank you. And then shifting towards your crude assets, giving us a little bit more detail and color related to your extension for the MPCs with traffic to year-end 2024, did you have to trade off some rate per term related to that?

Brad Barron: We did. As we -- I think we talked about this a little bit on the last call, it was a blend and extend deal. So we expected to give a little bit on volume and rate, and we did that through the end of 2024. And then we have a couple of options, option periods beyond that where the volumes and rates pick back up.

Theresa Chen: Got it. And order of magnitude, would you be able to share relative to the baseline the existing or previous contract, how much of an EBITDA impact this new one would be?

Brad Barron: I can't really get into specifics of a specific customer's contract. But it's in our guidance, which, as you know, was -- just heard Tom say, is unchanged.

Tom Shoaf: Yeah. We see this as a very positive development for our business and particularly the way that we've been able to work with Trafigura. The rates are competitive for what we see in Corpus Christi right now, and it also gives us the opportunity to -- well, what we expect to see is improving market conditions towards the end of that contract. So we're positioned well to take both.

Theresa Chen: Got it. Understood. And on the topic of Corpus Christi, this earnings season, there seems to be, I believe there have been a lot of commentary and discussion from some of your pipeline peers about volumes directed or shifted towards Corpus from Houston and the utilization of heading to Corpus. Would you be able to share your view on the puts and takes there, the dynamics evolving and what your outlook is for Corpus going forward?

Brad Barron: Yeah. We've always said and continue to believe and see that the incremental production out of the Permian is going for export and the export barrels go prefer Corpus. We see no change in that.

Theresa Chen: Thank you.

Brad Barron: Thank you.

Tom Shoaf: Thank you.

Operator: All right. Our next question comes from the line of Michael Blum with Wells Fargo. Welcome Michael Blum, your line is now open.

Michael Blum: Hi. Can you hear me?

Operator: Yes, we can.

Brad Barron: Yes, we can.

Michael Blum: Okay, great. First question I had was on your FERC index pipelines. I'm wondering if you're expecting to pass through the full rate increase that the PPI adjuster would allow for both 2022 and 2023?

Brad Barron: Yes, absolutely. We'll indexes -- the full indexation where we can, there's a few in the oil field, there's a few contracts that have some limits. But by and large, all of our FERC assets are getting the full indexation. And by the way, our pipelines are -- our pipeline revenues, 95% of them are FERC based.

Michael Blum: Great. Got it. I appreciate that. And then, obviously, you're making a lot of progress on leverage. Can you talk about where you think you're going to end up at the end of the year? I apologize if I missed that. And then just kind of where you think you'd like to take leverage overall as a target?

Brad Barron: Yeah. I mean as we said, we finished this quarter out below four times. And we haven't really given guidance on leverage in terms of year-end. But what I can tell you is we plan to stay on that course of delevering, and we think our leverage is going to be below even where it is in the second quarter. So we're going to continue that, lowering the leverage -- and so I think that's kind of where we are.

Michael Blum: All right. Thank you very much. Appreciate it.

Operator: Thank you. Our next question comes from James Carreker at US Capital of Advisors. James Carreker, your line is now open.

James Carreker: Hi. Can you guys hear me?

Operator: We can.

Brad Barron: Yeah.

James Carreker: Okay. Thank you. Just following up on that FERC impact question. So I mean, I guess, is it reasonable to assume from a baseline level, if the roughly 9% increase went into effect July 1st, nothing else changes, we'll see pipeline EBITDA go up in Q3 by something similar to that amount, excluding changes in volumes?

Brad Barron: Yes. Similar to that amount with the exception of the oil field. So the Eagle Ford and Permian volumes, some contracts have some limits, which is a market-based deal. But yeah, other than that, yeah.

James Carreker: You've also got to take into consideration OpEx goes up with inflation as well. So it won't be a dollar-for-dollar increase in EBITDA.

Brad Barron: Revenues though, yeah.

Tom Shoaf: It is.

James Carreker: Got you. And then, I guess, would you be willing to disclose the Permian EBITDA for this quarter? You generally put it out in presentations after the fact that it's always nice to have when filling out the model.

Pam Schmidt: Yeah, we'll have that out there in our deck in a couple of weeks.

James Carreker: Okay. Thank you. And if I could threw one more in. I guess, just any initial thoughts, anything in this Inflation Reduction Act as it applies to kind of your biofuels business on the West Coast?

Brad Barron: We've not seen anything specific. In general, regulatory trends are positive for our biofuels business on the West Coast. And so there's a lot of tailwinds for that business really no matter what the legislation is.

James Carreker: Okay. Thank you.

Operator: Thank you for that question. Our next question comes from the line of Jeffrey Christopher with Mizuho Group Securities, USA. Your line is now open.

Christopher Jeffrey: Hi. Thanks everyone for taking my question. I think just one left for me. If you could kind of talk about in the Permian, maybe some of the July exit rates that you were seeing on PCFs. And if you see second half, some of the constraints that were happening in the first half clearing up and maybe the cadence of how that will play out in 3Q, 4Q?

Tom Shoaf: Yeah. So as Brad mentioned, we averaged $555 million, but we exited July, running about $560 million. So that's where we're starting here in the month of August. We talked about, I think we see kind of similar activity -- I’m sorry. Okay. I think we'll see about the same type of activity in the second half. We actually see -- we reconfirmed our exit guidance of $560 million, $570 million we actually see in our forecast some months that are above that level. But we continue to forecast, we've seen for five years, we've seen a kind of a December, January lull of activity for whatever reason, whether it's holidays or companies hitting their CapEx budgets early. And so we kind of forecast that lull in even though it doesn't quite match the production data we're getting from our producer customers.

Christopher Jeffrey: Great. Thank you.

Tom Shoaf: You bet. Thank you.

Operator: Thank you for that question. If there are no further questions, I'd like to turn it back to Pam Schmidt for closing remarks.

Pam Schmidt: Thank you, Gerald. 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. Thank you again, and have a great day.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.