Earnings Transcript for NS - Q4 Fiscal Year 2021

Operator: Good day, and thank you for standing by, and welcome to the Q4 2021 NuStar Energy LP Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Pam Schmidt, Vice President of Investor Relations. You may begin.

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 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. Reconciliation 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 the website at nustarenergy.com. With that, I will turn the call over to Brad.

Brad Barron: Good morning. Thank you all for joining us. Before we get started, I want to let you know that Tom is out of the office today for a medical procedure, so I'll be providing you with both my overview and what would typically be Tom's discussion of the details on NuStar's results for the full year 2021 and 4Q as well as our positive outlook for 2022. Looking back over 2021. I'm very proud of the progress we've made toward achieving our strategic priorities as well as the resilience and strength that our business once again demonstrated this past year. At the beginning of 2021, we told you that we plan to take steps to lower our leverage, fund all our spending from internally generated cash flows and promote NuStar's commitment to ESG excellence. Over the course of the year, we divested noncore assets and we controlled our spending, and as promised, we lowered our leverage significantly. We closed out 2021 with a debt-to-EBITDA at 3.99x, a strong improvement from the 4.24x at the end of 2020. We also delivered on our commitment to fund our spending from our cash flows. In 2021, we generated solid results and funded 112% of our strategic capital from excess adjusted DCF, which is up 11% over 2020. And as we promised you, we reached significant milestones in reporting on our ESG performance in 2021 with the issuance of our inaugural sustainability report and the launch of our sustainability web page. Our sustainability report provides a great overview of our culture of responsibility, which has distinguished NuStar throughout our 20-plus year history as our employees have always been committed to protecting and caring for each other, our communities and the environment. I'm also proud that in 2021, once again, NuStar outperformed our industry in terms of safety stewardship with a total recordable injury rate that was 14x better than the bulk terminal industry and over 7x better than the pipeline industry as a whole. While last year brought its share of challenges, NuStar delivered strong, stable performance and solid results. Even with the detrimental impact of February 2021 winter storm Uri, after adjusting for divestitures and other items, we generated 2021 EBITDA comparable to 2020. Turning to our Pipeline segment. Our throughput grew 6% in 2021 compared to 2020, with 4Q '21 up 22% over the fourth quarter of 2020. Our refined products pipelines delivered consistent and strong results during both the Delta and Omicron waves, reflecting the strength of our assets and our position in the markets we serve across the Mid-Continent and throughout Texas. Our refined product pipeline throughput was up 11% for the full year '21 and up 16% quarter-over-quarter. We also saw higher throughputs on our crude pipelines, up 25% for 4Q '21 over 4Q 2020 and up 4% for full year '21 over '20. Our Permian system continued to rebound and grow. Our systems volumes averaged around 516,000 barrels per day for the fourth quarter of '21, a new record, up 3% over third quarter of '21 and up 23% over the fourth quarter of 2020. Our system's average barrels per day in 2021 was over 10% higher than 2020's average, and we exited 2021 more than 100,000 barrels per day over our 2020 exit, which is impressive. But even more impressive is how much our system outpaced the Permian Basin as a whole. In 2021, our core of the core Permian systems average barrels per day grew by more than 3x the basin's average 3% growth over the same period. And I'm pleased that the rig count on our system is running close to 30, which represents over 10% of the total number of rigs running across the entire Permian Basin as of the end of January. Looking ahead, we're encouraged by what we're hearing and seeing from our producers as well as the crude price outlook, and we 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. We continue to see volumes closer to our MVCs with throughput averaging around 380,000 barrels per day in 4Q '21, and we're forecasting 2022 revenue from our Eagle Ford and WTI commitments at slightly above our MVCs. Improving global demand, combined with sustained healthy U.S. shale production growth, should increase U.S. crude exports over time, which should also improve volumes across our Corpus Christi Crude System. Improving demand should also drive increased activity at our St. James terminal, but we're happy to report in January, we began receiving inbound barrels from the reversal of Capline. Turning next to our ammonia pipeline system. Throughput on our ammonia system was up about 20% compared to 4Q of '20 and up 42% over 3Q '21. As we've mentioned on prior calls, we're working to increase our systems utilization even more through low-spend, high-return projects to connect and extend our system to new and current customers. These projects would supply ammonia for traditional uses like the fertilizer that augments U.S. food production as well as for corn for ethanol production across the Midwest. We're also partnering with customers and potential customers to expand our utilization with green ammonia projects for existing applications and provisionary future opportunities like renewable electricity generation and safe, efficient transportation of hydrogen to power fuel cell vehicles. We look forward to providing more details later this year as we develop these projects to increase our ammonia system utilization and profitability in the short and longer term by supporting traditional ammonia needs today and participating in ammonia's renewable future. Moving over to our West Coast Renewable Fuels Network. NuStar is already playing an integral role in facilitating the West Coast low-carbon renewable fuels, which are continuing to significantly reduce emissions from transportation. In 2021, our West Coast storage assets generated over 27% of our total Storage segment revenue as adjusted to reflect asset divestitures, over 1/3 of which was derived exclusively from our renewable fuel-related services. We expect NuStar's leadership in the low-carbon fuel transition in California and across the West Coast to continue to grow as we continue to complete our capital projects there. We plan to continue to develop projects to expand our renewable fuels business as customer demand continues to grow. In addition to the growing financial contribution of our West Coast renewables network, we believe the network also demonstrates NuStar's ability to anticipate and find profitable innovative ways to evolve our nation's changing energy priorities. With that overview of our 2021 performance, I want to shift gears for a few minutes and provide some more detail on our quarterly results. For comparability, keep in mind that our 4Q '21 results include a $5 million gain from insurance proceeds we received to rebuild tanks at our Selby terminal. Backing that gain out, our adjusted 4Q '21 net income was $52 million, which is up $2 million over 4Q 2020 adjusted net income of $50 million. NuStar's 4Q 2021 DCF available to common limited partners was $63 million, comparable to 4Q 2020. And our distribution coverage ratio of common limited partners was 1.43x. Adjusted 4Q '21 EBITDA was $169 million, down 7% compared to 4Q 2020 EBITDA of $181 million with that delta largely due to our successful divestitures. Our Pipeline segment's 4Q '21 EBITDA was $149 million, up $19 million or 15% compared to $130 million in 4Q 2020. Thanks in large part to our Permian system and our ammonia system, we had solid increases in our Pipeline segment's 4Q 2021 throughput volumes compared to both 4Q 2020 and 3Q '21. Our fourth quarter 2021 Storage segment EBITDA was $46 million, which was down $27 million compared to 4Q 2020 due to several factors, including the sale of the Eastern U.S. terminals in October of '21 and the Texas City terminal in December of 2020, timing of customer transitions and tank maintenance at certain terminals and residual global economic recovery challenges. Our fourth quarter 2021 Fuels Marketing segment EBITDA was $5 million, up $3 million from the fourth quarter of 2020 due to stronger butane blending margins. At the end of 2021, our debt balance was $3.2 billion. That's an 11% reduction from year-end 2020. Thanks to the progress we made in lowering our debt balance over the course of the year, we were also able to reduce our interest expense in the fourth quarter by $6 million compared to the fourth quarter of the prior year. As I noted in my introduction, we made substantial progress, as promised, in lowering our debt-to-EBITDA ratio in '21, finishing 2021 with a debt-to-EBITDA ratio of 3.99x and with $885 million available on our $1 billion unsecured revolving credit facility. On a related note, on Monday, we filed an 8-K announcing that we had renewed our revolver. We were very pleased that our renewal is oversubscribed, allowing us to maintain our $1 billion unsecured revolver and extend the maturity of the facility an additional 18 months to April of 2025. Moving from what we accomplished in '21 to what we see on the horizon for 2022, we're encouraged by signs of continuing economic rebound. We're working hard to continue to advance our strategic priorities this year. We currently expect to generate full year 2022 EBITDA in the range of $700 million to $750 million, the midpoint of which represents a 6% growth over 2021 when adjusted for the sale of the Eastern U.S. terminals and other items. Moving to our 2022 strategic capital spending. We plan to spend $135 million to $165 million this year. Of that total spending, we're allocating approximately $55 million to growing our Permian system, which is scalable with our producer's throughput volume needs and about $25 million to expand our West Coast Renewable Fuels Network. In addition, we expect to spend $35 million to $45 million on reliability in 2022. Once again, this year, we expect to self-fund all of our 2022 spending from internally generated cash flows just as we did in 2021. And we remain committed to continuing to improve our debt-to-EBITDA ratio in 2022. We plan to continue to optimize and innovate across our footprint to enhance NuStar's financial resilience and strength and build sustainable value for our unitholders. And we are focused each and every day on operating safely, reliably and responsibly and on protecting our employees, our communities and our planet. 2021 was a strong year for NuStar, and we're already working hard across our footprint to make sure that 2022 is even better. With that, I'll open up the call for Q&A.

Operator: [Operator Instructions] And our first question comes from Theresa Chen from Barclays.

Theresa Chen: I appreciate all the comments, Brad. I wanted to follow up on the crude export side. Specifically, given the recent uptick that we've seen in the macro data, can you talk about the re-contracting outlook at Corpus Christi North Beach? I believe you have some volumes turning over mid-2023 time frame. And I would love to know if there's any sort of like early blend-and-extend option with that and what the tariff could potentially be?

Brad Barron: Yes. We've engaged with our big customer there, and we're having discussions with them, but there's nothing to announce at this time.

Daniel Oliver: Most of our other contracts, Theresa, are well beyond that '23 time line. We're just working on that one.

Theresa Chen: Got it. And just shifting to the Permian, very robust results, positive outlook. Would you mind just giving some more color about your conversations with producers there and anticipated growth plans?

Daniel Oliver: Sure. So we anticipate more of what we saw in 2021 in terms of activity. I think we've talked about this before. That same level of activity, just because of the nature of decline curves, won't yield the exact volume of growth, but still growth. In terms of the public's discipline in the market, we still have -- are assuming that is going to play out the same way in '22. And if that's going to change, they have not communicated that to us yet and it's not in our guidance. But that would be something I would see as potential upside for the year.

Brad Barron: Yes, to echo what Danny said, what we have in our forecast is more of what we saw last year, which is discipline on the public side and then the smaller producers producing more. So we feel good that we're balancing that way. And if something were to change and the big publics were to break ranks and start producing more, we'd obviously benefit from that, too.

Theresa Chen: Got it. And maybe if you could opine on the takeaway situation and potential changes there, given the excess capacity on the crude side and the increasing concern of lack of takeaway capacity to come on the natural gas side. There's been a lot of commentary out there around rationalization on the crude side, potential conversion to gas pipe. Just given your relationship with the producers as well as your presence in the basin, can you just opine on the likelihood of something like that to happen?

Daniel Oliver: I think we're hearing the same thing you are. We're looking at some time out in second half of '23 is where they start to see some constraints on the gas side. I don't know anything probably that you haven't already read, but I know there are some discussions going on about rationalizing some crude outbound capacity in natural gas. But I don't know anything more about that than what we've all read.

Theresa Chen: Okay. So maybe if I can ask it a different way, Danny. If one of the pipes were to rationalize from your delivery points, would that have to make you alter the way that you currently structure your business out there? Would that make -- do you have to alter your contracts with producers potentially? How should we think about that?

Daniel Oliver: No. Because our system is connected to virtually every exit out of the basin. And so the 2 places – the 2 main places we go to in Midland and Colorado City, if – we can go to any pipeline so if they shut one down, we’ll just see more going to other outlets.

Operator: And our next question comes from Michael Blum from Wells Fargo.

Michael Blum : I wanted to ask about terminal contract renewals in 2022. Just want to know how much of the portfolio is up for renewal and kind of what are your expectations for rates upon renewal?

Daniel Oliver: So we've got -- which is typical, we've got about 40% of our revenues up for renewal in the next 12 months. Most of those renew without any issue. We don't really have anything we're looking at that we're sweating, and I'm not expecting any change in rates. We've been in a backwardated market for so long. All of our contracts have renewed in backwardated markets already. So I don't really see any further downside. The thing we're focused on now is we try to keep our -- the terms on our contracts relatively short, just so we can get another bite at the apple if the -- if markets improve.

Michael Blum : Got it. Great. Super helpful. I appreciate that. I also wanted to ask about leverage. You obviously made some good progress there in the last few years, couple of years. For 2022, do you -- where do you think you could take leverage to? And do you have kind of a longer-term target that you're sort of angling for?

Brad Barron: So Tom is not here, so I’ll answer that. And what I’d say is we haven’t – we don’t have a published leverage target. What we are is focused on lowering our leverage overall. And we’re particularly focused on addressing the Series Ds that come due in 2023 – so not due but they become redeemable in 2023. So probably the biggest levers that we have are continuing to increase our EBITDA and then also to be laser-focused on optimization within the organization and reducing spending. So – and then we can use every available dollar to reduce leverage after that.

Operator: And our next question comes from Jeremy Tonet from JPMorgan.

Dan Walk : This is Dan Walk on for Jeremy. I thought your comments on the ammonia system were interesting. And wondering if you could just talk about how you see the demand trending for the more traditional uses. And also, I know it's very early days, but you mentioned partnering with customers, potential customers on future opportunities around green hydrogen and just wondering if you could give us a sense of how advanced those talks are.

Daniel Oliver: Sure. This is Danny all over again. So in terms of our traditional demand, agriculture demand is very strong. Obviously, there's an ethanol driver partly behind that. We expect that to continue. What we're seeing new in terms of the green and blue ammonia is interest from particular customers who are -- have a business plan to ship the blue or green ammonia up our system into the Mid-Continent and they will use that ammonia to -- as a source of hydrogen. So they'll split the nitrogen from the hydrogen at destination and use the hydrogen to supply fleet vehicles that are being converted to hydrogen fuel cell. So those conversations are actually quite progressed in the last few months. In fact, I hope to have, in the first half of this year, hopefully some more -- be able to share with you some more details on that as they work to make sure that they have space on the line to support their new business model. So I think we'll have some definition around that sooner rather than later, even though it's probably a couple of years out from an in-service date.

Dan Walk: Got it. Okay. And then just a quick follow-up on that. And I know you just mentioned it's a couple of years out, but can you give us any sense of what the -- just the order of magnitude is on capital outlay for a project like that?

Daniel Oliver: So it won’t be significant capital. We don’t need to do anything to the pipeline, we’ll just be making connections. So that’s not fully vetted yet on exactly where we will be making these connections. But that’s really all we have to do. We don’t have to expand capacity on the pipeline. But I think we’ll see upside in 2 ways. Just one, the additional volume for new demand. And then also given that the discussion is around guaranteed space, firm space on the line, it should be a premium market as well.

Operator: And our next question comes from Selman Akyol from Stifel.

Selman Akyol: Just a couple of quick follow-ups. In terms of thinking about the Permian, and you guys referenced you exited the year at 30 rigs, can you say where you expect to exit '22 at in terms of rig count or what you're assuming?

Daniel Oliver: We really don't forecast that. We're forecasting connections as they are communicated to us by our producers. But I'll tell you that we think that at this level, at around 520 or so, that it takes about 23 rigs just to maintain our volumes. And so we're above that. And that's -- when I throw that 23 rig number out there, that's without DUCs. And we do have more than our fair share of DUCs on our system. So the rig count, along with the DUCs that will be converted over the course of the year, will -- is what's giving us the growth that we're forecasting.

Brad Barron: Yes. One thing to also keep in mind about the Permian is the progress that we've seen over the last 5 years in terms of rig efficiency has just continued, and it's continued through the pandemic. So the rigs are getting more and more efficient.

Daniel Oliver: Good point.

Selman Akyol: Appreciate that. And I wouldn't anticipate this, but no concerns over the seismic activity, any of that? It's -- your producers aren't having any issues with that?

Daniel Oliver: No.

Brad Barron: No.

Selman Akyol : Okay. And then I know you talked a little bit about storage, but can you just maybe think about how we should think about this going forward? I mean we bottomed here with this quarter. And I know, obviously, comparisons are tough due to the asset sales. But should we think about this as being the low point we build from here?

Daniel Oliver: Yes, I think so. I don't see anything on the horizon that would change that. We had, in the fourth quarter of '21, we had some movement in customer contracts. And so we had where we were switching customers at a couple of locations. And so we had some gaps and revenue coverage on some of that storage as we transition from one to the other. And that transition has been done now, so we shouldn't see a repeat of that this year.

Brad Barron: Yes. Another thing I would direct you to is our West Coast, the sort of predominance or dominance of our West Coast biofuels business, which is now over 1/4 of our storage business.

Daniel Oliver: And that's all long term.

Brad Barron: It’s long term, and that’s not going to diminish.

Operator: And thank you. And I am showing no further questions. I would now like to turn the call back over to Pam Schmidt for closing words.

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

Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.