Shell Midstream Partners, LP (SHLX) Q3 2021 Earnings Call Transcript

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Shell Midstream Partners, LP (SHLX)
Q3 2021 Earnings Call
Oct 29, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jeff, and I will be your conference operator today. At this time, I would like to welcome everyone to today's webcast for Shell Midstream Partners. [Operator Instructions] I will now turn the call over to Mr. Jamie Parker, Investor Relations. You may begin your conference.

Jamie Parke -- Investor Relations Officer

Thank you, Jeff. Welcome to today's webcast for Shell Midstream Partners. With me today are Steve Ledbetter, CEO; Shawn Carsten, CFO; and Sean Guillory, VP, Commercial and Business Development. Slide two contains our safe harbor statement. We will be making forward-looking statements related to future events and expectations during the presentation and Q&A session. Actual results may differ materially from such statements and factors that could cause actual results to be different are included here as well as in today's press release and under Risk Factors in our filings with the SEC. Today's call also contains certain non-GAAP financial measures. Please refer to the earnings press release and Appendix one of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. We will take questions at the end of the presentation. With that, I'll turn the call over to Steve Ledbetter.

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Thanks, Jamie. Good morning, and welcome to our third quarter earnings webcast. First, let me start by saying how proud I am of our entire Shell Midstream team. We continue to show grit and resilience in the midst of adversity. As you know, Hurricane Ida impacted the United States Gulf Coast, with the most significant impact being in Louisiana, an area where many of our staff live. Their ability to bring back our assets in normal operations in a short time frame, while dealing with impacts to their own homes and families, is truly remarkable. And I would like to express my sincere gratitude to those who worked and continue to work to bring our assets back online. Shawn will address the short-term impacts in a bit, and I will focus on the longer-term outlook. As you recall, last quarter, we introduced an updated financial framework, which will drive our capital allocation into the future. Today, building upon this framework, we want to align our strategic intent for Shell Midstream Partners, which we believe will drive long-term sustainability. As we move forward, our decisions will support fueling stable and ratable cash flows with moderate growth to the partnership. This will be delivered by optimizing our diversified strategic asset base to increase value-added services to our customers, investing selectively to further strengthen our current positions and take advantage of the evolving market dynamics, evaluating opportunities to expand logistics services into energy transition themes like CCS or clean fuels and all the while continuing to focus on competitiveness in costs and capital efficiency in our decision-making. Shell Midstream Partners continues to benefit from its core fundamentals, upon which we always deliver, and which drive confidence in our ability to deliver value to unitholders year-over-year. We believe in our portfolio and the capabilities of our people to execute safely and responsibly and with respect and care for each other and the environment in which we live and work. Holding diversified assets with exposure to efficient and competitive basins, such as the Gulf of Mexico, offering optionality to multiple market centers and having access to cost-advantaged supply are all key benefits we enjoy, a strong financial footing complemented by a refreshed framework, which offers options for cash deployment and drives resilience through cycles and a track record of operational delivery with the expectation that we will continue to deliver stable and ratable cash flows with moderate growth for the long term. Our cash delivery will be driven mainly by our offshore and onshore crude and product systems.

With our assets and the ongoing activity in the Gulf of Mexico, we believe the region will continue to grow. In the near term, the story will be tiebacks with flat production across our assets. In the midterm, we anticipate Vito, Powernap and Anchor to flow into our systems to not only replenish but also to grow our cash flows. And longer term, we expect producers to remain active as the basin continues to be one of the most economic areas to explore and should provide long life cash flows. A few specific examples to share. Our Mars expansion is progressing well and will stand ready for first oil from Vito and Powernap in 2022. We also intend to expand in the Auger corridor, capturing new production in the area that is ready to come online in the midterm. We expect that opportunity to have a capital outlay of between $35 million and $45 million and to deliver an anticipated annual EBITDA value of between $15 million and $20 million, with an FID time line of 2022 and expectation to come online in 2025. Both projects are examples of continued investment in strategic areas of our business and will provide value to unitholders. Moving onshore. We expect demand to continue to return to pre-COVID levels. As we've discussed in the past, our cash flows are expected to be ratable and growing with inflation. And I will note that our assets should have minimal contractual risk as we move forward. What will drive onshore growth will be selective investments in core positions such as our intended Lockport expansion, which we anticipate will reach FID early next year. This opportunity allows us to take advantage of Canadian crude movements into the Midwest markets and staging to move into St. James and Clovelly for exports. We expect that project capex to be between $20 million and $25 million and to deliver an annual take-or-pay EBITDA value of between $3 million and $6 million. And further downstream in Southeast Louisiana, we look to utilize our asset positions to link St. James to Clovelly all with the intent of providing an efficient path to the water from the Midwest. Additionally, we see strategic growth opportunities in our nonoperated refined products portfolio, namely the previously announced Explorer project to expand the system in the North Dallas market. And although we will continue to take advantage of our portfolio position and the continued need for fossil fuels well into the future, in time, we will look to leverage our footprint and expand into alternative energy transition themes, such as renewable fuels, hydrogen and CCS solutions. One potential opportunity in this space would be Shell's recent announcement to explore a potential CCS project in the Gulf Coast, where we could be well positioned to provide the midstream solution. This is our core base plan, which provides stable and ratable cash flows with moderate growth, all with small levels of capex required, and we anticipate having excess cash above our distribution levels, which will allow us to weather uncertainties like Hurricane Ida and deliver upon our strategic intent as we move forward. With this excess cash flow, we will follow the framework we discussed last quarter to drive further value to the company. First, we will maintain our balance sheet strength in order to remain resilient and pursue additional growth opportunities aligned with our view of the market, and we will look to return dollars to unitholders. It is my belief that the market is undervaluing our units and ability to deliver over the long term. As such, we are evaluating options, such as using excess cash for a potential buyback program or increasing distributions in the future.

Finally, we continue to have access to a runway of assets where we could opportunistically pursue a drop to provide additional ratable cash flows and unlock future growth opportunities if it makes sense from a market and unitholder value perspective. Now as I close, we believe in our diversified asset base, which connects key supply areas to strategic market centers across the country. The long-term resilience of the Gulf and our advantageous position there will continue to serve us well. And when combined with our onshore Gulf Coast logistics assets, we believe our partnership remains well positioned to fuel stable cash flows and moderate growth well into the future. With that, I will now hand the call over to Shawn.

Shawn J. Carsten -- Chief Financial Officer, Vice President & Director of Shell Midstream Partners GP LLC

Thanks, Steve, and good morning, everyone. I think we can all agree, it's been quite a ride over the past 18 months, but we've proven our capability and strength multiple times over. I really can't say enough about the resilience of our staff and our assets, which continue to deliver best-in-class performance. Now all this resilience is underpinned by our strong and diversified asset base. It's my view that the United States and the world will have a need for the hydrocarbons that we transport for many years to come. And we believe that even as the energy transition evolves, our assets will be some of the most resilient in the infrastructure space. So with our strong set of assets to build upon, our financial framework now in place and more details on how we intend to continue to move forward, I'm confident in the partnership's ability to deliver consistent cash returns to our unitholders. So now let me cover a few of our key financial metrics for the quarter. For the quarter, even with the storm impacts in Colonial's decision to not declare a third quarter dividend, our partnership was able to meet its commitments. This speaks to our financial strength. Our total revenue was $128 million, a decrease of about $20 million from the second quarter. Now this was primarily related to lower throughput on Zydeco and the offshore as we experienced downtime related to Hurricane Ida. This decrease was partially offset by a higher product revenue. Operating expenses were $79 million, down about $4 million from the prior quarter, mostly related to the timing of project spend as some work was delayed, which was partially offset by a higher cost of allowance oil sales. Income from equity investments was $86 million, down about $19 million from the prior quarter, mostly due to storm impacts and lower volumes on Explorer. So with all this, adjusted EBITDA attributable to the partnership, it was about $145 million. And after interest expense, maintenance capital and other adjustments, total cash available for distribution was $122 million.

Our partnership declared a distribution of $0.30 per LP unit. Now this resulted in a coverage ratio for the quarter of 1 times. So now let me turn to the partnership's balance sheet and liquidity. As of September 30, the partnership had total debt outstanding of $2.7 billion and approximately $1.2 billion in available liquidity. We believe in the strength of our balance sheet as it provides us both the flexibility to effectively navigate events like Hurricane Ida and the ability to pursue opportunities as they arise. So now let me quickly provide a few updates for the rest of this year. In the Gulf, we expect to see an impact of roughly $10 million to $15 million to both net income and CAFD in Q4, all the way into the repairs on West Delta-143 platform, which we anticipate being completed around mid-November. It's important to understand that the Ida impacts are not expected to have any long-term effects on our company. And once the fields are back up, they should resume a normal production profile. And finally, for a little housekeeping, we expect to file a renewal of our shelf registration statement, which is set to expire in the near future. Although we do not anticipate any near-term needs to issue units, we believe it's prudent to keep our shelf registration active. As I close, we're optimistic about the future of the partnership, and we believe in our ability to drive long-term value for unitholders as we maximize value from our diversified asset base to move America's energy. So with all that, we'll now take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Shneur Gershuni from UBS. Your line is open.

Shneur Z. Gershuni -- UBS Investment Bank, Research Division -- Executive Director in the Energy Group and Analyst

Hi. Good morning, everyone. I just wanted to go back to your comments specifically about-kind of-the return of capital discussion. When do we start that thought process? Does the Colonial rate cases have to be decided and you have to know exactly what that's in place? And so that's something that we should be thinking about as kind of that as the triggering event? Or is it something that you're already evaluating today? You've cut the distribution, you've sort of rightsized the cash inflow and outflow and so forth relative to the highly accretive projects that you're working on. I'm just trying to understand kind of your thought process about when that is something that we should be thinking about as a near-term event?

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Hey, Shneur, this is Steve. I'll take that one. It's a good question. I wouldn't link it to any one event. I think what we have done in terms of our refreshed financial framework has allowed us to weather the headwinds that we see just like Hurricane Ida and over time, will allow us to build excess cash. And that along with the strength of our balance sheet will allow us to take opportunities to deploy that capital and as part of that grow value and the name. And one of those items is looking at a buyback program or returning dollars to shareholders. Timing of that will be as we move along and grow excess cash through the cycle, not talking about a specific point in time today.

Shneur Z. Gershuni -- UBS Investment Bank, Research Division -- Executive Director in the Energy Group and Analyst

Okay. And just a quick clarification. Like when you wrote the slide on Slide 7, you did write buybacks first distribution second. Is there something for us to read into that? Is that your preference right now or they're both viewed equally?

Shawn J. Carsten -- Chief Financial Officer, Vice President & Director of Shell Midstream Partners GP LLC

Hey, Shneur, this is Shawn. No, there are just two options of ways to return cash to unitholders.

Shneur Z. Gershuni -- UBS Investment Bank, Research Division -- Executive Director in the Energy Group and Analyst

Great. And maybe one final question, if I can slip one in. Is there any risk that you would have to put any capital into Colonial like a capital injection or the fact that it's not paying a distribution for the last few quarters, it's building up capital in case there's a need for that?

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Yes, I think. Good question. As we view it, and as we discussed last quarter, the risk associated with the rate case as well as the Huntersville incident could impact forward distributions and here we sit with the second quarter in a row where they didn't declare a distribution. However, we believe that Colonial will be able to manage that within their financial framework. Don't anticipate the need for a cash injection from owners. And also we see coming out of that, that the strategic nature of Colonial is still there. We believe in our investment, and we believe that it will turn to a distribution in time and are happy with our position there.

Operator

Your next question comes from the line of Theresa Chen from Barclays. Your line is open.

Theresa Chen -- Barclays Bank PLC, Research Division -- Research Analyst

Good morning. I'd like to follow up on Shneur's question related to Colonial, if you don't mind. Can you just remind us from here what are the next steps as far as the sequence of events go? And what kind of outcome do you expect as far as the rate resolution?

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Thanks, Theresa. Yes, I mean as far as the next steps go, we'd point you back directly to Colonial on that. As you know, there was an ALJ decision scheduled for November. We understand that, that has been pushed just a bit. But again, we put you back -- or point you back to Colonial for any of the specifics.

Theresa Chen -- Barclays Bank PLC, Research Division -- Research Analyst

Okay. And in terms of your potential participation in the sponsor's efforts in energy transition. Can you talk more about the CCS option? And what exactly would that entail from your end?

Sean Guillory

Hey, Theresa, this is Sean Guillory. I'll go ahead and take that. I think from a CCS perspective, you may have seen some of the recent announcements from the sponsor about work that they're looking at to have in the Gulf Coast. I mean what we said before, we'll continue to look at what makes sense for us at the pace of society, we would look at things like carbon capture storage, hydrogen, low-carbon fuels, tanking, anything that would use pipelines or terminals to get value and invest in that for the partnership.

Shawn J. Carsten -- Chief Financial Officer, Vice President & Director of Shell Midstream Partners GP LLC

And Theresa, this is Shawn Carsten. Just to add a little bit. These will -- how we participate in these will be backed by more traditional midstream contracts, as you've seen in the past. So we -- our objective is to support our affiliates and play in that integrated play, but also ensure that value returns to our unitholders..

Theresa Chen -- Barclays Bank PLC, Research Division -- Research Analyst

Thank you.

Operator

Your next question comes from the line of Doug Irwin from Credit Suisse. Your line is open

Douglas Baker Irwin -- Credit Suisse AG, Research Division -- Research Analyst

Hey, thanks for the question. Just wondering around the hurricane impact, if you can help frame that from a cost perspective in terms of -- kind of -- how much costs went into the quarter on repairs? And then to the extent that you're able to, are you able to talk about what might be recoverable under insurance policies? Or if it's too early to say on that?

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

All right. Doug, this is Steve. I think I heard the question. You were a little bit quiet there, but around the costs around assets and then potential insurance recovery. If that's correct, I can frame that up. Is that right?

Douglas Baker Irwin -- Credit Suisse AG, Research Division -- Research Analyst

Yes. Yes. That's right.

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Okay. Yes. I mean, so I think as far as the hurricane goes, the minimal repair costs to our assets and our assets held up very well. As you know, the impact to our business was associated with the damage on West Delta-143. And those -- while we operate and man those assets, we do not own them. They are owned by our affiliate and so the cost to repair those will be borne by our affiliate just a plug. I don't see any lasting damage for our assets, and I'm extraordinarily proud of the team and how they dealt with this, and in fact, bringing Platform C up in October and platform A up mid-November to get the flows going back through our March corridor system. Shawn, do you want to talk about the insurance?

Shawn J. Carsten -- Chief Financial Officer, Vice President & Director of Shell Midstream Partners GP LLC

Sure. Thanks, Steve. So Doug, I think with regards to the insurance, we have, as Steve highlights, minimal in terms of property damage. Mars is the only asset that we would qualify under the 60-day waiting period for the business interruption insurance today -- in that day. As we highlighted earlier, we expect that platform to return in the relatively near future. And so, we'll see what the claims might be. I'm not making any predictions. However, we shouldn't expect them to be significant if it comes up quickly.

Douglas Baker Irwin -- Credit Suisse AG, Research Division -- Research Analyst

Okay. That's helpful, thanks. And then I think you'd previously guided to kind of expected maintenance costs throughout the second half of the year. And you mentioned some of that might have been pushed out from 3Q. Is that baked into the $10 million to $15 million 4Q impact you've talked about? Or is there going to be some incremental maintenance on top of that in the fourth quarter?

Shawn J. Carsten -- Chief Financial Officer, Vice President & Director of Shell Midstream Partners GP LLC

Yes. So Doug, I mean, we always have maintenance every quarter. The $10 million to $15 million is almost all related to revenue, which is just lost production. And our -- from a capital standpoint right now, we have about -- we're about $5 million short for the entire year around maintenance capital just because these were projects that were delayed due to the hurricanes or were just canceled due to more efficiency. And so overall, I think we're relatively on track with our maintenance, but we're -- we pushed a little bit of activity over to the new year.

Douglas Baker Irwin -- Credit Suisse AG, Research Division -- Research Analyst

Okay. Thats all for me, thanks.

Operator

Your next question comes from the line of Derek Walker from BOA. Your line is open.

Derek Bryant Walker -- BofA Securities, Research Division -- Vice President

Hey. Good morning, guys. I apologize if you guys said this. My call dropped during your formal remarks, but I know you previously you talked about $30 million to $40 million of sort of cost reductions by the end of this year. I guess, ex sort of the impacts related to weather, I guess, how are you guys looking at that cost structure? Do you see any opportunities in 2022 to further reduce costs?

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Yes, Derek. As we have talked about in the past, that $30 million to $40 million run rate as we exit 2021 was our objective and what we had guided toward. And I'm happy to say that we are on target to meet that leaving 2021. Those are structural and sustainable elements where we take advantage to optimize what we do in the marketplace different procurement strategies and we see that those are sustaining and lasting. But we don't stop there. We continue to, as we talked about, focus on our competitiveness and our position in the marketplace. And we'll continue to look for opportunities to optimize and keep a lid on costs as well as our capital discipline as we move forward.

Derek Bryant Walker -- BofA Securities, Research Division -- Vice President

Got it, thanks. And then I know it's perhaps the media thing, but just on the drop downs. I mean you talked about potentially evaluating buybacks. I think in the past, you talked about where did your buyback -- to be sort of incremental interest on assets you already own. But just -- have you had recent discussions? I guess, is there anything there that has evolved, I guess, on the drop down front and sort of your funding strategy around that?

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Yes. I mean, so -- one of the benefits of being linked and having access to being associated with the sponsors, having access to those assets that could make sense in the drop structure. If and when it made sense financially, we would entertain doing that. At this point, we don't think it makes sense currently as far as the best value and growing value in the name.

Shawn J. Carsten -- Chief Financial Officer, Vice President & Director of Shell Midstream Partners GP LLC

Just to build a little on Steve's comment. Look, we have no intention to issue new equity, particularly in these markets when it's awfully expensive. And so as we move forward, whether we do it through our balance sheet or through cash on hand, we'll look to leverage some of our excess cash to take advantage of all the opportunities, which will include organic growth and this other slate of options that we reviewed both returning cash to unitholders as well as possibly drop down. But that's a longer-term issue.

Derek Bryant Walker -- BofA Securities, Research Division -- Vice President

Got it. And then maybe just a quick one on the Auger opportunity. I think you mentioned the FID in 2022. I guess -- how did that opportunity develop? And I guess, any other kind of data points to kind of point to before that FID happens?

Sean Guillory

This is Sean Guillory. I'll go ahead and take that one. Thanks for the question. And what I would say about the Auger opportunity is it continues to show the continued investment in the belief that we have in the Gulf of Mexico as one of the most resilient basins in the United States, and in a basin that actually over the last couple of cycles had gone through some -- quite some difficulty but has come out very much ahead. And we've seen producers want to continue the investment there, and our desire to go to expand that system. We see that as very similar to the Mars expansion. We will be able to provide the necessary producer solution that will allow the export of the Gulf of Mexico barrel that we think will play a vital role in delivery of cash. And in terms of the process going forward, as we get more through our own internal evaluation process, we'll come back to the market with a bit more detail at a later time.

Derek Bryant Walker -- BofA Securities, Research Division -- Vice President

Got it. Thats helpful. I appreciate it, guys. Thank you very much.

Operator

We have no further questions. I will now turn the call back over to Mr. Jamie Parker.

Jamie Parke -- Investor Relations Officer

Thanks, Jeff. Thank you very much for your interest in Shell Midstream Partners. If you have any additional follow-up questions following today's presentation, please feel free to call me directly. My contact information can be found on the presentation materials as well as on our website, shellmidstreampartners.com.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Jamie Parke -- Investor Relations Officer

Steven C. Ledbetter -- President, Chief Executive Officer & Director of Shell Midstream Partners GP LLC

Shawn J. Carsten -- Chief Financial Officer, Vice President & Director of Shell Midstream Partners GP LLC

Sean Guillory

Shneur Z. Gershuni -- UBS Investment Bank, Research Division -- Executive Director in the Energy Group and Analyst

Theresa Chen -- Barclays Bank PLC, Research Division -- Research Analyst

Douglas Baker Irwin -- Credit Suisse AG, Research Division -- Research Analyst

Derek Bryant Walker -- BofA Securities, Research Division -- Vice President

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