BP Midstream Partners LP (BPMP) Q3 2018 Earnings Conference Call Transcript

BP Midstream Partners LP (BPMP)
Q3 2018 Earnings Conference Call
Nov. 14, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to BP Midstream Partners' 3Q '18 Results Conference Call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing "*0". After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press "*1" using your telephone keypad. To withdraw your questions, you may press "*2". Please also note today's event is being recorded. And at this time I'd like to turn the conference call over to Mr. Brian Sullivan, Vice President of Investor Relations. Sir, you may begin.

Brian Sullivan -- Vice President of Investor Relations

Welcome to BP Midstream Partners' Third Quarter 2018 Results Presentation. I'm Brian Sullivan, Vice President of Investor Relations and I'm here today with Chief Executive Officer Rip Zinsmeister and Chief Financial Officer Craig Coburn.

Before we begin, I would like to draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans, and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our SEC filings.

We will also refer to non-GAAP financial measures. Please refer to our SEC filings and supplementary information for important disclosures related to these measures. These documents are also available on our website.

Now, over to Rip.

Rip Zinsmeister -- Chief Executive Officer

Thanks, Brian, and good morning, everyone. Thank you for joining us today. It's been a busy third quarter and an even busier October with the announcement of our 2018 dropdown in early October. We are excited by the quality of the assets we have purchased as part of the dropdown, particularly the organic growth potential of these assets, but more on this transaction in a moment.

Our high-quality asset portfolio delivered another strong result for the third quarter. Note that our third quarter results do not include any contribution from the 2018 dropdown. These assets will be included in our results from the fourth quarter onwards. The third quarter results demonstrates again that we are building a solid track record of delivering on our promises to the market.

The Board of Directors of the General Partner declared an increased quarterly cash distribution of $0.2915 per unit for the third quarter. This represents an increase of $0.019 or 7% over the second quarter distribution and, cumulatively, $0.029 over the minimum quarterly distribution. We have now raised our distribution for three consecutive quarters since our initial public offering, representing a cumulative 11% increase above the minimum quarterly distribution. With the forecast increase in our next quarterly distribution, we expect to achieve our target of mid-teens per unit distribution growth for 2018.

Today, I will start by briefly summarizing our recent 2018 dropdown. Then, as is our usual order of play, I will review our operational results for the third quarter. Craig will take you through our financial results for the quarter and our financial frame, including updated guidance for 2018 and new guidance for 2019. I'll come back to summarize our key messages regarding asset dropdowns and our distribution growth before we take your questions.

In early October, we completed our first asset dropdown. We acquired equity interest in three entities, an additional 45% interest in the Mardi Gras joint venture, increasing our interest from 20% to 65%, about 23% in the Ursa crude oil pipeline, and a 25% interest in the KM-Phoenix joint venture, which includes 13 refined product terminals. The purchase price of $468 million was funded using our existing revolving credit facility. The transaction value represented a 9.4 times multiple of the 2019 and 2020 average EBITDA forecast to be generated by the interests acquired.

Post the transaction, we increased our 2018 full-year cash available for distribution guidance to $140 million to $145 million. Craig will provide an update on this guidance shortly.

Our first dropdown demonstrated our ability to successfully execute a dropdown at an efficient multiple, complete a transaction that was immediately accretive to distributable cash flow per unit to unit holders, further diversify our asset portfolio, balancing forecast cash available for distribution between our onshore and offshore portfolios and expanding our portfolio beyond the pipelines, and acquire high-quality assets that bring stable cash flows from well-established customers and meaningful future growth potential, requiring minimal capital spend by the partnership.

Importantly, it demonstrated the robustness of the sponsor-driven dropdown model and the depth of quality assets across the midstream value chain of our sponsor, BP. The assets we acquired are high-quality. The embedded organic growth forecast from these assets alone is expected to be sufficient to deliver on our promise of mid-teens per unit annual distribution growth through 2019. This provides additional flexibility on the timing of our next drop.

Lastly, I would like to thank the members of the conflicts committee of the Board of Directors for the time and effort they put into this transaction.

Turning now to our operational results, our third quarter total pipeline gross throughput was around 1.5 million barrels of oil equivalent per day, higher than the second quarter, as previously guided, reflecting higher volumes on River Rouge, due to strong performance of the Whiting refinery during the quarter ahead of planned maintenance; the completion of planned maintenance on facilities in the Gulf of Mexico that occurred during the second quarter; and increased volumes on the Mars pipeline system with a full quarter of production from Kaikias following start-up late in the second quarter and increased deliveries via Amberjack. This was partially offset by lower volumes on Proteus, Endymion, Diamondback, and BP2 pipelines.

Lower volumes and Proteus and Endymion reflected the tie-in of the Thunder Horse Northwest Expansion project during the third quarter. BP announced the start-up of this project in October and we expect throughput volumes in the fourth quarter to return to more normal levels, consistent with volumes we saw in the first two quarters of the year. We anticipated lower throughput on Diamondback, as diluent volumes returned to more normal levels during the quarter, as previously guided.

Lower volumes on BP2 were consistent with the start of planned maintenance at the Whiting Refinery in mid-September. This maintenance is scheduled to continue through mid-November. A reminder that we have minimum volume commitment arrangements in place with BP with respect to throughput on our onshore pipelines, mitigating the impact to our cash available for distribution from this maintenance.

Third quarter average revenue per barrel on a portfolio basis was higher compared to the second quarter. On a full-year basis, we expect average revenue per barrel to be broadly flat compared to 2017, calculated on a like-for-like basis.

Looking ahead, we expect fourth-quarter pipeline gross throughput to be higher than the third quarter, reflecting a full-quarter contribution from the Ursa pipeline and higher volumes on Proteus and Endymion following the start-up of the Thunder Horse Northwest Expansion project in mid-October. This increase will be partially offset by lower throughput on the BP2 pipeline as a result of the maintenance at Whiting continuing into the fourth quarter as planned. The impact of Hurricane Michael on throughput of our offshore pipelines in the Gulf of Mexico in the fourth quarter is not material.

Now, over to Craig.

Craig Coburn -- Chief Financial Officer

Thanks, Rip. Good morning, everyone. We delivered another strong financial result in the third quarter. Net income, adjusted EBITDA, and cash available for distribution again exceeded the IPO forecast we gave for the same period. As Rip previously mentioned, our third quarter result does not include any contribution from the assets we acquired on October 1st. Contributions from these new assets will be included in our results from the fourth quarter onwards.

Net income attributable to the partnership for the third quarter was $35.2 million, exceeding the IPO forecast by approximately $5.4 million and 15% higher than the second quarter. Revenues related to our wholly owned assets were higher than the IPO forecast, benefiting from stronger volumes on the River Rouge pipeline than planned, higher fixed loss allowance revenue attributable to higher realizations during the quarter, and the recognition of $3.9 million of deficiency revenue under the throughput and deficiency agreements during the quarter.

We expect to recognize additional deficiency revenue during the fourth quarter, primarily due to the lower throughput on BP2 and Diamondback as a result of the planned maintenance at Whiting continuing in the fourth quarter. Income from Mars was also higher during the third quarter, reflecting the increased volumes that Rip previously mentioned. This was partially offset by transaction costs of approximately $1 million during the quarter relating to our 2018 dropdown acquisition.

Adjusted EBITDA was $37.7 million for the quarter and cash available for distribution was $34.1 million. Both exceeded our IPO forecast. Maintenance CapEx associated with our wholly owned assets was $0.8 million in the third quarter, higher than in previous quarters. This was largely due to piping upgrades on River Rouge.

After factoring in the increased distribution, our distribution coverage ratio was 1.12 times, which is within our forecast range of 1.1 to 1.2 times.

Looking ahead to the fourth quarter, we now expect to be at the top end of our full-year cash available for distribution guidance of $140 million to $145 million. Fourth quarter adjusted EBITDA and cash available for distribution are expected to be higher than the third quarter. The fourth quarter will reflect a full-quarter contribution from the dropped assets. You should expect the annualized 2018 EBITDA for the dropped assets to be less than the estimated 2019 and 2020 average EBITDA that we used as a basis for the transaction multiple, as the 2018 EBITDA does not take into account all of the near-term throughput growth from the dropped assets, particularly Mardi Gras.

Adjusted EBITDA and cash available for distribution from our portfolio, excluding the dropped assets, are expected to be broadly flat with the third quarter. We expect a full quarter of financing costs associated with using our revolving credit facility to fund the 2018 dropdown. Maintenance CapEx for our wholly owned assets is expected to return to a more normal level in the fourth quarter, reflecting the absence of the piping upgrades at River Rouge.

With the forecast increase in our next quarterly distribution, we expect to achieve our target of mid-teens per unit distribution growth for 2018. Reflecting the contribution from the 2018 dropdown, we expect our distribution coverage ratio to be above our target range of 1.1 to 1.2 times in the fourth quarter.

Turning now to our financial frame, today we are providing you with updated guidance for 2018, which includes the dropped assets. We are also providing guidance for 2019 and through 2020. Starting with our updated guidance for 2018, pipeline gross throughput and average revenue per barrel in 2018 is largely unchanged, as we present these metrics on a full-year 100% basis.

The contribution of Ursa pipeline's fourth quarter gross throughput to the portfolio expressed on a full-year basis is not visible due to the rounding of our guidance. We forecast this pipeline to contribute more than 100,000 barrels per day in the fourth quarter or more than 30,000 barrels per day expressed on a full-year gross throughput basis.

Distributions from our interest in the KM-Phoenix joint venture are expected to be more than $1 million in 2018, representing the fourth-quarter distribution that the partnership will be entitled to.

We funded the 2018 dropdown using our revolving credit facility. Details regarding the financing costs associated with this facility are set out in our 10-Q filing. In summary, indebtedness under this facility bears interest at the three-month LIBOR plus 85 basis points. This excludes the customary fees, such as the commitment fee and utilization fee, the details of which can be found in the footnotes on this slide and in our prospectus.

For maintenance spend, we are providing you two points of guidance: total maintenance spend and maintenance CapEx associated with our wholly owned assets. Total maintenance spend for 2018 is expected to be approximately $9 million, the majority of which will be expense. Total spend includes the maintenance CapEx and RevEx associated with our wholly owned assets and joint ventures. The latter is funded by the joint ventures themselves prior to paying distributions to the partnership. The increase of approximately $2 million from our previous guidance reflects the addition of the dropped assets. Maintenance CapEx associated with our wholly owned assets, which is a subset of the total maintenance spend, is expected to be in the range of $1 to $2 million this year.

We previously provided full-year cash available for distribution guidance in the range of $140 million to $145 million. As I mentioned on the previous slide, we now expect to be at the top end of this range.

Moving on to our guidance for 2019, the guidance we are providing is based upon our portfolio post the 2018 drop and is subject to change with potential future dropdowns.

We expect pipeline gross throughput to increase to more than 1.7 million barrels of oil equivalent per day in 2019, reflecting a full-year contribution from the Ursa pipeline, increased throughput on Mars with a full-year contribution of production from Kaikias and a full year of deliveries via Amberjack, an increase in volume on BP2 to 310,000 barrels per day, and slightly higher throughput on Proteus and Endymion with production from the Shell-operated Appomattox facility expected to start in 2019. Full-year average revenue per barrel on a portfolio basis is expected to be broadly flat compared to 2018, calculated on a like-for-like basis. Distribution from our interest in the KM-Phoenix joint venture are expected to be in the range of $5 million to $6 million.

The interest rate and fees associated with outstanding balances under our revolving credit facility are expected to be consistent with 2018 guidance. We assume an outstanding debt balance in 2019 consistent with current levels. However, we will remain flexible to market conditions and may refine our capital structure accordingly throughout the year.

Turning to maintenance spend, total maintenance spend is expected to be approximately $15 million in 2019. The increase of approximately $6 million from our 2018 guidance reflects the addition of the dropped assets, which accounts for about half of the increase from 2018 to 2019. We also forecast increased maintenance spend on Diamondback and Mars during 2019. Maintenance CapEx associated with our wholly owned assets is expected to be consistent with our 2018 guidance.

We expect our full-year cash available for distribution guidance to increase to a range of $160 million to $170 million. The forecast increase in our cash available for distribution is consistent with the embedded organic growth potential of our new portfolio, which we believe is sufficient to deliver on our mid-teens per unit annual distribution growth in 2019.

Looking further out through 2020, we are committed to delivering mid-teens per unit annual distribution growth through organic and inorganic growth activity. We expect continued organic growth of the existing portfolio to support our 5% to 6% organic distribution growth target. Including inorganic activity, cash available for distribution is expected to be sufficient to achieve our mid-teens growth aspirations.

Estimated total maintenance spend and financing costs are expected to be consistent with 2019 guidance, subject to future dropdown activity and changes to our capital structure. Throughout the period of our financial frame, we remain committed to targeting credit metrics consistent with an investment grade, with our gross debt to adjusted EBITDA ratio not exceeding 3.5 times, and we expect to maintain a distribution coverage ratio in the range of 1.1 to 1.2 times.

With that, I'll hand back to Rip.

Rip Zinsmeister -- Chief Executive Officer

Thanks, Craig. Our proposition to you, our unit holders, is to deliver consistent, top-tier distribution growth. We are committed to delivering our target of mid-teens per unit annual distribution growth to you through 2020 and we are building a solid track record of delivering on this promise.

First, we have consistently delivered strong operational and financial performance since our initial public offering. We are past our one-year anniversary and our assets and business continue to perform very well.

Second, our strong performance has allowed us to consistently raise our cash available for distribution guidance above IPO forecast levels and increase our distribution each quarter since IPO. With the forecast increase in our next quarterly distribution, we expect to achieve our target of mid-teens per unit distribution growth for 2018.

And, third, we successfully completed our first dropdown acquisition, confirming our ability to execute attractive dropdowns, which are not just accretive but bring stable and growing cash flows from high-quality assets with well-established customers and meaningful future growth potential.

We understand that the broader investment market for MLPs needs to see this track record of both organic and inorganic growth being consistently delivered before our multiple reflects our top-tier distribution growth promise. But we are right on course to do this. We are also watching the wave of simplifications and consolidation in the sector and are aware the market's biases as it relates to dealing with IDRs. We have put together a balanced, high-quality portfolio and there is plenty more where that came from.

Looking out to next year, the embedded organic growth potential of our new portfolio is expected to be sufficient to deliver on our mid-teens per unit annual distribution growth through 2019. This essentially provides us with a great deal of flexibility on the timing of a potential dropdown in 2019.

While we do not expect to need to do a dropdown next year to deliver on our 2019 distribution growth, we will continue to target one dropdown per year, subject to market conditions. A potential dropdown in 2019 would set us up early to deliver mid-teens per unit distribution growth through 2020.

We would expect our next dropdown to include an asset or assets from the bottom two tiers of our dropdown inventory pyramid, as shown in our supplementary information, and be consistent with the asset characteristics that align with our investment proposition. Remember that the assets in the bottom layer of the pyramid are included in a seven-year Right of First Offer or ROFO. Our next dropdown could be at least the size of the 2018 dropdown, although this is subject to change as the asset mix has progressed and depends on market conditions.

And we will remain flexible regarding financing to achieve the optimal financing mix given the market environment. We will continue to target investment grade credit metrics and a balanced capital structure while pursuing our growth strategy.

All of this collectively shows the strength of our sponsored MLP model. BP is a strong, supportive sponsor. The value of having a strong sponsor cannot be understated. The scale of BP's midstream value chain assets provides us with access to a significant inventory of high-quality dropdown assets for many years.

The quality of the information to value dropdown assets is very high and well-understood, as well as the quality of the operating information to manage the assets once dropped. On a select basis, we work alongside BP to de-risk assets prior to dropdown, with pre-investments in improvements or maintenance leading to a minimal or no capital spend by the partnership following acquisition.

From time to time, BP may also acquire assets which subsequently become drop candidates for us, as we have seen with the recent BHP transaction in the lower 48. Such assets grow our dropdown inventory pyramid over time. It's never static.

And, lastly, the MLP structure provides BP with a very efficient mechanism to recycle capital to grow the midstream while providing investors the opportunity to co-invest in some of BP's most strategic infrastructure.

Thank you for listening and let me now turn it over to you for questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. To ask a question, you may press "*1" using a touchtone telephone. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your questions, you may press "*2". Once again, that is "*1" to ask a question.

Our first question today comes from Jeremy Tonet from J.P. Morgan. Please go ahead with your question.

Joe-- J.P. Morgan -- Analyst

Hi. This is Joe on for Jeremy. I wanted to ask about the Diamondback pipeline. And Enbridge has said that there's some potential for them to reverse their Southern Lights pipeline. I'm just wondering your thoughts on how that would affect Diamondback and if you would make any adjustments to that.

Rip Zinsmeister -- Chief Executive Officer

Well, we have a relationship with Enbridge so we have conversations, let's just say, routinely, as well as TransCanada, etc., etc. We haven't had any substantive conversations about Diamondback or Southern Lights. So, I think you should principally look to what Enbridge is telling you and we're not going to volunteer anything on that. We are looking at alternative uses of Diamondback anyway, partly because we have substantial surplus capacity on it above the diluent volumes and we talked about vat shipping gasoline on it, as an example. So, we're always open to commercial opportunities, should they arise.

Joe-- J.P. Morgan -- Analyst

Okay. That's helpful. And maybe one on Mars. Obviously, volumes were up quite a bit in the quarter and that's partially because of the turnaround in a previous quarter. But I'm just wondering how we should think about the run rate there and what that will look like going forward.

Rip Zinsmeister -- Chief Executive Officer

Okay. So, for those of you who have been along on the journey for BPMP from IPO Analyst Day forward, I'm incredibly bullish about the offshore. There's such a huge queue of fields to be connected. Appomattox, Vicksburg, Mad Dog 2, Atlantis, Dover, Rideburg, Gettysburg, Vido, keep going, right? So, I believe Shell is actually using DRA to maximize production down the Mars line. Okay?

Craig Coburn -- Chief Financial Officer

And I would say that -- Joe, this is Craig. I'd say also, you should think about for 2019 that the 3Q volumes will be more consistent 4Q and going forward. So, it's going to look more like 3Q, of course, than it will look like 2Q on our go-forward basis in the near-term.

Rip Zinsmeister -- Chief Executive Officer

And for those folks who aren't pipeline aficionados, DRA is drag-reducing agent. So, if you want to push more fluids through a line, you up horsepower and you decrease the frictional costs or frictional losses or viscosity by using drag-reducing agent. Okay?

Joe-- J.P. Morgan -- Analyst

Okay. Thank you. That's helpful. That's all for me.

Operator

Our next question comes from Derek Walker from Bank of America. Please go ahead with your question.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, guys.

Rip Zinsmeister -- Chief Executive Officer

Good morning.

Craig Coburn -- Chief Financial Officer

Hey, Derek.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

I appreciate the color on the 2019 guidance. Maybe just wanted to ask a quick question there. Just given the $160 million to $170 million range, is there any particular parts there that drive sort of the lower end versus the higher end?

Rip Zinsmeister -- Chief Executive Officer

I think that's a good question. I mean, I think we always like to give ranges and like to be conservative. I don't think there's anything in particular that's driving us to say it would be at $160 million versus $170 million. We're kind of thinking in the middle of that range. But we're leaving ourselves some room because it is early days. It's unusual to put, I think, 2019 guidance out this early. We're very comfortable, though, with the profile, in terms of it being a conservative viewpoint, and also our ability to hit our mid-teens distribution growth with this plan and stay within the coverage ratios. So, all that lines very well.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Okay, great. And then you also gave some color around the potential dropdown in '19, mentioning the bottom two tiers as well. Is there a preference for assets that come with organic growth? I know there's still some interest in Mardi Gras. But any sort of color there and perhaps discussions that you have with BP to put the next assets into the MLP.

Rip Zinsmeister -- Chief Executive Officer

Okay. Great question. So, we have a line of sight of what the 2019 program is likely to be. The key soundbite for the market is, with our 2018 drop, we can deliver our 2019 distribution promise. So, any drop in 2019 is upside. And the line of sight on the targets -- plural, I should say -- will have embedded growth. Right? And will be kind of a mix of crude lines and product lines. Okay?

Craig Coburn -- Chief Financial Officer

I would also say we have a bias for them to have some organic growth but we also have a bias for them to have stable cash flows going forward as well. So, that's one -- that's probably the No. 1 priority that we work on. We do a lot of upfront work on these drops and we're doing them right now on the targets to make sure that when they do come in to BPMP, they're in the right shape to deliver on the promises that we'll set going forward when we drop them. And consistent with what we've done in the past, we look to do that in the future as well.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Okay. Great. Thanks, guys. That's it for me.

Operator

Once again --

Rip Zinsmeister -- Chief Executive Officer

Sorry. I think I'd offer as a bit of a sidebar, basically our fixed loss allowance revenue is less than $10 million. So I'm always a bit surprised how the market will trade on or off MLPs when we have stable fee-based income. Oil, let's say, has moved 20%. So, the impact of oil moving 20% for us is $10 million goes to $8 million, against a business that we've just discussed makes $145 million to $165 million, $170 million in EBITDA. So, the kind of trading patterns around at least this business seems kind of out of sync with the underlying ties to commodity prices. Next question?

Operator

Once again, if you would like to ask a question, please press "*1". To remove yourself from the question queue, you may press "*2".

Rip Zinsmeister -- Chief Executive Officer

All right. Thank you very much. Enjoyed the dialogue. Wish there was a bit more but OK. Understood. We delivered a really strong quarter and our momentum continues. So, we're delivering on BP's investment thesis -- BPMP's, excuse me, investment proposition. Thank you for listening today. We do look forward to seeing you all very soon.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.

Duration: 33 minutes

Call participants:

Brian Sullivan -- Vice President of Investor Relations

Rip Zinsmeister -- Chief Executive Officer

Craig Coburn -- Chief Financial Officer

Jeremy Tonet -- J.P. Morgan -- Analyst

Joe-- J.P. Morgan -- Analyst

Derek Walker -- Bank of America Merrill Lynch -- Analyst

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