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Shell Midstream Partners LPÂ (SHLX)
Q4Â 2018 Earnings Conference Call
Feb. 21, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good morning, my name is Geege (ph) and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Fourth Quarter 2018 Shell Midstream Partners Earnings Call. (Operator Instructions)
I will now turn the call over to Jamie Parker, Investor Relations Officer. You may begin your conference.
Jamie Parker -- Investor Relations Officer
Thank you. Welcome to the fourth quarter earnings conference call for Shell Midstream Partners. With me today are Kevin Nichols, CEO and Shawn Carsten, CFO.
Slide 2 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 1 of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.
We will take questions at the end of the presentation. With that, I'll turn the call over to Kevin Nichols.
Kevin M. Nichols -- President, Chief Executive Officer and Director
Thank you Jamie. Good morning, everyone, and thank you for joining Shell Midstream Partners' fourth quarter earnings webcast. Before I begin, I want to give a special recognition to our operating company Shell Pipeline, which as of this year in 2019 has been safely delivering America's energy for 100 years. This is an impressive milestone and it represents a strong legacy of operational excellence. Now in today's call, I will take you through fourth quarter performance, then offer some full-year 2018 highlights and finish by looking ahead to 2019, providing a brief operational outlook discussing both opportunities and challenges that we see ahead. I'll then pass the call over to Shawn, who will walk you through the fourth quarter financials.
Three common themes that I'll reiterate today, which I hope you have realized throughout the year. We have delivered against our promises. Our Gulf of Mexico corridor strategy is working and we continue to capture organic growth. Now beginning with the fourth quarter performance, we had another solid quarter, generating some $141 million of net income and around $179 million of adjusted EBITDA. Quarter-over-quarter, we saw an overall increase in volumes across the onshore and offshore systems.
Looking first at the onshore, results were largely driven by the Zydeco system, where volumes again were strong in the fourth quarter. The remaining onshore pipelines and terminals continued to deliver in line with prior quarter. A highlight for the quarter was growing our investment in the Permian in December. We approved the project to extend the Nautilus system to provide gathering and processing services for Halcon Resources Company. The Halcon opportunity provides an accretive expansion of the Nautilus system to secure third-party business as we continue to grow in the Permian.
Moving to the offshore, volumes were slightly higher quarter-over-quarter and results were driven by organic growth that we continue to capture in the Gulf of Mexico. And that's growth with little to no capital required. On Amberjack, we received first oil from Big Foot in November and in December, the Claiborne tieback came online. This new production continues to drive volume and growth into the system. And on Proteus and Endymion, we saw an increase of 56,000 barrels per day, a 19% increase over the prior quarter. This increase was driven by two new wells from the Thunder Horse platform.
And finally, in our Eastern Corridor, we continue to see strong activity around our footprint, with two new tiebacks coming into the system in the fourth quarter alone. Now some of this growth was partially offset by temporary operational impacts that we saw in the quarter. As you will recall, Hurricane Michael came through the Gulf of Mexico in October. And while we didn't shutdown any of our operations, the storm impacted the Eastern Corridor for two weeks and producers reduced production, causing an impact of approximately $2.5 million.
We also saw temporary production impacts on Amberjack and Mars. Both systems saw slightly lower volumes quarter-on-quarter as existing fields encountered temporary well performance issues, which was partially offset by the new fields coming online I spoke about just earlier. And along the Auger system, we saw unplanned maintenance from producers, which slightly impacted volumes. All of these operational issues are temporary in nature and we expect the volumes to return.
As I turn from the fourth quarter performance and summarize the year, 2018 was another year that Shell Midstream Partners delivered on its promises. We set the expectation that we would deliver between $2.5 billion and $2.9 billion of acquisitions over the 2017 and 2018 time frame. And with Amberjack, in May, we met that acquisition guidance, delivering 2.7 billion of drops and setting the partnership up for continued success with a diverse set of assets. We also said that we would deliver 20% annual distribution growth through 2018. With the $0.40 per unit distribution we recently declared, we achieved the 20% annual growth rate and we grew distribution some 146% over the previous 16 consecutive quarters since we've launched the company.
This continued delivery is underpinned by the strength of the Gulf of Mexico and capturing organic growth opportunities. Examples of this growth for the year include Amberjack, which has grown in the short time since we've acquired the system, has grown volume by around 40,000 barrels per day. The Mars system, which also has grown throughput some 30% year-over-year driven by new wells and the (inaudible) tieback and the Eastern Corridor, which had an impressive eight new tiebacks come online in 2018. And as we move into 2019 and beyond, I am confident in the future ahead for Shell Midstream Partners.
We will continue to be anchored by three strategic pillars; a resilient framework with strong sponsor support, continued diversification across the portfolio and sustainable growth via strong cash flows and access to Shell's high-quality asset base. Before I close, let me give you a few 2019 operational updates and Shawn will provide more detail on anticipated financial impacts in his section. Fourth quarter as you know marked the last quarter with all four contracts on our Zydeco system in place. Two contracts expired at the end of 2018, and the third contract will expire in the second quarter of 2019.
As I explained in our last webcast, the market dynamics between Texas and Louisiana continue to evolve and are evolving. And while we continue our discussions with new and existing shippers, we will run the system on spot shipments for non-contracted capacity. During this time, our volumes will be less predictable versus the take-or-pay contract structure we have previously had in place. It is worth noting that in the first half of 2019, previously contracted shippers will have the ability to ship on earned credits. As such, we will recognize revenue for these movements. However, the cash was recorded in previous and prior periods. We expect that the majority of these earned credits will be utilized in the first quarter.
And switching to the offshore, we expect to have a number of producer planned turnarounds and connected system maintenance that will primarily impact us in the second and third quarters. With that said, our Gulf of Mexico outlook has not changed, and we remain bullish on our organic growth opportunities both now and into the future. In fact, the Energy Information Administration, EIA, has reported that 2018 was the third consecutive year for record production in the Gulf of Mexico, and they are forecasting this to continue into the future. As proof points of this growth, we continue to see increased producer activity around our footprint. Much of this growth is driven by industrywide efficiency gains, reducing breakeven pricing. Examples of this growth include Chevron, which anticipates the second Big Foot well coming online with continued ramp-up and flow into the Amberjack system.
And further out, BP announced the discovery of an additional 1 billion barrels of oil in the Thunder Horse field, which is directly connected to the Proteus and Endymion system. And bringing it closer to home, Shell anticipates first oil from Appomattox in the third quarter of 2019, expecting to produce around 175,000 barrels of oil per day at full ramp-up. And this production will flow through the newly constructed Mattox pipeline, which is connected into the Proteus and Endymion system. All of this continues to drive our confidence in the Gulf of Mexico and the growth that we see on the horizon, and that's growth for the partnership and growth for our unitholders.
With that, I'll now turn the call over to Shawn to walk you through the financial performance for the quarter and 2019 outlook. Shawn?
Shawn J. Carsten -- Chief Financial Officer, Vice President and Director
Thanks, Kevin and good morning everyone. As shown in today's press release, the fourth quarter was a solid quarter for Shell Midstream Partners. Our business continues to perform well supported by our diversified offshore and onshore asset base.
Now let me cover a key -- a few of our key financial metrics for the quarter. Our revenue was about $142 million, down roughly $11 million from the prior quarter, which is primarily related to lower allowance oil sales in the fourth quarter. Operating expenses were approximately $70 million, an improvement of about $6 million from the prior quarter, driven by lower cost of sales of allowance oil, less project spend on Zydeco and revision in our estimate of our asset retirement obligations, partially offset by a net realizable value adjustment on allowance oil inventory.
Income from equity investments was about $74 million, roughly even to the prior quarter. Dividend and other income was about $22 million, down slightly due to a decreased quarterly dividend from Colonial (inaudible). In total, adjusted EBITDA attributable to the partnership was around $179 million, down approximately $8 million from the prior quarter. After interest expense, maintenance capital and other adjustments, total cash available for distribution was about $156 million. Our partnership declared a distribution of $0.40 per LP unit, representing a 4.7% increase over the prior quarter and a 20% increase over the fourth quarter of 2017. All of this resulted in a very healthy coverage ratio for the quarter of 1.2 times.
So now looking ahead to 2019 and related to the expired contracts on Zydeco that Kevin discussed earlier, we expect the impact to our first quarter net income and CAFD to each be in the range of $15 million to $25 million. In the offshore, we expect to have several producer turnarounds during the year. Now these turnarounds are expected to impact net income and cash available from distribution by approximately $20 million. Based on the current turnaround schedules, we anticipate this to break out roughly $10 million in the second quarter and a further $10 million in the third quarter.
Finally, in the CapEx space, we plan to spend about $48 million of capital this year. Of which, around $22 million will be growth capital. The growth capital is primarily related to continued expansion of the Permian gas gathering system as previously discussed by Kevin. So now for the partnership's balance sheet and liquidity, as of December 31, the partnership had total debt outstanding of about $2.1 billion, which equates to a debt to EBITDA ratio of 2.9 times based on an annualized Q4 adjusted EBITDA.
We continue to be very comfortable with our debt levels. I'd also like to remind everyone that the previously announced IDR growth waiver will begin in the first quarter of 2019. Our sponsor Shell has waived $50 million of IDR distributions, and this amount will be credited back to the partnership over the course of the year as follows; $17 million in each of Q1 and Q2 and then a further $16 million in Q3. We believe this reflects strong sponsor support and combining all of this affords us significant flexibility as we continue to grow our business.
To wrap it all up, reflecting on our continued delivery of growth since our IPO, combined with our solid operating results, our diversified portfolio and our strong sponsor support, let me reiterate our guidance of mid-teens distribution growth for 2019. And at the appropriate time, we will follow up with further guidance.
So with all that, I will now take -- we'll now take your questions. Operator?
Questions and Answers:
Operator
(Operator Instructions). And our first question is from Jeremy Tonet from JPMorgan. Your line is now open.
Jeremy Tonet -- JPMorgan -- Analyst
Good morning. Just want to pick up on the last point you said, with regards to distribution growth for 2019, it seems like there's been kind of a change in the market with regards to more of an emphasis on internally self funding growth CapEx as opposed to trying to maximize distribution growth. Just wondering if you have any thoughts of whether or not it would make sense to moderate that level of growth or any updated thoughts on distribution philosophy there?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yeah, hey, Jeremy this is Kevin. Thank you very much. We get that question both in the earnings calls like this and in investor conferences around, would we consider slowing down our growth rate? What I would say for 2019 is that we are reiterating our guidance and we are committed to the mid-teens distribution growth. Since we have launched our company, one of the things that we're proud of and we've always done is deliver on our commitments and our promises for marketplace and we gave that guidance earlier. So we're going to stick with the mid-teens distribution growth.
That said, we are hearing everything in the marketplace and we're evaluating all of that. We specifically have not given guidance beyond 2019. And we'll take that into consideration as we look to roll-out future guidance.
Jeremy Tonet -- JPMorgan -- Analyst
Thanks for that. And just kind of building of that I guess with the incentive distribution rights, we're seeing more simplifications or eliminations occurring in this space and granted you guys have just come up with the agreement there with the IDR relief that kind of freezes the payment level as it is, but wondering if you could share any new thoughts you have as far as IDRs are concerned, and when we should expect any kind of new developments on that front?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yeah, thanks again Jeremy. No additional guidance that we're prepared to give today. But what I will say is that we continue to have dialog with our sponsor. Our sponsor continues to evaluate all options that are available to them. I think the waiver was a good show of support that says, hey well we are thinking about this, we're going to at least freeze the distributions to effectively reflect fourth quarter of 2018. So I can't comment on the timing, but our sponsor and the company are having constant communications and we'll provide guidance at the appropriate time.
Jeremy Tonet -- JPMorgan -- Analyst
Thanks for that. That's it from me.
Operator
Thank you. Our next question is from Shneur Gershuni from UBS. Your line is now open.
Shneur Gershuni -- UBS -- Analyst
Hi, good morning guys. Just kind of wanted to build on the last few questions and maybe asking a little differently. In terms of your overall cost to capital, it sort of seems like it's kind of inefficient and I was just kind of wondering if you are looking at ways to optimize it better. You consistently seemed to have leverage at around the 3.0 times level. Would it now make more sense to have it kind of at the 3.5 times level obviously comfortably under 4.0 times.
And then secondly, do you foresee a structure in the future in terms of funding future drops where you use excess distributable cash flow as a piece of the pie chart as well as equity and getting there while slowing the distribution growth rate?
Shawn J. Carsten -- Chief Financial Officer, Vice President and Director
Thanks. This is Shawn. Great question. We saw -- a highlight in our balance sheet, we still have about $1.1 billion of liquidity available to us and our sponsor continues to be willing to take units back that's supported to our MLP. So to your question on cost of capital, we hear you and we do always try to maintain a relatively conservative balance sheet, so we can take advantage of opportunities in the market that might present themselves as well as be able to work through whatever comes in future acquisitions, whether it's third party or parent in the long term.
And so with that, I think your second question was around cash flow. Well we do that in the future, certainly that's in the cards and we will provide more guidance as appropriate in the future.
Shneur Gershuni -- UBS -- Analyst
I recognize that this sponsor is support by taking back units, but I mean it's still cash leaving the entity at the end of the day by distribution. I was just sort of thinking of ways to optimize for a lower unit count, where the amount of equity issued whether public or to the sponsor, goes down and you kind of commit to let's say funding 20% of all future drawdowns by retained DCF, something along those lines to help to optimize?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yeah, so let me maybe piggyback on something that Shawn answered there is that, we've always had the view that over time as we build scale within the company that we would continue to look at building things and spending organic capital inside the entity.
Let me remind you that Shell spends about a third of its capital program overall in the United States. Of which, there is a need for infrastructure and we have said that we will grow with our affiliates as we have with the Mattox pipeline and the Falcon pipeline and others, and Crestwood and to the extent that we can take advantage of some of those opportunities and fund those inside the MLP, that is the intention, but we will always take a look at how long it takes for those cash flows to get turned on versus when the cash need is, but we will -- that's an option.
Shneur Gershuni -- UBS -- Analyst
Okay. And then following up on the IDR question, I know that you've tipped your cards about trying to do something with the relief in hand and you said that you've had discussions with your parent and so forth. Have they advanced at all since the last time you updated us? Are they considering more options? Is it something that gives us some degree of comfort that there's kind of a light at the end of the tunnel on an IDR restructure?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yeah, thanks, I appreciate that. I know that it's on all of your minds and I wish I could give you something more definitive at this time, but it's just not appropriate. What I can tell you from my perspective is that, I am comfortable from where I sit. Looking at the discussions, the communication and the activity and the work that's been done to continue to look at not only the IDRs but a holistic strategy and longer term. So I'm comfortable with what's been done at this date and we'll just have to wait until we can actually announce something to you.
Shneur Gershuni -- UBS -- Analyst
Okay, and final question. In terms of rotations of management of SHLX (ph), is there kind of a philosophy within Shell where people rotate on a fairly regular basis or can we expect to see some increased consistency in terms of who's communicating with The Street in managing the entity and so forth?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yeah, there really hasn't been any change to any of those plans. I think when my announcement came out as well as Shawn's announcement came out, I think we told the market that while it was appropriate at the time with the previous CEOs and people we had in place for their expertise, both Shawn and I we're going to be here for a longer period of time and we announced that would be in the range of at least kind of in that six-year time frame and there's no change to that.
Shneur Gershuni -- UBS -- Analyst
Right, perfect. Thank you very much guys. Really appreciate the color.
Operator
Thank you. (Operator Instructions). And our next question is from Derek Walker from Bank of America. Your line is now open.
Derek Walker -- Bank of America -- Analyst
Hey, good morning guys.
Kevin M. Nichols -- President, Chief Executive Officer and Director
Good morning, Derek.
Derek Walker -- Bank of America -- Analyst
Appreciate the kind of the color that you gave (inaudible) Zydeco and some of the potential turnarounds. Maybe just a little bit, I know you kind of just still thinking about dropdowns at some point but the mid-teens distribution growth for '19, does that assume a drop? And then as far as timing around that, just given sort of the IDR waiver, Zydeco sort of impacts and then turnaround, is that sort of a back half of '19 sort of event? Just any sort of color that you might share there would be helpful.
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yes, so thank you, appreciate it Derek. We're not going to give specific guidance to acquisitions at this moment in time. A drop is not -- it is a possibility as part of what we may be looking at or can do sometime in the year, but we're not going to give guidance to kind of when, what does that look like as far as that goes, but I'm comfortable again with the mid-teen distribution coverage with everything that we've talked about.
Derek Walker -- Bank of America -- Analyst
Okay. And then maybe on Zydeco, it sounds like you're just running more on spot these days. And just given the kind of volume growth in the quarter, and it seems like the revenue per barrel came in a little less Q-over-Q. I guess how should we think about that revenue per barrel sort of on a spot basis kind of throughout 2019?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yes. So, thank you. I think, well, first, we're very careful, it's not appropriate and we don't plan to give guidance beyond Q1, at best -- at this time, the best that we can give you combined with everything that's going on in Zydeco, the ongoing commercial discussions and the credits that are rolling off, the $15 million to $25 million impact in Q1 is the best guidance that I can give you. We continue to see Zydeco as a strategic asset. It is well positioned in the marketplace. It is the only asset that's connecting the two refining centers, both Houston and Louisiana and also connected to LOOP Clovelly possible exports.
With what I said in this earnings call, we will be a little bit less predictable on the volumes as we will rely on customers and what they bring to us on a monthly basis, while we run on spot. That said, we're always looking to optimize the value for the system in the market and we could be looking at and consider an open season again at some point in the future.
Derek Walker -- Bank of America -- Analyst
Got it. Appreciate that. Maybe just last one from me. I think you previously alluded to volumes on Amberjack around 400 I believe by the end of 2019. Has that outlook changed at all?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yeah. So I mean, you heard me say that we've grown the system. The system has grown 40,000 barrels in two quarters; it's progressing nicely. We had a few operational issues with some of our customers online, but I see nothing that takes us off our previous bullishness on this as a growth asset in the portfolio. And with that, you saw the growth in the Gulf of Mexico. It's an exciting time for Amberjack.
Derek Walker -- Bank of America -- Analyst
I appreciate the comments. Thanks guys.
Operator
Thank you. Our next question is from Spiro Dounis from Credit Suisse. Your line is now open.
Spiro Michael Dounis -- Credit Suisse -- Analyst
Hey, good morning everyone. Maybe I start with Zydeco again here, trying to get a sense of the contracting for negotiations and most you can offer there is -- has there been any sort of price discovery around Zydeco? And is it a case where you'd rather not committed to those levels or is there just so much uncertainty from the customers here that they sort of prefer to wait?
Kevin M. Nichols -- President, Chief Executive Officer and Director
Yeah, I appreciate the comments. I know it's on all of your minds, but it really is best for me not to get into the specific discussions as they're ongoing right now with existing shippers, new shippers and the market continues to evolve. I think everybody in the marketplace has been used to the system running one way and now it's running differently, and I think it's taking time for the market to understand all of that. So we're going to get through those discussions and I'll provide some more guidance at the appropriate time.
Spiro Michael Dounis -- Credit Suisse -- Analyst
Okay, fair enough. That's all I had. Thanks guys.
Operator
Thank you. We have no further questions. I will now turn the call back over to Jamie Parker.
Jamie Parker -- Investor Relations Officer
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. Our contact information can be found on the presentation materials as well as on our website, shellmidstreampartners.com.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. you may now disconnect.
Duration: 28 minutes
Call participants:
Jamie Parker -- Investor Relations Officer
Kevin M. Nichols -- President, Chief Executive Officer and Director
Shawn J. Carsten -- Chief Financial Officer, Vice President and Director
Jeremy Tonet -- JPMorgan -- Analyst
Shneur Gershuni -- UBS -- Analyst
Derek Walker -- Bank of America -- Analyst
Spiro Michael Dounis -- Credit Suisse -- Analyst
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