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Semgroup Corp (NYSE:SEMG)
Q1 2019 Earnings Call
May. 8, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to SemGroup's First Quarter 2019 Earnings Conference Call. As a reminder, this call is being recorded. All participants will be in a listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions (Operator Instructions). I would like to now turn the conference over to SemGroup's Director of Investor Relations, Kevin Greenwell. Kevin, please go ahead.

Kevin Greenwell -- Director of Investor Relations

Thank you. Good morning, everyone. Our call today will be hosted by Carlin Conner, our CEO and Bob Fitzgerald, our CFO. We also have on the call Dave Minielly, Executive Vice President, US Operations; and Shaun Revere, Executive Vice President, US Commercial.

Before we begin, I would like to remind you that our earnings release and presentation for today's call include projections, forward-looking statements, and certain non-GAAP financial measures. We encourage you to read our full disclosures in our latest press release, slide presentation, and SEC filings for a discussion of those items, including reconciliations to GAAP financial measures.

With that I'll turn it over to Carlin.

Carlin G. Conner -- President and Chief Executive Officer and Director

Thank you, KG, and good morning everyone. We are glad to be here to discuss our financial results for the first quarter and provide an update on our strategic priorities. Our first quarter segment profit results were solid, led by our US Liquids and Canadian segments. As expected, these results were driven by contributions from recently commissioned projects and increased asset utilization. Bob will provide more detail on our first quarter results in a moment.

First, I would like to speak to a few key updates and provide color around our strategic outlook for the rest of 2019 and look into 2020 and beyond. Starting on Slide 4, our transformed portfolio is delivering reliable fee-based cash flows from a diversified, long-term focused customer base. Our newly commissioned assets, along with others currently under construction will drive incremental earnings growth.

For example, in Canada, volumes at our newly commissioned Wapiti gas plant will more than triple by year-end. Patterson Creek volumes are ramping steadily as well with expected growth of 30% by fourth quarter 2019. In addition, projects under construction, including the Smoke Lake plant and Pipestone pipeline will deliver full-year contributions in 2020.

In our US Liquids segment, the White Cliffs NGL conversion will be complete and begin contributing at the beginning of 2020. From a recontracting perspective, we are proactively managing exposure around White Cliffs' crude pipeline as we have line-of-sight to a significant multi-year commitment. In Cushing, we have renewed 100% of available tankage with good counterparties.

In Houston, the demand for heated tankage has exceeded supply. IMO 2020 is driving more need for heated storage while also increasing demand for middle distillate tankage. We have improved the tenure, rate and our quality of the counterparties in many of our negotiations.

Crude tankage with export and refinery-delivery optionality is in high demand. Long-term contracts are in place, but we continue to evaluate ways to drive more activity through existing assets. The closure of the Houston Ship Channel related to the ITC fire in March did result in service disruptions at our terminal, although it did not materially impact our first quarter results. It will take some time before we know the full financial impact of the closure, but at this point, we do not anticipate a material impact on earnings. I applaud our team for safely operating through this challenging time.

In Colorado, we believe that recently passed legislation is manageable for producers and that there will be continued investment in the DJ Basin. We were pleased to see recent public comments from our key producer customers that remain bullish on future investment in the basin. We remain focused on enhancing crude connectivity between our DJ, Cushing and Houston assets, to further drive utilization and cash flows. Although the official open season on our Gladiator project has expired, there is ample interest in a Rockies to Gulf Coast solution and we believe that SemGroup will play a role.

Likewise, in Canada, there is market demand for infrastructure to move liquids to market, whether it'd be our proposed Montney to Market project or a variation thereof. For these projects and others we are focused on capital efficient solutions that also de-risks the projects through collaboration with other market players.

From a spending perspective, we are balancing low multiple growth projects and future opportunities with disciplined allocation of capital. As we continue to support organic growth around our existing footprint, we have been very focused on our balance sheet, as outlined on Slide 5.

Since third quarter 2018, we have reduced our leverage ratio by almost a full turn from 5.9 times to 5.0 times, by capturing creative and low cost solutions, like the transactions we have executed over the last few months.

Looking forward, we will scrutinize every dollar of capital. The bottom line is this; the value change we serve depend on our strategic locations, connectivity and versatility. Our assets continue to generate organic opportunities, supported by strong contracts. As we bring into service key projects in 2019, we are well positioned to create further value for our customers and unlock the full potential of our platforms.

With that, I'll hand it over to Bob to provide more detail on our financial results for the quarter.

Robert Fitzgerald -- Executive Vice President and Chief Financial Officer

Thanks, Carlin. Starting on Slide 6 with our first quarter 2019 consolidated results, SemGroup reported a net loss of $3.3 million in the first quarter compared to net income of $3 million in the prior quarter. The change quarter-over-quarter is primarily due to an increase in depreciation and amortization expense related to new assets placed into service. First quarter adjusted EBITDA was $103 million compared to $105 million in the fourth quarter. Our cash available for dividends was $46.4 million for the quarter, resulting in a 1.3 times coverage ratio.

Turning to Slide 7 for segment profit results. Total segment profit was up over 3% quarter-over-quarter, as higher margins in our US Liquids segment and higher volumes in our Canadian segment more than offset our expected decline in US Gas.

Slide 8 provides key highlights for our US Liquids segment, which reported segment profit of $89.5 million for the quarter, a 5% increase over the prior quarter. Contributing to the increase in the segment profit were higher marketing margins in our Mid-Continent region and a $2.7 million insurance claims settlement at our Houston terminal. Overall, stable to growing earnings reflects the combination of growth from new projects at our Houston terminal and increased utilization of our existing assets.

White Cliffs' volumes increased slightly quarter-over-quarter as customers continued to build shipper history in advance of taking one of the pipelines out of service for the conversion project. Our terminals in Houston and Cushing are running at full available capacity as demand remains high for heated and crude storage. In Cushing, we have seen strengthening of market rates compared to six months ago and expect future renewal rates to improve.

Moving on to our US Gas segment on Slide 9, we reported segment profit of $12.2 million during the first quarter, down $5 million from the fourth quarter. The decrease was due to lower volumes as a result of reduced drilling activity in the Mississippi Lime and the expected decline in uncommitted volumes in the stack.

Given this week's announced merger between Midstates Petroleum and Amplify Energy, we are working with our customer to determine what, if any, impact this may have on anticipated 2019 volumes. We should have better visibility on their future production expectations over the next couple of months as they move forward to their anticipated close date in the third quarter.

Moving to Slide 10, segment profit at our Canadian business was $22.7 million for the quarter, reflecting incremental contributions from new plants, including one month of earnings from Patterson Creek and two months of earnings from the Wapiti plant. As Carlin noted earlier, we expect both Wapiti and Patterson Creek plants to ramp during the year, consistent with our initial guidance.

These plants are located in the heart of the Montney area where producers continue to invest and develop resources to supply oil sands' diluent demand. We expect total processing volumes to grow by 60% compared to our first quarter numbers with the fourth quarter exit rate of over 730 million cubic feet per day.

In summary, looking at our full-year, we are reaffirming the financial guidance we gave in February. We continue to expect 2019 adjusted EBITDA of $420 million to $465 million. Overall, we expect the strong growth in US Liquids and Canadian segments will more than offset any challenges faced by US Gas business.

I will now turn the call back over to Carlin for some closing comments.

Carlin G. Conner -- President and Chief Executive Officer and Director

Thanks, Bob. As we look to the remainder of 2019, we are focused on bringing our key projects into service on time and on budget. We are well positioned to create further value for our customers and maximize the full potential of our assets with additional growth, but it must be smart growth. We view each new opportunity with the sense of strong capital discipline and the goal of achieving long-term stable earnings. At the same time, we are keenly focused on running an efficient base business, renewing high-value contracts, serving our customers well, and above all else, being safe.

With that, I'd like to thank you for your time this morning. I will now turn the call over for questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question today comes from Shneur Gershuni with UBS. Please go ahead.

Shneur Gershuni -- UBS -- Analyst

Hi, good morning guys. Maybe we can start off with the leverage levels where they're currently at. I recognize that you've made some progress over the last year, but I was wondering if you can sort of clarify for us, the discussions that you've had with the Board in terms of trying to get that down to let's say a four times level versus the current level right now?

Has there been any discussion at all with respect to maybe temporarily cutting the dividend as an option? Could we see an acceleration of the plan to do an IPO in Canada? I was just wondering if you can give us some more clarity over some of the levers that you have that you could potentially pull to sort of address the leverage overhang.

Carlin G. Conner -- President and Chief Executive Officer and Director

Thanks, Shneur, we'll try to take those one-by-one. With respect to the Board conversations, the Board is very engaged. They appreciate the quality of cash flows that we're generating and the growth projects that we have not only intending to invest with our guidance in 2019 and capital to be spent, but also the projects we've already invested in and the ramping of cash flows. So they have a ringside view of where we're headed from a leverage point of view.

They obviously also are privy to other conversations we're having that are not public at this point. So it's probably not appropriate to opine on their viewpoints because they have information that the public doesn't share, but they are very much aware of where we're headed. They support the plan, and as we continue to work to leverage down, recognizing the intense discipline on capital allocation .

With respect to capital raises and how we will manage those raises, I think it's important to appreciate that we do have multiple levers. You've seen us in the last 1.5 years, 2 years execute many different type transactions, each of which you could consider at the time being fairly unique and creative, also fairly I think efficient relative to other forms of capital raises and I think we'll continue to be strategic and creative around the need to raise capital, as projects come forward that we feel like we need to invest in. It's really important that we continue the development of these core footprints. These are -- this transformation that we've gone under -- gone through has created, we believe, the footprint for tremendous growth, but it has to be disciplined growth and we're quite excited about it.

With respect to the dividend, I think we all are very much frustrated with how our stock has been trading lately and its resulting high dividend yield. Let me remind you that, we review the dividend in the context of balance sheet, capital needs, dividend yield, pro forma cash flow strength, growth, and investor expectations.

As we just recently announced, at this time we're holding the dividend flat, but we'll continue to evaluate it going forward. In the context of all the other things going on, we will continue to evaluate it. I believe it's my job to create long-term value and we believe our assets are positioned to do that and we don't want to short circuit that development, but we are constantly assessing the other components of our story, including the yield and leverage.

Shneur Gershuni -- UBS -- Analyst

And are you able to talk to potentially accelerating the IPO in Canada?

Carlin G. Conner -- President and Chief Executive Officer and Director

Well, it's all about the efficiency of a process and the ability to get fair value. When we bought the Meritage assets in conjunction with the KKR JV, we foreshadowed that an IPO was probably in the cards at some point. But I think we also said that the markets in Canada were not ready for us to IPO. So, the window is not there. I think as you look at our development in Canada, the scale of development and the ramping of our EBITDA, we will be in position from a size, and I think quality point of view, to be an IPO candidate sometime in 2020, whether or not the market will be in a position to give us fair value for that development is a totally different question, and we'll continue to evaluate that going forward.

I would not, again, with the mantra of creating long-term shareholder value is ultimately my duty, I would -- think I would be -- it would be difficult to accelerate any action that would be dramatically discounting the value of those assets. So we always will be recognizing the tension between the need to do something and the value that we receive relative to the value we think we're creating over time.

So those are the debates we have internally and discussions we have. And I think they've been healthy. And I think if you look at our last two years, I think you can see that we have figured out a way to continue to grow this business, transform this business while working leverage down.

Shneur Gershuni -- UBS -- Analyst

That makes sense and I appreciate the color there. Just one follow-up comment to something that you had made in your prepared remarks, I think you had said that you had line-of-sight on a multi-year commitment on -- did you say it on crude for White Cliffs? And if so, can you give us some color around that tenure, tariff relative to where we are, like how we should be thinking about it?

Carlin G. Conner -- President and Chief Executive Officer and Director

That was an unfair Ts, wasn't it Shneur?

Shneur Gershuni -- UBS -- Analyst

It was.

Carlin G. Conner -- President and Chief Executive Officer and Director

The Ts you like that, right. Let me talk real quick, the line-of-sights to the long-term commitment had to do with the crude side. We really can't say much more. We're in the middle of finalizing that and trying to protect confidentiality of that agreement. We put it in, because it is a data point that we feel very strongly about and I think it speaks to the de-risking of the recontracting that I think has been weighing on our stock a little bit.

So we're very, very pleased to have it. It is multi-year. I'll leave it at that. And it's quite a significant amount of volume. So we're excited about it. But the NGL side of the equation is also interesting to us because we see growing support for that conversion and our partner DCP has, I think, recently reflected in their call about the growth in their side of the business and we definitely believe we'll see the rest of that pipe full -- be full, whether it's the DCP delivering the volumes or maybe we do another open season and bring other customers into the pool.

Shneur Gershuni -- UBS -- Analyst

Alright, that makes sense. Really appreciate the color. Thank you very much for that.

Operator

Our next question comes from Kyle May with Capital One Securities. Please go ahead.

Kyle May -- Capital One Securities -- Analyst

Good morning, thanks for taking the question. One thing, I believe, you mentioned on the call is the Gladiator open season expired. Just wonder if you can talk a little bit more about what happened with the project and how SemGroup could participate in other projects?

Carlin G. Conner -- President and Chief Executive Officer and Director

Kyle, this is Carlin. I'm going hand this one over to Shaun Revere, our Vice President of Commercial.

Shaun Revere -- Executive Vice President of Commercial

Okay. Thanks, Carlin. Kyle, the open season expired. We still continue to have commercial discussions with potential shippers in that corridor. I think with the plethora of projects that were out there, finding shippers to make the commitments on any of the lines at that time seemed like a stretch. However, we continue to look at that corridor and try to work with not only the shippers but potentially look at what role we can play, if it's not a Gladiator type, but one of the other projects that goes forward as well from a connectivity standpoint.

Kyle May -- Capital One Securities -- Analyst

Okay, got it. Appreciate it. And one other thing, maybe circling back to the leverage, I believe on the last call you had mentioned that your target for the year was a consolidated level of 5.5 times by the end of 2019. Now that you're already there, do you see room for additional improvement and if so, kind of what's the target that you're working toward?

Robert Fitzgerald -- Executive Vice President and Chief Financial Officer

Hey Kyle, this is Bob, I'll take that one. I believe the way that we've been messaging it now for a while has been we're looking at a consolidated leverage target of 5 times or lower. And as you pointed out and as we demonstrated in the slide deck as well, we've been actively driving toward that. Now, as we look forward, we're looking at opportunities today. We have ongoing conversations and discussions around things we could do to accelerate that further; yet at the same time, we have capital programs that have been sanctioned we have to complete this year.

So, we're continuing to look at all of those variables moving forward with the goal overall of -- we want to keep driving that leverage number down and get it to where it's in a place that's more reasonably accepted to us and to the Street.

Kyle May -- Capital One Securities -- Analyst

Okay, got it. And maybe one last one, you gave the exit rate for processing volumes in Canada. Just wondering how you see that progressing throughout the year?

Robert Fitzgerald -- Executive Vice President and Chief Financial Officer

It's Bob again, I'll take that one. As we look forward going with Wapiti and Patterson Creek, obviously the two drivers of that growth rate this year and the ramping of it, we provided some interesting color I think on Slide 10 of the deck where you can kind of see the different plants and how those are going to fill up. To some extent, Patterson Creek will be more or less ratable overtime as we see the ongoing production at that asset. We could see a little bit of lumpiness at Wapiti. We see some growth throughout the year and then we have some additional take-or-pay commitment stepping up around the fourth quarter. So I expect it to be a little bit lumpy and back-end loaded.

Kyle May -- Capital One Securities -- Analyst

Okay, great. That's all from me. Thank you.

Operator

Our next question comes from Danilo with BMO Capital. Please go ahead.

Danilo Juvane -- BMO Capital -- Analyst

Thank you and good morning. Bob, if I could focus on the gas business, you made some comments with respect to some M&A activity potentially impacting volumes. But I wanted to specifically focus on volumes being a little light than what you guided back in the February, I think you guided 320 to 360 (ph) and I think in the press release I've read something about NBC happening at one of your facilities in July. How do you ultimately see your volumes shaping out in the gas business for the year?

Robert Fitzgerald -- Executive Vice President and Chief Financial Officer

Yeah, great question Danilo, appreciate that. And as we've talked about our guidance, that was an average for the year. So we've always anticipated that we'd start the year pretty low. I think even going back to November of last year, we started signaling that we expected STACK volumes to drop down. Now as we look forward through '19, we definitely are seeing increases in the STACK volumes. They're actually starting to increase in the second quarter.

So we've got one month under our belt and we can kind of see what's happening. And we expected that, coming out of the STACK, and we expect that to continue to ramp throughout the year. We do see a step-up in MBCs in July and there's going to be another step up in 2020 as well. But those volumes will continue to ramp at a lower margin.

I think we've talked before that the margins on the STACK volumes that we're handling are going to be lower than the margins that we're capturing in the Mississippi Lime. So when you think about the Mississippi Lime, we signaled in February that shippers -- producers were dropping a rig, we've one rig running in the first quarter, we see that kind of continuing at that level during the first half of the year. We see that uptick a little bit in the back half of the year, but we expect all-in-all that Mississippi volumes rather, relative to the first quarter, are going to be flat maybe slightly declining because that rig and the drilling expectation probably will just marginally offset if it gets to that point, and what the decline curve is.

So and those are higher margin volumes. So we're still looking forward through all that. There's a lot of variability in what those producers are going to do going forward, particularly with the M&A transaction announced on Monday. So we're continuing to look at that. And the Mississippi Lime volumes, I think are one that we're paying close attention to, but it's also very difficult right now to get a solid read on how that's going to play out. We'll continue our discussions, and we're taking kind of a risk-adjusted basis in how we're looking at that going forward.

Danilo Juvane -- BMO Capital -- Analyst

Got it. And the liquids business did quite well this quarter. Any sort of additional breakdown that you can provide, certainly White Cliffs did well, but what else drove the outperformance?

Robert Fitzgerald -- Executive Vice President and Chief Financial Officer

A couple of things that I could point out to, one is on our, our marketing supply business, which is reported in our US Liquids business. As we expected, it had a pretty decent quarter, positive contributions to segment profit for the quarter. Relative to what we saw last year, we see some improvement going. And right now, say, for that part of the business, we expect that to be positive for the year.

We don't see a huge amount of growth in contributions for the overall year, but we do see it's trending positive, which is good relative to where we've been. And then, when you think about some other things that are happening in that area, we've got ongoing growth happening in the Houston terminal. We are continuing to operate that terminal and seeing that growth come as we expected. It's really achieving all of its expectations going forward. Export is a big opportunity and has been, Carlin talked little bit about -- we had a little bit of the hiccup in the first quarter just from -- operationally with the ITC fire. But really no material impact in the first quarter and as we look at that business going forward, there's still big demand for export going forward.

Danilo Juvane -- BMO Capital -- Analyst

Thanks, Bob. And the marketing gains, was that driven by sort of basis that you're able to capture it in the quarter?

Robert Fitzgerald -- Executive Vice President and Chief Financial Officer

Well, two things were happening there. One is, we are seeing a strengthening in some of the margins we're able to capture in the Mid-Continent, which is going to be that kind of Oklahoma, Kansas, Cushing spread. So that's one piece of it. And aiding that piece is the fact that you might remember in the fourth quarter, we posted and took a charge for a lower cost-to-market adjustment, so that also helped the margins going forward.

So we had a pretty decent quarter -- first quarter in that business and we expect it to be positive in the future as well. But we'll see if it's going to be as positive. We're still looking through those spreads.

Danilo Juvane -- BMO Capital -- Analyst

Those are my questions. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Carlin Conner for any closing remarks.

Carlin G. Conner -- President and Chief Executive Officer and Director

Thank you all very much for joining us today. We appreciate your continued interest and support. Have a good day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 28 minutes

Call participants:

Kevin Greenwell -- Director of Investor Relations

Carlin G. Conner -- President and Chief Executive Officer and Director

Robert Fitzgerald -- Executive Vice President and Chief Financial Officer

Shaun Revere -- Executive Vice President of Commercial

Shneur Gershuni -- UBS -- Analyst

Kyle May -- Capital One Securities -- Analyst

Danilo Juvane -- BMO Capital -- Analyst

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