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BP Midstream Partners LP (NYSE:BPMP)
Q3 2019 Earnings Call
Nov 12, 2019, 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 '19 Results Conference Call and Webcast. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. At this time, I'd like to turn the conference call over to Mr. Brian Sullivan to begin the conference. Sir, please go ahead.

Brian Sullivan -- Vice President, BP North America Investor Relations

Thanks, operator. Welcome everyone to BP Midstream Partners' third quarter 2019 results presentation. I'm Brian Sullivan, Vice President of Investor Relations and I'm here today with our Chief Financial Officer, Craig Coburn.

Before we begin, please take a moment to review 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 the factors we note on this slide, and in our SEC filings.

We also refer to non-GAAP financial measures. Please refer to our SEC filings and supplemental information in this presentation for important disclosures related to these measures. These documents are also available on our website. And now, over to Craig.

Craig W. Coburn -- Chief Financial Officer

Thanks, Brian. Good morning, everyone. Thanks for joining our call. During the third quarter, we delivered both strong operational and financial results.

We have now grown quarterly adjusted EBITDA since the first quarter of 2018 by 47% and cash available for distribution by 23%, continuing our track record of consistent solid performance, delivery since our initial public offering.

A real highlight of the quarter was the record quarterly throughput at BP's Whiting refinery that underpin the strength and volumes shipped on our BP2 pipeline, notwithstanding continued apportionment on the Enbridge mainline. Throughput on BP2 during the quarter was a record 316,000 barrels per day. This was the highest throughput level achieved on BP2 since the IPO.

Earlier this year, we described our throughput and cash available for distribution profile as building across the year with a ramp at the back end of the year. This remains on track with continued growth on our offshore pipelines including increase in volumes from the Mattox pipeline.

During the third quarter, this growth allowed us to comfortably absorb throughput impacts of Hurricane Barry in July. Importantly, there was no material damage to any of our assets as a result of this hurricane. Delivering result like this, driven by underlying asset performance while facing the headwinds of apportionment on the Enbridge mainline and weather in the Gulf of Mexico demonstrates the resilience and the stability of cash generation of our portfolio.

Speaking of cash generation, the operational result translated to strong cash delivery in the quarter. At our second quarter results, we raised our full year cash available for distribution guidance to $165 million to $175 million. Based on the continued momentum in asset performance we saw during the third quarter and our confidence in the outlook through the end of the year, we now expect to be at the top end of this guidance range.

We have now had seven consecutive quarters of distribution increases and with our next quarterly distribution, we expect to deliver mid-teens distribution growth for 2019. So far in 2019, our cash delivery has exceeded the pace of our distribution growth, allowing us to build cash on the balance sheet. This presents us with the potential to self-fund some attractive growth capex opportunities in our hopper, something that we are currently evaluating.

Our target mid teens annual distribution growth is supported by around 5% to 6% organic growth. However, it's fair to say that we see our runway of organic and growth capex-led options continually improving as we refine our plans for the next year.

One example is the potential expansion of the Mars pipeline to accommodate new volumes from fields such as Vito and PowerNap as recently announced by Shell Midstream Partners. We will provide more details on these opportunities along with the guidance update early next year.

We remain interested in a drop-down, subject to market conditions acknowledging the market remains difficult. Regarding IDRs, we understand the market bias against IDRs and we will continue to watch closely the wave of simplification and consolidation across the sector learning from the actions of others. As we have said before, we will address any transition that BPMP may make proactively and pragmatically in the future.

I'll now take you through our third quarter operational and financial results, leaving plenty of time for your questions at the end. Our third quarter total pipeline gross throughput was more than 1.6 million barrels of oil equivalent per day, slightly lower than the second quarter of 2019, reflecting record throughput on BP2 since the IPO due to record quarterly performance at BP's Whiting refinery. And increased throughput on Proteus and Endymion due to the ramp up of Appomattox, notwithstanding the impact of Hurricane Barry.

Caesar, Cleopatra and Ursa, all reported lower throughput this quarter due to Hurricane Barry and maintenance activity by offshore producers. The gross throughput impact of Hurricane Barry was approximately 100,000 barrels of oil equivalent per day in the quarter and the impact to BPMP's cash available for distribution was around $2 million.

Third quarter average revenue per barrel on a portfolio basis was broadly flat compared to the second quarter. Looking ahead, we expect pipeline gross throughput in the fourth quarter to be higher than the third quarter, primarily due to significantly higher throughput on our offshore pipeline portfolio.

This reflects the assumption that there will be an absence of weather impacts in the Gulf of Mexico and the continued ramp up of volumes on the Shell operated Appomattox facility. This increase will be partially offset by producer maintenance in the offshore Gulf of Mexico previously planned for the third quarter, which is now delayed to the fourth quarter.

Turning now to our financial results. Net income attributable to the Partnership for the third quarter was $45.8 million higher than the second quarter of 2019, reflecting higher revenue from onshore pipelines due to higher throughput on BP2 and Diamondback as well as mid-year annual tariff increases across all three onshore pipelines.

The recognition of $2.4 million of deficiency revenue under the throughput and deficiency agreement relating to Diamondback and higher income from equity method investments due to favorable non-cash adjustments relating to offshore pipelines. This favorable impact more than offset any negative impacts from weather and producer maintenance in the Gulf of Mexico.

Adjusted EBITDA, attributable to Partnership was $51.9 million for the quarter and cash available for distribution was $45 million, both higher than the second quarter of 2019.

In October, the Board of Directors of the General Partner declared an increased quarterly cash distribution of $0.3355 per unit for the third quarter. This represented an increase of 3.6% over the second quarter 2019 distribution per unit. After factoring in the increased distribution, our distribution coverage ratio for the third quarter was 1.25 times.

Looking to the fourth quarter, cash available for distribution is expected to be higher than the third quarter, largely reflecting the favorable impact of River Rouge volumes shipped above minimum volume commitments year-to-date. We report the associated cash as distributable upon completion of the annual term for the throughput and deficiency agreement.

We expect the absence of impacts from Hurricane Barry in the Gulf of Mexico in the fourth quarter to be offset by impacts to the offshore pipelines from producer maintenance.

Let me wrap up with a few last thoughts. Our asset portfolio continues to perform very well and our confidence in its cash delivery is evidenced by us raising our cash available for distribution guidance to the top end of the range.

With one quarter to go this year, the BPMP team remains focused on delivering the 2019 targets. Thank you for listening to our call today. We will now take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Jeremy Tonet from J.P. Morgan. Please go ahead with your question.

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

Good morning. It seems like with just holding the distribution flat into next quarter, you can achieve kind of the mid-teens targeted growth rate that you've been talking about and I was just wondering what your thoughts are on distribution growth in general at this point? It doesn't seem like the market is really rewarding in the unit price and it only seems like it benefits kind of the IDR growth trajectory here. And so I was just wondering if you could provide us updated thoughts with regards to distribution growth philosophy for BPMP.

Craig W. Coburn -- Chief Financial Officer

Thanks for your question, Jeremy. I guess I would start by saying we're not changing our guidance that we've had the last couple of years in terms of distribution. So we're still sticking with mid-teens distribution through 2020, assuming that we have a drop and that we get sort of 10% from the inorganic and 5% to 6% from the organic.

Having said that, we did talk about earlier, we are looking at some internal growth capex projects that we can fund in 2020. We believe we can fund these with excess cash, because we've had actually an outstanding 2019, and we have good visibility into 2020.

So we're now beginning to develop a hopper of internally developed projects supported by BP in the first instance and then on offshore, such as the project that recently was announced by Shell Midstream Partners on Mars, supported by other producers in the offshore. So we're beginning to have sort of a multi-tier strategy here one around which we can -- and we are still interested in a drop, we would like to maintain a one drop a year cadence if possible. However, the market is extremely challenged with that respect.

So the next step for us is to look at these internally generated capex projects, which I think we will find will have very strong stable earnings configurations or we won't do them. And we'll be giving you more guidance on that after the first of the year as we go through these, but it's turning out to be a decent sized hopper that we can potentially pull the trigger on in 2020.

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

That's helpful, thanks. And one more if I could, just want to see -- in the past I think you talked about the potential for creative financing to assist in dropdowns. And it seems like you're flexing the distribution coverage a bit higher here and that could assist in that, and that's great to see, but just wondering if there's any other thoughts on that topic as far as credit financing or different avenues that you guys see, any new thoughts you can provide here?

Craig W. Coburn -- Chief Financial Officer

No new thoughts really, I mean I think BP continues to look at all the options, and I think we said that in the second quarter, Jeremy.

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

That's all from me. Thanks for taking my question.

Craig W. Coburn -- Chief Financial Officer

Thanks a lot, Jeremy.

Operator

[Operator Instructions]. 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 and thanks Craig for all the color. Just maybe a follow-up on the organic growth and I know you mentioned that you'd provide a little more color early next year, but you mentioned sort of self-funding that organic growth. Does that include the offshore Mars expansion? And you also mentioned some opportunities from BP. So maybe if you can just give a little bit more detail around some of the organic growth that you're seeing there, that would be great. And whether or not, that can [Phonetic] will be self funded?

Craig W. Coburn -- Chief Financial Officer

Okay. Thanks, Derek for the question. Yeah, so we do believe it can be self funded. And I mean I think we're talking here in the range of something like $20 million to $25 million a year.

One of the projects obviously, we're looking at is the Mars expansion now. Of course that has ways to go now in terms of seeing what the producers there on that line are interested in doing with us on that along with Shell, SHLX [Phonetic] on that.

Also we're looking at sort of the BP proprietary lines on the onshore, there's lots of opportunity going forward as Whiting increases its output, it needs avenues for increased throughput for its product slate. And so, and I don't want to go into too much detail, because it does have competitive implications, but we are looking at all of those onshore lines and potential growth opportunities there.

In addition, the additional output of the refineries also feeds our joint venture KM Phoenix which has additional throughput coming through there as well. And so we'll be looking at growth options as well within the terminalling areas in KM Phoenix. So it's turning out to be a respectable hopper we're going to build on.

And now I would say that, our first choice here probably in terms of capital structure would be to self-fund some of these capital projects because we could see really stable good returns on them, rather than potentially using that money to pay down debt or other things like that. But we're very excited about this potential option and we'll give more details as we roll it out in the first quarter of 2020.

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

That's helpful, Craig. And maybe I could just follow up a little bit on that. I think Rip and you mentioned some of the opportunities last quarter. Does that include potentially shipping other products other than diluent on the Diamondback pipeline?

Craig W. Coburn -- Chief Financial Officer

It does. I mean, I think from our standpoint, the world of Diamondback is maybe a little bit longer run project for us, but we are looking for options on Diamondback as well.

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

Okay, great, that's it from me. Thank you.

Craig W. Coburn -- Chief Financial Officer

Thanks, Derek.

Operator

[Operator Instructions]. And ladies and gentlemen, at this time, I'm showing no additional questions, I'd like to turn the conference call back over to Craig Coburn for any closing remarks.

Craig W. Coburn -- Chief Financial Officer

Thanks, Jeremy. Thanks everyone for joining us today. Let me quickly wrap up by saying I hope you came away [Phonetic] from our call this morning with a couple of impressions. First, that BPMP has a resilient portfolio, one which delivered yet another quarter of strong operating and financial performance, notwithstanding some weather and maintenance impacts in our offshore assets.

Second, we're on track to deliver our 2019 guidance points including mid-teens distribution growth. And rest assured, we are in action planning for the future. You should expect an update on our progress, early next year.

Last thing before we sign-off, the IR team is available to answer any residual questions you may have. Their contact information can be found on our website. Thanks, and everyone stay warm.

Operator

[Operator Closing Remarks].

Duration: 17 minutes

Call participants:

Brian Sullivan -- Vice President, BP North America Investor Relations

Craig W. Coburn -- Chief Financial Officer

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

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

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