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Shell Midstream Partners LP (NYSE:SHLX)
Q4 2019 Earnings Call
Feb 20, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Gigi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2019 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; Shawn Carsten, CFO; and Steve Ledbetter, VP Commercial and Business Development.

Slide 2 contains our Safe Harbor statement. We'll 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 -- Director, Chief Executive Officer and President

Hey, thanks, Jamie. Hey, good morning, everyone, and welcome to our fourth quarter earnings webcast. Before I begin talking about the quarter, the year and some business updates that we have for you, let me touch on the topic that I know is on all of your minds, IDRs.

I know for some time we've said that our sponsor's been looking at IDRs, which includes understanding the views from our investors, the market and input from management as well. Today, I do not have any new updates to provide. While I understand that's not what you wanted to hear, the conversations with our sponsor are ongoing, and as soon as we have an update, we'll provide that for you.

Today, I'd like to focus on our base business, and specifically several updates that we have for you related to the Gulf of Mexico. Before I get to those updates, our outlook, as always, on the Gulf of Mexico remains bullish. Production in the Gulf of Mexico has been growing 9% year-over-year, and it's up over 57% since 2014.

This growth is expected to continue and reach a new high of 2.1 million barrels per day this year in 2020. And this growth has come as producers continue to drive down breakeven prices and they do this through efficient execution, competitive scoping and affordable technology.

And our commercial team is busy working with the producers to replenish our funnel which will provide continued opportunities and growth through the Partnership into the future, and we're in a unique position as these new fields come online, and producers connect to us for little to no capital required for the Partnership.

So let me get to those updates that we have for you. As you may have seen in December, Chevron took its final investment decision on its Anchor project. And I'm happy to announce today that Amberjack has successfully signed a dedication and connection agreement for the Anchor production, with first oil expected in 2024.

So let me talk a bit more about that project. The first phase of Chevron's Anchor project, it's a $5.7 billion investment, and it opens up a new area of the Gulf of Mexico for development that Shell Midstream Partners is strategically positioned to capture.

This initial investment includes a new host and a drilling program, which is expected to produce up to 75,000 barrels of oil per day, all of which will flow through the Amberjack corridor. And a new host in this area also provides the opportunity for future tie backs of additional fields, which can provide volumes well into the future.

The Anchor connection is a great example of Shell Midstream Partners' organic growth story. We will have no capital outlay, while our Amberjack corridor attracts new production to the system. That's our corridor strategy in action.

Switching over to the Mars corridor, our producers have continued to grow production in the area. And we see the system nearing capacity as projects like Vito -- Shell's Vito project or PowerNap come online next year.

As I said last quarter, we're looking at the opportunity to expand the system. And I'm pleased to report that we have had significant interest from producers in our non-binding solicitation of interest and we're continuing to progress the project.

Currently we're scoping the project to accommodate the expected additional demand. Our commercial team is working toward finalizing agreements and we expect to take final investment decision on the project in the first half of this year.

We're excited about the future in the Gulf of Mexico. And with Mars and Anchor being examples of low risk projects with relatively low capital outlay that deliver organic growth to the Partnership, we're well positioned.

Touching on the onshore, the Partnership continues to benefit from our ratable base of cash flows that our diversified onshore pipelines and terminals provide. And we're focused on Zydeco and leveraging its connection to LOOP, which is still the only deepwater port capable of loading VLCCs.

Our Zydeco system, if you recall, is the only pipelines with the ability to deliver directly into St. James or LOOP from Houston. And it's one of the most flexible systems with the availability of batch and deliver various grades of crude to LOOP.

And this is a distinct advantage for Zydeco, as we continue to pull volume from Houston, Nederland or offshore, providing ratable supply to LOOP for export or for local refinery consumption.

So, in closing, I'm extremely proud of Shell Midstream, our people and our assets. We're focused, as always, on safely delivering the energy our customer's need, growing the Partnership, and delivering on our commitments.

And with that, I'll turn it over to Shawn to discuss the fourth quarter performance and give you a few updates for 2020. Shawn?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Thanks, Kevin. As I reflect on the full quarter results, we continue to see our portfolio delivering the expected returns for the Partnership. So, let me cover a few of our key financial metrics for the quarter.

Our total revenue was $126 million, up about $1 million from the prior quarter. Now this was primarily related to higher offshore transport revenue as our systems returned to normal operating levels. This is following the impacts of Hurricane Barry in the third quarter.

Operating expense was $73 million, a decrease of about $3 million from the prior quarter. Now most of this decrease is related to lower seasonal project spends on our projects. Income from equity investments was $108 million, down about $7 million from the third quarter and this was all primarily due to lower seasonal demand on Explorer.

And finally, other income was $8 million, flat as compared to the prior quarter. In total, adjusted EBITDA attributable to the Partnership was $187 million, about even with the prior quarter. After interest expense, maintenance capital and other adjustments, total cash available for distribution was $164 million, which includes a $9 million reimbursement from our sponsor related to Mars storage revenue.

Now, this is the result of the agreement entered into when we acquired an additional interest in Mars in 2016. That $9 million positively impacts cash available for distribution, but it is not considered income, so had no impact on earnings per unit.

Our Partnership declared a distribution of $0.46 per LP unit. Now this represents a 3.4% increase from the prior quarter. And all this resulted in a coverage ratio for the quarter of one time. As you'll recall, Q4 did not benefit from the sponsor's IDR waiver, and so for the full year of 2019, coverage was about 1.1 times.

And finally, in the capex space, we incurred about $18 million in the fourth quarter, of which $12 million was related to growth capital, mostly due to continued expansion of our Permian gas gathering system.

And so turning to the Partnership's balance sheet and liquidity, as of December 31st, the Partnership had total debt outstanding of $2.7 billion, which equates to a debt-to-EBITDA ratio of 3.6 times based on an annualized Q4 adjusted EBITDA. Now we're comfortable with our balance sheet and we believe it will allow us the desired flexibility to continue to effectively manage our business.

So now, let me shift to guidance for the year. In the offshore, in 2020, we expect to have several producer turnarounds during this year. Now these turnarounds are expected to impact both net income and cash available for distribution by roughly $10 million. Based on current schedules, we expect these turnarounds to take place primarily in the second quarter.

In the capex space, we plan to spend about $46 million this year, of which around $12 million will be growth capital. And that growth capital is primarily related to the continued expansion of our Permian gas gathering system.

So as we close, we're pleased to have a strong suite of high quality midstream assets, which provide us ratable and stable cash flow to work from. And this coupled with our strong balance sheet and support from Shell enables us the ability to weather the uncertainties in the current market environment as we work to make Shell Midstream Partners sustainable for future years.

So with all that, we'll now take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Theresa Chen from Barclays. Your line is now open.

Theresa Chen -- Barclays -- Analyst

Good morning. Thank you for taking my questions. First, wanted to touch upon your earlier comments, Kevin, about IDRs. And understand you don't have update on when it will happen. But can just help us think about exactly what is the sponsor looking for or waiting for at this point in terms of like market signals?

And also in light of the fact that, with Q1 results, you will not have neither the waiver or the Mars storage revenue and reimbursements, so coverage is going to look pretty pressured presumably. If you could just touch on those points, that'd be great.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, thanks, Theresa. I'll start and then if Shawn has got something to add I'll invite him to add in there. Look, I understand that it's not what you expected or hoped around not having the guidance. I'm not going to comment on timing at this time or the specific nature of those conversations.

What I think is best to do here is, as soon as we have a holistic set of guidance to give you, we'll come back out and we'll do that. We have a strong, stable ratable set of cash flows. On the base business, we have some growth in the Gulf of Mexico, a very diversified set of portfolios. But I think we'll just come out and give you that guidance as soon as we have it.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

And Kevin just to continue for Theresa second parts, we expect to cover our distribution needs with internally generated cash flow. And of course, we do have good credit facilities to draw upon, if needed. As Kevin highlighted earlier, we look to give you more guidance in the future.

Theresa Chen -- Barclays -- Analyst

Okay. And then maybe turning toward your opportunities in the Gulf of Mexico. Related to the expansions on Mars and Anchor that you are contemplating right now. What kind of capex dollars are we talking about and what kind of EBITDA multiples would you expect to generate?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, Theresa I'm going to turn that over to Steve to answer. He's got all of that in his commercial shop.

Steven C. Ledbetter -- Vice President, Commercial

Okay, thanks, Kevin. Theresa, thank you for the question. I think it's important, as we look at our strategy in the Gulf of Mexico, we've positioned the assets to where we can accommodate additional production with little to no capital for this new production.

And in the capital space that we do spend, it's marginal. It's not new trunk lines or looping lines. So we're in a very good spot to accommodate new production. As far as the financial projections go, given where we are in the current negotiations on Mars particularly, as well as scoping the project to meet even potentially more demand than we anticipated, we're not in a position to comment on the specifics. And when we get to the point of definitive agreements and bringing it online, which is estimated around mid-2021, we'll give guidance in customary fashion at that point.

Theresa Chen -- Barclays -- Analyst

Okay and last...

Kevin M. Nichols -- Director, Chief Executive Officer and President

And Theresa, just to be clear, on the Anchor project, there is no capital outlay.

Theresa Chen -- Barclays -- Analyst

Got it. And lastly, on Zydeco, to your point about its ability to deliver barrels to LOOP, do you know how much throughput it can do currently just on that section?

Steven C. Ledbetter -- Vice President, Commercial

So, on -- sorry go ahead Kevin.

Kevin M. Nichols -- Director, Chief Executive Officer and President

No. Go ahead, Steve.

Steven C. Ledbetter -- Vice President, Commercial

So Theresa, were you asking about the actual delivery capability going into LOOP?

Theresa Chen -- Barclays -- Analyst

Into Clovelly, yes. So, Zydeco to Clovelly, I believe is a 24-inch line. What's your throughput capacity for that portion?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Theresa those capacities are available with the filings, just on the Qs as well as will be with the Ks later today.

Theresa Chen -- Barclays -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Jeremy Tonet from JP Morgan. Your line is now open.

Joseph Martoglio -- JP Morgan Chase & Co. -- Analyst

Hi, this is Joe on for Jeremy. Wanted to first ask on distribution growth and wondering if you can say anything about what growth levels you're expecting for 2020. And then also on kind of how you would prioritize distribution growth. And I guess what would kind of be the driver of an ability to continue to grow the distribution?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, thanks, Jeremy [Phonetic]. I'll start. We're not providing the forward distribution growth for the year or for the next quarter. As I said we're not opened -- we'll come back and give you a holistic set of guidance that would include distribution growth as soon as we have it.

We'll look to fund our distributions through the cash flow that Shawn talked about. The way we're looking at kind of our cash going forward, we'll be evaluating opportunities to grow the business and look at how we create this sustainably going forward. Well we'll give you that guidance when we can put it and set a holistic guidance.

Joseph Martoglio -- JP Morgan Chase & Co. -- Analyst

Okay, thank you. And then I understand you can't say much on the IDRs. But just wanted to see if, I guess, anything to keep in mind with regards to, I guess, how you're thinking about any specific events that would make the timing better in 2020 versus kind of not doing it in 4Q 2019 or any specific events in 2020?

Kevin M. Nichols -- Director, Chief Executive Officer and President

No, I think it's really just continuing the conversations that we have with our sponsor and as soon as we have that holistic set of guidance put together, we'll come back out and give that to you.

Joseph Martoglio -- JP Morgan Chase & Co. -- Analyst

Okay, thank you. That's it for me.

Operator

Thank you. Our next question comes from the line of Derek Walker from Bank of America. Your line is now open.

Alex -- Bank of America Merrill Lynch -- Analyst

Good morning, everyone. This is Alex [Phonetic] for Derek. Thanks for the color today. First one for me, congrats on the Amberjack announcement. Similar to this type of project, do you guys see this on your asset footprint as well?

Kevin M. Nichols -- Director, Chief Executive Officer and President

So maybe I'll...

Alex -- Bank of America Merrill Lynch -- Analyst

Any other opportunities?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Steve?

Steven C. Ledbetter -- Vice President, Commercial

Yes, so can you go ahead and rephrase the question? I'm not sure I understood what you were-what you asked.

Alex -- Bank of America Merrill Lynch -- Analyst

Yeah, just with the Amberjack announcement, do you see any other types of these kind of expansions on your existing asset footprint?

Steven C. Ledbetter -- Vice President, Commercial

Okay. Sure, thanks for the question. I think what we would say there is we're extremely bullish in the Gulf. And we have done some very careful planning around positioning our assets in the corridors and we are always looking forward for opportunities in growth and de-constraining, if there is any.

But we don't have any that we're ready to announce. But we continuously look for opportunities and we stand ready to provide the needs in terms of flexibility and flow assurance for the various shippers and producers in the Gulf.

Kevin M. Nichols -- Director, Chief Executive Officer and President

I think Alex, I'll add to that, that we'll continue our tie back story. And you've seen a lot of tie backs in the past to our eastern corridor. We've had one in December. We've had another one in January. So in addition to these new prospects on a larger scale that we'll look to connect in, we see the tie back story continuing across our corridors.

Alex -- Bank of America Merrill Lynch -- Analyst

Great, thank you. And then maybe just one other question for me, with $12 million of growth capex primarily related to the Permian gas gathering this year. Any more color you could give on that, on the type of project that is?

Steven C. Ledbetter -- Vice President, Commercial

Yes, sure. This is Steve again. That is predominantly associated with our joint venture and building out the Crestwood joint venture to the Nautilus system. This is related to an ore slash area and compressor state --compressing station. And it will effectively be -- once it's completed, it will have roughly 60% of the original 100,000 acres contemplated in the original design to be developed at that point.

Alex -- Bank of America Merrill Lynch -- Analyst

Great, thank you guys.

Operator

Thank you. Our next question comes from the line of Gabe Moreen from Mizuho Securities. Your line is now open.

Robert Mosca -- Mizuho Securities -- Analyst

Hi, guys. This is Rob on for Gabe. My question on distribution growth guidance was already asked. But I just wanted to get your thoughts on coverage. And I know this isn't an item that you've provided formal guidance on in the past. But would it be fair to say that the Partnership is comfortable running on lower coverage than others in the space, just given how capital light your model is?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

So Rob, this is Shawn. As you highlight, we won't provide any further guidance. We do expect that we have adequate cash flow to cover our distribution. Do you think -- I'd also highlight though, as we go forward, we do have ample liquidity on our facilities between that and cash. So we have about $1.2 billion. So as we have opportunities, whether it's a drop or acquisition opportunities, where they're good for the Partnership, we'll look at it.

Robert Mosca -- Mizuho Securities -- Analyst

Okay, thanks. Appreciate it.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of Shneur Gershuni from UBS. Your line is now open

Shneur Gershuni -- UBS Investment Bank -- Analyst

Hi, good morning, everyone. I was wondering if we can talk about the waiver process or resolution to the whole thing. Can you provide us with a timeline of when the sponsor expects to resolve everything so that we can sort of lift this question and sort of move forward?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yes, thanks Shneur. I'll take that one. Look, I know you're looking for the timing, and kind of what the holistic set of guidance is going forward and put that whole long term story together. I'm just not ready to commit to the timing on that. Just -- we're in those conversations with the sponsor, continuing that dialogue. And as soon as we have the ability to put a holistic story together for you, we'll come back out and give that to you.

Shneur Gershuni -- UBS Investment Bank -- Analyst

Can we talk about the Shell process maybe a little bit? And this is something that's kind of been known and been out there. I mean, the last waiver was in place last quarter. So we've kind of known that this is coming. I mean, does it usually take that long to work through that type of process within Shell or is this an issue with the conflicts committee. Just like wondering if you can give us a little bit of color around that?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Well, I think all conversations are -- will include looking at what we do to build this business sustainably long term and to grow it and how you set it up. So, I'm just not prepared to comment on the specific natures of the conversations at this time.

Shneur Gershuni -- UBS Investment Bank -- Analyst

All right. Thank you very much. Appreciate the answers.

Operator

Thank you. Our next question comes from the line of Spiro Dounis from Credit Suisse. Your line is now open.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, good morning, gentlemen. Just kind of a bit of a different question here. If you were to maybe ask the sponsor today what Shell ex is [Phonetic] strategic purposes and sort of how it views that entity? Can you give us a sense for how they'd respond based on your discussions with them? And maybe any commentary they've made their own investors I guess more recently?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Well, I'm not going to comment on maybe the comments they've have had to their own investors. I'm not been a part of those. But Shell is certainly looking at this as a -- building a sustainable midstream business going forward. They believe in the MLP structure still today. And then looking at trying to grow that entity overtime.

We're centrally located Group that manages all the midstream business for Shell in U.S. and builds on that scale. So -- and I'll remind you that Shell continues to build out considerable amount of projects in the United States. Over a third of the capital that Shell spends historically over the last couple of years has been in the United States and with that come opportunities for Midstream new projects.

How we build those and what the -- how that relates to the MLP will give you guidance longer term. But we have a strong runway of high quality assets. And we see that being replenished as Shell continues to invest in U.S.

Spiro Dounis -- Credit Suisse -- Analyst

Okay, understood. Second one, just on I guess there's been several peer IDR transactions since you all have embarked on your own review here. And I understand it's tough for you guys to talk about it. But can you give us a sense for how much these other transactions are influencing you or just being taken into account as part of your process?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Well, I'm not going to talk about how they influence our shaping conversations. But I will say that, when we go to investor conferences, the feedback that we get from you all, what happens on the marketplace, what peers and competitors do, as well as the overall market dynamics are everything that we consider as part of that whole discussion.

Spiro Dounis -- Credit Suisse -- Analyst

Understood. Thanks for the time, guys.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Thank you.

Operator

Thank you. Our next question comes from the line of Shneur Gershuni from UBS. Your line is now open.

Shneur Gershuni -- UBS Investment Bank -- Analyst

Hi, guys. Just a quick follow up question. Maybe to ask all the different questions a little differently. As you sit and look at the Partnership today, do you even feel that anything needs to be addressed?

I know that we all in the investment community, like clean stories without IDRs and so forth and color. But as you sort of look at the cash flow generation of the business today and the capital projects that you've been talking about and the cash flow going forward, do you have an expectation that just on that alone should be able to grow both EBITDA and the distribution even without a resolution? Is that one of the takeaways that we should sort of take from all the commentary today?

Kevin M. Nichols -- Director, Chief Executive Officer and President

No, I'm not sure, Shneur, that's the takeaway that I would have. I am not getting the guidance that you want or as saying that we'll give you a holistic set of guidance when we're ready. I wouldn't draw any conclusion from that. We're busy building a sustainable long term business.

We're trying to set that business up for future. I would say that Shell has been happy with the performance of the MLP since we got to deal with this and our ability to acquire and grow the assets. Marketplaces change and we're busy looking at how we set this Company up long term for success.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

And Shneur, this is Shawn. I think I'd just add in that as we look at those opportunities for the long term, it's -- we do have plenty of liquidity available to us. But we will certainly intend to maintain a very healthy balance sheet and be disciplined in how we deploy our capital.

Shneur Gershuni -- UBS Investment Bank -- Analyst

I completely get those comments. I guess what I'm really saying is, is that you know given the flexibility in your balance sheet, given the fact that you've got these growth. I mean, if you don't grow the distribution you can increase your retained distributable cash flow. Could that be a way that you're acquiring assets and so it could actually sustain itself without having to do anything or do you feel that something needs to be done to just sort of sustain the longer term plan that you're putting together?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, I think that's going to be part of a holistic strategy. Sure, we'll answer that question for you when we come back out and look at what we grow and how we set the thing up long term, this year and next and beyond. All that's being part of the conversation.

Shneur Gershuni -- UBS Investment Bank -- Analyst

All right. Sounds good. I'm looking forward to that conversation. Cheers

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, thank you.

Shneur Gershuni -- UBS Investment Bank -- Analyst

Thank you.

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 for your interest in Shell Midstream Partners. If you have any more questions after today's call, please feel free to call me directly. My contact info can be found on the presentation materials as well as on our website shellmidstreampartners.com.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Jamie Parker -- Investor Relations Officer

Kevin M. Nichols -- Director, Chief Executive Officer and President

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Steven C. Ledbetter -- Vice President, Commercial

Theresa Chen -- Barclays -- Analyst

Joseph Martoglio -- JP Morgan Chase & Co. -- Analyst

Alex -- Bank of America Merrill Lynch -- Analyst

Robert Mosca -- Mizuho Securities -- Analyst

Shneur Gershuni -- UBS Investment Bank -- Analyst

Spiro Dounis -- Credit Suisse -- Analyst

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