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Genesis Energy Lp (NYSE:GEL)
Q1 2020 Earnings Call
May 6, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the 2020 First Quarter Conference Call for Genesis Energy.

Genesis has four business segments. The Offshore Pipeline Transportation segment is engaged in providing critical infrastructure to move oil produced from the long-lived, world-class reservoirs from the deepwater Gulf of Mexico to onshore refining centers. The Sodium Minerals and Sulfur Services segment includes trona and trona-based exploring, mining, processing, producing, marketing and selling activities, as well as the processing of sour gas streams to remove sulfur at refining operations. The Onshore Facilities and Transportation segment is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. The Marine Transportation segment is engaged in the maritime transportation of primarily refined petroleum products.

Genesis' operations are primarily located in Wyoming, the Gulf Coast States and the Gulf of Mexico.

During this conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those safe harbor provisions and directs you to its most recently filed and future filings with the Securities Exchange Commission.

We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Ryan Sims, Senior Vice President, Finance and Corporate Development.

Grant E. Sims -- CEO

Good morning. I would doubt most of you are all that interested in the results for the quarter ended March 31. Nonetheless, we had a pretty good quarter, as discussed in greater detail in the earnings release we issued earlier this morning.

As we pointed out several obvious challenges, by no means unique to Genesis, started to arise in February and March, and then continued into the second quarter. So, let's just cut to the chase.

Our, and virtually every other energy industrial company's operating environment is the most challenging it has likely been in multiple generations, driven by the demand destruction of shutting down large swaths of economic activity across the world to deal with COVID-19. There will be a recovery, just no one knows when it will start, although maybe it has, or what it will look like.

In our particular case, we believe we have already taken all the necessary steps and have all the tools we need in place to navigate through the next few quarters and be able to maintain our financial flexibility and manage our balance sheet, and especially compliance with the covenant or senior secured credit facility.

With the proactive decision to reduce our quarterly distribution, we reduced our recurring annual cash obligations by approximately $200 million, bringing our run-rate to around $410 million to $420 million per year, inclusive of maintenance capital spent but before growth capital and asset retirement expenditures.

With limited growth capital and asset retirement expenditures of approximately $50 million over the next 12 months, our adjusted EBITDA would have to be less than, call it, $470 million for us to not be a net payer of debt outstanding over this period.

Looking forward, given our recurring cash obligations and de minimis growth capital requirements outside of the Granger expansion, which can be funded through our agreements with GSO Capital Partners, we have no need to access the capital markets and, therefore, expect to be a net payer of debt for the foreseeable future.

No matter how challenging the environment is and remains, we just don't come up with a scenario that becomes insurmountable. And that's a good segue into the discussion of our individual business segments.

We expect total volumes out of the deepwater Gulf of Mexico to grow this year, and for us, at least certainly over the next several years. While in the last 12 months, onshore rigs have fallen by somewhere between 50% to 55%, mobile offshore drilling units working in the deepwater Gulf of Mexico have remained constant. These are long-lived development and resource exploitation projects.

As an example, just in March, we received an inquiry from a deepwater operator regarding capacity for more than 100,000 barrels a day, starting in late 2024 and going through 2046. Although, the likely sanctioning of brand new projects like this might be delayed in the current environment, we see little risk to the completion of or significant delays in our contract at known sanctioned projects in progress like Atlantis Phase 3, Argos and King's Quay, a significant portion of which have take-or-pay features, limiting our timing risk, and production and reserve risk.

There's been a lot of speculation about potential shut-ins due to the current low-price environment in the Gulf of Mexico. While we've seen some, they're not significant, much less material from a financial point of view for our offshore segment. Because of confidentiality obligations and Interstate Commerce Act, we can't go into a lot of details, but I will summarize in general terms what we're seeing across our assets.

We expect a total of approximately 12,000 to 15,000 barrels a day to be shut-in in May and June across our footprint. In addition to this, we expect approximately 35,000 barrels a day to be shut in for the entire month of May. But this same production was going to be shut in for 7 to 10 days for certain planned maintenance in any event, and it is expected to be fully back online in June.

Finally, on a minority owned pipeline, not operated by us, we just became aware of additional shut-ins for at least the month of May, which could represent a total of less than $750,000 a month net to our ownership interest.

In summary, the second and third quarters in the offshore would typically exhibit a lot of shut-ins for maintenance and often weather-related downtime.

Given the low-price world, it would be logical to see extended maintenance. But as described above, we do not expect significant declines in throughput or financial performance directly from this low-price environment.

Turning to onshore. As we mentioned in the release, we would expect to see crude-by-rail volumes go to zero for the rest of the year. While we do have certain protections to the downside in terms of minimum take-or-pay commitments through 2020, stepping down in 2021 and lasting through the first quarter of '22, we nonetheless expect to experience some $15 million to $20 million less in terms of reported segment margin than we would have otherwise expected through the remainder of 2020.

That being said, certain contango opportunities have appeared that will help to offset but by no means totally make up for lost segment margin this year. Other than that, we've not seen significant changes to our other onshore volumes and/or operations relative to the first quarter.

Our marine group turned in their best quarter since the fourth quarter of 2015. We expect the fundamentals in the second quarter to be relatively consistent with the first quarter. Performance was driven by strong utilization, improving fundamentals and day rates across our inland and offshore fleets as the demand for our types of marine equipment continue to increase.

Our inland fleet, which is focused on intermediate refined products and not crude oil and finished clean products, continues to benefit from refineries needing to move these intermediates from one location to another.

Market volatility and uncertainty is actually a positive for us as the flexibility represented by marine assets is highly valued in getting the right barrel to the right location at the right time.

I'll turn now to our Sodium Minerals and Sulfur Services segment. Our legacy refinery services business has experienced some volume loss starting at the end of the first quarter and continuing into the second. There are really two sources of this, both of which we think will resolve themselves and turn around fairly quickly.

First, a number of our mining customers in South America and primarily in Peru have been mandated to shut-in in order to combat the spread of COVID-19. We expect, as we move forward through the quarter, we will see a reopening of the mines and believe the lost volumes are likely to be exclusively in the second quarter, and we could return to normal volume levels in the third quarter and beyond.

Second, a number of our pulp and paper customers are pushing out turnarounds and outages as long as possible to avoid having third-party service providers entering their facilities during current mitigation efforts regarding COVID-19. We do not believe that they can go much longer without replenishing the sulfur and sodium molecules in their processes. As a result, these currently missing sales, we believe, have a high probability of showing up in the back half of the year.

Volumes in our soda ash business are challenged, especially in the second quarter because of the demand destruction from the mitigation efforts for the virus, primarily in the export markets. We've reacted to these diminished sales volumes by placing our Granger facility in hot hold mode, probably through the end of September, thereby reducing our total production in 2020 by some 300,000 tons. We believe this is the minimum necessary to balance our total anticipated sales, both domestically and internationally, for calendar year 2020.

Demand has slowed across all geographies with the flat glass segment being the most effected. With the year having started off with high inventory levels, as we explained in our fourth quarter call, and now with the demand issues resulting from COVID-19, the rest of 2020 and perhaps into 2021 is going to be challenging.

While export prices are under some pressure, it is really not a matter of price. With large portions of economic activity still shuttered worldwide, there just isn't the demand. If it goes on much longer, we believe synthetic capacity could be shuttered and natural production will take market share, giving us tremendous cost advantage. As the world economy starts to reopen, demand for soda ash should ultimately take care of itself.

We are seeing construction activities in more and more states pick up. Detroit is looking at May 18 as the targeted date to start most automobile factories. Germany, Austria and Italy as well as other European and Asian economies are starting to open back up.

As said earlier, there's going to be a recovery, we just don't know when and what it will look like. Anecdotally, we have picked up around 30,000 tons of incremental domestic sales, but all in the back half of the year.

An interesting phenomenon coming out of the pandemic might be a change in consumer preferences. For instance, there is evidence starting to emerge that single-family homes might be increasingly desirable relative to apartments or high-rises in densely populated areas.

Also, the demand for cars, as evidenced after the reopening of Wuhan, could be quite robust, given that public transportation and/or rideshare services might be considered risky from a personal health point of view for an extended period of time. If these patterns emerge and stick, they could potentially contribute to an even stronger recovery in both our soda ash and sulfur businesses.

In summary, we and almost every business enterprise faces some challenges. We believe we have taken the steps and have the ability to manage our way through these challenges. We have confidence in the resiliency of our businesses. They have existed, survived and thrived for many decades, not years, and through numerous previous cycles. There's no doubt that they will continue to do so.

I would like to recognize our entire workforce, and especially our miners, mariners and offshore personnel during this time of social distancing, and other mitigation efforts. We started screenings and other changes to our policies and procedures to protect our employees and their families and communities starting in late February, and continued to modify and communicate our procedures and protocols as local, state and federal guidelines were updated.

I can proudly say, with their commitment, we have safely operated all of our assets under our company recommended procedures with no impact to our customers or our operations, and had less than a handful of confirmed cases of COVID-19 among our somewhat 2,200 employees. It is a pleasure to have the opportunity to work alongside such quality people.

With that, I'll turn it back to the moderator for any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we have our first question from the line of TJ Schultz with RBC.

TJ Schultz -- RBC Capital Markets -- Analyst

Great. Thanks, Grant. Just on onshore, so, you've had periods before with zero rail volumes, but there have been some other moving parts. If we just look back to the first quarter of last year, I think there were zero volumes for much of the quarter and segment margin was in the $25 million range. Is that a fair snapshot of what the take-or-pay agreement supports? And then, if you can kind of walk through the step-down and the take-or-pay in '21and '22, and if we assume zero volumes persist? Thanks.

Grant E. Sims -- CEO

TJ, that's -- I don't know what else was in the first quarter of last year but that seems to me to be high relative to the minimum volume levels. But -- so again, I don't have all of that data right in front of me to be overly responsive. But, that does seem high on an MVC run rate basis. As I recall, it steps down, at least the portion that is reflected, it steps down to about 75% or so of what it ran -- or what it's running in 2020 through most of '21, and then, another slight step down, maybe to 50% percent of that in the first quarter of '22. And then, I think it expires at the end of 2022.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. And then, in onshore marine, you pointed to some potential opportunities to benefit from contango. Can you just try to quantify that opportunity for you this year?

Grant E. Sims -- CEO

Well, we don't really have normal storage like other people do. But we do have operational storage and we have a little bit of flexibility across our system. I would say that we can -- in terms of total volumes, that we could stick in our operational storage that wouldn't interfere with our other ongoing operations as order of magnitude around 800,000 barrels across all of our facilities.

And so, depending upon what the overall contango is and what the roles are, and I mean, I think that we could probably expect to -- again, potentially make $5 million to $10 million in 2020, potentially a little bit more, depending upon how long the contango lasts. I don't quite understand the strength in the current front month, given the total macro fundamentals, but we'll see how everything shakes out.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. I understood. Just last one. So, Granger facility holding in hot hold mode. If it's through the end of September, just kind of what are you looking for there to bring that back into production? Thanks.

Grant E. Sims -- CEO

Well, as we've said earlier, the Granger facility is currently configuration prior to restoring it to its original 1.2 million 1.3 million ton a year capability, is really running about 550,000 to 600,000 tons a year on an annual basis.

So, taking it down six months is basically the equivalent of 300,000 total tons. And we'll just have to -- we have to evaluate as we go through the remainder of 2020 and then start seeing whatever recovery there is in 2021 to make the decision of whether or not we bring it back up at the end of September.

So, it's just really a matter of balancing sales with production. It's the highest cost because of this inefficiency having high fixed cost, if you will, running basically 40% or so of its design capacity, which is why it's such an attractive expansion capability once we get it back up and running to where it was originally designed for. Then, it's a very-very attractive expansion capability. So, we just have to see how things kind of unfold over the next six months before we make that decision.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay, understood. Thank you.

Grant E. Sims -- CEO

Thanks.

Operator

Your next line of question comes from Shneur with UBS.

Shneur Gershuni -- UBS -- Analyst

Hi. Good morning, everyone. Grant, thank you for the sober and realistic shift today. I just wanted to start off a little bit first on the Gulf of Mexico. Obviously, there's been a lot of reports about shut-ins and so forth. But, if I recall, you may not have exposure to some of the names that people are talking about with respect to shut-ins in the Gulf of Mexico. Is there a way for you to remind us where the majority of your exposure is kind of like on an operator basis?

Grant E. Sims -- CEO

I'd rather not go from naming operators and stuff. I think, I tried to give, again, under confidentiality, and I don't know whether or not it's material from a public company point of view for us, but it's just not appropriate for us to name individual operators and/or individual fields. But I've tried to give you a little bit of flavor for -- it's not significant from our perspective from a financial point of view.

Shneur Gershuni -- UBS -- Analyst

Okay, fair enough. Then, secondly, I was wondering, given where you're currently trading at and so forth, do you see any opportunities to acquire debt in the open market or have you actually done so already at this stage?

Grant E. Sims -- CEO

We were somewhat surprised by the Federal Reserve's announcement on Thursday, before Good Friday, whatever day that was, where -- which I think was an extreme moral hazard of the Federal Reserve actually buying securities in the secondary market and not being --- not serving as a lender of last resort.

Presumably, it was to fetch a bid in the high yield market for fallen angels. But nonetheless, the bonds have, I think, rallied back up into the high 80s or something like that. And at that point, I think that we have to evaluate whether or not that's a realistic opportunity, whether or not we'd be interested in acquiring bonds at that rate.

Shneur Gershuni -- UBS -- Analyst

Okay. Moving on, I was just wondering if we can talk about, Granger, the hot idle. What are the costs to keep it in hot idle mode, either by month or by quarter? Like, how should we think about that from a cost perspective, if you don't have the revenue coming in?

Grant E. Sims -- CEO

I don't know that I have that exactly in front of me. I think that we're looking at redeploying -- the main cost is going to be personnel and power costs and consumable costs. And so, obviously, we're not going to have that. And we're looking at redeploying some of the personnel. And in fact, we've offered and have worked in agreement with the union there to have voluntary furloughs over the period of time under which we are going to have it temporarily held in hot hold mode.

So, I think that it's not a big dramatic run rate cost. And if these kind of prices, even on the variable operating expense basis, it's probably not worth us to continue to run. And there's limited storage. So, it was the best thing that we had to do to balance the -- material balance between our production and our sales.

Shneur Gershuni -- UBS -- Analyst

Okay, fair enough. I've just got two more questions. You gave a lot of good color on the soda ash market and kind of what the drivers are and so forth. But, given the fact that Asia tends to reprice more often in the soda ash market, and that's where the recovery is starting first; have you seen any positive price developments coming out of the Chinese market, or is there demand currently just being satisfied by inventory from elsewhere in the world being redirected to China?

Grant E. Sims -- CEO

I think that the inventories were high inside China as well as the Asian economies outside of China, as we discussed going into the end of the year and prior to the obvious outbreak and mitigation efforts associated with the virus.

I do think that it's probably -- we're going to see a return of production capability, on the synthetic production, prior to the May, in all likelihood outstrip the return of demand.

So, I think that -- and I think what we're going to see that as more and more of the world economies, and it's not just unique to soda ash, but I think it's going to be easier to "turn on industrial production rather than turn on the demand for industrial products."

So, long-winded answer is that we don't see the dynamic setup that we're going to see increased pricing. But as I said in the prepared comments, it's really not a matter of price at this point. It's a matter of the total quantity demanded. And if that doesn't turn around quickly, it's our belief that these prices that synthetic producers in China, both domestically as well as competing for exports are losing money on a cash basis. So, it's going to be interesting how long that people are willing to do that prior to adjusting the production.

Shneur Gershuni -- UBS -- Analyst

Okay. And one last final question, if I may. You put Granger in hot idle, obviously, that's an expense reduction there. Are there any other cost cutting measures that you're taking throughout the organization right now, something that could be more lasting than just through the coronavirus environment?

Grant E. Sims -- CEO

I think that we are -- certainly, our focus over the last several months has been on the safety of our employees and continuing to be able to deliver safe and responsible products and services to our customers. I think that we're comfortable that we've achieved that. And we are going to focus on whatever the next normal really means.

There's four of us in the office today sitting in a room that consists of 22 people or something. So, there's lots of interesting changes that are likely to occur, but something that we're going to start focusing on and probably be in a position to share with everyone by the time that we have our second quarter call.

Shneur Gershuni -- UBS -- Analyst

Perfect. Well, thank you, Grant. I really appreciate the color today. And stay safe.

Grant E. Sims -- CEO

Thank you, Shneur.

Operator

Our next question comes from the line of Kyle May with Capital One Securities.

Kyle May -- Capital One Securities -- Analyst

Good morning. I wanted to start by revisiting your guidance for the year for just a moment. You mentioned that Genesis expects to finish the year at the bottom end of the guidance range, if not below. Can you help us kind of frame up some of the different scenarios that would place you either at the bottom end of the range or kind of help understand like what is the potential below?

Grant E. Sims -- CEO

I'm not sure that we're willing to go a lot beyond that. But I think that -- I mean, there is a number of scenarios, and I don't want to say that we have a tremendous amount of uncertainty. But I think that you might see something more triangulate toward, call it, the $620 million to $640 million range. But as the bookings maybe a little bit above where we think they were coming out. But, again, we're five weeks into the second quarter, and we have different things in front of us, primarily -- the main things are going to drive and have the variability between now and the end of the year or there is the rapidity of the recovery and demand for soda ash and NaSH, which is again, primarily used in copper mining, which -- in pulp and papers businesses. So, that's really the -- and not pricing as volumes. So, that's really what's going to drive the delta between lower or higher for the year.

Kyle May -- Capital One Securities -- Analyst

Okay. That's helpful. And even though it sounds like you're not really expecting any volume declines in the Gulf of Mexico, can you remind us if there's any MVC contracts in the Offshore Pipeline Transportation segment, or is that all fee based on throughput?

Grant E. Sims -- CEO

The older generation contracts are, and I'm talking about the ones we entered into in 1995 to 2010, which are still producing, by the way, to give you an idea of the longevity of these agreements, that those primarily do not have MVC agreements, newer generation contracts, not all but the vast majority of things that were entered into, call it, 2010-2012 time period forward. The majority of those do have MVC agreements.

We rarely collect, under the MVCs, as mainly just from a timing point of view. But there's very few instances where the producer doesn't actually -- because they've spent billions of dollars. In some cases, we don't spend anything. But there's very few cases where they don't meet and exceed the MVCs.

Kyle May -- Capital One Securities -- Analyst

Okay. That's helpful. Thank you.

Grant E. Sims -- CEO

Okay. Thank you.

Operator

And that was our last question.

Grant E. Sims -- CEO

Okay. Well, thanks everybody And we'll chat again in three months or so. Thank you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Grant E. Sims -- CEO

TJ Schultz -- RBC Capital Markets -- Analyst

Shneur Gershuni -- UBS -- Analyst

Kyle May -- Capital One Securities -- Analyst

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