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BP Midstream Partners LP (NYSE:BPMP)
Q1 2020 Earnings Call
May 8, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the BP Midstream Partners First Quarter 2020 Results Conference Call.

[Operator Instructions]

After today's presentation, there would be an opportunity to ask questions.

[Operator Instructions]

I would now like to turn the conference over to Brian Sullivan, Vice President of Investor Relations. Mr. Sullivan, please go ahead.

Brian Sullivan -- Vice President of Investor Relations

Welcome everyone to BP Midstream Partners first quarter 2020 results presentation. I am Brian Sullivan, Vice President of Investor Relations. Most of you listening today are probably working from home, and we are no different here at BP Midstream Partners as we are presenting our results this morning remotely. So, please bear with us, if we experience any technical challenges throughout today's presentation.

I am joined remotely today by Rip Zinsmeister, our Chief Executive Officer; and Craig Coburn, our Chief Financial Officer. Our usual practice would be to have only Craig here to present our first quarter results. However, given the unprecedented backdrop against which we present our first quarter results, Rip has also joined the call.

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.

Now, over to Rip.

Robert P. Zinsmeister -- Chief Executive Officer

Thanks, Brian. Good morning, everyone, and thank you for joining our call today. Wherever you may be, we hope you are safe and well.

The world looked very different only a few months ago at the end of February, when we reported our fourth quarter and full-year 2019 results. Today, it's a much more challenging environment for everyone in many different ways. At BP Midstream Partners, our priorities are: first, protecting the health and safety of the employees of our sponsor and its affiliates and other partners who operate our assets, as well as our customers, suppliers, and the broader community; and second, prudently maintaining the financial strength of the Partnership to ensure we remain resilient during this period of significant uncertainty.

Our pandemic response and business continuity plans have been implemented across our asset portfolio, and we continue to monitor the evolving situation and adapt as appropriate. While all our assets remain operational, we did start to experience some financial impacts as a result of the pandemic toward the end of the first quarter. However, we entered this challenging period from a position of strength, the strong liquidity position and a conservative financial framework.

The combined demand destruction and price impacts have had unprecedented and wide-reaching effects on the energy sector, and we expect conditions to remain challenging. Looking forward, there remains an exceptional level of uncertainty regarding the near-term outlook for commodity prices, and recovery and mobility on refined product demand, both of which could impact demand for our services. There is risk of more sustained consequences depending on the efforts of the public and private sector to manage the health, economic and financial stability effects of the pandemic.

Given these factors, the Board of Directors of our General Partner felt it prudent to declare a first quarter distribution consistent with the distribution level of the fourth quarter 2019. And while our limited exposure to commodity prices and the minimum volume commitment arrangements we have in place through 2020 on our onshore pipelines offer downside protection to current market conditions, we do expect adverse impacts.

While we have updated our 2020 guidance, there are factors that we cannot reasonably estimate the impacts in order to include them in our guidance at present time. We may update guidance throughout the year as necessary. Craig will share more details on how we are adapting our guidance shortly.

We have spoken with many of our unitholders since early March and we appreciate your ongoing support and feedback. We will remain engaged with our unitholders and other stakeholders as we continue to navigate this challenging environment.Speaker C-Robert P. Zinsmeister

Thanks, Brian. Good morning, everyone, and thank you for joining our call today. Wherever you may be, we hope you are safe and well.

The world looked very different only a few months ago at the end of February, when we reported our fourth quarter and full-year 2019 results. Today, it's a much more challenging environment for everyone in many different ways. At BP Midstream Partners, our priorities are: first, protecting the health and safety of the employees of our sponsor and its affiliates and other partners who operate our assets, as well as our customers, suppliers, and the broader community; and second, prudently maintaining the financial strength of the Partnership to ensure we remain resilient during this period of significant uncertainty.

Our pandemic response and business continuity plans have been implemented across our asset portfolio, and we continue to monitor the evolving situation and adapt as appropriate. While all our assets remain operational, we did start to experience some financial impacts as a result of the pandemic toward the end of the first quarter. However, we entered this challenging period from a position of strength, the strong liquidity position and a conservative financial framework.

The combined demand destruction and price impacts have had unprecedented and wide-reaching effects on the energy sector, and we expect conditions to remain challenging. Looking forward, there remains an exceptional level of uncertainty regarding the near-term outlook for commodity prices, and recovery and mobility on refined product demand, both of which could impact demand for our services. There is risk of more sustained consequences depending on the efforts of the public and private sector to manage the health, economic and financial stability effects of the pandemic.

Given these factors, the Board of Directors of our General Partner felt it prudent to declare a first quarter distribution consistent with the distribution level of the fourth quarter 2019. And while our limited exposure to commodity prices and the minimum volume commitment arrangements we have in place through 2020 on our onshore pipelines offer downside protection to current market conditions, we do expect adverse impacts.

While we have updated our 2020 guidance, there are factors that we cannot reasonably estimate the impacts in order to include them in our guidance at present time. We may update guidance throughout the year as necessary. Craig will share more details on how we are adapting our guidance shortly.

We have spoken with many of our unitholders since early March and we appreciate your ongoing support and feedback. We will remain engaged with our unitholders and other stakeholders as we continue to navigate this challenging environment.

Turning to our agenda for today. I'll begin by discussing the environment, then highlighting the resilience of our onshore portfolio, and also briefly touch on certain attributes of our offshore portfolio and underpinned relative stability; Craig will then talk about the strength of our liquidity position, which is robust, take you through the detail of our first quarter 2020 operational and financial results, and lastly, we'll update you on 2020 guidance; and finally, we will leave plenty of time for your questions.

Let me start by sharing a few thoughts on the environment where we have seen significant volatility. Oil markets were initially impacted in January as we started to see the coronavirus pandemic impacting commodity demand in Asia, notably in China. This situation was further compounded on the supply side following a fallout from the OPEC Plus production discussions in early March and have since dramatically deteriorated with the COVID-19-driven collapse in global demand.

The impact on the global economy is severe with the IMF now anticipating a 3% contraction in economic activity this year. This compares with a contraction of 0.1% in 2009 following the financial crisis. This economic backdrop, coupled with pre-existing supply and demand factors, has resulted in the exceptionally challenged commodity environment we see today. The resulting reduction in demand for crude oil and products has begun to put severe pressure on storage and logistics.

In April, OPEC and its partners agreed to significant supply cuts, which is expected to help reduce the imbalance, but is unlikely to prevent material supply shut-ins by some producers in the near term, some of which may be difficult to reverse. And as I have already mentioned, there remains an exceptional level of uncertainty regarding the near-term outlook. However, we are well-positioned to navigate these difficult circumstances. Our financial strength and resilience are built around a foundation of high-quality assets that generate stable fee-based cash flows. We have a balanced portfolio with around half of our cash available for distribution in 2020 generated by our onshore pipelines and interest in terminal assets and the remainder from our interest in offshore pipeline servicing production from the deep waters of the Gulf of Mexico.

Let me explain this in more detail. First, to our onshore assets where resilience is demonstrated through four lenses. First, our pipelines are highly integrated with BP's Whiting Refinery, an advantaged refinery in the U.S. Midwest. Second, we benefit from fee-based revenues with limited direct exposure to commodity price fluctuations. Third, a majority of these revenues are generated from our investment-grade sponsor. And finally, we have minimum volume commitments in place for all onshore pipelines through the end of this year and for certain volumes on Diamondback through June 30, 2021. These MVCs protect roughly 90% of our estimated onshore revenues in 2020.

The Whiting Refinery is configured to preferentially refine heavy sour crude. The refinery's access to Canadian crude discounts provides both feedstock and location advantages. Optimizing utilization of the refinery and maintaining reliable supply to customers remains a priority for our sponsor. Our only direct commodity price exposure is associated with fixed loss allowance revenue, or FLA, that we earn on BP through throughput. It represents only about $10 million of revenue per year in an environment where the crude oil price is in the range of $50 to $60 per barrel. We acknowledge that there is interest from our unitholders in whether our MVC arrangements will be renewed beyond their current expiry. The Partnership is reviewing various scenarios, and we will provide an update at the appropriate time.

Turning now to our offshore portfolio. There are several attributes of our offshore assets that we believe underpin flow assurance and revenue stability. The crude quality of the barrel shipped on our offshore pipelines is highly desired by the U.S. Gulf Coast refining complex. Most shippers on our pipelines have extensive commercial capabilities to market and trade these barrels at the shoreline with access to multiple storage and takeaway options. This includes our Mars and Endymion pipelines having access to LOOP as well as export options. Such access is particularly valuable given current market conditions.

Around 90% of the revenues in our offshore interest are generated from investment-grade counterparties. Most production in the deepwater Gulf of Mexico have a low relative variable operating cost. This means that producers can potentially generate positive marginal cash flows even at low oil prices. And finally, much of the forecast production growth in this region is underpinned by projects in advanced stages of construction and infill drilling opportunities tied back to existing facilities. While there may be some temporary impacts to project construction and drilling timelines in the near-term resulting from COVID-19 preventive measures, we expect these major projects and infill wells are likely to be relatively less impacted when compared to onshore in the long term by capital reduction interventions made by producers.

There are no MVC protections in place on our offshore assets and they may be exposed to potential flow assurance risk. However, on a relative basis, our offshore assets are well positioned to manage this risk.

With that, I'll now hand over to Craig.

Craig W. Coburn -- Chief Financial Officer

Thanks, Rip. Good morning, everyone. The Partnership entered this downturn from a strong financial position with a conservative financial framework and a strong liquidity position. Since our initial public offering in 2017, our asset portfolio has performed very well, both operationally and financially. As a result, our cash delivery has exceeded the pace of our distribution growth, allowing us to build cash on the balance sheet. And we have achieved this growth within a conservative financial framework. We have maintained or exceeded a full-year distribution coverage ratio target of 1.1 times to 1.2 times. Our full-year 2019 distribution coverage ratio was above this range at 1.28 times.

We targeted investment grade credit metrics with our gross debt to adjusted EBITDA ratio not exceeding 3.5 times. Our ratio has consistently been well below this. At the end of the first quarter 2020, the balance of our cash and cash equivalents was $105.5 million, an increase of around 7% from the end of the previous quarter. Our receivables balance totaled $10.8 million, of which $10.4 million is with affiliates of our sponsor, who recently had their investment-grade credit rating reaffirmed by S&P and Moody's. Our long-term debt balance remained at $468 million, unchanged from the end of the previous quarter with a gross debt to adjusted EBITDA ratio of 2.4 times. We have no principal payments due until 2025 following the recent restructuring of our debt to a five-year term loan. We also expect our financing costs to be around $3 million to $4 million lower in 2020 compared with 2019 assuming interest rates stay broadly flat through the end of the year. Our available revolver capacity is $132 million. However, we do not anticipate drawing on this facility further in the near-term.

As Rip mentioned during his opening remarks, the Board of Directors of our General Partner declared a quarterly cash distribution of $0.3475 per unit for the first quarter 2020. This cash distribution was consistent with the distribution level for the fourth quarter 2019 and represented an 11% increase over first quarter 2019. In light of the many unknowns regarding the near-term outlook for prices and product demand, the Board considered it prudent to maintain the distribution at the current level.

The Board reviews the distribution every quarter taking account of current circumstances and the outlook. While the distribution remains a decision for the Board, and there are many unknowns that could change our outlook, we currently anticipate our distribution remaining at the current level throughout 2020 and our full-year distribution coverage ratio to approach the upper end of the target range of 1.1 times to 1.2 times through 2020 at current guidance levels.

The takeaway for you is that our cash delivery is forecasted to exceed our distribution allowing us to further build cash on the balance sheet. This is dependent on the outlook, and if there are material changes during the year, we may update guidance as necessary. Taken together, our strong financial position, conservative financial framework and cautious approach to the distribution position us to navigate current challenging environment.

Moving now to our first quarter results. We had solid operational and financial performance during the first quarter 2020. However, we started to see throughput impacted on our onshore pipelines as a result of COVID-19 pandemic toward the end of the quarter. The impacts on throughput are likely to be even more apparent across our portfolio in the second quarter as a result of COVID-19 and broader market volatility.

Our total pipeline gross throughput was more than 1.7 million barrels of oil equivalent per day in the first quarter, which is broadly flat compared to the fourth quarter 2019, reflecting higher diluent volumes on our Diamondback pipeline due to peak winter demand offset by lower volumes on BP2 due to higher levels of apportionment on the Enbridge mainline during the quarter. Offshore volumes during the quarter were largely consistent with the fourth quarter 2019.

Net income attributable to the Partnership for the first quarter was $41.7 million, 12% lower than the fourth quarter of 2019, reflecting the absence of deficiency revenue of $3.2 million that was recognized in the fourth quarter 2019 and lower fixed loss allowance revenue due to a lower realized oil price. Adjusted EBITDA attributable to the partnership was $47.8 million for the quarter, around 12% lower compared with the fourth quarter of 2019 for the reasons I just mentioned.

As you will be aware, the revenue line in our financial results includes only our three onshore pipelines and we have MVCs in place with BP with respect to the throughput on these three pipelines. While we did not recognize any revenue from MVCs in the first quarter, we did record around $2 million of deferred revenue on the balance sheet in the quarter related to volume deficiency on BP2 and Diamondback pipelines. Taken together, revenue and deferred revenue related to our onshore pipelines totaled around $32.7 million for the first quarter, in line with revenue consensus estimates. Similarly, adjusted EBITDA was also consistent with consensus estimates after including this deferred revenue amount.

Cash available for distribution for the first quarter of 2020 was $44.1 million, around 16.5% lower compared with the fourth quarter of 2019. This reflects an absence of favorable cash adjustment relating to River Rouge that occurred in the fourth quarter 2019, the impact of withholding cash associated with the throughput on the River Rouge pipeline being above the minimum volume commitment for the first quarter 2020, and lower fixed loss allowance revenue as previously mentioned.

I'll now talk about how we are adapting our 2020 guidance to the current conditions. On April 15th, we updated the market on our 2020 guidance, specifically our full-year cash available for distribution is now expected to be in the range of $180 million to $190 million, and our full-year 2020 distribution growth is expected to be 5% over the full-year 2019 distribution, assuming we hold the current distribution level flat throughout the remainder of 2020.

We also expect adjusted EBITDA for 2020 to be in the range of $190 million to $200 million. This guidance reflects the impacts of reduced FLA revenues. Full year 2020 FLA revenue is now expected to be around $5 million lower and an assumed oil price reflecting current market conditions. Lower cash available for distribution generated by River Rouge Pipeline and distributions from our KM Phoenix terminal joint venture. This is expected to be partially offset by reduced finance costs associated with the five-year term loan.

Given the uncertainties already discussed, we are no longer providing guidance on full year throughput volumes. Rip mentioned there remains an exceptional level of uncertainty regarding the near-term outlook for prices and product demand. They're factors that we cannot reasonably estimate the impacts in order to include them in our guidance at the present time.

Potentially factors where there is significant uncertainty and have not been included in our guidance include lower-than-expected FLA revenue should the oil price continue to deteriorate from the current level; lower-than-expected offshore volumes should market access become restricted; standard major project construction timelines or changes in offshore facility maintenance schedules as a result of operational constraints due to COVID-19; additional storage revenue associated with our offshore pipelines, specifically our Mars pipeline joint venture has access to storage capacity at LOOP where we have seen an increase in utilization of this storage recently; and operational and maintenance cost reductions that do not impact safety or compliance.

Given significant uncertainty regarding the near-term outlook, we expect to see continued adverse impacts on our operational and financial results in the second quarter. We expect our second quarter throughput, revenue, and adjusted EBITDA to all be adversely impacted compared with the first quarter. However, the MVCs on our onshore pipelines should ensure cash available for distribution remains relatively more stable. Consistent with our accounting standards, we would expect to recognize deferred revenue associated with MVCs when we believe it is remote, but any of the deficiency volumes could be offset later in the year. This would be reflected in revenue and adjusted EBITDA. Historically, this has occurred during the third and fourth quarters of the year.

We expect pipeline gross throughput in the second quarter to be slightly lower than the first quarter. For our onshore pipelines, we expect significantly lower throughput on River Rouge driven by refined product demand destruction as a result of COVID-19; lower throughput on Diamondback as diluent demand reduces stronger [Indecipherable] peak winter season, partially offset by increasing diluent production at Whiting Refinery and slightly lower throughput on BP2.

Offshore portfolio volumes are expected to remain broadly consistent with the first quarter, subject to the risks we have already mentioned. Adjusted EBITDA is expected to be significantly lower than the first quarter primarily due to forecasted lower throughput on River Rouge pipeline as a result of demand destruction previously mentioned. Cash available for distribution is expected to be slightly higher than the first quarter, largely reflecting lower financing costs associated with our long-term debt facility as highlighted in our fourth quarter and full year 2019 results.

With that, I will hand back to Rip.

Robert P. Zinsmeister -- Chief Executive Officer

Thanks, Craig. We've given you a lot of information today. So, let me quickly sum up before we take your questions. First, we remain focused on our priorities of protecting the health and safety of the employees of our sponsor and its affiliates and our other partners who operate our assets, as well as our customers, suppliers, and the broader community, and prudently maintaining the financial strength of the Partnership to ensure we remain resilient during this period of significant uncertainty.

Second, we've updated our guidance where we believe we have enough information to take an informed view. We've tried to present a balanced view of the risks and opportunities that may lay ahead. And finally, we continue to adopt a conservative financial framework and maintain a strong liquidity position, including expecting to hold our distributions flat through 2020. We believe BPMP is well-positioned to navigate the current difficult conditions.

Craig and I will, of course, continue to provide you with updates at the appropriate time, and our Investor Relations team are always available, including after this call, to speak with you further and address your questions. In the meantime, please stay safe and healthy. Thank you for listening.

Operator, we're now ready to take questions. And in a slight change to our normal practice, at the end of the questions, the operator will end today's call for us.

Questions and Answers:

Operator

Thank you.

[Operator Instructions]

The first question today comes from Derek Walker. Please go ahead.

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

Hey. Good morning, guys. Thanks for the time and appreciate all the commentary today. Hey, Rip, maybe you can touch base on just the MVC commentary. Seems like you were able to extend the Diamondback MVC through June, and I think you're reviewing other scenarios. Can you maybe just kind of walk us through each of the onshore pipelines and sort of where your discussions are and sort of the -- how those contracts are laying out and what the MVC was on that extension?

Robert P. Zinsmeister -- Chief Executive Officer

Okay. Thanks for the question, Derek. Can you hear me OK?

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

Yes.

Robert P. Zinsmeister -- Chief Executive Officer

Okay. Novel times, so kind of awkward to ask, but you're never quite sure. I didn't want to talk into a vacuum. On MVCs, we -- and I believe our sponsor would prefer to go out with a multi-year renewal. Quite frankly, Line 3 expansion contract carriage, Canadian regulator suspending the open season put a wrench in that works, to be frank. That's still a bit up in the air whether that's going to get resolved in 2020 and if we don't see that is going to get resolved in 2020, in all likelihood, we're going to do a short, say, one-year renewal, get a firm footing on what the agreement will be and for how long it will last, and then we'll renew everything over a multi-year period again.

The other backdrop is we're reorganizing BP. So the people in the chairs, say, last month, in all likelihood, won't be the same people making decisions next month. So that mapped into COVID just not the right time to tackle this, but we will get after it in 2020's business. That's about all I can say about that at this point in time.

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

Appreciate that. But maybe just -- go ahead.

Craig W. Coburn -- Chief Financial Officer

I was going to say, specifically on Diamondback, there were two pieces of the Diamondback that we rolled over for one year just in light of the circumstances. So that's the part that rolled over until June 2021.

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

And that's at similar MVC level on Diamondback?

Craig W. Coburn -- Chief Financial Officer

A similar MVC level, correct.

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

Got it, OK. That's helpful. And then I understand all the kind of moving parts here in guidance. I think if I heard you right, I think you're not providing full-year volume guidance, but you obviously are providing -- sticking with your EBITDA and DCF guidance. So I guess maybe what's sort of factored in there now and with the caveat, obviously, there's lot of uncertainty around some of those numbers? Is it sort of that similar rate what we observed this quarter, the 1.7 what's in there currently, or just trying to get a sense for what's in there now versus I understand a lot of the moving parts moving forward here. But any sort of color around that would be helpful.

Craig W. Coburn -- Chief Financial Officer

Hey, Derek. I mean, I think a little of that is the lawyers getting involved. I mean, I think we have visibility right now into what's happening in April and May in the second quarter. We have assumptions about where we're going to be full year. And obviously, we can roll those assumptions into some capital [Phonetic] and EBITDA targets. But I think it's just prudent right now to be careful about what we do around guidance on volumes in total. Again, we have a very stable environment here, but our visibility really limited right now, and so we're just being cautious if that makes sense.

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

Yeah. No, it does. And then just one last one from me. One of the factors that you mentioned that was not included in guidance was additional storage revenue opportunities at LOOP. Can you just provide a little bit more color on what you're seeing on some of those dynamics there?

Robert P. Zinsmeister -- Chief Executive Officer

You can hear my chuckle, Derek. I got an email in the last half hour from the lawyer saying, by the way, there is a confidentiality agreement there. Like, OK, thank you very much.

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

Nice.

Robert P. Zinsmeister -- Chief Executive Officer

Historically, you can take a look at -- yeah, yeah, yeah. Historically, you can take a look at both, well, reported storage revenue. For us, it's in the small millions of dollars, right. When we look at the totality of our business in these kind of trying times, you can aggregate from a sensitivity and variance analysis couple of downside risks. So what's the positive offsets? For us, it's our interest because we've renegotiated our note and it's going to be storage revenue. Those two are kind of nice buffers to have, but they're not game changers, right. And net-net, that's why management is in a place to say we're probably at the low end of our guidance right now, and there is a sufficient gap between guidance and our distributions that we feel pretty darn good about our circumstances.

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

Understood. I appreciate it guys. And that's all I have for now. I'll hop back in queue. Thanks, Rip. Thanks, Craig. Thanks, Brian.

Robert P. Zinsmeister -- Chief Executive Officer

Thanks, Derek.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Brian Sullivan -- Vice President of Investor Relations

Robert P. Zinsmeister -- Chief Executive Officer

Craig W. Coburn -- Chief Financial Officer

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

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