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USD Partners LP (NYSE:USDP)
Q1 2020 Earnings Call
May 7, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

[Starts Abruptly] First Quarter 2020 Results Conference Call. [Operator Instructions] It's now my pleasure to turn the call over to Jennifer Waller, Director of Financial Reporting and Investor Relations for opening remarks. Please go ahead, ma'am.

Jennifer Waller -- Director, Financial Reporting and Investor Relations

Good morning, and thank you for joining us today. Welcome to our first quarter 2020 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; Josh Ruple, our Chief Operating Officer; as well as several other members of our senior management team.

Yesterday evening, we issued a press release announcing results for the three months ended March 31, 2020. If you would like a copy of the press release, you can find one on our website at usdpartners.com.

Before we proceed, please note that the safe harbor disclosure statement regarding forward-looking statements in last night's press release applies to the statements of management on this call. Also, please note that information presented on today's call speaks only as of today, May 7, 2020. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today's call will include discussion of non-GAAP financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures.

And with that, I'll turn the call over to Dan Borgen.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Jennifer. Good morning, everybody. Thanks for joining the call today, and hope everyone is staying safe in these challenging times. First, let me say a quick thank you to our USD team. Really proud of the way that we have continued to work and be focused during this challenging time. And I can tell you, as an investor, you can be proud of the team that we have, and the hard work that they're putting in, in difficult conditions. So thanks to the USD team for all the hard effort and work here.

The first quarter was a good quarter for the Partnership as our terminals continued to perform well under our long-term take-or-pay contracts. As we have referenced before, our strong contract structure and counterparty credit profile continue to provide the foundation for our business and predictable cash flows, which are so important during these times.

That being said, during the first quarter, we made the difficult decision to proactively strengthen our balance sheet by reducing our quarterly distribution in order to divert free cash flow toward enhancing our liquidity position for future growth. Given the uncertainty in the energy industry, we believe this is a prudent initiative, which will enhance long-term value for our unitholders. We believe this decision will enhance the Partnership's balance sheet, and liquidity positions, providing a strong base to weather the current downturn.

We remain excited about the contract renewals that we announced in December of last year at the Partnership's Hardisty and Stroud terminals, as well as our sponsors recently announced joint venture with Gibson Energy. As a reminder, the joint venture with Gibson was created to build a diluent recovery unit, or DRU, at Hardisty, which will create long-term sustainable takeaway solutions for the industry and enhance the cash flow profile of the Partnership.

We've broken ground on the DRU project, and we expect it will be placed into service in the second quarter of 2021. The DRU is underpinned by a long-term contract with ConocoPhillips, which, once the DRU is built, will be extended to 2031. While the DRU project is at the sponsor, the longer-term contracts at the DRU benefit the Partnership because those contracts are matched up with the terminalling services agreements at the Partnership's Hardisty terminal, and therefore, will be elongated on the same term.

In addition, we have broken ground on our new destination terminal in Port Arthur, Texas for the DRUbit that will be transloaded at our Hardisty origination terminal. We are currently in active discussions with existing and new customers at Hardisty to secure additional long-term take-or-pay agreements to support future expansions at the DRU.

Adam is going to start us off with an update on the Partnership's latest financial results and our liquidity position. Then we'll jump back into the recent market and commercial developments. Adam, go ahead.

Adam Altsuler -- Senior Vice President and Chief Financial Officer

Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our first quarter 2020 results, which included the details of our operating and financial results for the quarter. And we plan to issue our first quarter 10-Q with additional details after close of market today.

For the first quarter, we reported a net loss of $33.8 million, net cash provided by operating activities of $11.7 million, adjusted EBITDA of $12.3 million and distributable cash flow of $9.9 million. The net loss was primarily due to a non-cash impairment of the Partnership's goodwill associated with the Casper terminal resulting from the overall downturn in the crude oil market and the decline in the demand for petroleum products. In addition, we also reported a non-cash loss associated with the five-year interest rate derivative instrument that the Partnership entered into in November of 2017.

The Partnership's operating results for the first quarter of 2020 relative to the same quarter in 2019 were primarily influenced by higher revenue at our Hardisty terminal due to increased rates on a portion of the terminalling services agreement that became effective July 1, 2019. In addition, the Partnership experienced higher revenue during the quarter associated with contracted throughput that exceeded the Partnership's existing capacity at our Hardisty terminal.

Furthermore, in the third quarter of 2019, the Partnership entered into a terminalling services agreement with the Hardisty South Facility owned by the Partnership's Sponsor to provide terminalling services for the contracted throughput that exceeded the Hardisty terminal's transloading capacity. Under this arrangement, the Partnership incurred operating costs payable to our sponsor, representing the same rate on a per barrel basis that the Partnership received in revenue for such contracted throughput. Lower revenue at the Partnership's Casper terminal resulting from the conclusion of a customer agreement in August 2019 partially offset the higher revenue at Hardisty during the quarter.

Net income for the quarter decreased as compared to the first quarter of 2019, primarily as a result of the operating factors previously discussed. The decrease was partially offset by lower interest expense incurred resulting from lower interest rates during the quarter, which were also partially offset by a higher weighted average balance of debt outstanding in the first quarter.

Net cash provided by operating activities for the quarter increased by 15% relative to the first quarter of 2019, primarily due to the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances. Adjusted EBITDA and DCF increased by 7% and 17%, respectively, for the quarter relative to the first quarter of 2019. The increase in adjusted EBITDA was primarily a result of the operating factors already discussed. DCF was also impacted by a decrease in cash paid for interest during the quarter.

As of March 31, the Partnership had approximately $5 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $161 million on a $385 million senior secured credit facility, subject to the Partnership's continued compliance with financial covenants. Pursuant to the terms of the Partnership's credit agreement, the Partnership's borrowing capacity is currently limited to 4.5 times its trailing 12-month consolidated EBITDA, as defined in the credit agreement. The Partnership was in compliance with its financial covenants as of March 31.

On April 23, the Partnership declared a quarterly cash distribution of $0.11 per unit or $0.44 per unit on an annualized basis, representing a 70% decrease from the prior quarter's distribution. The distribution is payable on May 15 to unitholders of record at the close of business on May 5.

As Dan mentioned, given the current uncertainty in the energy industry, the Board of Directors made a proactive decision to strengthen the Partnership's financial position by reducing its quarterly distribution and redeploying free cash flow toward paying down debt. The decision to reduce the quarterly distribution was not driven by any material deterioration in the performance of the Partnership's underlying business, but rather represents a conscious effort to enhance long-term value by proactively strengthening the Partnership's balance sheet. We estimate this reduction will free up approximately $20 million to $25 million of free cash flow per year, which we intend to use to opportunistically delever.

Management will continue to monitor its financial condition, operations, customers and workforce, and intends to continue to assess its liquidity position and distribution policy over time.

And with that, I would now like to turn the call back over to Dan.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Adam. Now I'll ask Brad to give us a quick commercial update regarding the Western Canada select market and the impact of recent market events on our assets. Brad?

Brad Sanders -- Executive Vice President and Chief Commercial Officer for USDG

Thank you, Dan. We are definitely in unprecedented times and unprecedented challenges for our customers, primarily our producing and refining customers. At a high level, the pandemic-induced economic slowdown has caused refineries to reduce their throughputs by approximately 30%, which is a historically low run rate level of approximately 70%. This was done to -- in attempt to balance their outputs relative to declining demand in primarily gasoline and jet. Most recent data shows gasoline demand is down 44% year-on-year and jet 70%. So the challenges are material.

In response to that, all producers, including Canadian producers, have been challenged to find new sources of demand and/or rationalize their supply to match the decline in refinery throughputs. Effectively, they have accomplished both. Inventories are growing at rates and to levels never seen before, and production has been temporarily shut-in up to levels approaching 2.5 million barrels a day between the US and Canada. And I say temporary shut-in, because that is effectively the way a producer participates in contango storage, if the value in the future is worth more than it's to their benefit to store the crude in the ground.

So these are very uncertain times, and most folks are hunkered down, waiting for greater clarity of outcome to decide where they want to prioritize next steps. Fortunately, for the Partnership, and as Dan mentioned, our core business is sound and our customer profile is strong.

As a reminder, our contract structure consists primarily of multi-year take-or-pay contracts with minimum monthly commitment fees. Our customers include major integrated oil companies, refiners and marketers, of which the majority are investment-grade rated. So the Partnership's terminals continue to perform well under our long-term take-or-pay contracts.

Additionally, though, during these times of uncertainty and working with our current and new customers, we have also found ways to create incremental new value at our assets. An example is that CCR. As you've heard on previous calls, we've invested to support what we think is a strong value proposition by improving our connectivity at CCR and creating what we call a hub strategy.

And during these periods, we've had an opportunity to store, stage and redistribute crude, both sweet and sour, with shippers on Express, with refiners in Salt Lake and with refiners in the Mid-Continent. So we've had an opportunity to test this hub value proposition, and it's performed well. This will also serve us well later this summer when Enbridge increases their capacity on their Express pipeline, which is an export pipeline out of Hardisty that will export crude directly into Casper and rely on our hub and our connectivity at Casper to create distribution solutions for that incremental volume, which we estimate to be somewhere between 25,000 and 30,000 barrels a day. So, we look forward to working with Enbridge and making that reality.

Another example is at our Stroud facility, and I'll remind folks on the phone that our Stroud facility is connected to the Cushing terminal in Oklahoma, which is the largest above-ground storage facility in the world, and where most of the oil seeks to get to for storage purposes. We have been working with our current customer to help them maximize their value at that asset by providing throughput options for them that include sweet crude, not just sour crude. So as crude production competes for contango and storage opportunities, their desire to get to Cushing intensifies, and we're providing a solution to make that happen. So lots of new stuff, clever stuff, being done to try to maximize the value with our customers and create new value and new customers.

As it relates to activities at the parent, Dan mentioned that we've broken ground at the DRU, and we've broken ground at our destination terminal at Port Arthur. I just want to reiterate his point that we are in advanced discussions during these periods and times, during these uncertain periods and times, to expand that facility, both at the DRU and at Port Arthur. So we're excited about that. And that's really a tribute to the merits of the DRU from a cost savings and value enhancement standpoint. So we're excited about our ability to continue to grow that asset.

Finally, I wanted to just comment on our asset in the Houston ship channel and start with reminding the folks on the phone that we have existing core activities there, the storage and handling of railcars and the disposal of dredge spoils. And during these difficult times, we've actually been able to grow our cash flows and returns there. So we're excited about that.

But secondly and more importantly, this was, as I said earlier, a demand-led event that has caused the turmoil and the uncertainty that we're in today. It will likely be a demand led event that returns us to normal. That is evident by the fact that we continue to have advanced discussions with multiple parties, specifically around export opportunities, both rail and by water, for products that will lead this return to normalcy. Things like gasoline, things like diesel, things like jet, and things like NGLs. So it simply substantiates the value proposition, the opportunity of Texas Deepwater, its position in the Houston ship channel and its ability to service refiners and NGL companies and their needs to export the products internationally to where the demand growth lies.

So tough times, but we stay very, very busy, as Dan had mentioned, and we look forward to what return-to-normal looks like, because we're confident that we've already seen, as an example, improvements in gasoline demand month-on-month up to 10% to 15%. So as folks start reengaging back into the economy, we expect to see the pace of [Indecipherable] to accelerate as well.

That's all I had, Dan. Thank you.

Dan Borgen -- Chairman, Chief Executive Officer and President

Thank you, Brad. Appreciate that. To echo a bit of what Brad said, we do remain extremely busy and focused on creating cash flow with our foundation principles of strong counterparties, take-or-pay, fee-based agreements, that create both cash flow and long-term value. So we're very busy with that, continue to do that and are blessed to be able to have the quality of customers and engagement with future customers that meet that.

We continue to work hard on our DRU and bringing that with our strong partner, Gibson Energy. I couldn't ask for a better partner in Gibson. We really work well together and have a common focus on bringing this project to bear and to be a very useful mode of transportation and new product type that meets both safer rail transportation as well as meeting a better netback for our customers.

We've historically always been able to manage through this downturn and other downturns. We've been in business for a long time. We've learned -- we learned something through every downturn, down cycle that the industry goes through. We've been able to grow through those, and I have no doubt that we expect the same here to continue to grow based upon our conservative principles and how we work with our customers to continue to grow projects that makes sense for them, and therefore, their investment in the projects from take-or-pay perspective.

We'll continue to keep you updated and look forward to the additional announcements regarding our DRU progress in the future. We have many exciting things to talk about as we bring on additional customers to that.

And with that, I think that we look forward to the end coming sooner of this down cycle. We see a stronger demand on -- coming back on as states are turning back on to their first gear of the economy, we'll call it, and seeing more consumption and leading to -- should start leading to inventory draws of refined product and then a greater refinery runs and then a greater call on crude.

So with that, thanks again. Thanks for all the support. Thanks for the kind notes of support from investors all over, and we appreciate you taking the time to be on the call today. Thanks again.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 22 minutes

Call participants:

Jennifer Waller -- Director, Financial Reporting and Investor Relations

Dan Borgen -- Chairman, Chief Executive Officer and President

Adam Altsuler -- Senior Vice President and Chief Financial Officer

Brad Sanders -- Executive Vice President and Chief Commercial Officer for USDG

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