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BP Midstream Partners LP (NYSE:BPMP)
Q2 2020 Earnings Call
Aug 7, 2020, 10:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning everyone and welcome to the BP Midstream Partners 2Q 20 Results Conference Call and Webcast. [Operator Instructions].

At this time, I'd like to turn the conference call over to Brian Sullivan, Vice President of Investor Relations. Sir, please go ahead.

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

Hello and welcome everyone to BP Midstream Partners Second Quarter 2020 Results Presentation. I'm Brian Sullivan, Vice President of Investor Relations. And I'm joined today remotely by Rip Zinsmeister, our Chief Executive Officer, and Craig Coburn, our Chief Financial Officer. Before we begin, please take a moment to review our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to the factors we note on this slide, and in our SEC filings. We also refer to non-GAAP financial measures. Please refer to our SEC filings and supplemental information in this presentation for important disclosures related to these measures. These documents are also available on our website.

And now, over to Rip.

Robert P. Zinsmeister -- Chief executive officer

Thanks, Brian. Good morning everyone and thank you for joining our call today. I'm very pleased today to report to you a solid set of quarterly results. And what was a tough second quarter, where we saw the continuation of a volatile and challenging environment. This is a testament to our portfolio's ability to generate stable and resilient cash flows. At BP Midstream Partners, we have remain focused on our two priorities. Firstly, our core value of safety. Protecting the health and safety of operational personnel and other stakeholders through the COVID-19 pandemic, as well as remaining focused on operating our assets in a safe and reliable manner. And second, maintaining the financial strength of the partnership to ensure we continue to deliver financial stability. I would like to thank everyone at BP Midstream Partners and our sponsor BP for the resolve they have shown in the face of such a challenging environment. And I would like to acknowledge the support and helpful dialog we have had with our unit holders during this past quarter. We will continue to remain engaged with you. Our presentation today will be much shorter than last quarter. We previously described the attributes of our portfolio that underpin our ability to generate stable and resilient cash flows and today's results demonstrate that those attributes are indeed delivering as expected. I'll begin today with a brief update on our COVID-19 response, 2020 guidance and the status of minimum volume commitments or MVC arrangements with our sponsor BP. Greg will then take you through the details of our second quarter operational and financial results and provide further details on our 2020 guidance. We will then take your questions.

Starting with our COVID-19 response; to date, we have not had any COVID-19-related issues impacting the availability of our pipelines. We continue to monitor local conditions and adapt our operating practices as appropriate. Our sponsor, BP, has been very supportive during this pandemic. Applying their front-line operating practices to our assets and providing access to critical resources as necessary. Second, our 2020 guidance; our existing full-year guidance is unchanged. There remain factors, the impacts of which we cannot reasonably estimate at the present time to include them in our guidance. Craig will cover these shortly. However, we entered this volatile and challenging environment from a position of strength with a conservative financial framework and a strong liquidity position. And although there are signs of demand improvement and some reduced volatility, there are still operational and financial risks that we will continue to monitor and take actions to mitigate where possible. With all of that said, we are very pleased with the operational and financial performance of our portfolio, which Craig will speak to in more detail shortly. The confidence we have in our operational and financial stability underpins our ability to continue providing guidance for the full year. Third, our MVC arrangements; most of our MVCs expire at the end of 2020. Except for one agreement relating to Diamondback, which automatically renewed in June for another year. We are holding regular discussions with our sponsor regarding MVC arrangements. We expect to conclude these discussions and update you further with our third quarter results.

With that, I'll hand over to Craig.

Craig W. Coburn -- Chief financial officer

Thanks, Rip. Good morning, everyone. Set against a challenging environment, we delivered a resilient set of operational and financial results and our full-year 2020 guidance remains unchanged as Rip previously mentioned. The impacts of COVID-19 and broader market volatility on pipeline throughput was much more apparent across our portfolio in the second quarter compared to the first quarter. That against the backdrop of significant product demand destruction across the US, industrywide we saw reduced refinery utilization during the quarter. However, notwithstanding these conditions, our total gross throughput was only around 10% lower in the second quarter compared to the first quarter. Further, our adjusted EBITDA and cash available for distribution were broadly flat in the second quarter compared to the first quarter. Even though total gross throughput declined during the quarter, earnings and cash flow remained resilient. Our operational and financial stability during the second quarter, notwithstanding the environment conditions clearly demonstrate our operating resilience. The benefits of a high-quality balanced portfolio and the benefits of MVC arrangement. Looking at throughput in more detail. Total pipeline gross throughput was approximately 1.6 million barrels of oil equivalent per day in the second quarter. Around 10% lower than the first quarter of 2020 as mentioned. Throughput on our onshore pipelines was around 14% lower compared to the first quarter. On BP2 reduced volumes reflected lower refinery utilization and feedstock optimization as a result of the demand destruction from COVID-19. Throughput on River Rouge was lower driven by refined products demand destruction early in the second quarter when we saw demand in the US for gasoline, diesel and jet fuel drop by around 40%, 10% and 70% respectively.

And although lower than the first quarter, throughput on this pipeline was better than we expected with a faster recovery in the latter part of the quarter. Throughput on Diamondback was consistent with the historical average for the second quarter driven by seasonally lower diluent demand and reduced Canadian heavy oil production. Throughput on our offshore pipelines was around 8% lower compared to the first quarter. This reflected the impacts of maintenance activities of offshore producers, tropical storm Cristobal and offshore producer constraints due to COVID-19 and lower crude price. Net income attributable to the partnership for the second quarter was $40.6 million, only 3% lower than the first quarter of 2020.That's a really solid result given the second quarter macro conditions and lower throughput. The result reflected first higher onshore revenues. The impacts on revenue from lower throughput across all our onshore pipelines together with lower fixed loss allowance revenue on BP2 were more than offset by the favorable impact of recognizing deficiency revenue for the first half of 2020 in the second quarter. And second, lower interest expense due to a lower interest rate on the new term loan.These two favorable impacts were offset by lower income from equity method investments due to lower throughput on our offshore pipelines. Adjusted EBITDA attributable to the Partnership for the second quarter was $47.4 million. This was broadly flat compared with the first quarter of 2020. Again. this was a resilient result notwithstanding the environment in the second quarter. Cash available for distribution for the second quarter was $43.2 million, only 2% lower compared with the first quarter of 2020. So, as you can see, our earnings and cash available for distribution remained resilient in the face of a challenging second quarter.

The Board of Directors of the general partner declared a second quarter distribution of 34.75 cents per unit, consistent with the distribution level of the first quarter of 2020. Our distribution coverage ratio for the second quarter was 1.15, comfortably in the middle of our target range of 1.1 to 1.2 times. Our ability to hold the second quarter distribution flat further demonstrates the confidence we have in our financial strengths and the cash flow stability. Turning now to our guidance; our full-year 2020 guidance remains unchanged. Adjusted EBITDA is expected to be in the range of $190-200 million. Full-year cash available for distribution is expected to be in the range of $180-190 million. Assuming we hold the current distribution level flat throughout the remainder of 2020, our full- year distribution growth will be 5% over the full year 2019 distribution. Our distribution coverage ratio for the full year is expected to approach the upper end of the target range of 1.1 to 1.2 times at current guidance levels. During the second quarter, we grew the balance for cash and cash equivalents by around $9 million. And based on our guidance, we expect to grow our cash balance by around $30 million this year. This growth in our cash balance underpins our ability to pursue organic growth projects to facilitate our mid- to long-term growth while managing through the ongoing pandemic uncertainties. Mars expansion discussions continue to progress with producers and definitive agreements are expected to be signed by the end of the year and the project online in 2021. In addition to offshore growth projects, we're also progressing on onshore growth options including terminals. Having reaffirmed our 2020 guidance, I'd like to remind you that last quarter, we shared factors that we had reflected in our guidance as well as factors that we could not reasonably estimate the impacts of in order to include them in our guidance.

Although some factors have now resolved themselves, such as continued deterioration in oil price, new ones have emerged. At the time of our first quarter results, we included impacts from reduced FLA revenue, lower onshore asset throughput and reduced financing costs. Our guidance today now also reflects two factors that we highlighted last quarter is not included in our guidance. First, storage revenues at LOOP associated with the Mars pipeline. These revenues are now reflected in our actual second-quarter results. We expect modest upside during the remainder of the year and have not reflected this in our guidance. And second, operations and maintenance cost reductions, our sponsor has waived the increase of the omnibus fee paid to an affiliate of our sponsor for the period of April to December 2020. This demonstrates the support of our sponsor during this challenging period. These two factors are shown in bolded text on this slide under the heading reflected in guidance. There still remains some factors that we cannot reasonably estimate the impacts of in order to include them in our guidance. We highlighted these last quarter. Our ability to maintain our guidance for 2020 notwithstanding the environment and uncertainty ahead is further evidence of the confidence we have in the operational and financial stability of the partnership. Looking ahead to the third quarter, we expect pipeline gross throughput to be higher than the second quarter, reflecting higher throughput on River Rouge as refined product demand conditions improve and higher throughput across our offshore pipelines, mostly due to expected higher throughput on Proteus and Endymion pipelines. Adjusted EBITDA is forecast to be broadly flat compared to the second quarter. We expect higher revenue driven by increased throughput and tariff increases on our onshore pipeline and slightly higher income from equity method investments. These favorable impacts are expected to be largely offset by the absence of deficiency revenue at the level recognized in the second quarter. Cash available for distribution is expected to be higher than the second quarter, reflecting increased revenues from onshore assets supported by tariff increases in the third quarter as well as lower interest expenses associated with our term loan facility. And as I'm sure you can appreciate and understand our forecasts and expectations for the third quarter may change given the ongoing uncertainty and volatility, particularly surrounding Covid-19.

With that, I will hand back to Rip.

Robert P. Zinsmeister -- Chief executive officer

Thanks, Craig. Let me wrap up with a few last thoughts. We have delivered another solid quarterly result today. When we conceived BP Midstream Partners, we envisioned an asset portfolio capable of sustainably delivering stable cash flows. And that's exactly what our portfolio did during this past quarter. We have remained focused on our two priorities, first, our core value of safety, protecting the health and safety of operational personnel and other stakeholders, as well as the remaining focused on operating our assets in a safe and reliable manner. And second, maintaining the financial strength of the partnership to ensure we continue to deliver financial stability. We are on track to deliver our full-year 2020 guidance, recognizing that there remains considerable macro uncertainty ahead. We are on track to build cash while delivering full-year distribution growth of 5% compared to 2019. And we will continue to provide you with a balanced view of the risks and opportunities in our guidance and mitigate the risks wherever possible. Our balance sheet and liquidity remain strong. We are in action on MVC arrangements with our sponsor and we will update you further on this with our third quarter results and we continue to pursue opportunities for organic growth investment in our portfolio. Our Investor Relations team are always available to speak with you further outside of our quarterly results presentation. Finally, BP Midstream Partners will be at the virtual Citi Midstream/Energy, Infrastructure Conference next week. We look forward to speaking with many of you then.

With that, let's open the phone lines and take questions.

Operator

[Operator Instructions] Our first question today, comes from Jeremy Tonet. Please go ahead with your question.

Joe Martoglio -- Analyst

Hi. This is Joe on for Jeremy, wanted to first ask on your, kind of, current volume trend both onshore and offshore. I appreciate you talked a bit about River Rouge recovering toward the end of the second quarter. Did you see that continue to third quarter, and you can use that where volumes are there now and also did you see a similar trend on BP2 and your offshore pipeline.

Robert P. Zinsmeister -- Chief executive officer

So good morning. With respect to, kind of, the underlying asset performance, each asset is being driven, by its own local market, right. So when we look at River Rouge, quite frankly, we are a bit stunned on the turnaround. It was at half volumes in the depths of March, right now we are above MVC level and we see that for the remainder of the year. Each of us kind of live in our own bubble, both Craig and I have been in and out of Midwest and you would think the traffic patterns on the highways if people are back to normal. So the kind of corporate local view is down 10% to 15%, but Whiting and our trading group are awfully good at what they do. So we're above MVC on River Rouge. The sentiment is Aviation isn't going to come back anytime soon, but River Rouge's volumes are circa 2% or 4% jet fuel. So not really impacting that asset. When I pivot the Diamondback, we're back in the summer season, so there is always seasonality on diluent demand, need more diluent in the winter, so the assets are performing OK. We don't see much difference there in terms of the seasonal pattern and then offshore really is about COVID and COVID's impact on crewing, staffing, and workover activity. We saw a couple of blips on the assets, you lose a week, you lose 200K in our topline, basically across each specific asset. We think there is going to be more turnaround and maintenance activity opportunistic through the summer, and we're still not out of the hurricane season yet Summing all that up, when you take a look at our distribution versus our cover, we still feel that we have a very solid second half of the year. I'm going to turn to Craig and see if you want to supplement that in anyway.

Craig W. Coburn -- Chief financial officer

Yeah, picking up on, I think Joe asked also about BP2. I think the Whiting Refinery kit is actually running really well, considering where demand is across nationwide, when you look at the averages, BP2 is also running well, but you know that Canadian diffs have been down a little bit historically through the back half of second quarter and in the third quarter. So there has been a little less volume going down BP2 but we're protected by MVCs there. We do see those differentials coming back already. I think there're somewhere between $7 to $10 now. So as those differentials come back, the volumes on BP2 will also come back in the second half of the year. Did that answer your question, Joe?

Joe Martoglio -- Analyst

Yeah, yeah. Thank you. That's really helpful, I appreciate all the color there. And then maybe if I can also ask just about the organic growth and I'm particularly thinking looking, is there any more information you can say about the terminal opportunity, I assuming is that from the KM-Phoenix and what would kind of be the scope of any expansion there.

Craig W. Coburn -- Chief financial officer

We'll keep this relatively succinct. It's fair to say that when the sponsor entered into the Barton's JV, there's synergistic opportunities to tie Thornton network into the BP system, so that's where the investment opportunities lie, principally. Okay.

Joe Martoglio -- Analyst

Okay. Yes, OK. Thank you. I'll stop there.

Operator

And our next question comes from Derek Walker from Bank of America. Please go ahead with your question.

Derek Walker -- Analyst

Good morning, guys, and congrats on a strong quarter, maybe just on the guidance piece, I appreciate that you reiterated the range, but you know in some kind of moving part, so can you just kind of clarify or give some color around what the contribution of the additional storage revenues at LOOP and what the cost reduction contribution is and I guess, is there any other change to guidance relative to sort of the volume expectations, relative to say first quarter, that's sort of baked in the second half of the year. Thanks.

Craig W. Coburn -- Chief financial officer

Thanks, Derek. Yeah, I know we're not going to comment specifically on how much money we're getting out of the storage revenues but suffice it to say that Rip talked about a few blips on the platforms with respect to COVID and some increased maintenance work and I think between the water handling and the increased storage revenue that sort of made up for some of those downturns, and so we were pleased with the distributions we're getting from Mars in that respects. I mean I think we do see increased ramping of volumes on the offshore, particularly around Proteus and Endymion as those Appomattox fields are bought on by Shell in the second half of the year, we're very cautious about this though Derek because it's, you know, it's a different world out there working in the offshore these days, you have to make sure you have clean crews, you have to have clean contractor crews as well with the COVID coming and bringing things up and down. And so I think they have done an amazing job of managing through all of that to have sort of volumes only be down sort of 10% across that world, given everything that they've been facing. So we had a couple of smaller platforms shut in due to economic reasons but our trading groups across Shell, Exxon, BP have also done a remarkable job of moving product through what was a pretty shaky time there back in April, as the Saudi Crude came in, but we managed through all of that. So we don't see those types of headwinds in the back half of the year. But we're being conservative in our guidance, in the sense that the way things are working in the offshore they're getting through it, but it's not just the old world in terms of how things come on and come off in that respect. What was the second part of your question?

Derek Walker -- Analyst

Yeah, I think that pretty much answered it. I mean I think I was just looking for contribution of the add-ins. And then if there is any adjustments relative to what you previously had factored in for some of the prior assumptions. So I think you've alluded to that. Maybe having to follow up a little bit on the commentary around just BP2 and the Canadian diffs and I appreciate that you are anticipating an update in what Q3 results around and we see extension. But maybe can you give us a little bit of flavor around how the discussions have been going, what are some of the factors being discussed and what are some of the considerations as well around you looking for certain diff levels or is it just a matter of getting multiyear extensions and anticipate that being at a similar level. I just want to get a little bit sense of what those discussions have been like and recognize the updates coming with the 3Q results. Thanks.

Craig W. Coburn -- Chief financial officer

I'll give you some color on this. Think about when we went public in 2017. There is a particular landscape that people anticipated, line three expansion, potential build of KXL and it's been a very choppy market, moving from 2017 to the current state in many respects when diffs are highly attractive, we can't get all the crude we'd like, and when there is a lack of apportionment that's really the reflection of the market signals on the diffs. And there actually has been limited apportionment during the whole COVID period. But clearly, there is also decline in need for gasoline production. All right. Our affiliate would prefer to have greater certainty about what's going on with Line 3, the Canadian regulator has suspended the open season and as I understand at Enbridge those responses yet again tomorrow. And COVID has pushed that whole process back in time. Knowing what access you can have to Line three and Line three volumes would certainly make this a whole lot easier. And it would be fair to say last year we anticipated we would know that this year; we still don't know that. And that's what's contributed to both the delay in the ambiguity on what is inappropriate MVC and for how long. We've gone back and forth on that topic and monitoring the market and monitoring Line three events. If Line three doesn't provide us any greater certainty or closure, so to speak, we'll have to look at some type of stop-gap measure, and not a longer term MVC. But that has not been decided nor concluded.

Derek Walker -- Analyst

Okay. Appreciate the commentary.

Robert P. Zinsmeister -- Chief executive officer

Yeah, Derek. I'd also like to say that increasingly as we move into 2021 and we will have discussions with you guys about the growth beyond 2020, the MVCs are an important piece. I think they help smooth the cash available for distribution quarter-to-quarter, but in the whole spectrum of where BPMP eventually goes they become less than less material in the longer-term. And so we'll be talking to you, not just about MVCs on the onshore pipes, but we'll be talking to you about the figure package of what's coming in terms of the growth in the offshore and how that all works together for a balanced portfolio.

Derek Walker -- Analyst

I appreciate that. Thanks Craig. Thanks Rip. Thanks, Brian. I appreciate that.

Operator

[Operator Instructions]. Our next question comes from Theresa Chen from Barclays. Please go ahead with your question.

Theresa Chen -- Analyst

Hi, there. I just like to start by asking a follow-up question to the MVC topic and appreciate the commentary on the supply side in terms of the uncertainty related to the WCS differentials and I wanted to further touch upon your comment Rip about the demand side of things out there. Not as much demand for gasoline production and such. As you speak with your affiliate about renegotiating the MVCs, what is the outlook for general refining utilization at Whiting next year and beyond, post this unprecedented demand shock and especially as we're still working through some sloppy inventories from a macro perspective.

Robert P. Zinsmeister -- Chief executive officer

It's probably fair to say that we're blessed with advantaged asset in Whiting. There's no Jack Welch if you are number one to two in your market. And people catch a cold, some are dying of pneumonia and you're still highly profitable, that is outstanding asset we have run at nameplate recently. So, we're not seeing perhaps what, like fourth quartile refiners would see in terms of access to the market, ability to move product, ability to make product and still making money. Okay. So, we actually really haven't had much of a conversation that has any kind of market angst to it.

Craig W. Coburn -- Chief financial officer

I guess, I would hold on that Theresa. I build on that to say what we're talking about is a refinery that actually probably was less underutilized than most, during the Second Quarter and has come back strong. And that's evidenced by, you see the product volumes down River Rouge recovering quite quickly and being well above MVC's now already in sort of June and July and in August. What we're really wrestling with on the BP2 volumes is really more a crude slate optimization issue with the Canadian diffs. Once that moves back to normality, we would expect to see the volumes on BP2. So, you know, there's two ways to get crude into Whiting, BP2 and there's another pipe that comes in. And so, I don't think that decreased volumes on BP2 are necessarily indicative of how Whiting has been running through this whole thing.

Theresa Chen -- Analyst

Got it. And then switching to the offshore side, so you mentioned having to work through the, I guess, Saudi Flotilla headed our way during the second quarter and as we kind of look to the near-to-medium term seems that incremental production from Russia and OPEC countries going to ramp up in some order, potentially widening out that medium sour differential. How do you think about economics on the offshore side in light of all that?

Craig W. Coburn -- Chief financial officer

Well, I'll start. Honestly speaking, we are the personnel, I was surprised by how in Q2 different crudes attracted premium prices relative to other crudes, partly because of supply disruption elsewhere in the world. This was principally on the March quarter and before bidding up, we're only talking $1 a barrel, right, so we're not talking wild swings in value, but just because of who could get to what, various crudes were moving at a premium, vis-a-vis their historical pattern. I think we take comfort that between Shell, BP, and Exxon, the owners of the fields in our pipes, they're all very sophisticated companies and they will move their product to market. I can't give you any better answer than that.

Robert P. Zinsmeister -- Chief executive officer

Yeah. And I guess from a visibility standpoint, I think we only saw that getting better over time. And there was a time there, I guess, in the second quarter where it was a bigger concern and I think we're not hearing those types of concerns from our trading organization these days.

Craig W. Coburn -- Chief financial officer

Yeah, As you saw from the results of the IOC majors in their trading, it was extremely beneficial to have high-quality trading and supply groups. I think that also carries through to your onshore and also carries through to your product sales as well, having good-supply organizations that move gasoline when it's down to 15% is also very important. And BP has that type of a tradings by organization. The other majors do as well, but at times like this, it tends to really stand out versus some of the other smaller players.

Robert P. Zinsmeister -- Chief executive officer

So, there was angst in the second quarter, it was really about tank tops and what happens if you actually don't have a home or crude. It seems we're through that.

Theresa Chen -- Analyst

Got it. And speaking of finding a home for crude, just on the LOOP storage piece and the added benefit from incremental revenues there. Was that a result of super contango opportunities, and if so, how long were you able to term that out for us, and is it a benefit that we should be able to expect into 2021, beyond, or was it relatively short term in nature.

Robert P. Zinsmeister -- Chief executive officer

I'd say we had a soft contango. And we kind of have a soft contango right now. Our guidance is, don't expect any further upside on this, partly because cabin size are finite, right. If you look back in history, there are periods where 10s of millions of dollars have been made in a super contango environment in a single year. That's obviously shared among the partners. So would never go to our bottom line. This is kind of, at best. 10 million bucks for BPMP net. It's not a a large alpha in our results at all. But it's nice to have in a difficult market, and it's really more a mitigate of the environment that you get these benefits.

Theresa Chen -- Analyst

Thank you very much.

Craig W. Coburn -- Chief financial officer

Just to come back on that Theresa. I think the 10 million Rip is speaking to was a gross numbers, so adding that to the BPMP. I mean what we've told you in our guidance was, it's not in our guidance going forward if there is upside with those storage revenues and water handling revenues that will come through. But we're not counting on it in our guidance right now.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 38 minutes

Call participants:

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

Robert P. Zinsmeister -- Chief executive officer

Craig W. Coburn -- Chief financial officer

Joe Martoglio -- JPMorgan -- Analyst

Derek Walker -- Bank of America -- Analyst

Theresa Chen -- Barclays -- Analyst

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