BP Midstream Partners LP (BPMP) Q4 2020 Earnings Call Transcript

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BP Midstream Partners LP (BPMP)
Q4 2020 Earnings Call
Feb 25, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the BP Midstream Partners Fourth Quarter 2020 Results Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Geoff Carr. Please go ahead.

Geoff Carr -- Vice President, Investor Relations

Thank you, and good morning, everyone. Welcome to BP Midstream Partners fourth quarter and full year 2020 results presentation. Joining me remotely today are Rip Zinsmeister, our Chief Executive Officer; Craig Coburn, our Chief Financial Officer; and Jack Collins, our CFO Designate.

Before we begin, let me draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans, and expectation. 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, as well as reconciliations to the non-GAAP financial measures. These documents and our presentation today are available on our website.

Rip, over to you.

Robert P. Zinsmeister -- Chief Executive Officer

Thanks, Geoff, and hello, everyone. I think it's fair to say that 2020 goes down as a year unlike any other we have experienced. We've dealt with the human tragedy of the COVID-19 pandemic and the uncertainty it has brought to our personal lives in the broader macro environment. For BPMP, we have navigated the impacts of COVID-19 on the demand for refined products, industry refinery utilization, commodity prices, and the ability for offshore producers to safely maintain production and execute major projects, while adhering to responsible COVID-related work practices.

We have also dealt with the historic Atlantic hurricane season in terms of the number of named storms in a single season. Hurricane impacts in the Gulf of Mexico, which required offshore producers to temporarily shut-in production for safety reasons, extended well into the fourth quarter of 2020. Through all of this uncertainty, we demonstrated stability and resilience with safe operations remaining at the core of everything we do. We delivered solid operational and financial results in a challenging environment, a testament to the underlying operational and financial strength of the business.

I would like to thank everyone at BPMP for consistently delivering throughout the year against what was a tough backdrop. Thank you to our sponsor BP who provided support throughout the year in many different ways and to our unitholders. We appreciate the support and dialog that we have had with you throughout 2020 and we will remain engaged with you.

As we look ahead, we are optimistic, particularly as vaccines are rolled out but we're also realistic and we still have a way to go as evidenced by COVID-related restrictions and several key demand centers continuing from late in the fourth quarter of 2020 to well into the first quarter of 2021. We are encouraged though by the opportunities we see to build our track record. I'll start today with a brief recap of some key areas over the past year, Craig will take you through our latest operational and financial results and then, Geoff will provide you with our guidance for 2021, I'll come back at the end to briefly sum up before we take your questions.

During 2020, we focused on two priorities. First, safe operation. Protecting the health and safety of operational personnel and other stakeholders through the COVID-19 pandemic and operating our assets in a safe and reliable manner. We remain focused on this as we enter 2021, continuing to monitor local conditions and adapting our operating practices as appropriate. And second, maintaining the financial strength through the partnership to deliver financial stability. Specifically, we increased the quarterly distribution in January 2020 prior to the COVID-19 pandemic, and then prudently maintained the distribution at this level through 2020, delivering unitholders 5% distribution growth over the full year 2018.

We maintained a robust distribution coverage ratio at 1.2 times for the full year at the top end of our target range of 1.1 to 1.2 times. And as a result, we built cash during 2020, approximately $28 million, a great outcome in a challenging year. We made progress in several other areas as well. In early 2020, we restructured our debt with BP to a five-year term loan facility with no principal payments due until 2025. This reduced our net interest expense by around $7 million in 2020 compared to 2019.

During the third quarter of 2020, we agreed to a new three-year MVC arrangement with BP relating to our three onshore pipelines. We believe these new arrangements strike the right balance between security and protection for the partnership from significant disruptions and maintenance, affecting the Whiting refinery and our onshore pipeline network, while providing BP with the flexibility to optimize refinery supply and outflow.

During 2020, our sponsor laid out a new strategy, in which it described both the Whiting refinery and offshore Gulf of Mexico hydrocarbon production as resilient and focused assets. We believe this reinforces their importance to BP going forward and the importance of the partnership's pipeline asset as they are highly integrated with these operations.

With that, I'll hand over to Craig for what will be his last time on the results call.

Craig W. Coburn -- Chief Financial Officer

Thanks, Rip. Good morning, everyone. As Rip mentioned, we delivered solid operational and financial results in 2020. Our full year results were in line with guidance we provided you at the start of the pandemic, that's an outstanding result given the changing conditions throughout the year that we had to navigate. It demonstrated our operational and financial resilience, underpinning our ability to deliver financial stability, an important element of our investor proposition.

Even with the impacts of COVID-19 and multiple weather events in the Gulf of Mexico during a historic Atlantic hurricane season, full year 2020 gross throughput was only around 4% lower compared to 2019. Reflecting this lower throughput, adjusted EBITDA was also around 4% lower. Cash available for distribution remained resilient though, broadly flat compared to 2019 and we built cash during the year.

Looking at operational results in more detail. Total pipeline gross throughput was approximately 1.6 million barrels of oil equivalent per day in the fourth quarter, around 5% higher compared to the third quarter of 2020. Gross throughput on our offshore pipelines was around 4% higher compared to the third quarter, reflecting fewer adverse weather events in the Gulf of Mexico compared with the previous quarter, although throughput continued to be impacted during the fourth quarter by hurricanes Delta and Zeta, and the continued ramp up of production from the Appomattox facility. These favorable impacts were partially offset by planned facility maintenance undertaken by offshore producers during the quarter.

Gross throughput on our onshore pipelines was around 11% higher compared to the third quarter, primarily driven by higher throughput on BP2 as crude supply optimization at the Whiting refinery favored Canadian-sourced barrels. Apportionment on the Enbridge mainline increased during the fourth quarter from 12% in October to 32% in December, tempering some of this throughput increase. This was partially offset by lower throughput on River Rouge and Diamondback. Throughput on River Rouge was lower than expected during the quarter, particularly in December with several key demand centers reinstating COVID-related restrictions during the second half of the quarter impacting refined products' demand.

Throughput was also lower on Diamondback in the fourth quarter due to a slower build of diluent inventories in Canada ahead of the peak demand season. Full year 2020 throughput on Diamondback remained broadly consistent with 2019. For the full year 2020, total gross throughput was approximately 1.6 million barrels of oil equivalent per day, around 4% lower compared to 2019.

Offshore pipeline throughput was adversely impacted by multiple weather events in the Gulf of Mexico, as previously mentioned, as well as planned facility maintenance by offshore producers. This was partially offset by the continued ramp up of major projects during the year, including the Appomattox facility. Onshore pipeline throughput was also lower, largely due to the impacts of COVID-19 on the demand for refined products and refinery utilization.

Turning to financial results. Net income attributable to the Partnership for the fourth quarter was $40.8 million, around 10% lower than the third quarter of 2020, reflecting lower onshore pipeline revenue, primarily due to lower revenue on River Rouge, consistent with lower throughput during the quarter. Cost associated with planned pipeline inspections incurred during the quarter and lower net income from equity method investments. Adjusted EBITDA attributable to the Partnership for the fourth quarter was $47.2 million, slightly higher compared to the third quarter of 2020. This was another resilient quarterly result benefiting from increased distributions from our interest in offshore pipeline joint ventures.

Cash available for distribution for the fourth quarter was $49.5 million, around 16% higher than the third quarter of 2020, reflecting the recognition of cash in the fourth quarter associated with the portion of River Rouge's volumes above the minimum volume commitment level for the full year 2020 as previously guided.

On a full year basis, adjusted EBITDA attributable to the Partnership was only around 4% lower than 2019 and cash available for distribution was broadly flat with 2019 as previously mentioned. Given all of the challenges during 2020, delivering a full year result that was consistent with 2019 and consistent with our guidance was a great achievement. The Board of Directors of our general partner declared a fourth quarter distribution of $0.3475 per unit, consistent with the distribution level of the third quarter 2020. As Rip mentioned, with this distribution, we delivered unitholders 5% distribution growth over the full year 2019.

Earlier this month, we confirmed the end of the subordination period following the payment of the fourth quarter 2020 distribution, a milestone which speaks to our track record of paying distributions in excess of those set at the time of our IPO over three years ago. Our distribution coverage ratio for the fourth quarter was around 1.3 times, slightly above the top-end of our target range of 1.1 to 1.2 times. And as Rip mentioned, our full year distribution coverage ratio was robust at around 1.2 times.

Finally, on a personal note, this is my final set of quarterly results before I retire from BPMP as CFO. It has been an absolute privilege for me to serve BPMP and our unitholders since our IPO in 2017. I would like to thank Rip for his steadfast guidance through the last three years and our Chairman, Doug Sparkman, and the rest of the BPMP Board. I would also like to thank my finance team who have provided me with amazing support since the IPO and especially this year during a challenging environment with COVID-19.

And finally, I would like to thank the operations team, the operators, engineers, schedulers and the front-line who have been so instrumental in keeping BPMP operating safely during the past year under the most challenging circumstances.

And with that, I will hand over to Jack to take you through our guidance for 2021.

Jack Collins -- Chief Financial Officer Designate

Thank you, Craig, and hello, everyone. As Craig mentioned, we start 2021 from a position of financial strength. We are one of the few remaining traditional sponsored MLPs. An MLP with a strong investment grade-rated sponsor, conservative financial framework, high quality assets, a well underpinned distribution and one that has built cash.

As we have done year in and year out since our IPO, we will continue to manage BPMP in a thoughtful, disciplined manner, while creating value for our unitholders. We will maintain our laser focus on safe operations and delivering stable resilient performance from our high-quality asset base and always doing what we say we're going to do as you have come to expect from us.

Today, we will provide full year 2021 guidance for adjusted EBITDA, cash available for distribution and our distribution coverage ratio, all assuming a distribution level in 2021 consistent with the fourth quarter of 2020. We will also provide guidance for the first quarter of 2021. Starting with full year 2021, adjusted EBITDA and cash available for distribution. We expect these to be broadly consistent with full year 2020 based on the following assumptions. First, for our onshore pipeline portfolio, we expect onshore pipeline gross throughput to be higher in 2021 compared with 2020 primarily due to increased throughput on BP too.

Revenues from the onshore pipelines are expected to be broadly flat with 2020. Cost and expenses are expected to be between $5 million to $10 million higher in 2021, reflecting increased pipeline inspection costs, higher insurance premiums and increase in the omnibus fee paid to our sponsor and increased variable costs associated with higher throughput on BP2.

Turning next to our offshore pipeline portfolio. We expect offshore pipeline gross throughput to be higher in 2021, largely reflecting the full year impacts of an expected ramp-up in production from the Appomattox facility, the start-up of BP's Thunder Horse South Expansion Phase 2 project, and an allowance for weather in the Gulf of Mexico that is aligned with a statistically normal year for the Atlantic hurricane season compared with the above normal hurricane activity experienced in 2020.

Consistent with higher throughput on offshore pipelines, we expect higher distributions from our equity method investments. On a full year portfolio basis, we forecast pipeline gross throughput of around 1.7 million barrels of oil equivalent per day. Overall, we expect our portfolio to remain balanced with our full year 2021 cash available for distribution being generated near equally between our onshore pipeline portfolio and our offshore pipeline portfolio.

Turning next to organic growth opportunities. We previously outlined that we have a portfolio of organic growth capital projects that we are working to progress. These projects are expected to generate stable fee-based revenues and mid-teens returns. We plan on continuing to progress these projects in 2021, including an increase in the capacity of the Mars offshore pipeline, which is being funded by the producers and increasing the capacity of the River Rouge onshore pipeline. We have earmarked up to $15 million in 2021 to progress these and other organic growth opportunities and we expect to start realizing the benefits from these investments in 2022.

In 2021, assuming a distribution level consistent with the fourth quarter of 2020, we expect our distribution coverage ratio to be at the top end of our target range of 1.1 to 1.2 times. This implies that even after funding the organic growth budget I just mentioned, we expect to increase our cash balances by between $10 million and $20 million by the end of 2021 from the $127 million of cash on hand at year-end 2020.

Before handing back to Rip, let me briefly touch on guidance for the first quarter of 2021. We expect pipeline gross throughput to be higher than the fourth quarter of 2020. Increased throughput on offshore pipelines is expected to be supported by the absence of adverse weather impacts, the continued ramp-up of major projects, including the Appomattox facility and lower levels of maintenance by offshore producers.

Throughput on onshore pipelines is expected to be broadly flat with the fourth quarter as seasonally higher diluent volumes on Diamondback from peak winter demand is expected to be offset by lower volumes on BP2 due to higher levels of apportionment on the Enbridge mainline, and anticipated lower throughput on River Rouge due to our continued conservative view of refined products demand until COVID-related restrictions are fully relaxed.

Adjusted EBITDA is forecast to be lower than the fourth quarter primarily due to the financial impact of the estimated lower throughput on BP2 and River Rouge. Cash available for distribution is also forecasted to be lower than the fourth quarter primarily due to the absence of cash recognized in the fourth quarter associated with River Rouge's volume above its minimum volume commitment. We expect distribution coverage ratio in the first quarter of 2021 to be comfortably within our target range of 1.1 to 1.2 times, consistent with our conservative financial framework.

In closing, I look forward to working with Rip, our Board of Directors and the highly experienced and talented team at BPMP to deliver on the numerous value-adding opportunities we see ahead and keeping you all updated on our progress.

Back to you, Rip.

Robert P. Zinsmeister -- Chief Executive Officer

Thanks, Jack. So to briefly sum up, BPMP has a strong foundation, a high-quality asset portfolio that has and continues to perform well, a management team focused on maintaining safe operation and the performance of our asset, a balance sheet and liquidity position that is strong and a distribution coverage ratio, that is meant we have consistently built cash over three years, collectively underpinning the financial strength of the partnership, a sponsor who has been supportive and flexible.

This year, we plan to continue maintaining our focus on safe operations, delivering financial stability as we navigate the ongoing challenges that COVID presents, doing what we say we are going to do and being transparent around the operational and financial risks and opportunities we see throughout the year and delivering value for our unitholders.

And last but not least, this is Craig's final set of quarterly results after more than three years as CFO of BPMP. The strength and resilience of BPMP today are reflections of his credibility and command of the finance. He has brought transparency and consistency to the investment community since our IPO. Craig, thank you for everything you have done for BPMP. We are all going to miss you. As usual, our investor relations team are available to speak with you further outside of this results call. Thank you everyone for joining our call today.

And now, over to you, for your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Joe Martoglio from J.P. Morgan. Please go ahead.

Joseph Martoglio -- J.P. Morgan -- Analyst

Hi, thank you for taking my question. First, I wanted to ask on building the cash on the balance sheet and just could you discuss why you feel that's the right thing to do now and also are you kind of exploring other opportunities to return cash to unitholders either through like a special one-time distribution or buybacks or distribution growth going forward?

Robert P. Zinsmeister -- Chief Executive Officer

Good morning, Joe. Thanks for the question. Probably fair to say 2020 was quite a challenging year if you compare say, April to December and where we're sitting right now. As we look at the plan, in many respects, it feels like a plan, it's balanced. So what are we seeing in the market right now? We're seeing the return of apportionment, decent debts, so comfortable that Whiting is going to want all the heavy we can get, balanced against the ability to get it. Offshore feels like, we're yet to see the full Biden agenda and much has been delayed there.

Basically, COVID cost the industry, we'll say, six to nine months in terms of project delays and the Norfleet[Phonetic] has presented some challenges to Shell. So together with my Board, we're in a bit of a wait and see attitude with respect to how the clutches let out and we slip back into gear, OK. So our distribution looks fine and I think we have the opportunity to deploy cash, but I think we're going to wait a quarter or two before we make any real decisions.

Joseph Martoglio -- J.P. Morgan -- Analyst

Okay, that makes sense, yeah, and that's helpful. And then just kind of a follow-up on that. Do you still think the 3.5 times debt-to-EBITDA is the right long-term target? I know you kind of -- I guess, once you see how some of the things you mentioned worked out, do you kind of expect to go back up toward that range?

Robert P. Zinsmeister -- Chief Executive Officer

I'm going to pass on that in this -- at this point in time, we've had no conversation with the Board about changing our financial frame, OK. It seems like the rest of the industry is working bloody hard to try and get back to some kind of normalcy. We've weathered a very difficult storm and did so -- other than worrying about storage volumes in April, our financial frame bore us very well through a very tough period.

Joseph Martoglio -- J.P. Morgan -- Analyst

Okay, that makes sense. Thanks for taking my questions.

Operator

[Operator Instructions] The next question is from Derek Walker from Bank of America. Please go ahead.

Derek Walker -- Bank of America -- Analyst

Good morning, everyone. Craig, I think I mentioned this last time but congrats again on your retirement, it was a pleasure working with you and wish you well.

Craig W. Coburn -- Chief Financial Officer

Thank you.

Derek Walker -- Bank of America -- Analyst

Maybe I can start with a -- maybe a little bit more of a higher-level question just around some of the announcements from the Bureau of Ocean Energy Management, maybe two pieces there. One just, how are you guys thinking about the offshore lease schedule, I think they've put a pause on the March event, just how you think about that for the rest of the year? That's one. And then, I think they also just came out with an announcement around wave energy projects in the Gulf of Mexico. And I just wanted to see if that is something that you guys have been looking at, if that's actually an area of opportunity to kind of step into the kind of renewable side of things? Thanks.

Robert P. Zinsmeister -- Chief Executive Officer

Good morning, Derek. Welcome. With respect to the industry's -- I'm going to speak both in terms of how we see it and what I've read and I'm sure you've read. The industry basically has a sufficient inventory of leasehold positions and certainly with development options that will last years and years and years, right. So in the past, I've done a deep dive on our GOM portfolio and existing producers and there is a decade of work one could undertake in these fields, OK. I am mindful of -- we haven't seen the full Biden agenda. So far we understand with their plans are with respect to leases, so there may be other elements that we need to be mindful about, TBD, to be determined. As qualifying income MLP, I really can't comment on wave energy. So I'm going to pass on that one. I don't think that one fits inside the MLP.

Craig W. Coburn -- Chief Financial Officer

I guess, Derek, I can comment a little bit on this having been CFO of alternative energy in a past life. So we did look at wave energy, probably 10 years ago. You never know because technology moves on but it's something that we took a pass on way back down, but going forward things change.

Derek Walker -- Bank of America -- Analyst

Understood. Thanks for that. And maybe just a quick one on just the cost increases. I think you guys mentioned $5 million to $10 million, there's a few different components there. Do you have a sense of the breakdown of each of those contributions?

Craig W. Coburn -- Chief Financial Officer

Yeah, so I'll take that one. The biggest piece of the cost we've got is on line inspection costs on one of our main lines on the onshore. It's part of our normal cycle every four years, that's the biggest chunk of the increase. And then, we did have some -- and I think everybody is going to be faced with this a bit, we did have some insurance cost increases come through just as people looked generally at the segment and those costs have gone up.

And then, Jack did mention for 2021, we took a pause on the omnibus increase for 2020. I think that was a very good thing for BP to do but that kicks in in 2021 for us. So -- and those three things combined are the cost increases. We'll be watching the in-line inspection costs very carefully to see where they come in and I think we've seen some good signals, they may come in lower than we've anticipated here for this guidance, but it's early days on that.

Derek Walker -- Bank of America -- Analyst

Yeah, thanks for that, Craig. And then, maybe just one clarification. I believe in the guidance you talked about just having more normal weather assumptions, but do you have quantified sort of the -- what that assumption is and are you also factoring any planned producer timelines in the -- and to try one out?

Robert P. Zinsmeister -- Chief Executive Officer

Jack, do you want to take that question?

Jack Collins -- Chief Financial Officer Designate

Sure. Yeah, first -- Hi, Derek. We don't really comment on other producers' kind of plans with regards to turnarounds and impacts. So I think on the weather impacts, overall, we're expecting a statistically normal year, which is kind of -- if you just look back at the five to 10-year average number of storms. So would be lesser impact clearly in 2021 relative to 2020.

Derek Walker -- Bank of America -- Analyst

Got it. Thank you. I'll hop back...

Robert P. Zinsmeister -- Chief Executive Officer

Thank you.

Derek Walker -- Bank of America -- Analyst

In the queue. Thanks, Rip. Thanks, Craig.

Craig W. Coburn -- Chief Financial Officer

Derek, one...

Derek Walker -- Bank of America -- Analyst

Yeah.

Craig W. Coburn -- Chief Financial Officer

One follow-up on that for you. I mean, I did -- we did say in our third quarter that the hurricane impact was probably around $4 million to $5 million worth of cash tea[Phonetic]. We saw similar ranges of that through the fourth quarter, so it was a pretty big impact on BPMP's financial performance in 2020, those hurricanes. So fingers crossed for everybody, we have a better year this year.

Derek Walker -- Bank of America -- Analyst

Appreciate the clarification there. That's it for me. Thank you, guys.

Operator

There are no more questions...

Robert P. Zinsmeister -- Chief Executive Officer

Thank you, Derek.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Geoff Carr -- Vice President, Investor Relations

Robert P. Zinsmeister -- Chief Executive Officer

Craig W. Coburn -- Chief Financial Officer

Jack Collins -- Chief Financial Officer Designate

Joseph Martoglio -- J.P. Morgan -- Analyst

Derek Walker -- Bank of America -- Analyst

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