Shell Midstream Partners LP (SHLX) Q1 2021 Earnings Call Transcript

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Shell Midstream Partners LP (SHLX)
Q1 2021 Earnings Call
Apr 30, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, my name is Peter and I will be your conference operator for today. At this time, I would like to welcome everyone to today's webcast for Shell Midstream Partners. [Operator Instructions]

I would now like to welcome Jamie Parker, Investor Relations Officer. You may begin.

Jamie Parker -- Investor Relations

Thank you. Welcome to today's webcast for Shell Midstream Partners. With me today; Steve Ledbetter, CEO; Shawn Carsten, CFO; and Sean Guillory, VP of Commercial and Business Development. Slide 2 contains our Safe Harbor statement. We'll be making forward-looking statements related to future events and expectations during the presentation and Q&A session.

Actual results may differ materially from such statements and factors that could cause actual results to be different are included here as well as in today's press release and under Risk Factors in our filings with the SEC. Today's call also contains certain non-GAAP financial measures. Please refer to the earnings press release and Appendix 1 of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. We'll take questions at the end of the presentation.

With that, I'll turn the call over to Steve Ledbetter.

Steven C. Ledbetter -- Director, Chief Executive Officer and President

Thanks, Jamie. Good morning, everyone and welcome to our first quarter earnings webcast. This is my first call as CEO of Shell Midstream Partners and I look forward to talking to you about our business and the discussion following the prepared remarks. Today, I will discuss our asset performance during the quarter, as well as a few medium-term opportunities we are focused on to ensure Shell Midstream Partners are set for continued sustainability in an evolving market.

Starting offshore. Across our footprint, we continue to see increased volumes as our throughput grew some 11% during the quarter. These increases were a continuation of activity, returning to normal levels as the 2020 hurricane season ended and producers came back online from planned turnarounds that were completed in the fourth quarter. Also, during the quarter, we benefited from increased volumes on our Auger system, as we were able to leverage our connectivity and provide evacuation routes for producers, as a competitor pipeline -- completed repairs from hurricane damage.

And as we've said many times, we remain positive on the outlook for the Gulf of Mexico, and are encouraged by the level of activity in and around our corridors as we work to grow our funnel of projects to meet customer needs. And one project to highlight is the Mars expansion, which we expect will increase our capacity in the corridor by approximately 65,000 barrels per day to help our customers reach the markets that matter most. And currently, we're working to finalize the definitive agreements, and have begun procuring the materials needed for the modifications on the system. This investment will be funded by SPLC and the Mars JV will benefit from the expected throughput, all with no capital from the partnership. We expect the expansion to be fully operational in advance of incremental volumes from Powernap and Vito arriving into the system in 2022.

Moving to the onshore, we continue to experience lower than normal throughput on our refined product systems, resulting from impacts of the ongoing pandemic. But we remain optimistic and expect that when demand improves across the US, our system throughput will recover as well. Looking a bit further out on our growth opportunities, we maintain our core belief that assets in the ground connecting the key supply areas to refineries, trading hubs and export demand centers are extremely valuable. In addition, we [Technical Issues]

Jamie Parker -- Investor Relations

Peter, are you there?

Operator

I am here sir.

Jamie Parker -- Investor Relations

Sorry, guys. Peter, are you there?

Operator

I can hear you sir. How can I help you? And it looks like the line of Jamie has disconnected. Ladies and gentlemen, this is the operator. We have experienced a technical problem. The conference will resume momentarily. Please continue to stand by. Thank you for your patience. Again, this is the operator. We have experienced a technical problem. The conference will resume momentarily. Please continue to stand by. Thank you for your patience.

Jamie Parker -- Investor Relations

Start from onshore.

Operator

And you are now connected, Mr. Jamie Parker.

Jamie Parker -- Investor Relations

Yes, we apologize for the technical difficulty there. Steve will resume a few sentences back and we'll move forward.

Steven C. Ledbetter -- Director, Chief Executive Officer and President

I apologize, everyone, the technical difficulties. But I'm going to start on the onshore comments and we'll go from there, sorry if a couple of these might be repeat. So as we move to the onshore, we continue to experience lower than normal throughput on our refined products systems, resulting from the impacts of the ongoing pandemic. But we remain optimistic and expect that when demand improves across the US, our system throughput will recover as well. And then looking a bit further out on our growth opportunities, we maintain our core belief that assets is the ground connecting the key supply areas to refineries, trading hubs and export demand centers are extremely valuable.

In addition, we believe that one of our competitive advantages is our diversified footprint that provides connectivity to key market centers in the Gulf Coast, the Northeast and the Midwest. And it's from this position of strength that we see opportunities as crude flow patterns in North America change due to various factors, such as certain pipeline cancellations. With these changing dynamics, we continue to pursue development opportunities that provide efficient and competitive optionality for our customers.

A few examples to highlight, I'm pleased to announce that our Zydeco team was able to contract 75,000 barrels per day of capacity, starting May 1st for a 12-month term. With this new contract, we will have roughly two-thirds of capacity contracted through at least April 2022. As for the remaining space that is able to be contracted, we are optimistic that we will be able to contract those volumes in the near future. Based on the interest shown by potential shippers. Longer-term, we're exploring the possible expansion of our Lockport facility, providing further staging and segregation and crude blending services for the local Midwest market or to allow shippers to move south on the previously announced Capline reversal, providing access to the St. James market.

Additionally, we're pursuing multiple opportunities to connect St. James to Clovelly which will provide access to the coveted VLCC export capabilities at LOOP. And we continue to leverage our existing assets like Zydeco are pursuing joint tariffs to extend our reach further to supply centers to create connectivity to multiple destinations that customers' desire. And these are just a few areas I'm excited about that our team continues to work. And we continue to create value for Shell Midstream, both now and into the future.

And with that, I'll now hand the call over to Shawn. Shawn?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Thanks, Steve and good morning, everybody. As I reflect on the quarter, our assets has continued to perform well even in this difficult economic environment. So first, let me cover a few of our key financial metrics for the quarter.

Our total revenue was $139 million, an increase of $9 million from the fourth quarter. Now this increase was primarily related to improved offshore throughput that had been impacted by storms and turnaround activity in the prior quarter, as well as shippers' utilization of deficiency credits. Now, this increase was partially offset by the expiration of certain Zydeco contracts and the closure of the Convent refinery at the end of 2020.

Our operating expenses were $75 million, down about $7 million from the prior quarter, primarily related to lower project spending at Zydeco and Norco along with an improved cost profile resulting from our cost initiatives.

Our income from equity investments was $102 million, up about $15 million from the prior quarter, mostly due to increased offshore throughput as volumes return to normal levels following storms and turnaround activity. And with all this, adjusted EBITDA attributable to the partnership was $201 million. And after interest expense, maintenance capital and other adjustments, total cash available for distribution was $173 million. Our partnership declared a distribution to $0.46 per LP unit now this resulted in a coverage ratio for the quarter of 1.1 times.

So now, let me turn to the partnership's balance sheet and liquidity. As of March 31st, the partnership had total debt outstanding of $2.7 billion. Now this equates to a debt to EBIT ratio of 3.3 times based on an annualized Q1 adjusted EBITDA. We believe in the strength of our balance sheet as it provides us flexibility to continue to effectively navigate these turbulent times.

So now turning to a few updates. Starting with our portfolio, we've entered into an asset swap with our sponsor to exchange our Anacortes Truck Rack for the remaining 7.5% interest in the Zydeco pipeline. Now all this was an opportunity for the partnership to acquire the remaining interest in Zydeco where we have scale and opportunities for future growth as we continue to look for ways to create additional value by creating efficient pathways from Houston to the Southeast Louisiana Corridor all the way to the LOOP facility.

Additionally, on the balance sheet by working with our sponsor, we were able to take advantage of the low interest rate environment and proactively entered into a new 10-year facility. This was a $600 million fixed rate debt facility. This facility was issued at competitive rates and carries few covenants. It was used to retire the existing five-year facility, which was due to expire next year.

And as indicated last quarter, we expect to have several producer turnarounds during the year. Now based on the current schedule, we can reaffirm an expected impact to both net income and cash available for distribution of roughly $10 million, primarily in the second quarter. And -- we continue to actively work to reduce our operating cost run rate across all of our consolidated assets and our operated equity method investments. Currently, we continue to be on pace to exit 2021 with roughly $30 million to $40 million of savings to net income. Finally, as I close, we're pleased with the performance of our overall diversified asset base as we continue to navigate the current macro environment.

So with all that, we'll now take your questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Shneur Gershuni with UBS. Your line is open.

Shneur Gershuni -- UBS -- Analyst

Hi, good morning, everyone. I was just wondering if we can start off by focusing kind of on your last comments there, specifically about the asset swap for Zydeco and the credit facility renewal and so forth. Can you give us a sense of what the annualized run rate positive impact would be for SHLX? And I think correctly, it was $10 million. I just want to make sure I understood everything correctly.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Yeah, Shneur, this is Shawn. Thanks for the question. So look but generally, the transaction does not alter our expected earnings or cash flow profile. So they're roughly equivalent, but due to the structure of the transaction, we expect the partnership to have a one-time increase to CAFD of roughly $10 million for the second quarter.

Shneur Gershuni -- UBS -- Analyst

Okay, got it. And then secondly, I was wondering if we can talk about the waiver -- or lack of extension, I guess at this point right now. I was wondering if you can give us a little color here. Are there any discussions internally about a waiver extension? Or do you kind of see a recovery at this point right now materializing and therefore there may not need one. You know, are there -- is more benefits to come on the cost optimization side? I was wondering if you can give us a holistic view or discussion on how we should think about will there be a waiver extension? Or are there other factors that you're thinking of you know, as I said, you know, cost reductions, the growth, recovery or even a drop down? Usually, this is the time of year you tend to do drop down? So just wondered you give us some color on that.

Steven C. Ledbetter -- Director, Chief Executive Officer and President

Hey, Shneur, this is Steve Ledbetter. Thanks for the question. A lot packed in there, so let me try to unpack that a little bit by bit. We all know that the waiver does roll off in Q1. As far as you know how we look at the business, I wanted to kind of start just quickly by reflecting on how proud I am of our business and the resiliency of our assets and our team as we've performed well over the past many quarters facing unprecedented situation with a pandemic, as well as the record number of hurricanes in 2020.

Now, what we're focused on, you heard in the prepared remarks, the kind of run rate associated with our cost competitiveness measures and we feel good about us being able to deliver that. And we're still focused on those things. And we expect kind of a $30 million to $40 million run rate exiting 2021. And that we're also looking to take advantage of our footprint and some selective growth options both in the offshore and the onshore. In the offshore, we have our expansion coming along well in Mars and producers continue to deploy capital in the Gulf of Mexico, so we feel good.

In addition, you know, we feel good about our position and assets in the ground are always going to win the day. And we are taking advantage of those use case scenarios and what that looks like we'll have to wait and see as the market unfolds, but we're pursuing many of those options. And then are just general position in the market from a diversified level of assets and our position in the offshore and onshore you know we feel really good about that. And as Shawn mentioned, you know our balance sheet is in good shape and we have plenty of room on there to help us through whatever may come in turbulent times. And so I'm pretty confident in the underlying aspects of the business. And that's what we're focused on.

Shneur Gershuni -- UBS -- Analyst

Okay, so to sum up, basically wait to see on the waiver for next quarter.

Steven C. Ledbetter -- Director, Chief Executive Officer and President

Yes, we're not providing any guidance on any waivers moving forward.

Shneur Gershuni -- UBS -- Analyst

Okay, perfect. That was all for me. Thank you very much. Appreciate it, and have a great weekend.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Thanks, Shneur.

Operator

And your next question comes from the line of Theresa Chen with Barclays. Your line is open.

Theresa Chen -- Barclays -- Analyst

Good morning, thank you for taking my questions. First, on Zydeco related to the recontracting that was done as of -- or soon to be May 1st, two-thirds of the pipe we contracted through April. Can -- or April 2022. Can you give us a sense of what kind of rate you were able to get in that?

Steven C. Ledbetter -- Director, Chief Executive Officer and President

Hey, Theresa. I'm going to -- and I haven't done this only -- formally introduced the new Vice President of Commercial who's Sean Guillory who replaced me as I took this role. So he's going to answer any questions you may have on some of the commercial aspects. Sean?

Sean Guillory -- Vice President of Commercial

Yeah, thanks, Steve and thanks, Theresa for the question. What I will say about Zydeco is, it continues to be a core strategic system to our portfolio. It meets the demand of shippers to move crude to a refinery demand centers and to the desired export locations. It's more specific around and you heard what Steve talked about earlier around the new T&D of 75,000 barrels a day that will begin on the first of May, the rates that you asked specifically about are developed in the same range as the rates that came out in November. But we continue with the asset itself, we'll continue to optimize the asset and continue to work through additional T&Ds and combine those with joint tariffs that we feel will be competitive and bring value to the partnership.

Theresa Chen -- Barclays -- Analyst

Great, that is very helpful. And turning to your refined products assets. Curious to hear how you're seeing demand trend across your footprint there. We, you know, whether it be the EIA data or you know anecdotal commentary from other industry participants, it seems that things are moving in the right direction. So I'd love to hear a little bit more color on the quarter-over-quarter decline in Colonial and Bengal, specifically, was this really just a, you know, result of demand not being there to have other volatility, perhaps related to, you know, refineries in the Gulf Coast being down to this -- due to the storms and that's a lack of supply.

Or was it -- on the Colonial, was it you know, due to the RP not being economic as there was a local bid for products within three and we did see a lot of cargoes arrived and had one from Europe and nor medium-term for that, you know, are you concerned that there will be a higher than normal amount of shipments of products from Europe this summer and beyond, given that many areas there are you know currently facing lockdowns and longer-term, just lack of profitability locally, and the, you know, European refiners will be looking for outlets for their products?

Steven C. Ledbetter -- Director, Chief Executive Officer and President

Theresa, hey, this is Steve, that was a lot in that question. I appreciate it. And I think you've thought through a lot of that very well. Yeah, we continue to see this being a demand picture issue, right. And as demand -- the picture changes both locally and abroad as you mentioned, the RPs does impact movement into Colonial with the New York Harbor and import possibilities as different parts of the globe shut down for the pandemic and there's no place for that product. So those are natural competitive elements.

I think more on a macro level in our geography, the United States is still balancing out the remaining refineries and the production associated with that. So it's both of an impact, largely demand-oriented. And also there's probably a bit of latent effect of some of the storm elements impacted early on. So yeah, I think you're reading it right. We believe that the demand settles out. These are still very strategic lines that our volume will come back as demand picks up and they will have a place longer-term from a strategic asset in the United States.

Theresa Chen -- Barclays -- Analyst

Got it. And lastly, just as it relates to the winter storms, I imagine this does not significantly impact your offshore footprint, if at all. But on the onshore side, whether any impact one way or another and specifically, were you able to sell back any power to the grid from any of your systems?

Steven C. Ledbetter -- Director, Chief Executive Officer and President

No. So yeah, you're correct. There weren't a significant impact offshore, there was some impact onshore where we had to take down due to loss of power. Obviously, the grid issue in Texas and ERCOT was -- is very well known. Well that obviously impacted some of our assets onshore, we didn't have any material damage. But there was a few days where we had to slow down, given bottlenecks in either receipt or actual energy to run the assets. But not a material impact to our business.

Theresa Chen -- Barclays -- Analyst

Thank you.

Operator

And your next question comes from the line of Derek Walker with Bank of America. Your line is open.

Derek Walker -- Bank of America -- Analyst

Good morning, everyone and congrats, Steve on your first conference call here. Wanted to touch base on the opportunities around Lockport. You mentioned there's a potential for expansion there. Now, what size opportunities are you referring to? And I guess when do you expect those to kind of firm up and can you also talk about some of the connectivity thing from St. James to some of the VLCC. Just want to see how you expect that to unfold and when do you expect those opportunities to firm up? Thanks.

Sean Guillory -- Vice President of Commercial

Hey, Derek, this is Sean Guillory, I'll go ahead and take that one. Thanks for your question. It's a good one. Because as we see crude flows continue to be dynamic. And you see some of the recent news with canceled projects and the reversal of Capline, we feel that we have a competitive advantage with our diversified footprint of assets. And as Steve mentioned earlier, having assets in ground has its own competitive advantages also. And as they provide connectivity to the key market centers, especially in the Midwest.

With that in mind, we're exploring the possibility of an expansion of our Lockport systems that will provide shippers, tanking and storage, not just for the Midwest market, but also for the potential staging of movement to the St. James and export markets themselves. What I would tell you about since you asked about timing, it's still early days. But when we have something a bit more definitive, we'll come back to the market at that time.

Derek Walker -- Bank of America -- Analyst

Got it. Thanks, Sean. And maybe I could just follow-up on just Auger. I think volumes were down to Q-on-Q. But the revenue per barrel was up pretty meaningfully. Just can you talk to some of the dynamics there and how you expect that you know play out over the course the year? Thanks.

Sean Guillory -- Vice President of Commercial

Yeah, thanks, Derek. Thanks for the follow-up question. Auger continues to be a very strategic asset for us in the Gulf of Mexico. As we continue to see development and investment in the Gulf of Mexico, we still expect volumes to make its way and flow through there, Auger has, presents the great connectivity from the offshore onto the onshore -- into the onshore markets, to then move into the refining centers or even make its way to onshore pipelines that connected to export facilities. So I would expect that going forward, we'll continue to see similar type of volumes that we've seen in the past for the Auger system.

Derek Walker -- Bank of America -- Analyst

So just to be clear, is the $1.69 is that a fair run rate on the revenue per barrel? Because it was like $1.14 last quarter, so I'm trying to get a feel for what's the appropriate run rate?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Derek, this is Shawn, just I'll suggest, maybe just call Jamie and he'll help you work through the model on that one.

Derek Walker -- Bank of America -- Analyst

Okay, perfect. Thank you.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Thanks.

Derek Walker -- Bank of America -- Analyst

That's it for me.

Operator

And your next question comes from the line of Joe Martoglio with J.P. Morgan. Your line is open.

Joe Martoglio -- J.P. Morgan -- Analyst

Hi, thanks for taking my question. I wanted to ask kind of a clarification question on the asset swap. And you mentioned that was kind of, I think, accretive CAFD by $10 million in the second quarter. Is that just I guess a payment from the sponsor or what does that? And then and since it's, I guess, I think you also mentioned kind of the long-term cash flow and earnings profile it doesn't change. And then also with asset swap, can you kind of just walk through the reasoning there and why it was now the right time to kind of do that swap?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Right. Thanks, Joe, this is Shawn. Look so a couple of things. One for your question, again, it's kind of on a long-term basis, you know, it's kind of like-for-like about roughly the same cash flows. So it doesn't really change the model. The transaction itself was the swap at plus $10 million was what the MLP gained. And so, again, it's a one-time cash flow increase, just to do for that balancing payment between the two assets when we swapped the Rack for Zydeco.

To your bigger question. Yeah, look, this is just an opportunity for us to take a non-core asset, which is this truck rack, which is, you know, near -- not near any of our assets in the northwest, and swap it for the remaining 7.5% of Zydeco. And this is a core asset to our Heartland. And in MLP RE owns most of it. So now we own a 100% of it.

You know, look Zydeco is one of our core corridors, we think that by increasing this ownership is going to provide upside as our teams continue to develop that Houston corridor all the way to the water via LOOP. So that's kind of the big picture on the -- why we did it. And we just took the opportunity because the sponsor made the offer so.

Joe Martoglio -- J.P. Morgan -- Analyst

Okay, that makes sense. And then also I just wanted to ask on the Mars expansion. Is it kind of fair to assume the incremental barrels that'll come with that or are at a similar rate to, you know, what the barrel is being moved far now or kind of -- what are negotiations for that might be?

Sean Guillory -- Vice President of Commercial

This is Sean Guillory. Thanks for the question on the Mars expansion. What I would say with the Mars expansion is, maybe I'll give you a little bit of color on the progression of the project itself is, we just continue to progress as planned, though, we procured a long lead items and as Steven mentioned earlier, we expect those definitive agreements to be completed by the end of the second quarter.

I mean in terms of the way that the rate will be similar to what has been on Mars before. But what I would also say is, just a reminder, this is no cap -- this has no capital outlay to the partnership itself. And that also is provides further evidence for us around the continued investment and strategic nature of the Gulf of Mexico for offshore producers and offshore producers continually wanting Shell Midstream Partners by an export solution for forward shots.

Joe Martoglio -- J.P. Morgan -- Analyst

Okay, thank you. That's all for me.

Operator

[Operator Instructions] And your next question comes from the line of Michael Blum with Wells Fargo. Your line is open.

Michael Blum -- Wells Fargo -- Analyst

Thank you. Good morning, everyone. I just wanted to go back and just make sure I understand on Zydeco just all the puts and takes here. So I guess the first, if you could just explain the decrease quarter-over-quarter in revenue per barrel. Is that really just a function of the higher throughputs you saw? And then as it relates to when the new contract comes -- kicks in. Just wanted to clarify that you're saying that will effectively not impact this revenue per barrel rate. I mean, holding everything else equal. Thanks.

Sean Guillory -- Vice President of Commercial

Hey, Michael this is Sean Guillory. You know, what I would say about Zydeco is, I'll reiterate what I said before is, with the new T&D, we'll fill up about two-thirds of the volume on the asset itself. And with the rates, the rates will be similar to the rates that -- that you saw come off at the end of November, and with the volume situation with Zydeco will continue to progress and optimize the asset and fill the asset with volume through future T&D contracts. And we anticipate continuing with joint tariffs to fill the volume on the asset also.

Michael Blum -- Wells Fargo -- Analyst

Okay, great. And then just in terms of the change in the revenue per barrel quarter-over-quarter, can you just talk to that?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Michael, this is Shawn. Just may we have a chat with Jamie and he can help you walk through your models on that.

Michael Blum -- Wells Fargo -- Analyst

Great. Thank you.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Thanks.

Operator

Thank you. We have no further questions. I will now turn the call back over to Jamie Parker.

Jamie Parker -- Investor Relations

Thanks, Peter. We apologize for the technical delay today and thank you for your patience as we worked through this and for your continued interest in Shell Midstream Partners. If you have any additional follow-up questions on today's presentation, please feel free to call me directly. My information can be found in the presentation materials and on our website shellmidstreampartners.com. Thank you.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Jamie Parker -- Investor Relations

Steven C. Ledbetter -- Director, Chief Executive Officer and President

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Sean Guillory -- Vice President of Commercial

Shneur Gershuni -- UBS -- Analyst

Theresa Chen -- Barclays -- Analyst

Derek Walker -- Bank of America -- Analyst

Joe Martoglio -- J.P. Morgan -- Analyst

Michael Blum -- Wells Fargo -- Analyst

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