Genesis Energy (GEL) Q3 2021 Earnings Call Transcript

Genesis Energy (GEL 0.26%)
Q3 2021 Earnings Call
Nov 04, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, welcome to the Genesis Energy LP 3Q 2021 earnings conference call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Dwayne Morley, Vice President, investor relations. Thank you.

You may begin.

Dwayne Morley -- Senior Vice President and Controller

Good morning. Welcome to the 2021 third quarter conference call for Genesis Energy. Genesis Energy has four business segments: the offshore pipeline transportation segment is engaged in providing the critical infrastructure to move oil produced from the long-lived, world-class reservoirs from the deepwater Gulf of Mexico to onshore refining centers; the sodium minerals and sulfur services business includes trona and trona-based exploring, mining, processing, producing, marketing, and selling activities, as well as the processing of sour gas streams to remove sulfur at refining operations; the onshore facilities and transportation segment is engaged in the transportation, handling, blending, storage, and supply of energy products, including crude oil and refined products; the marine transportation segment is engaged in the maritime transportation of primarily refined petroleum products. Genesis' operations are primarily located in Wyoming, the Gulf Coast states and the Gulf of Mexico.

During this call, management may be making forward-looking statements with the meanings of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those safe harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission. We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located.

The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures. At this time, I would like to introduce Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Bob Deere, chief financial officer; and Ryan Sims, senior vice president, finance and corporate development.

Grant Sims -- Chief Executive Officer

Good morning. As we mentioned in this morning's earnings release, the third quarter was generally in line with our expectations. But more importantly, we continue to make steady progress toward our goal of building long-term value for all of our stakeholders. As we look forward, we remain on track to see increasing volumes in the Gulf of Mexico in the first half of 2022 and improving market conditions in our soda ash business driven by the ongoing global economic recovery and the tailwinds associated with the energy transition.

We're also now less than two years away from first soda ash on the belt from our expanded Granger facility, which is poised to benefit from these ongoing market trends. The next 24 to 36 months will confirm the longevity and resiliency of our world-class leading infrastructure in the Gulf of Mexico, the competitive strengths of our soda ash business and ultimately the earnings power of our market-leading businesses. Our offshore pipeline transportation segment performed in line with our expectations despite a steady level of maintenance by our producer customers and longer-than-anticipated downtime associated with Hurricane Ida. We did not experience any damage to our assets nor did any of our producer customers, but the path of the storm greatly impacted the number of onshore facilities critical to the receipt and downstream movement of offshore oil and gas production.

As a result, we did experience a longer-than-anticipated downtime during the quarter, primarily on our Poseidon pipeline, which was a direct result of the lack of power in certain third-party facilities and gas processing limitations onshore. Once our CHOPS pipeline resumes service, we were able to divert certain barrels that would otherwise flow on our Poseidon pipeline to our CHOPS pipeline, which allowed certain producer customers to restart their production earlier than they anticipated. This once again highlights the connectivity and the multi delivery point optionality of our offshore systems that we provide our producer customers in the Central Gulf of Mexico. Because of equity accounting, our third quarter results for Poseidon reflect this financial performance for June, July and August.

Accordingly, this next quarter, we will experience some financial impact from Poseidon being down for the first 11 or 12 days of September as a result of Hurricane Ida, as the distribution we will receive in the fourth quarter covers commercial activities for September, October and November. As such, we would reasonably expect the fourth quarter to come in at the lower end of our previous guidance range of $80 million per quarter, or even slightly less. The Gulf of Mexico continues to demonstrate its resiliency despite any combination of planned or unplanned downtime associated with producer maintenance or hurricanes. The activity levels remain strong as the vast resources, low carbon footprint and highly economic drilling activities allow producers to step out further and further to explore around existing builds and exploit their tremendous reserves under their existing and valid leases.

Our lateral strategy is proving very valuable as producers pursue the short-cycle, high-return business of tie-in and subsea development wells to existing production hubs. Each deepwater production facility as a practical engineering and economic matter has only one oil export pipeline. As a result, to the extent we're directly or indirectly connected to any such hub, all of the production from these incremental tieback developments is destined practically to be forever dedicated for transportation service through our assets. We continue to advance our discussions to provide midstream services using our existing footprint, along with the potential to deploy new capital at contracted low single-digit build multiples with three new stand-alone deepwater developments in various stages of sanctioning with anticipated first oil in late 2024 to 2025 timeframe.

These developments represent up to approximately 200,000 barrels per day of incremental production in the Central Gulf of Mexico. And we would anticipate the producers of each of these projects will make their respective final investment decisions no later than the end of this year or early next. We would also note in late August, the Department of Energy announced it would take steps to restart the federal oil and gas leasing program in the Gulf of Mexico in response to a federal judge's order on June 15 that blocks the current administration's pause in oil and gas leasing on federal lands and waters. At the end of September, BOEM or the Bureau of Ocean Energy Management announced that it would hold an oil and gas lease sale No.

257 for the Gulf of Mexico in roughly two weeks or on or November 17. And this will once again allow the producer community to evaluate, lease and explore any currently unleased blocks in the Gulf of Mexico. These incremental subsea tieback and new production hub opportunities, combined with the continued leasing of new blocks and subsequent discovery of new prospects in fields, should provide Genesis with decades and decades of additional visibility with pipeline and opportunities for moving the future crude oil production from the Central Gulf of Mexico to refining centers onshore. Now, turning to our soda ash business.

During the third quarter, we saw a continued improvement in overall market conditions for soda ash. We remain very encouraged with the overall supply and demand balance dynamics and we expect the market to do nothing but grind tighter over the coming years as we continue to recover from the pandemic and the demand tailwinds from the various green initiatives and energy transition continue to build. As we sit here today, spot export prices, FOB at Chinese port have continued to rise throughout the year as Chinese exporters have chosen to supply the Chinese domestic market over exporting soda ash, as well as responded to government mandates to reduce production for environmental reasons and as a result of power shortage. By publicly available accounts, Chinese exports of soda ash are down 45% through August of this year compared to the eight months ending August of 2020.

This is really quite remarkable given the total demand in 2021 is so much higher than the trough experienced during the height of the pandemic and the depths of economic activity a year ago. As we have discussed before, we generally do not place tons into the spot market given the long lead time and logistical challenges. Additionally, whether domestically or through ANSAC, we sometimes have to respond to what seems like totally irrational behavior on both price and volume. Nonetheless, we believe the current market backdrop positions us very well as we gain in earnest both pricing and volume discussions for 2022.

These increases in price have been driven for the most part by a significant recovery in global demand, as well as rising energy input costs in container and bulk shipping rates. All producers of soda ash are experiencing similar cost inflation from their energy inputs, especially synthetic producers whose chemical process is two to three times more energy-intensive than natural producers. One could reasonably infer that synthetic producers are experiencing much greater cost impact from the rise in their energy input costs and thus needs soda ash prices to increase correspondingly to preserve their margins. The market price will need to rise further for more high cost and make tons to enter the market to supply the marginal tons of soda ash demand worldwide.

Regarding shipping costs, again, all producers face rising costs. Domestic customers are responsible for all delivery costs, although we often act as agent for them on arranging the delivery options. ANSAC, which typically sells on a delivered bulk basis, has used its scale, as well as a laddered approach to contracting marine vessels which has made managing these rising costs substantially easier than those exporters who have less scale and who have chosen to go with a loan. Chinese exporters ship via containers have faced both higher cost and availability issues.

And remember, just like taxes, ultimately, the consumer will pay for all of the rise in costs associated with these escalating shipping rates. The effect of rising energy prices on us is quite manageable. We would note that only about a third of our thermal energy demand for both our steam and process heating requirements is exposed to fluctuations in the spot price of natural gas. We strive to maintain a balanced portfolio of financial hedges for our natural gas volumes, as well as pass-through mechanisms in an effort to reduce our exposure to any significant fluctuation in our energy input costs.

In fact, ANSAC has just implemented a per ton surcharge in its contracts as applicable to pass on the cost impact of increases in natural gas prices above $5 per MMBtu. Most of our overall contracted tonnage, including domestic and export sales is already protected by similar provisions. In addition, in the case of ANSAC, a fuel surcharge for increases in bunker fuel related to its cost of marine transportation was implemented earlier this year. As we look ahead, we continue to believe the energy transition will provide the backdrop for meaningful demand growth of soda ash over and above the projected baseline GDP correlated growth of 2% to 3% per year.

Soda ash remains poised to play an increasingly important role in the energy transition and we believe this trend only continues as the world's insatiable appetite for solar panels and new generation lithium-ion phosphate batteries increases over time. Genesis remains very well positioned to participate in this market growth. And our global low-cost position, including from an expanded Granger facility will allow us not only to participate, but also profit from the energy transition moving forward. The Granger expansion remains on schedule to be the first global expansion of natural soda ash in over four years with the first soda ash scheduled to be on the belt in the third quarter of 2023, if not a little sooner, with an expected ramp to its design capacity of 1.3 million tons per year over the subsequent nine to 12 months.

As we mentioned, we locked in substantially all of our construction costs prior to this inflationary cycle that has really just accelerated here in the last six months. As a result, we are comfortable the Granger expansion will come in very close to the $350 million estimate envisioned back in September of 2019 when the project was originally sanctioned. We've also preserved the optionality to restart the original Granger facility, and its roughly 500,000 to 600,000 tons of production -- annual production as early as the first quarter of 2023 or perhaps a little sooner, if market conditions persist and specifically, if export pricing continues to improve through 2022. We believe the opportunity set within our soda ash business is an enviable position by any major and will ultimately allow Genesis to solidify its position as a leading and low-cost baseload supplier of soda ash to the world.

Our onshore facilities and transportation segment performed in line with our internal expectations. Looking forward, we continue to see -- expect to see an increase in volumes on our onshore facilities in Texas City and Raceland as incremental volumes from our offshore pipelines come online and need to be routed and further transported via pipeline to the major refining centers along the Gulf Coast. Our Marine Transportation segment performed in line with our expectations, except for the effects of Hurricane Ida. We did experience some relatively minor physical damage to 14 of our inland barges and three of our push boats, all of which broke away from usual and customary fleeting arrangements while riding out the storm.

All of these costs were covered by insurance except for a single $100,000 deductible reflected in the third quarter. As a result, however, these assets were unable to work for most of September and even more recently. As of today, six barges are still in the yard being repaired, but all push boats have returned to service. That being said, demand for our inland fleet of black oil heater barges seem to have bottomed, and in fact, we have seen a dramatic uptick in the last several weeks to the point recent utilization is in the high 90% rate and spot pricing is beginning to move up.

We believe this recovery is being driven by increased refinery utilization and importantly, a widening of the light heavy differentials, leading crude slates to return to more historical norms. We have also seen steady activity levels in our blue water fleet as the demand to move refined products from the Gulf Coast to the East Coast remain strong due to certain refinery closures on the East Coast. Additionally, a not insignificant amount of blue water capacity concentrated along the East Coast has been practically out of the market due to a financial restructuring bankruptcy situation. The petroleum marine sector is seeing an accelerating retirement of older tonnage and virtually zero new build activity across all classes and marine assets, which most certainly will benefit a relatively young fleet such as ours.

As the demand for Jones Act tonnage returns to pre-pandemic levels in the face of this absolutely shrinking supply, we believe we are likely to experience accelerating improvement in the financial results from our marine operations in 2022 and beyond. I'll switch gears now and quickly touch on our view for the remainder of 2021. As we look forward, Genesis remains well positioned to benefit from free cash flow over the coming years. And thus, we do not foresee a scenario where we do not comfortably live within our senior secured bank covenants moving forward.

As a result of the unplanned downtime in our offshore and marine segments associated with Hurricane Ida, we expect to come in around $620 million of adjusted consolidated EBITDA for all of 2021, which includes approximately $30 million to $35 million of pro forma adjustments and which is slightly below our previously announced guidance for the full year. Regardless of 2021, the future remains bright and importantly visible. We remain steadfast in our commitment and are working hard to build long-term value for all of our stakeholders through a combination of leverage reduction and meaningful growth in our free cash flow and adjusted consolidated EBITDA. The decisions we are making today reflect this commitment and our confidence in our core market-leading businesses moving forward.

I would like to once again recognize our entire workforce, and especially our miners, mariners and offshore personnel who live and work in close quarters during this time of social distancing. I'm extremely proud to say that we have safely operated our assets under our own health and safety protocols and procedures with no impact to our business partners or customers. It's an honor to have the opportunity to work alongside such quality folks. With that, I'll turn it back to the moderator for any questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Shneur Gershuni with UBS. Please proceed with your question.

Shneur Gershuni -- UBS -- Analyst

Hi, good morning. Grant, I was wondering if we can start off with some of the tailwinds potentially for next year. So, you sort of talked about the soda ash pricing and so forth. Also, there's PPI inflators out there as well, too.

Can you remind us how many contracts are up for renewal next year on soda ash? On my math, I think it's about 60%. And then, secondly, if you have any PPI inflators with respect to your offshore pipelines?

Grant Sims -- Chief Executive Officer

Well, we're just now kicking off in earnest, as we've said, the pricing discussions for next year. And generally speaking, a portion of our domestic sales will come due every three or four years, which will get -- which will be what we would call a jump ball in terms of pricing in today's kind of price metrics on a prospective basis. The rest of our domestic sales are subject to longer-term contracts, which are -- have annual price redetermination and subject generally speaking to caps and collars. So, those won't be moving up.

And the vast majority of our export sales are under less than one year -- one year or less contracts. And so, those will be available for discussions. But again, a repricing in today's market. But again, we have to be mindful of costs associated with everything in terms of shipping costs and other things.

But the FOB pricing back to the Green River facility should benefit substantially in '22 as we get through this pricing deal. Relative to PPI players, I mean, there are two major systems and all of our laterals are under proprietary systems. So, they're not typical. They're not FERC regulated, and therefore, don't have the typical escalation.

Although newer generation contracts do. But oftentimes, that's capitalized negotiation at 2.5% to 3.5% per year. So, we would expect some bump associated with that. Typically, those occur on an annual basis, either on the January time frame or July time frame on the cycle of FERC regulation.

So, we'll get some benefit from that. But really, the story out of the Gulf of Mexico is the incremental volumes that we anticipate coming with the developments that we've talked about in the past.

Shneur Gershuni -- UBS -- Analyst

If I can just clarify your comments on soda ash for a second before my second question. So, basically, you said 50% is under contract for less than one year. And then, a quarter of the ANSAC would -- or roughly a quarter of the ANSAC would come up, so that would be about 62.5%, should see a repricing throughout '22?

Grant Sims -- Chief Executive Officer

That's a quarter of domestic prices -- domestic contracts should come up. And then, basically, the majority of the 50% of ANSAC sales are one year -- or a vast majority are one year less from a volumetric point of view. And so, those would all come up for a redetermination. And in some cases, there's a short term that's quarterly.

So.

Shneur Gershuni -- UBS -- Analyst

Perfect. And you talked about the fact that you've got fuel pass-throughs in your cost structure with certain charges and so forth. I was just wondering just on the other side of some of the inflation in terms of costs that we've been seeing. If I recall, but maybe I don't recall correctly, you do have a settled union contract, and so we should only see previously negotiated wage increases at the soda ash business? Or is this whole PPI factor going on potentially change that?

Grant Sims -- Chief Executive Officer

We're in the second year at this point of a five-year collective bargaining agreement with our union employees in the soda ash business. And I believe that has an annual escalator at 3.5% per annum in that contract. So, we have some amount of cost control yet a fair bargain arrangement with the workforce.

Shneur Gershuni -- UBS -- Analyst

All right. Perfect. Thank you very much. Really appreciate the color tonight.

Grant Sims -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.

Theresa Chen -- Barclays -- Analyst

Good morning. Grant, I'd love to follow up on your comments about the Granger facility possibly restarting a little earlier than anticipated. Just curious, if you were to elect a restart in the first quarter 2023, at what point in 2022 would you have to make that decision? How quickly can you do it? And what would be the cost of that?

Grant Sims -- Chief Executive Officer

Ultimately, the cost of starting up is going to be absorbed anyway because the cost of the margin is going to be hiring the personnel and training the personnel to operate the expanded or the old Granger facility as the case may be. So, it's just a matter of -- and again, I don't want to get out too in front, but I mean it's -- we have to hire. We're going to be very safe and trained and go forward. But really at the margin, it's just an acceleration of the cost that we're going to incur anyway.

And that's making the decision to hire and train the personnel to operate the facility. And obviously, we have the ability to move people around from our other facilities. Because on an expanded basis, it is identical to one of our facilities from a technology point of view that we currently operate the LDM facility on our Westvaco facility or our Westvaco footprint. So, I think that we could probably do it certainly within the, I would think, 90-day plus or minus once we pulled the trigger and made that decision to go forward.

Theresa Chen -- Barclays -- Analyst

Got it. And then, in terms of the onshore segment, I was hoping if you could provide some clarity around what the true run rate earnings power is here. And going forward, clearly, quarter over quarter, we saw some volumes decline. Was that a result of hurricane impacts and then nonetheless, segment margin increase quarter over quarter, stripping out the Denbury payment? Just wanted to understand from your perspective, what is the true run rate of this segment?

Grant Sims -- Chief Executive Officer

Well, I think that, Theresa, we would rather -- when we roll out kind of '22 guidance in our fourth quarter call, I think that we'll have a better idea of what the -- or be able to communicate to everyone what the earnings power is. We've had some some gains that we didn't kind of expect in the third quarter. So, I'm not sure that I would necessarily use that as the arithmetic of backing out the Denbury payment to look for the fourth quarter. But I think that we're burning through some of the existing credits that were built up, and we would hope that -- and we're also in the process of amending and extending the agreements with some of our customers onshore, specifically in and around the Baton Rouge area.

So, I think we'll have a much better idea as we get through those discussions. And hopefully, that's by the end of the year, and we'll be able to talk about that on the fourth quarter call.

Theresa Chen -- Barclays -- Analyst

OK. I hear you on the 2022 outlook. I guess, maybe just in terms of third quarter results, do you have an idea how much the gains were that were onetime in nature?

Grant Sims -- Chief Executive Officer

I don't off the top of my head. We can work to get that to you. I mean, order of magnitude, I would say, around $3 million.

Theresa Chen -- Barclays -- Analyst

OK. Thank you.

Operator

Our next question comes from the line of Michael Blum with Wells Fargo. Please proceed with your question.

Michael Blum -- Wells Fargo Securities -- Analyst

Thanks. Good morning, everyone. I just wanted to understand a little bit better in the soda ash business your exposure to spot natural gas prices and just exactly how that works. I guess, are you saying that you leave one-third of your exposure unhedged or that you do hedge? And then of that third that is unhedged at least as of now, are you able to pass all of that cost increase on to your customers? Just wanted to better understand how that piece of it all works.

Thanks.

Grant Sims -- Chief Executive Officer

Yeah. Basically, we directly and indirectly, get some of our thermal requirements from coal under long-term fixed-price contracts. And so, basically, based upon our approach to managing the overall energy input expense, that kind of one-third of it is -- of the total requirements is subject to the fluctuations in the spot price -- or current month price of natural gas. So, within that one-third, that's where we employ other hedging type mechanisms, as well as have the mechanics in place to pass on the -- at the margin, the incremental costs associated with those fluctuations directly to the customers.

Michael Blum -- Wells Fargo Securities -- Analyst

OK. Thank you very much. Appreciate it.

Grant Sims -- Chief Executive Officer

Yeah. Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Grant Sims for closing remarks.

Grant Sims -- Chief Executive Officer

Yeah. Well, thanks, everyone, for participating. I appreciate your time. I know it's busy during the earnings season, but we'll talk in 90 days, if not sooner.

So, thanks again.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Dwayne Morley -- Senior Vice President and Controller

Grant Sims -- Chief Executive Officer

Shneur Gershuni -- UBS -- Analyst

Theresa Chen -- Barclays -- Analyst

Michael Blum -- Wells Fargo Securities -- Analyst

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