Genesis Energy (GEL) Q4 2021 Earnings Call Transcript

Genesis Energy (GEL 0.65%)
Q4 2021 Earnings Call
Feb 17, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Genesis Energy fourth quarter 2021 earnings call and webcast. [Operator instructions] As a reminder, this conference is being recorded.  It's now my pleasure to turn the call over to Dwayne Morley, vice president, investor relations. Please go ahead, Dwayne.

Dwayne Morley -- Senior Vice President and Controller

Thank you. Good morning. Welcome to the 2021 fourth quarter conference call for Genesis Energy. Genesis 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 segment include 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 conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor provisions 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 L.P. 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

Thanks, Dwayne, and good morning. As we stated in our earnings release this morning, 2021 was expected to be a year of transition as our businesses recovered from the impacts of the COVID-19 pandemic and the unprecedented hurricane season of 2020. We did, in fact, see our businesses begin to recover and our financial performance for the fourth quarter and all of 2021 was in line with our expectations. As we look forward to 2022, we're very excited about the continuing recovery and the future trajectory of our businesses.

Our two largest businesses meaningfully improved as we move through 2021 and that momentum is expected to accelerate as we move through '22. Because of the increasingly tight conditions in the world soda ash market, we expect our weighted average price this year to be at or above what we realized in 2019 or before any of the effects of the pandemic. This recovery in pricing is at least one year ahead of schedule, based upon our previous expectations and taking into account the caps and collars we have in place for a significant percentage of our sales contracts. We're also excited because we expect that 2022 will be a year of dramatically increasing volumes out of the deepwater Gulf of Mexico as Kings Quay and Argos begin ramping production.

Together, these two projects represent some $12 billion to $15 billion of capital invested over the last several years in the deepwater Gulf of Mexico, one of the lowest, if not the lowest carbon footprint crude oil basins in the world. As we look forward and not backwards, we're rolling out initial guidance for 2022 of total segment margin expected in the $620 million to $640 million range and adjusted EBITDA within the $565 million to $585 million range. Both of these ranges reflect zero payments from our legacy CO2 pipeline business, which totaled $70 million in 2021, only a 64% interest in CHOPS for the entire year and no add-backs or pro forma adjustments as explicitly allowed under our senior secured credit facility to determine covenant compliance and/or pricing thereunder. This segment margin and adjusted EBITDA expectations for 2022 are both higher by more than 15% year over year, adjusting 2021 for the $70 million we received from Denbury and even though we owned all of CHOPS for some 10 and a half months last year.

I'll now focus on our individual business segments. During the quarter, our offshore pipeline transportation business performed in line with our expectations. Notably, we made the strategic decision to sell a 36% equity interest in our CHOPS pipeline for gross proceeds of approximately $418 million. We thought this transaction helped us accomplish three main objectives.

The first of which was taking any perceived covenant risk off the table. We used the proceeds to pay down 100% of our term loan, with the remainder being used to reduce the amounts outstanding under our senior secured revolving credit facility, which contributed to us having a leverage ratio under five times, as calculated pursuant to our senior secured credit facility for the first time in almost two and a half years. Second, the transaction provided us with ample liquidity to fund the remaining capital associated with our Granger expansion project with more cost-efficient dollars, which we estimate will save us over $10 million annually in the coming years versus drawing additional funds under the Alkali asset level preferred. Finally, the transaction based on an 8/8ths valuation of $1.16 billion and an estimated earnings range for CHOPS of around 110 to -- around 110 in 2023 implied a multiple of roughly 11 times forward earnings for CHOPS.

We believe this is a tangible, recent and real valuation marker that should help the investment community whether you're on the buy side or the sell side, "reprice" our entire offshore segment in your sum of the products valuation models. If one were to apply this multiple to our 2022 segment margin guidance for offshore of some $345 million, which, by the way, will be even higher in 2023, one could derive a stand-alone valuation for just this part of our business as some $3.8 billion. As we said in the release, our two large upstream developments are now just months away from achieving first production. Both the Argos and Kings Quay floating production systems have been anchored in place in the Gulf of Mexico, and both are working to achieve first production soon.

We anticipate them ramping production to their design capacities of some 80,000 barrels a day and 140,000 barrels a day, respectively, as we move through '22 and into 2023. Activity levels in and around our assets continue to be exciting in terms of future opportunities to provide midstream services to the upstream community in the Gulf of Mexico as they continue to spend billions and billions and billions of dollars in one of the most prolific, profitable and lowest carbon footprint crude oil basins in the world. Now, turning to our sodium minerals and sulfur services segment. As we mentioned in our earnings release, the demand for soda ash continues to improve through a combination of a recovery in global economic activity along with the various tailwinds associated with the energy transition and specifically its application for both solar panels and lithium batteries.

This rapidly increasing demand coupled with, as a practical matter, a net decrease in supply provided a favorable environment for price redetermination for our volumes to be sold in 2022. As such, we anticipate our weighted average realized price in 2022, even after taking into account the caps and collars under a significant percentage of our multiyear sales agreements, to actually exceed the weighted average price we received in 2019. This favorable environment also afforded Genesis and ANSAC the opportunity to continue to optimize contract terms to not only take advantage of current prices, but also to further reduce our exposure to any significant fluctuations in energy prices and bulk shipping rates. As of today, approximately 50% of our domestic sales contracts and 75% of our international sales contracts via ANSAC contain provisions that allow us to pass along certain increases in energy costs directly to our customers.

As contract terms allow, we will look to include similar provisions in all of our remaining contracts. In the case of ANSAC, a fuel surcharge for increases in bunker fuel related to its cost of maritime transportation has now been implemented for 100% of its contracts. The range in the guidance we provided today reflects these improvements in our soda ash contracts, which are ultimately designed to limit our exposure to volatility in natural gas prices and marine transportation costs. While domestic markets continue to recovery -- to recover, we see demand in Latin America recovered to at or above pre-pandemic levels.

Demand in Asia outside of China remains slightly below pre-pandemic levels, but including China, total demand across Asia is now above pre-pandemic levels, even as the market deals with the temporary reduction in economic activity associated with the Chinese New Year and hosting of the Olympic Games. Any effects of this temporary lagging demand in Asia should be more than offset with supply rationalizations, including a closure of a 1.3 million ton per year synthetic soda ash facility in China just in December of last year, as well as the increasing cost structure of synthetic producers in China and across the globe as a result of higher energy input costs, stricter environmental regulations and increasing container shipping rates for export volumes. Chinese exports remain below the historical averages as Chinese exporters continue to supply the domestic market, which ultimately reduces the amount of soda ash available to markets in Asia outside of China. While on the topic of Chinese soda ash, I want to touch briefly on the assessment of physical spot prices, FOB China, which were reported by a certain financial news service to which many folks subscribe.

No matter what the reported FOB Chinese prices, it is important to note that neither Genesis nor ANSAC sell any volumes directly into the spot market for which its prices are all relevant primarily because of the lengthy supply chain from Green River, Wyoming to Asian markets, as well as the fact that each distinct geographic market has its own supply and demand dynamics, driven in large part by the existence or nonexistence of local synthetic production and the transportation costs from other exporting reasons. I'm not 100% sure, in fact, that this reported price has ever been mentioned in any of our pricing discussions with any of our customers. If we were to try and sell significant volumes into China's domestic market, we would face tariffs and substantial intra-China transportation expenses. This reported price or maybe even just its movements is reasonably relevant for the supply demand balance inside China.

It is also indicative and reflective of the increased costs faced by Chinese synthetic producers. To compete internationally, those synthetic producers would also face transportation expense to get to an export point and container freight expense on top of this price to get to other markets. It's just not that simple to translate or calculate its absolute relevance to our or any other U.S. producers' financial results this quarter or even this year given the structure of our contracts.

Having said that, it clearly went up through most of '21, then dipped slightly in anticipation of the events I mentioned earlier and now has reversed and is increasing again. Directionally, that's a good thing. Given its quantum shift to the upside over the last year or so, one could surmise that there is ample room for prices FOB Green River, Wyoming to increase in coming years, beyond the increases we will already realize in 2022. As we look forward, we do not see anything on the horizon to significantly alter this higher price environment.

Demand growth with flat supply will always drive prices higher. As we have discussed, the costs associated with synthetic producers have dramatically increased, providing a constructive backdrop for soda ash prices. If the current supply and demand dynamic and other macroeconomic conditions hold, all else being equal and even after taking into account the caps and collars in our multiyear contracts, our weighted average realized price in '23 could easily move higher by more than $10 per ton across all of the 3.5 million tons we sell just from our Westvaco production facilities. Based on current and our expectation of future market conditions, we have made the decision to restart our original Granger production facility and it's roughly 550,000 tons of annual production in the first quarter of 2023.

The Granger expansion representing an incremental 750,000 tons or so of annual production remains on schedule and, importantly, on budget for first production in the third quarter of 2023. This incremental production, both from the restart and the expansion of the Granger facility, will further increase our produced tons to primarily serve rapidly growing demand in our export markets. When fully expanded and online in the third quarter of 2023, the Granger expansion will be the first global expansion of soda ash in over four years, and we would expect to ramp to its design capacity of 1.3 million tons per year over the subsequent nine- to 12-month period. The Granger design is based upon our patented ELDM-alkaline brine-based technology, which we have been operating for more than 25 years.

Interestingly, export prices, FOB Wyoming, are expected to be some $20 per ton higher in 2022 and maybe more in '23 and beyond than those that we were receiving when we originally sanctioned the Granger expansion in the third quarter of 2019. At that time, we indicated the expansion was around a six or seven times deal given a $350 million investment. If export prices and market conditions hold, then the Granger expansion can turn out to be more like a four or five times deal, once fully ramped and online. The Granger expansion appears very, very attractive, and the remaining capital to be spent represents the lion's share of the several hundred millions of growth capital we expect to spend this year.

Also of note, during the fourth quarter, we saw Sisecam, a multinational glass and chemicals manufacturer out of Europe, acquired a controlling stake in one of our neighbors in Green River, Wyoming. The consideration paid implied a transaction value of roughly $530 per ton of existing production capacity. This recent data point if applied to our fully expanded 4.8 million tons of production capacity would imply a valuation of over $2.5 billion for our soda ash business by itself. Sisecam's published investment presentation laid out their investment rationale and highlighted some key topics.

The first was the global demand for soda ash was going to continue to grow by approximately 3% per annum at least through 2028 due to the resiliency of end markets and the tailwinds associated with various green initiatives. I will note that this growth forecast was also recently confirmed by IHS on a call hosted by sell-side research just within the last couple of weeks. Starting from a base worldwide market, including China of around 60 million tons, that's dramatic in terms of the incremental supply required to meet that demand. Furthermore, Sisecam mentioned ESG considerations was leading a structural shift to natural soda ash resources due to its lower emissions and more environmentally benign footprint when compared to the synthetic production alternative.

They concluded by suggesting -- they believe there is significant upside potential for future soda ash prices, primarily driven by this increase in demand, rising cost of synthetic production and ESG considerations. It is reasonable to say this transaction further reinforces and validates our original investment thesis in natural soda ash being structurally advantaged on the global market versus the synthetic alternative through a combination of lower production costs, lower energy input costs and a lower carbon footprint. We are confident this thesis will continue to provide the framework for continuing improving results from this segment over the years ahead. Our legacy refinery services business continues to perform in line with our expectations.

We continue to see steady demand from our copper mining customers as copper prices remain at or near an all-time high, given its important role in the energy transition, along with being one of the most environmentally friendly methods to handle sulfur entrained in the crude oil consumed at a refinery, we continue to see utility and other manufacturing customers use our sulfur removal by-product to help them reduce harmful emissions in their respective operations. This business has been remarkably resilient and a steady financial contributor over the 15-plus years that we've owned it. And over the decades before we became involved, we would argue this legacy refinery or sulfur service business is deserving of a low double-digit multiple given that history of consistent financial performance across multiple economic cycles. If one were to agree with that premise and then one were to add to the recent market valuation of our soda ash operations mentioned earlier, one can come up with evaluation of our total sodium minerals and sulfur services segment of north of $3 billion.

Again, for those interested in actually analyzing and deriving a sum of the parts valuation of our businesses. Moving on. Overall market conditions in our marine transportation segment continue to improve as we have seen utilization rates on our equipment steadily increase as refinery utilization continues to recover and like heavy differentials return to historical norms. More importantly, the industry has been disciplined with little to no equipment being built over the last several years.

This, when combined with the continued retirement of older equipment, has contributed to a net reduction in overall supply of marine tonnage across all classes of Jones Act vessels. We believe this macro theme should provide the backdrop for increasing utilization and day rates as we move through 2022 and beyond. As a result, we expect the segment margin for marine, as we have historically presented it with a significant portion of maintenance capital being expense as a practical matter in our presentation of segment margin, to be approximately $50 million at the midpoint of our expectation for 2022. In our onshore facilities and transportation segment, we expect increasing volume activity in and around our assets in the Baton Rouge corridor as we move through the year.

We would also expect volumes and utilization of our terminals and pipelines in Texas City and South Louisiana. To improve this year as we see volume ramp from the offshore and make their way to our increasingly integrated onshore facilities for further distribution to refining centers or other infrastructure along the Gulf Coast. As a result, we would expect the midpoint of segment margin for our onshore facilities and transportation segment to total approximately $25 million in 2022, which will start out relatively small on a quarterly basis, but accelerate through the year. In summary, as we get 2021 and 2020 in our rearview mirror, we remain very excited with the expected improving financial results of our market-leading businesses and continue to have an increasingly clear line of sight of $700 million to $800 million of annual adjusted EBITDA in coming years, even after the sale of a minority interest in CHOPS.

This outlook highlights the resiliency of our businesses and demonstrates the tremendous operating leverage we have to overall improving market conditions. The management team and board of directors remain steadfast in our commitment to build long-term value for all of our stakeholders, and we believe the decisions we are making reflect this commitment and our confidence in Genesis moving forward. I would like to once again recognize our entire workforce, and especially our miners, mariners and offshore personnel for their efforts and unwavering commitment to safe and responsible operations. I am proud to be associated with each and every one of you.

With that, I'll turn it back to the moderator for any questions.

Questions & Answers:

Operator

[Operator instructions] Our first question today is coming from Michael Blum from Wells Fargo. Your line is now live.

Michael Blum -- Wells Fargo Securities -- Analyst

Thanks. Good morning, everyone. I'm wondering if you have a 2022 growth and maintenance capital number and any kind of large projects or large buckets you could highlight there?

Grant Sims -- Chief Executive Officer

Generally speaking, I think that our expectation for maintenance capital in 2022 is in the $50 million, $60 million range, which is consistent with our historical run rate.

Michael Blum -- Wells Fargo Securities -- Analyst

OK. Any...

Grant Sims -- Chief Executive Officer

Excuse me, Michael, with the lion's share of being in -- associated with our soda ash operations as it usually is.

Michael Blum -- Wells Fargo Securities -- Analyst

OK. Any estimate on growth capital?

Grant Sims -- Chief Executive Officer

As I said earlier, in it, there's a couple of hundred million. The lion's share again is the -- remaining capital associated with the Granger expansion, which is a very, very attractive opportunity for us.

Michael Blum -- Wells Fargo Securities -- Analyst

OK. Great. And then, I apologize if I missed this, but do you have an expectation or forecast for soda ash volumes in 2022?

Grant Sims -- Chief Executive Officer

Well, we're basically -- we're sold out, which is -- includes all of the 3.5 million to 3.6 million tons that we make at the Westvaco facility. Not all of that is obviously sold as bulk soda ash sales, but also included is the soda ash that we use for our AR specialty products, as well as the soda ash that we use to make synthetic caustic soda, which in turn, we use as a lion's share of that in our refinery services business. But we will be sold out just as we were actually sold out in 2021. That's the way the market works, low-cost suppliers, the low-cost producers, such that as natural producers and certainly us are base-loaded into the world's market.

Michael Blum -- Wells Fargo Securities -- Analyst

OK. Great. And then, my last question, just on Argos and Kings Quay. Just want to confirm what I heard in your comments that you -- it sounds like you think you'll hit kind of run rate volumes by 2023.

Is that right?

Grant Sims -- Chief Executive Officer

Correct. We would anticipate a fairly dramatic rapid ramp and it's in the public domain, but because it's reported on BOEM websites and other places, but there are 14 wells that are predrilled and completed at Argos. And I think the number is either eight or nine that are drilled and completed at Kings Quay. So it's a matter of picking them up, if you will, which is more or less a two-week to four-week process per well as opposed to drilling and which could be four to six months.

So we would anticipate a fairly rapid rate ramp of production once they're commissioned to start hooking up the wells.

Michael Blum -- Wells Fargo Securities -- Analyst

OK, great. Thank you so much.

Grant Sims -- Chief Executive Officer

OK. Thanks, Michael.

Operator

Our next question today is coming from Kyle May from Capital One Securities. Your line is now live.

Kyle May -- Capital One Securities -- Analyst

Hi. Good morning, everyone, grant, maybe following along with the discussion on the Gulf of Mexico. In the past, I believe you all have talked about maybe some longer-dated potential developments, maybe in the '24, '25 timeframe. Can you give us any updates on these projects? And then also maybe any other thoughts about Gulf of Mexico production over the next few years?

Grant Sims -- Chief Executive Officer

We're still in active discussions and not at a position yet to divulge some of the things that we talked about in the '24, '25 type time frame. We continue to see very active levels of activity in and around our assets with folks actually, I think Transocean just announced a kind of extension of some of their drilling activities and in fact returning some of their vessels into the deepwater Gulf of Mexico for further activity. So we see that those lumpy, if you will, new fields to come on in 2024, obviously, in 2025, we believe we'll have ramping volumes that we've talked about out of Argos and Kings Quay ramping in the latter part of '22 and into '23. And then, what we don't normally kind of highlight, but there's a tremendous amount of what I would call infill drilling or subsea tiebacks in and around a lot of our existing production hubs to which we're the exclusive provider of downstream transportation.

So we believe that that level of development activity, either additional infill drilling and/or subsea satellite tiebacks to the existing hubs that that more or less addresses any of the decline or makes up for any of the natural decline, one would expect out of the reservoirs. And so, that these new incremental facilities are basically their net increase in terms of total throughput. So very good things happening in the Gulf.

Kyle May -- Capital One Securities -- Analyst

Got it. That's helpful. I appreciate that. And another question, maybe following on the previous capex comments.

I know you all have talked about the -- I believe you described it as cost effective use of capital from Granger. Can you give us any more details around the -- I guess, the split of spending between 2022 and 2023?

Grant Sims -- Chief Executive Officer

I don't have that at my fingertips at this point. We will probably -- we'll file the K later and probably have a little bit more detail. But basically, the large portion of the remaining capital to be spent on the Granger expansion is going to hit in '22. And so, we can get that for you at a later date, but I don't have it right in front of me at this point.

Kyle May -- Capital One Securities -- Analyst

OK. Understood. Appreciate the time this morning.

Grant Sims -- Chief Executive Officer

OK. Thank you.

Operator

[Operator instructions] Our next question is coming from Karl Blunden from Goldman Sachs. Your line is now live.

Karl Blunden -- Goldman Sachs -- Analyst

Hi. Good morning. Thanks for the time. Just good to see the pricing upside that you guided to on the soda ash business.

I was just curious if you could provide a bit more color on two things: one, when you think about the contract resets, have -- at this point in time in your guidance, does that reflect most of your contracts having reset higher? Or is there a good proportion that still need a reset to current supply demand dynamics? And maybe an extension of that is, if current conditions hold into 2023, do you get material upside from caps and collars rolling off? Or are those going to continue to impede the upside going forward?

Grant Sims -- Chief Executive Officer

That's a good question. Basically, all of our contracts, the vast majority of our contracts have been determined for 2022. So we do have a portion of our international sales contracts, which are through ANSAC, which are determined on a quarterly basis. But basically, all the domestic contracts and Latin America contracts and a portion of the Asian contracts are known and fixed for '22.

So the volatility, if you will, which we would -- again, given the current market conditions, the only exposure, if you will, to soda ash prices, which we believe should be up rather than down is in the Asian markets or that portion of it to be redetermined on a quarterly basis as we go through 2022. As I made reference in the prepared remarks, as we enter into 2023, a, we'll have a certain portion. I don't have that right off the top of my head, both domestic term contracts, as well as some of the ANSAC longer-dated contracts, will be available to reset, if you will, at upper markets and then even taking into account the caps and collars that we have on the remaining domestic contracts and ANSAC contracts, which extend beyond '23. If we would anticipate getting again under current market conditions, we would anticipate pricing at the high end, if not being limited by the caps that we have on those agreements, that we could easily see our weighted average price in 2023 go up in excess of $10 a ton, taking into account the overall dynamics of resets, as well as the restrictions associated with having caps and collars in a significant portion of our contract portfolio.

Karl Blunden -- Goldman Sachs -- Analyst

Helpful framing. With regard to the guidance that you gave and now specifically on offshore, there have been, as you alluded to in your remarks, some years where there's been more impact from weather disruptions or hurricane activity. What do you bake in there for 2022? Just trying to figure out if -- what kind of allowance we can put in our model.

Grant Sims -- Chief Executive Officer

Yeah. Historic -- yeah, good question. Historically, as we've prepared our own internal budgets, we have baked in, in the third quarter, that the third quarter is basically an 84-day quarter, instead of 92 -- excuse me, 85-day instead of 92. So we've taken a full seven days' worth of aggregate anticipated shut-ins.

And that's how historically we have done it. We've been in -- even 2020 and 2021 have been kind of unprecedented in terms of -- or way to the right tale of a normal distribution of hurricane activity and its effect on the offshore. So in the guidance that we gave, we acted as if -- or we put together a budget and a plan that anticipated that the third quarter was actually an 82-day quarter instead of a 92-day quarter. So we've baked into that annual guidance a full 10 days in the aggregate of, in essence, a zero revenue out of the Gulf of Mexico as opposed to our historical norm of only baking in seven days.

So we've tried to be a little bit more cautious on the approach based upon the last two years' activity levels. But as I said, historically, seven seem to be the right number.

Karl Blunden -- Goldman Sachs -- Analyst

Thanks very much. Appreciate that.

Grant Sims -- Chief Executive Officer

OK.

Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Grant Sims -- Chief Executive Officer

OK. Well, we appreciate everybody's time as usual, and we look forward to visiting with you either as a group or individually over the next 90 days. So thanks, everyone, for participating.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Dwayne Morley -- Senior Vice President and Controller

Grant Sims -- Chief Executive Officer

Michael Blum -- Wells Fargo Securities -- Analyst

Kyle May -- Capital One Securities -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

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