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Genesis Energy LP Third Quarter 2020 Results

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   |    Thursday,November 05,2020

Genesis Energy, L.P. announced its third quarter results.

Q3 Highlights:

• Net Loss Attributable to Genesis Energy, L.P. of $29.7 million for the third quarter of 2020, compared to Net Income Attributable to Genesis Energy, L.P. of $17.6 million for the same period in 2019.

• Cash Flows from Operating Activities of $143.5 million for the third quarter of 2020 compared to $136.1 million for the same period in 2019.

• Total Segment Margin in the third quarter of 2020 of $161.9 million.

• Available Cash before Reserves to common unitholders of $70.7 million for the third quarter of 2020, which provided 3.84X coverage for the quarterly distribution of $0.15 per common unit attributable to the third quarter.

• We declared cash distributions on our preferred units of $0.7374 for each preferred unit, which equates to a cash distribution of approximately $18.7 million and is reflected as a reduction to Available Cash before Reserves to common unitholders.

• Adjusted EBITDA of $151.5 million in the third quarter of 2020. Our bank leverage ratio, calculated consistent with our credit agreement, is 5.25X as of September 30, 2020 and is discussed further in this release.

Grant Sims, CEO of Genesis Energy, said, "During the quarter, we paid down total outstanding debt by approximately $70 million, in spite of continuing, but improving, macro challenges from the worldwide Covid-19 pandemic as well as the most disruptive hurricane season since 2005. We are continuing to realize the benefits of the actions we took earlier this year to maintain and improve our financial flexibility. We have clear and defined opportunities to realize improving financial results in future periods as the upstream community gets back to normalized operations in the Gulf of Mexico and the demand for some of our goods and services continues its return to pre-pandemic levels, which will more than likely grow from there.

Hurricanes Marco and Laura combined for basically two weeks of complete temporary cessation of production in the central Gulf of Mexico during the quarter. As we have previously discussed, a platform that our CHOPS pipeline goes up and over incurred some limited structural issues which has required investigation and analyses. As a result, this quarter's financial results include approximately $5 million of non-recurring expense associated with such efforts. We would not expect significant additional capital requirements, and any additional dollars required to be spent will in all likelihood be capitalized.

To date, we have been successful in routing affected volumes through our Poseidon pipeline system and are close to revenue neutral, although the financial impact from Poseidon is on a one month lag due to it being effectively a joint venture. We continue to work with the Bureau of Safety and Environmental Enforcement to determine how best to return to normal, safe and responsible operations on CHOPS as soon as practicable.

While we had Hurricanes Delta and Zeta disrupt producers' operations for some 15 days in the fourth quarter, I would point everyone to the first quarter of this year's financial results. Those results of approximately $85 million represent the normalized quarterly earning capability of our industry critical infrastructure assets in the Gulf of Mexico. Nothing has occurred to lose production or reserves or otherwise detract from that run rate. In fact, quite the contrary as we have seen increased achievable production from Atlantis and Katmai, both as anticipated. Also, we are now just some 12-18 months from initial flows from Argos and Kings Quay, which required minimal capital from us. These two fields alone, when fully ramped up, will likely generate in excess of $25 million a quarter, or over $100 million a year, in incremental segment margin, EBITDA and importantly cash flow to us in the very near future. We remain confident that the Gulf of Mexico will be an important producing province for the U.S. and the world as a whole for decades and decades to come.

Our sodium minerals and sulfur services segment continues to improve from the depths of the second quarter. Recent data points would suggest the soda ash market is definitely re-balancing and improving. Early indications would suggest we will be sold out this quarter from our Westvaco facility and continuing into and throughout 2021. Not only will we realize higher sales, but this is very important given the loss of fixed cost absorption and other inefficiencies of not running at full design capacity as we have over the last 6 months or so.

This near-term improvement in world-wide supply and demand balances for soda ash is currently occurring as the world's economies begin to re-open along with certain supply responses, like our near-term furloughing of Granger and more permanent reductions in capacity in China as well as short-term supply disruptions from flooding in central China. In other words, the market is working through inventories and existing bulges in the soda ash supply chain that developed at the end of last year and became materially worse as a result of the economic reaction to Covid-19. While one would expect to see prices rise under these developing market conditions, we are taking a conservative view and expect price action to be reasonably muted entering 2021 but see prices increasing, perhaps meaningfully, as we move through next year, provided we do not see a second shut down of economic activity in response to the virus.

Longer term, it would be hard to conceive of a brighter future than what we envision for this segment. Whether it is general fiscal stimulus, general infrastructure expenditures or spending targeted at energy conservation and a lengthy process of transitioning from hydrocarbons as the primary transportation fuel, these businesses will materially benefit.

Soda ash, among others, is an essential component used in glass manufacturing and the production of lithium ion/phosphate batteries. Construction of new homes and new automobiles, as well as the retro-fitting of older buildings with new LEED certified glass windows, will continue to drive increasing soda ash demand. The demand from the production of new batteries to facilitate the storage and usage of developing renewable sources of energy is likely to be a major contributor to increasing demand for soda ash. By some accounts, the demand for soda ash to produce new batteries alone may be an additional 6 to 7 million tons a year by 2030. This alone represents more than a 15% increase in demand for soda ash outside of China relative to today. All of these growth drivers are in addition to the intrinsic growth of 2-3% per year we would expect as the developing countries resume their inexorable path of growth towards the per capita consumption levels of the more mature OECD economies. Mining for copper, the primary metal used in everything from phones to automobiles to bridges, is the primary market and use for the sodium and sulfur based product we make at refineries while helping them limit air pollution given our proprietary process is a closed chemical reaction as opposed to their conventional combustion processes to remove sulfur from their finished products.

Our marine segment performed in-line with our expectations for the quarter. We are starting to see the impact of lower refinery runs in the Midwest and Gulf Coast which is putting pressure on both rates and utilization, especially in the inland world. We do expect to see an acceleration in asset retirements beginning this year, into and throughout 2021, which will help balance supply with the current reduced demand for marine tonnage. At the end of the quarter, we successfully re-contracted the American Phoenix with a credit-worthy new customer, albeit at a lower rate. We only re-contracted her, inclusive of our customer's options, through next year, as we believe the market will tighten given expected asset retirements and a recovery of demand as we move through 2021.

Our onshore facilities and transportation segment also performed in-line with our expectations. As previously disclosed, we received approximately $41 million in cash from a subsidiary of Denbury Inc. ("Denbury") which was included in segment margin and Adjusted Consolidated EBITDA in the quarter. As also previously disclosed, we have finalized an agreement with Denbury which allows us to totally exit the CO2 pipeline business, a non-core business for us. During the fourth quarter, we received proceeds of $22.5 million for the Free State CO2 pipeline and we are scheduled to receive an additional $70 million in cash, to be paid over four equal quarterly installments of $17.5 million, starting in the first quarter of 2021 for the remaining amounts owed under the NEJD financing lease. Combined, we will receive approximately $134 million in cash from Denbury which we will use to pay down debt. Additionally, we will recognize all of that $134 million as Adjusted Consolidated EBITDA under our bank revolving credit facility for purposes of complying with the two financial covenants therein.

We expect Adjusted Consolidated EBITDA for the full year to come in a range of $590-610 million, despite the active hurricane season and the continuing macroeconomic challenges presented by Covid-19. We will continue to evaluate additional sales of non-core assets and examine our general, administrative and operating expenses in the context of the economic operating environment.

Accordingly, we find it difficult to see any scenarios where we have the risk of not comfortably complying with all of our financial covenants, and look forward to the improving financial performance of our core businesses as previously described. With this accelerating ability to pay down debt and with relatively de minimus capital requirements to realize the financial benefits of these improving business conditions, we foresee no issues in extending our senior secured credit facility and re-financing our near-term un-secured maturity, which is still some two and a half years out.

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 am extremely proud to say we have safely operated our assets under our own Covid-19 safety procedures and protocols with no impact to our business partners and customers with limited confirmed cases amongst our some 2,000 employees and with no known cases of community transmission at any of our work locations. As always, we intend to be prudent, diligent and intelligent and focus on delivering long-term value for everyone in our capital structure without ever losing our commitment to safe, reliable and responsible operations."

Financial Results

Segment Margin

Segment margin results for the 2020 Quarter and 2019 Quarter were as follows:

Offshore pipeline transportation Segment Margin for the 2020 Quarter decreased $23.7 million, or 29%, from the 2019 Quarter, primarily due to lower overall volumes on our crude oil and natural gas pipeline systems and a relative increase in operating costs. During the 2020 Quarter, our Gulf of Mexico assets experienced unplanned downtime and interruption from Hurricanes Laura and Marco as a result of producers shutting in during the storm and us taking the necessary precautions to remove all personnel from the platform assets that we operate and maintain. While the 2019 Quarter was negatively impacted by Hurricane Barry, the effects during the 2020 Quarter on our assets were more significant and longer lasting. In addition to the majority of our assets being shut in for approximately one to two weeks, our 100% owned CHOPS pipeline, although not damaged, has been out of service since August 26, 2020 due to damage at a junction platform that the CHOPS system goes up and over. We are currently in the process of undergoing the required regulatory inspections and analysis to address any platform issues caused by Hurricane Laura in an effort to safely return our assets to operation as soon as possible, and we incurred approximately $5 million of incremental operating costs in the 2020 Quarter associated with these efforts. During this time, we have successfully diverted all CHOPS barrels to our 64% owned and operated Poseidon oil pipeline system and expect to continue so during the fourth quarter of 2020. We expect volumes on our other offshore pipeline transportation assets to return to normal pre-hurricane levels in the fourth quarter of 2020, with the exception of unexpected downtime we incurred in October due to Hurricanes Delta and Zeta that impacted our operations by some 15 days.

Sodium minerals and sulfur services Segment Margin for the 2020 Quarter decreased $27.7 million, or 50% from the 2019 Quarter, primarily due to lower volumes and pricing in our Alkali Business. During the 2020 Quarter, we experienced lower ANSAC and domestic sales volumes of soda ash relative to the 2019 Quarter due to the continued demand destruction from the worldwide economic shutdowns and uncertainty from the pandemic. This was coupled with lower export pricing due to supply and demand imbalances that existed at the time of our re-contracting phase in December 2019 and January 2020, which is expected to continue, to some extent, for at least the rest of 2020. While the soda ash volumes sold during the 2020 Quarter were relatively flat compared to the second quarter of 2020, we began to see an uptick in demand both domestically and on ANSAC volumes throughout the 2020 Quarter as certain regions of the world are beginning to re-open their economies and we expect continued recovery throughout the rest of 2020 and into 2021. In our refinery services business, we experienced a slight increase in NaHS volumes during the 2020 Quarter due to higher demand from certain of our domestic pulp and paper customers. Additionally, in South America (primarily in Peru), we began to see some recovery in demand from previous customer shut-ins amidst the spread of Covid-19 and we expect these volumes to continue recovering to their normal levels throughout the rest of 2020.

Onshore facilities and transportation Segment Margin for the 2020 Quarter increased by $36.5 million, or 146.9%, from the 2019 Quarter primarily due to the 2020 Quarter including the receipt of a cash payment of approximately $41 million associated with the exercise of a letter of credit we had issued to us as beneficiary from a customer that defaulted under a twenty year term agreement. This increase was partially offset by lower volumes throughout our onshore facilities and transportation asset base, primarily in Louisiana at our Baton Rouge corridor assets and our Raceland rail facility. Due to the decline in crude oil prices and the collapse in the differential of Western Canadian Select (WCS) to the Gulf Coast, which has made crude-by-rail to the Gulf Coast uneconomic, the volumes at our Baton Rouge facilities were below our minimum take-or-pay levels and we were only able to recognize our minimum volume commitment in segment margin during the 2020 Quarter. We expect to only recognize our minimum volume commitment in segment margin through the rest of 2020 and as we enter 2021 due to the lower anticipated volumes and the prepaid transportation credits that our customer has accumulated over the last six months.

Marine transportation Segment Margin for the 2020 Quarter increased $0.9 million, or 6%, from the 2019 Quarter. During the 2020 Quarter, in our offshore barge operation, we benefited from the continual improving rates in the spot and short term markets coupled with increased utilization relative to the 2019 Quarter. This was partially offset by lower utilization and day rates in our inland business. We expect to see continued pressure on our utilization, and to an extent, the spot rates in our inland business as Midwest and Gulf Coast refineries continue to lower their utilization rates to better align with overall demand as a result of Covid-19 and the current operating environment. Additionally, the five year contract associated with our M/T American Phoenix tanker ended on September 30, 2020. We have re-contracted the tanker beginning in the fourth quarter of 2020 at a marginally lower rate and shorter term. We have continued to enter into short term contracts (less than a year) in both the inland and offshore (including the M/T American Phoenix) markets because we believe the day rates currently being offered by the market have yet to fully recover from their cyclical lows.

Other Components of Net Income

In the 2020 Quarter, we recorded Net Loss Attributable to Genesis Energy, L.P. of $29.7 million compared to Net Income Attributable to Genesis Energy, L.P. of $17.6 million in the 2019 Quarter. Net Loss Attributable to Genesis Energy, L.P. in the 2020 Quarter was negatively impacted, relative to the 2019 Quarter, by: (i) lower segment margin of $14.0 million, which is inclusive of approximately $41 million of incremental cash receipts received in the 2020 Quarter and included in the 2020 Quarter's segment margin, associated with principal repayments on our direct financing lease; and (ii) lower non-cash revenues of $11.8 million within our offshore pipeline transportation and onshore facilities and transportation segments as a result of how we recognize revenue in accordance with GAAP on certain contracts. These decreases were partially offset by (i) lower depreciation, depletion and amortization expense of $15.8 million during the 2020 Quarter due to lower depreciation expense on our rail logistics assets as they were impaired during the second quarter of 2020; and (ii) lower interest expense of $3.4 million during the 2020 Quarter.