Adams Resources & Energy, Inc. (AMEX:AE) Q2 2023 Earnings Call Transcript

Adams Resources & Energy, Inc. (AMEX:AE) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Good morning, everyone. Welcome to the Adams Resources & Energy Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this call is being recorded. Now I will turn the call over to John Beisler, Investor Relations at Three Part Advisors. Please go ahead.

John Beisler: Thank you, and good morning, everyone. Welcome to the Adams Resources & Energy second quarter 2023 conference call. Joining me on the call today are Adams Resources & Energy President and CEO, Kevin Roycraft; and the company’s EVP and CFO, Tracy Ohmart. Additionally, Greg Mills, President of GulfMark Asset Holdings; and Wade Harrison, President of Service Transport Company, will be joining us for the Q&A session at the end of the call. This call is also being webcast and can be accessed through the audio link on the Investor Relations page at adamsresources.com. Today’s call, including the Q&A session will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading.

I would also like to remind you that the statements made in today’s discussion that are not historical facts, including statements or expectations or future events or future financial performance, are forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, by their nature, are uncertain and outside of the company’s control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued yesterday for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s filings with the Securities and Exchange Commission.

Adams Resources & Energy assumes no obligation to publicly update or revise any forward-looking statement. Management will refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on and adjusted net income and earnings per share. Reconciliations to the nearest GAAP measures can be found at the end of the earnings release. Finally, the earnings press release issued yesterday is posted on the Investor Relations section of the website, adamsresources.com. A copy of the release has also been included in an 8-K submitted to the SEC. Now I would like to turn the call over to the company’s President and CEO, Kevin Roycraft. Kevin, please go ahead.

Kevin Roycraft: Thank you, John, and good morning, everyone. I will begin today’s call with some color on the quarter before turning it over to Tracy for a deeper dive into the financials. I will then close the prepared remarks by discussing the outlook for Q3 and beyond. Myself, Tracy and our division presidents will be available for your questions at the conclusion of the prepared remarks. I am pleased with the improved sequential quarter-over-quarter performance of the company. Adam saw adjusted cash flow rise from just over $5 million in Q1 to just over $7 million in Q2 of this year, an increase of 50%. Adjusted net income also improved by $800,000 over the same time period. These results were largely driven by the improved performance of our GulfMark Energy division.

These improvements were achieved despite continued market challenges. These challenges included sticky inflation, depressed chemical manufacturing, falling crude oil prices, oil production declines in our primary basins and even a weather event that first GulfMark Energy’s largest refining customer to declare force majeure where they had to shut down their production. I’m extremely proud of the entire team for the resilience to fight through these challenges and to deliver these positive results. As previously mentioned, GulfMark Energy’s performance was a significant driver of our improved Q2 results. Although, we saw lower volume in Q2, GulfMark is successfully executing its plan to improve margins on our buy/sell contracts and reduce expenses.

For the quarter, GulfMark legacy volumes were 92,152 barrels per day. As I touched on earlier, GulfMark’s largest refinery market was forced to shut down operations in June due to a lightning strike that caused a fire at the plant, completely destroying one of their primary product storage units. The marketing team at GulfMark showed amazing agility by finding alternate markets to place June’s already purchased barrels. The ability to place these barrels on very short notice and to do so at comparable margin really shows the resilience of the team and the business overall. GulfMark’s Red River area in Oklahoma and North Texas showed volume growth as the new customer came on board mid-quarter, giving a boost to results. In this area, the volume grew from 26,05 barrels per day in Q1 to 26,139 barrels per day in Q2.

The VEX Pipeline and Storage assets saw volumes drop quarter-over-quarter, largely due to the force majeure at the previously mentioned refinery, which was affected by product markets feeding the supply. Q1 barrels per day on VEX were 10,088 barrels per day versus 8,560 barrels per day for Q2. On a positive note, the drop in volume was partially offset by the asset gaining new third-party customer revenue for storage and bar building activity — barge loading activity in the quarter. Two additional new customers were secured for this business. with one of the new customers having signed a one-year commitment to utilize the asset storage and barge loading facilities. As mentioned on our previous earnings call, the connection with Max Midstream is complete.

However, commercial in-service has been delayed due to the connecting pipeline needing additional repairs before it becomes operational. In the third full quarter under the Adams umbrella, the acquisition of Phoenix Oil and Firebird Bulk Carriers produced just over $1 million in cash flow for the quarter. Phoenix saw margin pressures as commodity prices fell in the quarter. However, the business saw improve — results improve in June as the commodity prices began to rise. Firebird hauling volumes remained steady at around 25,000 barrels hauled per day. We are pleased with the progress regarding the integration of these acquisitions as we saw a significant increase in intercompany business through low sharing and customer crossover opportunities.

In the quarter, the company closed on the — on land in Dayton, Texas will be the future home of Phoenix oil. We expect to break ground on the rail spur later this year. Turning to Service Transport Company. Our over-the-road chemical hauling division, STC’s results were largely flat quarter-over-quarter, delivering approximately $2.4 million in cash flow for the company. A continued soft chemical manufacturing environment is leading to excess hauling capacity in the market, pressing shippers to bid out business and efforts to drive down rates. The positive side of this bidding activity is that it affords STC the opportunity to add new customers to its recently expanded footprint, setting up this division for a strong rebound when the market strengthened.

I will touch on Q3 and future outlook later in the call, why I am confident the company is well positioned for strong performance when the market conditions improve. I will now turn the call over to Tracy for a deeper dive into the financials.

Tracy Ohmart: Thank you, Kevin, and good morning, everyone. Total revenue for the second quarter of 2023 was $624.8 million, compared to $992.1 million in the prior year quarter. The decline was primarily driven by lower revenues in our crude oil marketing segment, which are directly tied to the price of oil and were partially offset by revenues related to our acquisitions of Firebird Bulk Carriers and Phoenix Oil last August. Now let’s look at the quarter by individual segments. Second quarter revenues for our marketing segment were $585.3 million, compared to $962.5 million in the prior year quarter. The decrease is primarily due to a 34% decrease in the price of crude oil over the past year and a 3% decrease in daily volume.

Operating income for the marketing segment was $3.4 million, compared to $5.1 million in the second quarter of 2022. The decrease is due to an inventory valuation loss of $1 million in this year’s second quarter versus a loss of $1.5 million in the second quarter of last year, as well as higher operating expenses, reflecting cost pressures across the business. Our transportation segment recorded $24.5 million of revenue in the second quarter, compared to $29.5 million in the prior year quarter. Operating income was $1.1 million versus $2.9 million for the second quarter of 2022. The decrease is primarily due to lower fixed cost coverage brought about by reduced transportation rates and higher depreciation and maintenance expenses. Our logistics and repurposing segment will consist of Firebird and Phoenix that was acquired in August of 2022, added $14.8 million in revenue for the second quarter of 2023.

The segment reported a loss of $133,000 for the quarter, which includes the allocation of corporate overhead. General and administrative expenses decreased by $2.5 million from the second quarter of 20 — $1.7 million this quarter. The decrease is related to the reversal of an accrual related to the contingent purchase price consideration from the acquisition of Firebird and Phoenix. Without this accrual, the G&A expenses were mostly in line with last year’s expenses. Interest expense increased to $800,000 this year versus $100,000 in last year’s second quarter, primarily due to the term loan we put in place to finance a part of the repurchase of approximately 1 million shares of stock from KSA last year. Net income for the quarter was $827,000 or $0.32 per diluted share, compared to net income of $2.5 million or $0.56 per diluted share in the second quarter of 2022.

For the quarter, cash used in operating activities was $27.3 million, primarily driven by the timing of payments and receipts from crude oil customers and changes in inventory due to fluctuations in crude oil pricing and barrels held. Capital expenditures for the quarter totaled $4 million, which includes the $1.8 million for the purchase of the land for the Phoenix relocation and expansion. Our available cash and cash equivalents as of June 30, 2023, totaled $9 million, compared to $20.5 million on December 31, 2022. Total liquidity as of June 30th was $48.6 million, which includes $39.6 million available under our $60 million credit agreement. Now I’ll turn the call back over to Kevin for some final remarks. Kevin?

Kevin Roycraft: Thank you, Tracy. I wanted to touch on Q3 and the outlook for the remainder of 2023. It appears we will be facing challenges of continued higher costs, lower oil production and a soft chemical manufacturing environment in Q3 and most likely for the balance of the year. This will continue to make growing our oil purchasing volumes and chemical shipment volumes difficult, as well as put continued pressures on margins. On a positive note, it appears things are not getting worse. We are seeing incremental improvements as the year progresses, but we maybe expect range bound until market conditions improve. Our large shippers are projecting flat production for the remainder of the year before growth returns in 2024.

During this time, we will continue to execute our plans to reduce costs and grow volumes and margins where possible. So far, this plan has produced positive results as we have seen sequential quarter-over-quarter improvement for the last two quarters. There are many signals that point to higher commodity prices in the back half of the year and we have seen a jump in these prices early in the third quarter. This should significantly help margins at our Phoenix Oil division and hopefully spur additional drilling activity in the GulfMark and Firebird basins. Also, the refiner affected by the lightning strike is expected to restart limited production late in the third quarter. Since this company was founded in 1947, Adams has always overcome the challenges of a very volatile industry.

Today, we are better positioned than ever to face these challenges and truly flourish when the market conditions improve. With that, I would like to open the line for questions. Operator?

Q&A Session

Operator: [Operator Instructions] The first question is from Liam Burke of B. Riley. Please go ahead.

Liam Burke: Thank you. Good morning, Kevin. Good morning, Tracy.

Kevin Roycraft: Good morning, Liam.

Tracy Ohmart: Hi, Liam.

Liam Burke: On operating expenses, driver costs are a key component in there, are you seeing any relief there or do you anticipate any relief?

Kevin Roycraft: Only from the perspective that most of our drivers are paid by the load. So doing fewer loads, I think, the natural expense of the drivers will come down. But reducing driver pay directly is not a strategy that we look to implement. So I think we want to be prepared to be able to quickly react to customer demand when the demand returns and changing driver payment certainly have a negative effect on that group. So we will reduce expenses just through fewer loads, but not by cutting the pay itself.

Liam Burke: Fair enough. And on the refinery shutdown, it’s obviously stopped your progression of higher barrels transported every quarter. You talked about the refinery possibly opening at the end of the third quarter. Would you anticipate the trend of growing barrel shipments getting back on trend in the fourth quarter?

Kevin Roycraft: I’ll turn that over to Greg Mills, our President of GulfMark, Liam, so he can answer that question.

Liam Burke: Hi, Greg.

Greg Mills: Good morning. I think with that refiner coming back online in September, that does give us another outlet. However, I’ll point out that we continue to move all the volumes — most all of the volumes that we typically move in that market and we’re easily — we’re able to place and hats off to our marketing group that they did a great job of using our other markets to move the crew to in the middle of the month, which is very not routine in the crude oil business. We do our business a month in advance usually. So as far as that goes, we’ll continue to grow volumes where we can make money and some of the volume drop-off is related to some of our lower margin business that we do in our trading business.

Kevin Roycraft: Liam, I’ll add — this is Kevin again. That — is really a buy-side restriction. So there’s a fine that because of the lack of production and lack of drilling in the area. There’s a buy-side limitation to us. So we have a finite number of barrels we can purchase.

Liam Burke: Right.

Kevin Roycraft: So when the new refinery comes back online, it will allow us to probably divert some of those barrels back. We’ll continue to supply some of the new opportunities we have. But until drilling activity really increases and we see more production out of the area, we’ll be able to then buy more barrels, and therefore, sell more barrels on the other side.

Liam Burke: Got it. Okay. Great. And finally, on VEX. It’s third-party revenue. You had a little bit there that wasn’t Max Midstream. Outside of Max Midstream, which will eventually come online, do you see third-party opportunities to [Technical Difficulty] here?

Kevin Roycraft: Yeah. Very much. So we’re working on a number of activities that have outside of the Max connection, which would include potential shippers on the VEX pipeline, but especially an opportunity to do an increased amount of — an increased volume of terminaling at our Victoria terminal. So that business activity is actually busier than it’s been in the last year and we see some good opportunities there to independently of the Max business to bring on some new revenue there. And I’ll also say that, with respect to the Max business, I think, we’ve got some good targets there that will add some good value to us and bring some volume.

Liam Burke: Great. Positive. Great. Thank you very much.

Kevin Roycraft: Thank you, Liam. Appreciate it.

Operator: [Operator Instructions] The next question is from Chris Sakai of Singular Research. Please go ahead.

Chris Sakai: Yes. Hi. Good morning.

Kevin Roycraft: Hi, Chris. Good morning.

Chris Sakai: Just a question on the VEX pipeline. I wanted to get your sense of the barrels per day for the remainder of the year, how should we be looking at next — this quarter and next quarter for barrels per day for VEX?

Kevin Roycraft: I think we’re going to be a little better than we’ve been in the last several months. We had some — when you change your demand structure, you change your supply and we rerouted some barrels around VEX. I see with the market coming back on in September, that we will see an increase in VEX volume just within our normal business routine in the next several months. So — and we’re actually — since we closed the second quarter, we’re up a bit already from there by almost 1,000 barrels a day. So I see it returning to kind of where we were in the beginning of the year.

Chris Sakai: Okay. Sounds good. And then for Firebird and Phoenix, can you comment on how these had a positive impact on quarterly cash flow?

Tracy Ohmart: Yeah. This is Tracy. We — it generated a little excess of $1 million of cash flow for the quarter. Again, that’s not meeting what our original expectations are. But when we acquired it and set up our expectations, the price of crude oil was substantially higher now. As price of crude oil goes up, we expect to see that the cash flow generated continued to improve.

Kevin Roycraft: This is Kevin. I’ll add that, late in the quarter when commodity prices did start to rise, we saw a better performance out of Phoenix and we’ve seen some of that continue into July and August. So we’re bullish on that as long as commodity prices continue to move in the right direction.

Chris Sakai: Okay. Great. And then can you comment on driver retention? How is that this quarter?

Kevin Roycraft: Yeah. Maybe I’ll turn it to Wade. Wade, would you like to talk about driver retention, what you’re seeing on the Service Transport side?

Wade Harrison: Sure. On the Service Transport side, we actually recorded pretty close to identical numbers to 2022 running pretty much a year-to-date number of around 35% or so. Drivers — we did have some driver movement, particularly on the contractor side, not so much on the company driver side. Opportunities are fairly slim in the chemical market right now. A lot of companies similar to us have kind of reduced their hiring strategies based on current volumes and so I think it’s limited the opportunities for drivers to move around as much as they have in the past and that’s kind of helped with our retention. Most companies have kind of cut back on their hiring as we have due to volume and so it’s kind of helped drivers stay put, which has helped reduce our training and hiring costs.

Kevin Roycraft: Yeah. I’ll just add to…

Chris Sakai: Okay.

Kevin Roycraft: During — Chris, during this time, I think, we see drivers tend to flock to stable companies. I believe we’re one of those stable companies. The last week announced a freight recession out there and so drivers are looking for solid homes. So we’ve been able to really maintain our driver base and increase it in areas where we can without, as Wade mentioned, having much advertising expense at all. Those drivers are generally just coming to us and applying.

Wade Harrison: You might touch on the service — I mean, on GulfMark and Firebird to put…

Kevin Roycraft: Yeah. And GulfMark and Firebird have always had since their drivers are home every day and in some remote areas. We don’t have turnover issues like you do with the over the road fleet. And the slowdown we’ve seen since the beginning of the year has not really affected their turnover at all.

Chris Sakai: Okay. Great. Thanks for the answer.

Kevin Roycraft: Thank you, Chris. Appreciate the interest.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Roycraft for closing remarks.

Kevin Roycraft: Thank you, Kate, and thank you everyone for your continued interest in the company. We will be participating in the Three Part Advisors IDEAS Conference in Chicago on August 23rd, and we look forward to providing you an update on our progress when we report third quarter results in November. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.