NuStar Energy L.P. (NYSE:NS) Q1 2023 Earnings Call Transcript

NuStar Energy L.P. (NYSE:NS) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good day, and thank you for standing by. Welcome to the NuStar Energy L.P. First Quarter 2023 Earnings Conference Call. Please be advised, today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Pam Schmidt, Vice President of Investor Relations. Please go ahead.

Pam Schmidt: Good morning, and welcome to today’s call. On the call today are NuStar Energy L.P.’s Chairman and CEO, Brad Barron; and our Executive Vice President and CFO, Tom Shoaf; and our Executive Vice President of Business Development and Engineering, Danny Oliver, as well as other members of our management team. Before we get started, we would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements.

During the course of this call, we will also refer to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release and if applicable, additional reconciliations may be located on the Financials page of the Investors section of our website at nustarenergy.com. With that, I will turn the call over to Brad.

Brad Barron: Good morning. Thank you all for joining us today. I’m excited to tell you about our great first quarter as well as our positive outlook for the rest of 2023. Let’s get started with a few highlights from our strong first quarter ’23 results. We generated $187 million of total adjusted EBITDA in the first quarter of ’23, which is 8% higher than adjusted EBITDA in the first quarter of 2022. Our Pipeline segment EBITDA was up in the first quarter of ’23 by 16% over the same period in 2022. Our refined product systems and our ammonia system continue to deliver solid dependable revenue contributions in the first quarter of ’23, with throughput up 6% over the first quarter of ’22, reflecting the strength of these assets and our position in the markets we serve in the Mid-Continent and throughout Texas.

Our Central West Pipeline systems, particularly our McKee System, performed well last quarter with higher revenues and throughputs versus the same period last year. Additionally, our Permian crude systems volumes averaged 543,000 barrels per day, which is up 6% over the same quarter last year. In South Texas, we’re pleased that our Corpus Christi Crude System throughputs averaged 369,000 barrels per day in the first quarter, which is above our MVCs for that system and 8% higher than our first quarter 2022 volumes. After a near record breaking 2022, our fuels marketing segment kicked off 2023 with a strong first quarter, generating $7 million of EBITDA comparable to the segment’s strong first quarter ’22 results. With that, a few observations about the rest of ’23 before I turn it over to Tom.

First, looking at the Permian. As we mentioned on our previous call, we’ve seen some lumpiness in some of our producer schedules so far this year. We expect volumes to pick up as those producers ramp up activity. But depending on how quickly they’re able to do so, we could see our 2023 exit rate slightly lower than we forecasted. We’re in the range of 570,000 up to our original forecast of just under 600,000 barrels per day. There’s still a lot of the year left, but fortunately, as we frequently emphasize, given the fact our systems CapEx scales up and down with our producers’ needs, we would expect that if our exit rate varies, we would also see a commensurate change in our CapEx, which should counterbalance any potential reduction in volumes.

Looking at the full year of ’23 for our business as a whole, even though the high inflation and volatility that distinguished ’22 have persisted so far this year, NuStar continues to expect to generate total adjusted EBITDA of $700 million to $760 million. As we have mentioned in prior calls, we proactively mitigated some of the impact of inflation in ’23 through the expense optimization initiative we kicked off in early 2022. And NuStar results will also benefit from provisions of our pipeline tariffs and contracts that provide for annual rate escalations linked to the preceding year’s PPI or the FERC Index. This year, we expect to once again self-fund all of our cash requirements, including all of our growth capital spending and our distributions, and we also expect to finish the year with a healthy debt-to-EBITDA metric well below 4x.

And with that, I’ll turn the call over to Tom.

Tom Shoaf: Thanks, Brad, and good morning, everyone. As Brad mentioned our first quarter adjusted EBITDA was up $14 million or 8% over the first quarter of ’22. Our first quarter ’23 adjusted DCF was $101 million, up 11% over first quarter of 2022. And our adjusted distribution coverage ratio was 2.27x. Now turning to our segments. In the first quarter ’23, our Pipeline segment generated $163 million of EBITDA, up $23 million or 16% over first quarter ’22 EBITDA of $141 million. Thanks in large part to our McKee System Pipelines and Permian Crude System, but also from robust increases in EBITDA and throughputs across most of our Pipeline systems. Turning next to our Storage segment. Our EBITDA for first quarter ’23 was $41 million, which is about $8 million lower than the first quarter of ’22 adjusted EBITDA.

That decrease was mostly due to customer transitions and required tank maintenance at our St. James terminal that we mentioned last quarter as well as an amendment and extension of a customer contract at our Corpus Christi North Beach terminal. Our West Coast region delivered another strong quarter, driven in large part by our West Coast renewable strategy with revenues up about 33% over first quarter ’22. And for our Fuels Marketing segment, EBITDA was $7 million comparable to the first quarter ’22, driven by strong butane blending and bunker margins in both periods. I’m also pleased to report on our continued progress in reducing our debt and building our financial strength and flexibility. In March, we entered into a structured finance arrangement to monetize a portion of our real estate at our corporate headquarters, which provided approximately $100 million of lower priced financing.

By doing so, we were able to deploy the proceeds to reduce debt, which facilitates our redemption of another portion of the Series D units later this year. Thanks to that transaction, along with the strong first quarter EBITDA. We ended first quarter ’23 with a debt-to-EBITDA ratio of 3.46x. That’s the lowest it’s been since 2005. And as we have mentioned in prior calls, we are planning to redeem all of the remaining Series D by the end of 2024 or about 2 years ahead of the original schedule. At the end of the first quarter ’23, our total debt balance was $3.1 billion, and our revolving facility availability was $940 million of the facility’s $1 billion capacity. Moving now to our outlook for 2023. As Brad mentioned, for the first year, we continue to expect to generate adjusted EBITDA in the range of $700 million to $760 million.

We continue to plan to spend $130 million to $150 million in strategic capital in ’23. Depending upon the activity of our Permian producers, the rest of the year, as Brad discussed, we expect to allocate between $45 million and $60 million to growing our Permian system. And we continue to expect to spend around $25 million to expand our West Coast Renewable Fuels Network. Turning to reliability capital. We still expect to spend between $25 million and $35 million on reliability in ’23. And even with our planned Series D redemption later this year, we’re still on track to finish 2023 with a healthy debt-to-EBITDA ratio below 4x. And now I’ll turn the call back over to Brad.

Brad Barron: Thanks, Tom. As you’ve heard, we had a strong first quarter. EBITDA was up, DCF was up. Our Pipeline segment was up, and our Fuels Marketing segment kept pace with its near record-breaking 2022 results. We’re on track to deliver another solid year. And we’re also excited about what the future holds. Yesterday, we announced a project to connect our ammonia system to OCI state-of-the-art ammonia products facility in Iowa, supported by a long-term revenue commitment, which we expect to have in service in early 2024. OCI’s facility uses ammonia to make fertilizer and also to produce DEF, which is a product that dramatically reduces emissions from diesel engines in cars as well as light and heavy-duty trucks, farming equipment and other heavy machinery.

We expect this healthy return, low capital project will meaningfully increase utilization of our system starting in 2024. And we expect this project to be just the first of several as we are actively working with several potential customers interested in connection to our ammonia system across our footprint for a variety of different opportunities. As you may know, about 90% of ammonia is used to support agricultural production and more than half the world’s food production is dependent on this key product. Because ammonia is such an important product, there is increasing focus on decarbonizing the process used to make it, either by capturing emissions or by utilizing electrolysis fueled by solar or wind to lower emissions, referred to, respectively, as ‘blue’ and ‘green’ ammonia.

We’re seeing growing interest in lower carbon ammonia from the company’s developing production facilities seeking market access, from the company’s interest in supply of lower carbon ammonia to make fertilizer DES and other important products, and from potential customers who are looking at new uses for lower carbon ammonia, including as a low-cost, safe way to transport hydrogen for fuel. In addition to the greening of ammonia expanding the market domestically, international demand is also driving interest in ammonia export. Our system currently supplies the U.S. spread basket in the Midwest, primarily with domestically produced ammonia, but growing interest and export capabilities could drive additional utilization of not only our ammonia system but also potentially our St. James facility, which has dock capacity that could also support ammonia export.

This growing interest in ammonia to reduce emissions and supply the globe is generating opportunities for attractive return, low spend projects that we are confident will increase our system utilization significantly across our footprint over the next several years. We look forward to talking more about these opportunities as we progress, and we look forward to talking to you next quarter. And with that, we’ll open it up for Q&A.

Q&A Session

Operator: Our first question comes from Gabriel Moreen with Mizuho.

Chris Jeffrey: This is Chris on for Gabe. Just wondering if we could talk about the West Coast market. And as we’re seeing more participants enter that market, are you starting to see some competition as far as customers looking around for different rates, different contracts, and kind of just the outlook in the near term for that?

Daniel Oliver: Yes. Well, this is Danny Oliver. The outlook there is the short — storage is short, I would say, in California. So we have a lot of interest in storage there. We have long-term contracts. Rates are very healthy. But it’s been very positive for storage.

Chris Jeffrey: Great. And then maybe switching to the volumes at Corpus Christi seems like those were solid for the second quarter in a row. Just kind of wondering drivers behind what’s bringing those volumes back to the system and kind of how they’re trending for the year?

Daniel Oliver: Yes, just continued general growth in the oilfield and those barrels need to be exported, and Corpus continues to be the preferred export area. And so we see those volumes come in through our customers.

Chris Jeffrey: Great. And then maybe just one quick more. Were there any weather impacts either in refined product usage for the quarter or in the Permian or anything?

Daniel Oliver: We had a little weather impact in January in the Permian. Nothing on the refined products side. In fact, since the beginning of the year, we’ve been outpacing pre-pandemic in every year since the pandemic volumes on our refined product demand.

Operator: Our next question comes from Michael Blum with Wells Fargo.

Michael Blum: I wanted to talk about the Permian. So I think volumes were down sequentially about 7%. So I just wanted to ask, if you could just talk about what’s going on there? And then are you still comfortable with the ’23 volume target of 600,000 today?

Daniel Oliver: Yes. So this is Danny again. So I think Brad used the term lumpy. The Permian activity and volumes have always been lumpy. It’s been a little more lumpy than usual so far early this year. But it’s still core of the core acreage, and I don’t read anything anymore than that into it. And I think Brad also mentioned that our exit rates are somewhere between 570,000 and 600,000. And I think last time we said slightly below 600,000. So it hadn’t changed materially.

Brad Barron: What you may have heard is some of the big producers talked about the lumpiness in production. So as we expect that to work itself out over the course of the year, we expect our volumes to ramp up towards the back half of the year.

Daniel Oliver: Yes. That’s — I was going to mention. We mentioned that last quarter. And again, I think in Brad’s comments, we do expect to see activity ramp up in the second half.

Brad Barron: Probably the most important thing to emphasize, and we say this on every call, is that our CapEx ramps up and down with volumes. And so whatever — however our volumes vary, so does our CapEx, which is a good offset.

Michael Blum: Okay. And then I just wanted to ask a little bit about this ammonia pipeline project, which seems pretty interesting and promising. I guess what’s the capital spend for that? And how do we think about returns? And is this capital going to be — when is it going to be spent?

Daniel Oliver: Yes. We haven’t given any specifics on capital. It’s contract specific. However, I will tell you that OCI is contributing some of the capital required to make these connections. So our out-of-pocket is less than it would have been.

Brad Barron: Yes. Any capital for this is already in what we’ve disclosed is our CapEx budget.

Operator: Our next question comes from Selman Akyol with Stifel.

Selman Stifel: Real quick. Just a couple of follow-ups. As it relates to California, you mentioned storage short out there, good rates. I’m curious, do you see additional opportunities to deploy capital and build more storage out there?

Daniel Oliver: We still got a couple of projects we’re completing. We’ve had a dozen projects that we’ve completed since 2017 around our biofuel strategy. A lot of that has been done now. I think going forward, what you’ll see us be doing in terms of projects are very, very low cost CapEx. It’s just transitioning some carb diesel storage into the renewable diesel storage as the demand dictates.

Selman Stifel: Got it. And then just kind of going back over to St. James and ammonia. I presume a lot of that would just be repurposing of assets? Or is there anything we should be thinking about ammonia as having to be special handled and requiring any CapEx for that?

Daniel Oliver: Yes. So well, on the Pipeline side, we’re contemplating some — I think Brad mentioned, we’ve got several more projects. I think that we’ll be talking to you about and over the next several years, one of which probably we’ll announce later this year. But the Pipeline won’t require much work. If it does involve storage at St. James, it would be different storage. It requires a different storage than our crude oil tanks there.

Operator: And I’m not showing any further questions at this time. I’d like to turn the call back over to Pam Schmidt.

Pam Schmidt: Thank you, Kevin. We would once again like to thank everyone for joining us on the call today. If anyone has additional questions, please feel free to contact NuStar Investor Relations. Thanks again, and have a great day.

Operator: Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.