USD Partners LP (NYSE:USDP) Q1 2023 Earnings Call Transcript May 7, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP First Quarter 2023 Results Conference Call. It is now my pleasure to turn the call over to Jennifer Waller, Senior Director of Financial Reporting and Investor Relations for opening remarks. Please go ahead.

Jennifer Waller: Good morning and thank you for joining us. Welcome to our first quarter 2023 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; Josh Ruple, our Chief Operating Officer as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the 3 months ended March 31, 2023. If you would like a copy of the press release, you can find one on our website at usdpartners.com. Before we proceed, please note that the safe harbor disclosure statement regarding forward-looking statements in last night’s press release applies to the statements of management on this call.

Also, please note that information presented on today’s call speaks only as of today, May 4, 2023. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today’s call will include discussion of non-GAAP financial measures. Please see last night’s press release for reconciliations to the most comparable GAAP financial measures. And with that, I will turn the call over to Dan Borgen.

Dan Borgen: Thank you, Jennifer and good morning and thank you, everyone, for joining us on the call today. During the quarter, the partnership continued to see challenging market conditions surrounding the Canadian heavy crude oil macro. Short-term market for Dilbit has continued to be difficult and volatile. While we are still working to secure Dilbit business to fill current and near-term capacity at the Hardisty terminal, we remain primarily focused on transitioning from transloading Dilbit to transloading longer term, more sustainable DRUbit at the Hardisty terminal through expansions to our sponsor’s Diluent Recovery Unit joint venture. Over the years, we’ve experienced fluctuations in the demand for our DRUbit by rail egress solutions during similar cycles within the industry.

As a reference, examples of this include the lower volumes transloaded at our Hardisty terminal in both 2016 and 2020, respectively, when market conditions were also challenging. However, we recovered and renewed our volumes and life to date, we have transloaded approximately 158 million barrels of crude oil at the Hardisty terminal, and we remain confident in the value that the Hardisty terminal has to offer to the industry. We have progressed our discussions with multiple potential customers regarding the expansion of our DRUbit by rail network and remain encouraged that these discussions could lead to additional long-term take-or-pay commitments that will benefit the partnership. The successful completion of the first phase of our sponsor’s Hardisty DRU joint venture project enhanced the sustainability and quality of the partnership’s cash flows by significantly increasing the average tenure of a portion of the terminal services agreements at the partnership’s Hardisty terminal.

As a reminder, DRUbit creates enhanced blending and netback opportunities for our customers with a lower carbon footprint and offers an egress solution that moves a safer, nonhazardous, nonflammable product to new end markets. We remain encouraged and are pleased with the great customer that we have that help pioneer this program. To date, we’ve moved approximately 22 million barrels of DRUbit through the Hardisty terminal. Pending our successful planned 50,000 barrel a day expansion of the DRU, we’d be handling approximately 30 million barrels of DRUbit per year through the Hardisty Terminal. Brad will talk more about the Stroud Terminal in a moment, but I would just like to remind everyone that we’ve handled approximately 48 million barrels of crude oil at the terminal since we acquired it in 2017.

The Stroud Terminal has more than paid for itself during our ownership, but we’re not done there. Like at Hardisty, discussion with potential customers are underway to transition the Stroud terminal to heavier – to handling, sorry, heavier grades of crude oil. As we continue to navigate the recontracting cycle, the Board of Directors of the partnership’s general partner made the difficult decision to suspend the partnership’s quarterly distribution to utilize free cash flow to support the partnership’s operations and to potentially pay down debt. Given all of this, we believe this proactive measure, coupled with management’s review of strategic alternatives was the prudent thing to do and will be best positioned the partnership for both recontracting or for refinancing or replacement of our senior secured credit facility before it matures later this year.

This wasn’t a decision we made lightly by any means. As a reminder, the sponsor currently owns approximately 51% of the partnership and is very aligned with other unitholders both in seeing the partnership continue to return cash to unitholders as well as, more importantly, in seeing the partnership achieve long-term sustainable success. While this was a difficult decision, we remain steadfast in our commitment to providing value to our unitholders as we have in the past and are hopeful that we will be able to restore our distribution in the future, if we are able to renew or replace customer agreements at our terminals. Next, Adam is going to give an update on the partnership’s financial results and our liquidity position. Then we will jump back and Brad will talk about recent market and commercial developments.

Adam?

Adam Altsuler: Thank you, Dan and thank you for joining us on the call this morning. Yesterday afternoon, we issued our first quarter earnings release, which included the details of our operating and financial results for the first quarter of 2023, and we plan to issue our first quarter 10-Q with additional details after market close today. The partnership reported net income of $2 million, net cash used in operating activities of $600,000, adjusted EBITDA of $3.3 million and distributable cash flow of negative $1.6 million. Adjusted EBITDA included the impact of approximately $1.9 million of transaction costs associated with the sale of the Casper Terminal. We successfully closed on the sale of Casper Terminal for $33 million on March 31, which was the first phase of our plan to strengthen the partnership’s balance sheet and liquidity position during this recontracting cycle.

As Dan mentioned, the Board of Directors of the partnership’s general partner approved the suspension of the partnership’s quarterly distribution and the utilization of free cash flow to support the partnership’s operations and to potentially pay down debt as we consider strategic alternatives. The Board of Directors also approved the engagement of financial advisers and counsel to assist the Board and senior management with evaluating and pursuing strategic options and alternative financing sources. We believe in the long-term viability of the partnership’s assets as key components of our sponsor’s DRU network and Clean Fuels initiative, and we are committed to rationalizing our capital structure and securing long-term financing as we grow these next phases of the partnership’s business.

We look forward to sharing more updates on this in the coming months. And now for the details from the quarter, the partnership’s revenues for the first quarter of 2023 relative to the same quarter in 2022 were lower primarily as a result of lower revenues at the Hardisty Terminal due to a reduction in contracted capacity. Revenues were also lower at Hardisty due to an unfavorable variance in the Canadian exchange rate on the partnership’s Canadian dollar-denominated contracts during the first quarter of 2023 as compared to the first quarter of 2022. Revenue was lower at the Stroud Terminal due to the conclusion of the partnership’s terminalling services contract with its sole customer effective July 1, 2022. Partially offsetting this decrease was a slight increase in revenues at the partnership’s Casper terminal due to an increase in throughput in the current period as compared to the prior year period.

The partnership achieved lower operating costs during the first quarter of 2023 as compared to the first quarter of 2022. SG&A costs and pipeline fees associated with the partnership’s Hardisty Terminal were lower, which is directly attributable to the associated decrease in Hardisty Terminal revenues already mentioned as compared to the first quarter of 2022. In addition, subcontracted rail services costs were lower due to decreased throughput at the partnership’s terminals. Depreciation and amortization expenses were also lower in the first quarter of 2023, primarily associated with the decrease in the carrying value of the assets at the Casper terminal resulting from the impairment that was recognized in September 2022. In addition, the partnership discontinued the depreciation and amortization of its Casper terminal assets during the quarter as the assets were classified as held for sale in January of this year.

Partially offsetting the decrease in SG&A costs were transaction costs incurred during the first quarter of 2023 related to the partnership’s divestiture of the Casper Terminal, partially offset by expenses incurred in the first quarter of 2022 associated with the Hardisty South acquisition with no acquisition expenses incurred in 2023. The partnership generated net income of $2 million in the first quarter of 2023 as compared to net income of $7.5 million in the first quarter of 2022. The decrease is primarily due to the factors already discussed, coupled with higher interest expense incurred during the first quarter of 2023, resulting from higher interest rates and higher balance of debt outstanding as compared to the first quarter of this year.

The partnership also had noncash loss associated with the partnership’s interest rate derivatives recognized in the first quarter this year as compared to a non-cash gain during the comparative period. Partially offsetting this reduction in net income, the partnership recognized a lower foreign currency transaction loss in the first quarter of this year as compared to the first quarter of 2022. The partnership had net cash used in operating activities of $600,000 for the 3 months ended March 31 as compared to net cash provided by operating activities of $9.2 million for the prior year period. The decrease in the partnership’s operating cash flow resulted from the factors already discussed. Net cash used in operating activities was also impacted by the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances.

Adjusted EBITDA for the first quarter decreased by 67% when compared to the same period in 2022 due primarily to the factors already discussed. Distributable cash flow decreased to negative $1.6 million for the current quarter and also includes the impact of higher cash paid for interest and taxes when compared to the prior year. As of March 31, the partnership had approximately $11 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of approximately $60 million on its $275 million senior secured credit facility, subject to the partnership’s continued compliance with financial covenants and borrowings of $215 million. Per the terms of the amended credit agreement, the partnership’s available borrowings, was limited to 5.5x its 12-month trailing consolidated EBITDA.

As such, the borrowing capacity and available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $41 million as of March 31. In April of 2023, partnership used approximately $19 million of the net proceeds from the sale of the Casper Terminal to repay borrowings under its senior secured credit facility and retain the remaining proceeds to support general partnership purposes. As of April 30, the partnership had borrowings of approximately $196 million under its senior secured credit facility and unrestricted cash and cash equivalents of approximately $9 million. The partnership was in compliance with its financial covenants as of March 31. And lastly, as Dan mentioned, we are encouraged by and remain focused on converting the partnership’s existing Dilbit capacity to our longer-term sustainable DRUbit by rail program.

As always, we look forward to sharing more updates with you on that in the future. And with that, I’d like to now turn the call back over to Dan.

Dan Borgen: Thank you, Adam. Appreciate the update there. We’ll pitch it over to Brad for the commercial update. Brad?

Brad Sanders: Thank you, Dan. Excuse me. As you mentioned in your opening dialogue, the Canadian macro conditions continue to be challenging. Spreads between Canada and the U.S. Gulf Coast continue to price at or near pipeline economics. This indicates Canadian supply is equal to or less than pipe egress capacity. As we’ve stated, though, on previous calls, it is projected that 2023 Canadian supply growth should be sufficient enough to transition this macro environment to one where supply should exceed pipe egress capacity. The biggest unknown, of course, is not only does the production show up, but when. Given the current high Canadian inventory levels, should this growth materialize and it now appears to be more likely in the second half of ‘23, then the market has the potential to return to crude by rail parity.

Therefore, given these conditions and timing issues, renewing contracts in our traditional Dilbit business remains challenged, and our ability to possibly commercialize our Hardisty capacity is more likely in the second half of 2023. Let me give a quick update on DRU. Effectively, there is really nothing to add to what Dan messaged earlier. So let me simply restate what is critical. One, we continue to have advanced discussions with potential customers and are encouraged with their momentum and progress. And two, we are purposed and committed to transitioning our Dilbit business to a more competitive and sustainable DRUbit by rail solution. Now I’d like to ask Josh to provide an update regarding our operating performance at the DRU.

Josh Ruple: Thanks, Brad. In regards to DRU operations, that unit operated by our partner, Gibson, is performing quite well. Our ratability, run rates, percentages are per plan. Yields for both DRUbit and condensate are also per plan, both on volume and spec. And I’d also like to mention and aligned with our commercial efforts, we’ve recently completed a test on an alternative feed, an alternative Dilbit feed. That test was successful and proved our goal of designing and operating a DRU unit that was flexible to handle a multiple range of Dilbit feedstocks. So overall, we’re quite happy with the DRU unit and it’s doing what we expected and planned for it to do. I’ll hand it back to you, Brad.

Brad Sanders: Thanks, Josh. That’s great news, great update. Appreciate it. Finally, I’d like to provide a quick update on our Cushing rail asset, the Stroud rail terminal. As a reminder, Cushing is the largest crude hub in North America, providing advantaged connectivity and tankage capacity for both producers and refiners. And more importantly, our Stroud Terminal is the only rail asset supporting the hub. As the largest hub in the U.S., Cushing provides access to tankage blend stocks refiners in the Midwest and the U.S. Gulf Coast. Our rail connectivity then provides advantaged access to Cushing markets during both micro – or I’m sorry, macro cycles, as Dan mentioned in his opening statement, but also and more importantly, advantage access for unique production that does not have access to pipe egress at origin and relies on rail for egress and market access.

In that vein, beginning in the third quarter of ‘23, we expect to begin throughputting waxy crude from the Uinta basin as part of the new and scalable destination solution for this growing production. The basin’s growth ability is primarily constrained by access to rail logistics at destinations. At Cushing via our rail assets, the market access is ratable and unlimited. So we’re excited about this initial new business startup and its potential and look forward to providing updates and next steps. Now Dan, I’ll pass it back to you.

Dan Borgen: Thank you, Brad. With that, we’ll open the call up for any questions, thank you.

Q&A Session

Operator: Thank you. And our first question will come from Kyle May with Sidoti & Company. Your line is open.

Kyle May: Hi, good morning, everyone.

Adam Altsuler: Good morning.

Kyle May: I was wondering if we could start with the distribution. And just wondering if you could maybe provide some color around when you would potentially plan on reinstating that. Maybe just – would it take progress on new contracts, refinancing? Any additional details would be great.

Dan Borgen: Sure, Kyle. Happy to address that. Obviously, that’s something we never like doing, but we felt like it was prudent given the re-cycle state that we’re in with – on the renewals. So clearly, as we see hopefully soon, the renew and extension of existing contracts and/or our new DRUbit extension, both of which, one being DRUbit, one being Dilbit that we would look – we have – increase our distributable cash flow and look then to be able to get our distribution back up to speed. So I think this year, not only do we have the re-cycling of the season, the market season’s here, but we also have our long-term our revolver up for renewal at the end of the year. And so we kind of have a double this year that we’re just trying to be prudent about. And – but as soon as we can see the highlights of the renewals, then we would look to increasing. And Adam, go ahead.

Adam Altsuler: Yes. No, I think that’s exactly right. I mean we did it to preserve our liquidity position, reduce our net debt. And as Dan said, get us through this recontracting cycle. And just as a reminder, this is something that’s evaluated every quarter by our Board, and we’ll obviously continue to do that every quarter.

Dan Borgen: Does that help, Kyle or do you need further color?

Kyle May: No, that’s very helpful. I appreciate it. And then for the next question, you definitely touched on some of the conversations that you’re having about the DRUbit terminal or network. And just wondering if you can maybe talk and give us a little bit more detail about kind of what you’re seeing in those recent discussions, kind of maybe your confidence in winning new agreements. Just any more details would be really helpful.

Dan Borgen: Yes. I would say – and then I’ll ask Brad to jump in, if I don’t cover it completely. But I would say we remain very confident. We have – when we say we have active discussions, we are having, I mean, weekly discussions on that with existing customers as well as new customers to increase their size and volume. And we wish, obviously, it would happen faster. We had anticipated that it would happen faster, but we believe we’ll see a result of that very soon. And we look forward to being able to share that news as quickly as we can. Brad?

Brad Sanders: Kyle, this is Brad. I would say the most important maybe messaging and feedback would be that – one is our customer is happy with our performance and reliability. I would say that overall, they’re happy with performance financially as well. So, the two of those things are really critical. And what we can’t control is their decision process and authority process and how they get things across the line and what they’re competing capital challenges are. So that obviously impacts timing. But I think from a performance and validation of sustainability and being competitive, which is what’s most critical to us, we’re really pleased with those type of discussions. And therefore, that’s what gives us the confidence that we think we can grow our capacity and grow our relationship not only with existing customers, but new.

Dan Borgen: And with over 22 million barrels already handled through that facility and growing every day, it continues to prove its importance in the industry and giving the additional – as one of the elected officials in Canada said, not only does it give us additional egress, but it gives us a new market destination, which has also been proven. So not only is it an origination play coming out of Canada, but it has established a new market destination that gives our customers – customer and customers better netbacks and more competitive alternatives, again, with a lower carbon footprint. And obviously, with the GHG, greenhouse gas emissions in Canada being a pressure point for most producers. Those are important pieces of that as we lower that over 30% relative to other means of transportation.

All of that adds up to positive impacts for the customer. That’s why multiple customers are at the table. That’s why we feel good about renewing. And as Brad said, the proven ratability and success of the program is evident.

Kyle May: Okay, great. I appreciate the additional color.

Dan Borgen: Sure. Thanks, Kyle.

Operator: Thank you. At this time, we have no further questions. So I would like to turn the call back over to Dan Borgen for additional and closing remarks.

Dan Borgen: Thanks, everybody. I know it was a tough call and – but know that as your partner, as you’re roughly 50% partner here, we are committed to see this thing produce, get back to strong production of cash flow. That’s our intent, both – for all of us on the phone, and we appreciate the patience, obviously. We have to remind ourselves that quite often that, as Brad said, the customers and – customers move in different approval processes, but they are highly engaged. And again, we feel good about that happening. I think with the volumes that we shared today, and just as a reminder, these assets are important to the industry. They serve a need. They’ll continue to serve a need. And we look forward to being able to share that evidenced by some of the commitments that we’ve been talking about.

As we continue to grow and transition our business into safer and cleaner grades of heavy crude through our DRUbit program, it’s the right long-term strategy for the partnership. Transition is tough. But it is the right thing to do to assure long-term sustainability with cleaner transportation and safer transportation methods. So with that, we look forward to sharing additional updates with you. We don’t think it will be too far in the future, and we look forward to being able to share that exciting news with you. Thanks again for being on the call.

Operator: Thank you, ladies and gentlemen. This concludes today’s call, and we appreciate your participation. You may disconnect at any time.