Genesis Energy, L.P.

Welcome to the 2020 second 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 includes 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 protection 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 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 LP. Mr. Sims will be joined by Bob Deer, Chief Financial Officer, and Ryan Sims, Senior Vice President, Finance and Corporate Development.

Good morning, everyone. Thanks, Carol. As we mentioned in our earnings release over the course of the last few months, we have taken the proactive steps necessary to improve our financial flexibility and be a net payer of debt even in such a difficult operating environment. Let me repeat that. We expect to be a net payer of debt even in this generationally challenging environment. We reduced our quarterly distribution. We saved us approximately $200 million a year. We amended our agreements with GSO Capital Partners to allow us to delay the capital expenditures associated with our Grainger optimization project by up to 12 months. We recently implemented cost savings initiatives that are expected to generate approximately $38 million in annual savings beginning this quarter. We amended with the unanimous support of our 19 banks. our senior secured credit facility to be able to add back $13.5 million in one-time charges associated with our cost savings initiatives, as well as increasing our covenants through first quarter of 2021. Early in the second quarter, we were also successful in purchasing approximately $96 million worth of our unsecured notes on the open market at a weighted average price of just under 79 cents on the dollar, resulting in a gain as well as a net reduction of total debt of approximately $20 million. Now turning to our individual business segments, our offshore pipeline transportation segment continued to perform in line with our expectations, with the exception of the unexpected downtime associated with Tropical Storm Cristobal. During the quarter, we saw producers shut in volumes in May, with some continuing into June, representing maybe 2% to 3% of total volumes for the quarter. as a response to the dramatic fall in commodity prices during late April and May. Virtually all of these volumes, with the exception of around maybe 5,000 barrels of oil equivalent a day, are back online as of July 1st. As we mentioned in our second quarter call, the third quarter is typically a very heavy quarter for scheduled maintenance and downtime, some of which does ultimately result in higher output in future periods. In addition, we are currently in the midst of hurricane season, and still have roughly two months left with no guarantee we will not have additional shut-ins as a result of a name storm or more than one name storm in the Gulf of Mexico. Additionally, we did reconfirm during the quarter the anticipated timing of several major offshore projects which are already contracted to our expansive infrastructure in the central Gulf of Mexico. Argos, formerly Mad Dog II, and the Kings Key Flood and Production System, has the fields Khaleesi, Moormont and Samurai tied to it, are still scheduled for first production in late 21 or early 2022 and early to mid 2022 respectively. These two fields alone, which required almost zero capital from us, are expected to generate well in excess of $100 million of annual segment margin to us when ramped up to anticipated full production. I thought it might be useful to touch briefly on the current political environment, some of the political policy rhetoric that is out there. While I'm not going to speculate on the election or future policy, I would say that we continue to believe the future of the Gulf of Mexico remains strong, especially in the near to median term, with the existing contractor volumes dedicated to our system. Additionally, a significant portion, but by no means all, of the highly prospective acreage of the Deepwater Gulf has already been leased under primary terms of 10 years. And the upstream community has already paid the federal government billions in lease bonuses, and has spent tens of billions more on exploration activities and production facilities to date. Under previously approved plans of exploration, or plans of development, There are literally hundreds and hundreds of wells already permitted to be drilled on leases under primary term, leases that have already have an approved plan of development or suspension of production, and or leases which are held in perpetuity by having established already production thereof. The upstream community continues to spend significant amounts of money despite the perceived political risk. and we continue to have discussions with producers about providing critical infrastructure for their future developments. During the quarter, our onshore facilities and transportation segment performed as expected, and we did see some short-term benefit from contango during the quarter, but do not expect that to repeat in future periods. We continue to see zero crude by rail volumes from Canada at our scenic station and continue to build at our minimum volume commitment level. If the recent news about a potential dapple shutdown comes to fruition, we could potentially see certain crude by rail volumes from North Dakota sent to our rail unloading facilities, and specifically our Raceland Terminal, given their direct routing from virtually every loading facility in North Dakota via the BNSF Railroad. Marine fundamentals during the quarter were relatively consistent with our expectations. We continue to monitor refinery utilization as lower refinery runs in pad two and pad three have started to have a financial impact on us, specifically on our brown water fleet, given there's less intermediate refined product volumes needing to be moved between refinery and terminal locations. Our offshore coastal barges have fared remarkably well and utilization and rates have held in this quarter, at least so far, consistent with the first half of the year. The American Phoenix existing contract is up in late September. In early March, we were in active discussion on new terms in the neighborhood of her current contract. Unfortunately, the dislocations resulting from COVID-19 has caused a near-term supply-demand imbalance in Jones Act tonnage, and we would otherwise expect her to recontract at a day rate south of her current contract. The second quarter was challenging for our sodium minerals and sulfur services segment, even more challenging than we reasonably expected at the time of our first quarter call. Our legacy refinery services business experienced some volume loss during the quarter in domestic pulp and paper sales, but especially in South America as mining activities were ordered curtailed or shuttered by local governments in response to those countries attempting to address the spread of COVID-19. In July, Freeport-McMoran indicated they were allowed to restore their copper mining operations in Peru during the second quarter, following the COVID-19 restrictions that were imposed by the Peruvian government in March 2020. The company indicated they exited the second quarter roughly 80% of their 2019 operating capacity. Copper prices are at or near their highs for all of even 2019 pre-pandemic, reflecting the effects of the production loss in the second quarter, and hopefully increasing demand as more and more economies attempt to reopen. Our pulp and paper customers attempted to avoid turnarounds in the quarter in order to limit the number of non-employees on location due to protocols on combating COVID-19, and during which they would normally use large amounts of sodium hydrosulfide or NASH. So far this quarter, we are starting to see more normal volumes as those facilities no longer can avoid the turnarounds or ignore their need to replenish the sodium and sulfur molecules critical to their processes. As a result, we're increasingly confident that our NASH cells are likely to fully recover as we approach the end of the year. In SODASH, we are facing a generationally difficult operating environment. Beginning in May and accelerating into June, our domestic and international customers for Soda Ash began canceling orders for the remainder of the year as they adjusted to the demand destruction associated with COVID-19 for their final products in which Soda Ash is used. In fact, since our last earnings call, we received cancellation of orders for slightly more than 300,000 tons through the rest of this year alone. This physical demand destruction dwarfs the down draft to our soda operations experienced during the financial crisis of 2008-2009. To respond to such imbalance, we made the decision to cold stack, meaning we could return to normal operations in three to six months. Our existing operations at Grainger, which currently our highest cost facility, resulting in a reduction of our supplies to be sold by some 550,000 tons on an annual basis. We know other domestic producers have also reduced supplies, and we are aware of a major synthetic producer in China shutting down as the worldwide market for sodash adjusts to the current demand environment. Additionally, we delayed our Grainger expansion project by a year and currently expect to bring on a fully expanded Grainger facility in late 2023, that a fully expanded capacity of 1.2 to 1.3 million tons a year and optimize such it will join our West Bay Co. facility as one of the most economic soda ash production facilities in the world. The market for soda ash can tighten very quickly as demand recovers along with increases in economic activity, especially given the supply responses we have already seen. There is no doubt in our minds that the demand for sodash will ultimately rebound and that we will benefit from being one of the world's largest and lowest cost suppliers of such a critical industrial component. There are a few signs that maybe we've put in a bottom form of volume for it. Export orders have stabilized over the last four to six weeks. In July, domestic sales were up relative to June, which were marginally up from May. We have also seen that reported Chinese soda ash inventories have decreased almost 18% over the last several weeks. While encouraging, we know that economic activity has to continue to recover worldwide before we see a return to 2019 type levels. Longer term, we are encouraged by certain emerging macro trends beyond just a recovery in economic activity to pre-pandemic levels. It appears people are increasingly interested in living horizontally rather than vertically, which would be more soda ash intensive. Similarly, we believe auto sales are likely to increase as fewer commuters want to ride congested public transportation at the same time that the average age of the automobile fleet in the U.S. is at an all-time high. There are also a couple of green initiatives starting to underpin soda ash demand. Demand for soda ash from the lithium carbonate producers in South America and elsewhere is growing rapidly. There are slightly more than two parts of soda ash required for each part of lithium to make lithium carbonate, the major constituent of new generation lithium batteries. Additionally, accelerating endeavors to retrofit older buildings to meet the standards for LEED certification. should lead to significant new demand for glass and hence soda ash. As we look forward to the second half of 2020, we would expect adjusted consolidated EBITDA as defined by our banks and used to calculate compliance with our covenants to come in a range of $570 to $610 million, or generally in line with current street expectations. While challenges certainly remain, given the steps we have already taken and given our lack of future capital requirements, we believe we have positioned the partnership to comfortably live within its means and navigate the current macroeconomic environment. The pace and scope of the recovery in the world's economies is not abundantly clear and could well extend into 2021. In any event, we believe we are well positioned to weather the storm regardless of duration and will still be cash flow positive and be a net payer of debt this year and in subsequent years. A more important focus from our perspective is for everyone to recognize the significant operating leverage we have to produce increasing financial results in future periods with no capital as the world's economies recover and contracted offshore volumes come online. 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 protocols and procedures with no impact to our business partners and customers with limited confirmed cases amongst our some 2,000 employees. It is an honor to have the opportunity to work alongside such quality people. With that, I'll turn it back to the moderator for any questions.

To ask a question via the telephone, please press star 1. If you would like to withdraw your question, please press the pound key. Again, that's star and the number 1. And your first question comes from the line of Kyle May.

Hey, good morning. I wanted to start off with the sodium and sulfur segment. Obviously, you talked about the effects of COVID-19 on the business, but wondering if you can provide any additional thoughts around the pace of recovery at this point and kind of the cadence of how you see volumes trending through the second half of the year.

As I gave in the prepared remarks, I mean, I think that domestically we are seeing sequential increases from July over June, June over May, but at this point we're still obviously below 2019 levels. Our visibility, while it's improving and our customers seem to be – and on the export markets where at the margin we compete with Chinese exports and the Asian economies outside of China. It's a good sign that Chinese inventories have declined over the last couple of weeks, which everything else is saying means that we're starting to see a little bit more balance between demand and supply. So, you know, at this point we anticipate that volume will continue to – to recover, but by no means do we think that we're going to at this point, exit 20 with anything close to what we were doing in 2019. I think that it's probably going to take realistically through 20 and into 2021 until we depending upon the pace of reopening the economies worldwide to get back to 2019 levels.

Okay, got it. And I believe last quarter you discussed placing the existing Grainger facility in hot hold mode, and now that's going to cold stack. Can you walk us through the decision here and then how this will change your operations and expenses?

Basically, it will... Yeah, what we did was initially we were very quick to react when we saw the demand destruction starting to come through the supply chain with our customers. We furloughed and, if you will, initially for what was anticipated to be a 90 to 120-day period, the Grainger facility. So, in other words, we still pretty much have the – had most of the expenses, except for certain labor expenses resulting from furloughs, associated with maintaining it in ready mode. We made the decision during the quarters, May unfolded and accelerated into June, that in order to facilitate a rebalance not only of our portfolio supply and demand, but to help accelerate the world balancing, we made the decision to cold stack it, which basically required a reduction in force, a more permanent reduction in force as we go forward, as well as it saved us money from maintaining it in warm stack mode. It was the best way and most efficient way for us to do it to address the reality of what we perceive to be the market over the next couple of years. As we said, we can bring it back in three to six months if market conditions dictate. But right now, our plan is to keep it in cold stack and bring it back on altogether as we making the expanded Granger project a reality and bring it all back up in 2023. We do not believe that the delay in the Granger optimization project or the expansion of Granger has been significantly impacted from a dollar point of view by delaying in a couple of years. So in fact, there are some economies especially during tie-ins with the existing operations of other interface points between existing Grainger and expanded Grainger that we can do more efficiently and cheaper when existing Grainger is down in cold stack mode.

Got it. Okay. Thanks, Grant. I'll turn it back. Thank you.

Again, in order to ask a question, press star, visit number one on your telephone keypad. That's star one. Your next question comes from the line of . Hi.

Good morning, everyone. Good to hear everyone's well. I guess to start off a little bit here, kind of wanted to talk about your options here. I mean, at the end of the day, you're free cash flow positive given the actions that you've actually taken. At the same time, when I look at where your public debt is trading, you're actually trading really well and not providing much of a discount at this point right now. So what are the options that you're going to do with the excess cash? Do you still buy bonds that are in the 90s? Do you look to, you know, maybe go after other parts of the capital structure or even possibly buy back some units? Just kind of wondering what your options and that you're thinking about in orders of priority.

Very good questions, Nerv, as usual. You know, I don't think that we will actively participate in trying to buy in bonds in the nines or in the 90s, if you will. We will continue to use the cash to pay down revolver debt. We have the ability under the existing agreement once we go below five times on our calculated total funded debt covenant with our banks that we can actually go into the equity to the extent that that makes sense at that point in time. Obviously, we're not there at this point, but we will be hopefully in fairly short order. That will give us another opportunity to manage the capital structure and return money to the investors.

Okay, that makes sense. And then, just, I don't want to beat the whole Sodash thing too much. I think it's been kind of straightforward, but I was just wondering, are you sitting on a lot of inventory at this point right now? You know, I understand that Grainger has been cold-stacked at this point right now, but You know, is the market for SODASH pricing actually improving based on the trend that you just highlighted, and do you have inventory where we can see a working capital conversion to cash, you know, as you sell out, and how deep is that inventory of SODASH?

Yeah, we don't have a – we are kind of – within reason, you would call us kind of a just-in-time supplier, so we don't have large amounts of – inventory in our supply chain. That's not our business. We make it and push it through as the first step in the supply chain. So we don't anticipate any kind of gain, if you will, as prices improve from selling inventory made at a low price and selling at a high price at this point.

Okay, that makes sense. And maybe one final question. You know, as we sort of think about the guidance range or your updated guidance range that you put out today, you know, what are the scenarios that get us to the high end and what are the scenarios that get us to the low end? I imagine shelter in place would get us to the low end, but, you know, what are specific trends, you know, within reason of trying to predict that gets us to your high end and low end?

Yeah, I think it's really driven by the rapidity and the the pace of the recovery in worldwide markets and whether or not we can primarily in our – and that would translate into the pricing, if you will, for soda ash as well as volume recovery. So that's really going to be the big driver as well as can we – Can we manage through a recontracting with the Phoenix, which, again, is small around the edge of the overall aggregate segment margin. But, you know, just, you know, a few negatives relative to a few positives is really driven primarily by the volume recovery in SODASH in the second half of the year. That's going to determine where we come in in that range.

So the biggest driver is going to ultimately be Sonash pricing and volume effectively. That's kind of the biggest swing one way or another? That's correct.

Perfect.

Really appreciate the call today. Once again, glad to hear you guys are all well and have a safe day.

Thanks, sir.

Again, in order to ask a question, press star 1 on your telephone keypad. That's star and the number 1. And there are no further questions.

Okay. Well, thanks, everyone, for participating this morning. You know, I think the second half is going to be better than the first half, hopefully. But we will talk in 90 days, if not sooner. So thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.