Genesis Energy, L.P.

Greetings and welcome to Genesis Energy's Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dwayne Morley. Thank you. You may begin.

Welcome to the 2021 first quarter conference call for Genesis Energy. Genesis Energy 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 deep water 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's operations are primarily located in Wyoming, the Gulf Coast states, and the Gulf of Mexico. During this 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 and 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. Thanks, Joy, and good morning to everyone.

As we mentioned in this morning's earnings release, the first quarter of 2021 demonstrated our market-leading businesses are in fact resilient and our financial results were consistent with, if not slightly ahead of, our internal expectations. As we look forward, we remain increasingly confident that improving macroeconomic conditions provide a significant operating leverage to the upside. In combination with our de minimis capital requirements outside of our Granger-Sodash expansion project, we believe we are poised to deliver significant value in future periods to all of our stakeholders. Our actions taken in early April to extend our senior secured credit facility, coupled with the tack-on offering to our senior unsecured notes due 2027, have positioned Genesis with no maturities of long-term debt until 2024, while providing ample liquidity and flexibility to deal with the trailing impacts of COVID-19 and the 2020 hurricane season. While we continue to expect 2021 to be a year of transition, the partnership is well positioned for long-term success with a recovery in our sodash business, significant additional free cash flow coming from our two contracted projects in the Gulf of Mexico, and first production from our fully expanded Granger sodash facility in the back half of 2023. Now turning to our individual business segments, our offshore pipeline transportation segment performed in line with our expectations and achieved a more normalized earnings run rate during the first quarter. As we look forward, the second quarter is typically a heavy maintenance quarter for our producer customers in the Gulf of Mexico, and we'd expect a certain level of planned downtime associated with these activities. Even with this expected downtime, we still anticipate to achieve quarterly segment margin in the second quarter of around $80 million. Our two large contracted offshore projects, Argos and Kings Key, continue to remain on track for first oil in the first half of 2022. BP and Murphy have both publicly communicated reaffirmed their prospective project schedules for the first and second quarters of 2022, respectively. We continue to anticipate that these two fields, when fully ramped, will generate an excess of $25 million a quarter or over $100 million a year in additional segment margin and free cash flow net to Genesis. We remain in discussions with three separate new standalone deepwater production hubs in various stages of sanctioning, with anticipated first oils starting in the late 2024-2025 timeframe, assuming they are sanctioned by the end of this year or early next year. We understand from our discussions with the producer community that drilling and development activity on existing and valid leases in the Gulf of Mexico is continuing pretty much the same as it always has. The recent announcement of BP's Puma West prospect is yet another example of producers building around and leveraging their existing footprints and expertise in the Gulf of Mexico. Along with Ecuador's Monument discovery and Beacon's Winterfell discovery, the opportunity set of future new developments, all of which more likely than not will need to access our existing infrastructure over the decades to come, continues to grow. We continue to believe that a large percentage of the economic acreage in the Gulf of Mexico which can be developed under current drilling technology, has already been leased. This inventory of existing and valid leases should provide decades' worth of drilling, development, and production opportunities, regardless of when the statutorily mandated leasing programs in the Gulf resume. To further elaborate on my comments from last quarter, crude oil from the deep water Gulf of Mexico remains some of the lowest carbon intensity barrels produced and refined in North America, if not the world. Several large producers, including supermajors such as BP and Chevron, have recently indicated the Gulf of Mexico is core to their future carbon neutral initiatives, and a cash flow from these low carbon barrels will help fund and fuel their growing renewables initiatives to help them meet their emissions targets or net zero goals. Recently, BP CEO Bernard Looney said, and I quote, hydrocarbon projects like Mad Dog 2 are crucially important in our new strategy. The cash flow these developments provide will drive our company's transformation. These types of comments and the continued activity in and around our footprint further drive our confidence that the Gulf of Mexico will remain one of the leading North American basins for years and years to come. Now turning to sodium minerals and sulfur services. Our sodash business continues to recover as demand for sodash is steadily increasing as the world's economies reopen and trending towards pre-COVID levels. The global supply and demand dynamic for sodash continues to tighten, and we believe all natural producers are sold out globally for 2021. Remember, We don't compete with an alternative product. We compete with synthetically produced sodash, which costs nearly twice as much to produce and has a carbon and other environmental footprint far in excess of naturally produced sodash. Listen, markets work. Low-cost and environmentally conscious natural sodash production will be baseloaded to meet the world's demand, and the market will swing on synthetic production, which, given its cost basis, will provide the backdrop for significantly improving pricing as the world's economies recover from the effects of the pandemic. Within China, against whom we primarily compete in Asia, certain synthetic productions come offline due to environmental restrictions, while domestic demand for soda ash continues to increase, ultimately reducing the number of tons available to be exported outside of China. Lower export volumes from China And recent increases in container shipping rates are also driving up costs associated with Chinese synthetic production on a deliver basis to markets in Southeast Asia. In response to this dynamic, NSAC announced a price increase for soda ash in early March for the second quarter on all of their non-contract sales of soda ash and on contracted sales when contracts allow. We believe this increasingly tight supply and demand dynamic will continue to support prices rising through the remainder of the year, especially towards the end of the year when we would otherwise redetermine most of our contract prices for the majority of our sales for 2022. In addition to rapidly recovering demand from a resumption of economic activity and longer-term demand growth from existing applications, we remain encouraged with increasing demand for soda ash from a variety of the green initiatives around the world. Lithium producers utilize soda ash in a two-to-one ratio to support their production of lithium carbonate, which is also used to make lithium hydroxide, both of which are building blocks to new generation lithium ion phosphate batteries that are placed in the exponentially growing electric vehicle and battery storage markets. Lithium batteries are the primary energy source for battery-operated vehicles, and depending upon your assumption of EV penetration rates in the overall automobile market, we could see a meaningful impact to the demand for soda ash over the coming years. Soda ash is also a critical component in the glass manufacturing process and subsequently in the manufacturing process of solar panels. In fact, there are recent reports of up to five new glass float furnaces coming online in China to build more solar panels, all of which, importantly, will consume higher-cost Chinese synthetic soda ash, thus further reducing Chinese synthetic ash volumes available for export. The increasing demand to manufacture additional solar panels in both China and the United States, when combined with the increasing demand from the lithium producers and battery manufacturers, should provide our SODASH business with increasing levels of participation and financial benefit from the various green initiatives around the world. Looking out a couple of years, we also have reason to believe that certain competitors are shelving or otherwise delaying their respective production expansions due to company-specific reasons. This dynamic could suggest our Grainger expansion project remains the only material natural production expansion project in the world that will come online by late 2023. Once expanded and optimized, Grainger's significantly reduced cost structure will allow its production to compete favorably on the global market to capture just normal demand growth resulting from GDP growth, as well as renewables-driven demand, or at a minimum, displace higher-cost synthetic soda ash production. Our legacy refinery services business performed in line with our expectations. During the quarter, we saw steady production levels combined with a strong demand from our copper mining customers and improving volumes from our pulp and paper customers. Copper prices remain at near decade-high levels, driven by the tremendous demand for copper from the reopening of the world's economies and the insatiable appetite for renewable and green initiatives around the world. While copper remains a foundational building block for many mainstream items in our lives, it is a critical component for the energy transition, in particular wind and solar technology, energy storage, and electric vehicles. To provide some additional color, if you looked at the amount of copper in a traditional internal combustion engine vehicle, it would require roughly 48 pounds of copper, while an electric vehicle requires approximately 3.8 times the amount of copper, or up to 180 pounds per vehicle. We believe the demand for copper from the various green initiatives will only continue to increase as we move forward, which should help us provide with steady and possibly increasing demand for our sodium hydrosulfide product in future years if and when copper mining expansions come online. As you can surmise, our sodium minerals and sulfur services segment is well positioned to benefit from various energy transition initiatives, not only to directly and indirectly contribute to lowering carbon emissions, but in fact to profit from the energy transition. We provide the picks and shovels, or the mission-critical building blocks, to both lithium producers and copper miners today as they continue to produce the raw materials needed to help drive the energy transition and future green initiatives around the world. As mentioned above, in early April, we successfully refinanced our senior secured credit facility, receiving $950 million in total commitments consisting of a new $650 million revolver and a $300 million term loan, all held with a syndication of 13 banks. We proactively reduced the size, extended the tenor to March of 2024, and obtained certain additional flexibility to address any uncertainty of covenant compliance as we deal with the trailing impacts of COVID-19 in the 2020 hurricane season, even as our businesses are rapidly recovering. In mid-April, we successfully priced a tack-on offering of additional 8% senior notes due 2027 at a premium of 103.75%. and received net proceeds of approximately $256 million. The proceeds from this offering were used for general partnership purposes, including repaying a portion of the borrowings under our recently extended revolver to further improve our liquidity position. As of March 31st, pro forma for these transactions, we would have had approximately $150 million outstanding on our $650 million senior secured revolving facility. While our total adjusted debt was sequentially flat from last quarter, we did liquidate crude oil inventory that had been hedged in the contango market. We sold such barrels for approximately $22 million in March, but did not receive the cash proceeds until April or after quarter end. Had we received the proceeds in the first quarter, we would have sequentially reduced our total adjusted debt by $22 million during the quarter. I'll switch gears now and touch on our view for the remainder of 2021. We remain on track with our previously announced guidance for full-year adjusted consolidated EBITDA, as defined in our Senior Secured Credit Agreement, coming in a range of between $630 and $660 million, which includes approximately $30 to $40 million of pro forma adjustments. In addition, we continue to expect to generate free cash flow after all cash obligations, in the range of $80 to $110 million in 2021. That being said, given the anticipated cadence of the future spend on our Granger expansion project, we might choose to spend some of this or future period's free cash flow to fund portions over and above the $250 million minimum obligation for us to draw under our asset-level preferred funding arrangement. This option does not take away from the fact we will continue to generate increasing amounts of free cash flow, and our ability to accelerate our deleveraging plan remains on track, and we are steadfast in our commitment to achieving our long-term target leverage ratio of 4.0 times. 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'm 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 and no known workplace transmission. It is an honor to have the opportunity to work alongside such quality folks. With that, I'll turn it back to the moderator for any questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please as we poll for questions. Our first question comes online of Kyle May with Capital One Securities. Please proceed with your question.

Hi, good morning, everyone. Grant, you mentioned some of the synthetic soda ash production in China was offline. Can you talk more about what's going on, I guess, with the environmental restrictions, perhaps how much global supply that represents, and any indication of how long it could be offline?

It's a little bit of a dark space from our perspective, but that's the indications that we've We hear from consultants and other boots on the ground that that's basically due to the environmental discharges associated with synthetic production. So we don't know really the whole quantity or the duration of it, but it appears in the first part of – First quarter of 2021, this is on somewhat of a lagging basis that total exports out of China, which we can track, but again, on a lagging basis, we're down about 10% year over year.

Okay, got it. That's helpful. And then I guess as we think about the ANZAC price increase and a better backdrop for soda ash pricing this year, Can you remind us if Genesis has much exposure to the better pricing or are you pretty much entirely contracted for the year?

In round terms, about half of our sales are domestically, and those are pretty much fixed for the remainder of 2021. About half of our export sales are 25% of our total sales. are to Latin America through ANSAC, and those are typically also fixed for the period. So the other half of exports, or 25% of our total sales, which are sales through ANSAC to Asian economies outside of China, are typically shorter duration, and the majority of them reprice on a quarterly basis. During 2021, the only real uplift you're going to see from a move in pricing is on the 25% of the sales. But the mix within either of those portfolios, you know, can affect some of the pricing. But suffice it to say that it certainly is, I've tried to make clear in our comments, It certainly feels that the market is rebalancing and that the supply overhang and the continued demand running below a year earlier levels, which occurred at the end of 2020, kind of gave the backdrop for lower prices in 2021. But we see that reversing and the dynamic changing that we would expect prices to recover in 2022.

Okay, that's very helpful. Thanks for taking the questions.

Our next question comes from Teresa Chen with Barclays. Please proceed with your question.

Hi, Grant. Thanks for taking my questions. I wanted to kind of follow up on the pricing question. Just when you boil all of that down in relation to the mix of your portfolios as far as what is contracted versus what is, you know, re-rating in price quarterly, and the magnitude of the ANZAC price increases and also the mix of the portfolio of your, you know, 25% exports to Asia X China. What kind of quarter to quarter uplift should we expect near term? And also, you know, looking to 2022 as you renegotiate contracts at the end of 2021, what kind of uplift should we expect just from the price movement alone there?

Well, the, you know, we're the crystal ball is not as crystal as sometimes it would appear to be. I mean, I think, and let's go back and Teresa with a little bit of historical perspective, you know, we had in late 19 pre pandemic. And so when we were setting prices for 2020, we had kind of the beginning of a slowdown in worldwide economic activity, as well as an overhang of a potential trade war between the U.S. and China going on. So there was a little bit of an overhang. So 2020 prices actually started the year lower than they were in 2019. And then the pandemic hit. And so we had this, we went through the 2020, the domestic prices and land and prices held up because they were negotiated. And then the Chinese expect Asian prices ex-China. continued to fall as we went through 2020, and we had the dynamic going in 2021. So a long-winded answer is that we're not exactly sure how rapidly things are going to recover, although they're going to recover. If we could get back to I would say it this way, if we can get back to 2019 prices, which, again, I'm not claiming that we're going to get there in 22, but certainly 23 feels potentially that, you know, the business would recover order of magnitude back into the 160 to 180 run rate, and that's before Grainger comes on. And with those 2019 prices that Mid-2019 prices, when Grainger comes on, we'd expect incremental segment margin contribution from an optimized Grainger to be in the $60 billion range. So, again, with getting back to $220 to $240, you know, kind of in a $23, $24 type timeframe, certainly seems reasonable to us.

Understood. Thank you. And then just turning to marine, a lot of moving parts in this segment as well. Can you kind of just distill for us, you know, what the run rate should be, assuming a more normalized quarter for a dry docks and session as refining utilization continues to increase and also on the heels of the new American Phoenix contract?

Yep. The AP contract in the first quarter was the low water mark. It's gone under contract at probably, in round terms, $6,000 or $7,000 a day more than it got in the first quarter. So that will be a 12-month contract on a prospective basis. And also in the first quarter, due to various dry docks and other things, we more or less had one net blue water unit out of service during the entire quarter. which, again, we think that that's kind of behind us, so we should get a little bump in that. And then, importantly, once in reality, the winter storm, which I think some people called Yuri. I never knew what that meant. But, you know, once it caused some dislocations and refining along the Gulf Coast, our specific types of barges, black oil barges or internal heater barges, actually started to see a dramatic increase in utilization. And then, as you point out, Teresa, refinery runs continuing to inch their way higher. If the world can figure out what to do with the jet cut on a crude barrel, then we would expect it to even recover more. So as we sit here today, our brown water utilization – is in the high 80% range. So we've seen a fairly steady cadence of improvement in that as the refinery utilization has continued. So on a go-forward basis, you know, I don't know what the good run rate is because we're kind of stuck for 12 months in a fairly low-pricing environment for the American Phoenix, which really moves the needle. But Things are improving from a fundamental point of view rather rapidly for us.

Thank you, Grant.

Thanks, Tracy.

And once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of with UBS. Please start with your question.

Hi. Good morning, everyone. I figured since Sodash is popular, I'll just continue with the questions there. Given the growing renewable initiatives, just kind of curious if it's possible for you to accelerate the timeline on Grainger, and just also wondering if your customer base has expanded to include these green buyers, and if so, can you give us some examples?

Yeah, I think there are certain circumstances where we can accelerate the Grainger expansion. But we could always, at some point within probably a four- to six-month time frame, if prices supported it, so there was a dramatic recovery in primarily export prices because it doesn't make any sense to kind of bring it up and try to fight for market share, something that's already contracted domestically. But if export prices got to the point where it made sense, even on an inefficient basis, to resume the 550,000 ton annual production we could get out of Grainger, we could probably put that back into service and call it four to six months, kind of at the outside if conditions warranted. But There's not all that much we can do to accelerate the overall, the expansion to the 1.2 to 1.3 million ton range. So not a lot that we can do. Now, relative to your second question embedded in that, I mean, obviously, you know, companies like Albemarle, which is the world's largest lithium producer, and others, we're seeing – increased demand from those types of applications and certainly as pointed out both in the U.S. but especially in China which again is our major competitor at the margin for export sales out of Wyoming is really dramatically increasing their demand of sodash worldwide for solar panel manufacturing so you know I'm not going to go into the individual discussions with the individual customers and stuff, but suffice it to say that we are participating in those discussions and looking to be a supply chain partner with some of the leaders on other things that are the building blocks for the green initiative.

All right. Perfect. Maybe as a follow-up question, you'd mentioned in your prepared remarks about a liquidation of some crude that generates a $22 million leverage benefit. Just want to understand, is that just a leverage benefit, or is that something that we should be thinking about for second quarter from an earnings perspective as well, too? And how does this impact the securities buyback basket that you have currently outstanding?

The – no, whatever – margin, if you will, that we earned associated with the contango marketing play was reflected in the first quarter. So that it's strictly kind of a balance sheet item that the cash is coming in post the end of the quarter. So all it does is otherwise reduce our total outstanding debt. So we have within our revolving facility, we have a sub- Hedged inventory facility, so it doesn't fill up any of the baskets or relieve any pressure or relieve anything, take anything out of using any of the other baskets. So it's not a net earnings effect. It's just a net cash and a reduction in total outstanding debts simply because we received the cash proceeds post the end of the quarter.

All right. Perfect. I have a few more questions, but I'll jump back in the queue. Thank you. Thank you.

Our next question comes from the line of TJ Schultz with RBC Capital Markets. Please proceed with your question.

Hey, good morning. So in the Gulf, just one question around your prepared commentary on the discussions with new standalone deepwater hubs that would hit maybe in the 24, 25 timeframe. Are those hubs where you have the natural system to get the volumes? What type of magnitude, either volumes or to your segment margin, are some of the discussions around those hubs, and are these low-capital projects that just utilize some of your open capacity, or do you invest in the new infrastructure?

We're probably not in a position under NDAs and other things to go into a lot more detail. I can give you – I'm comfortable that from a volumetric point of view that the – The sum of it would be somewhere arguably on peak production between 200 and 220,000 barrels a day of incremental production. Everything else is the same. It certainly feels and looks like that we are the logical transporter to shore given the capacity configurations that we have on our systems and the capacity situations on competing systems. So, you know, that's about as far as I can go at this point. But, again, indicative of, you know, if you put it in context, I mean, Argos and Kings Key together, because Argos is quite a large system, but from our FPU floating production unit, those two are 210. So right behind here are kind of three systems. additional ones that are, you know, add up to about the same amount.

Okay. Great. Thank you. That's all I got. Thanks, TJ.

And once again, as a final reminder, if you would like to ask questions, please press star 1 on your telephone keypad. Once again, if you would like to ask questions, please press star 1 on your telephone keypad. We do have a follow-up question from the line of with UPS. Please, with your question.

Hi, Grant. As promised, I did say I have some more questions. Just out of curiosity, when I sort of think about this Sodash business, you know, I imagine that there's a lot of fixed cost absorption within that business. I was wondering, like, in a constant pricing environment, at this stage right now, you know, what is the marginal ton due to your margin? Like, you know, from the, if you add an incremental ton at this point right now, production, does that expand your margin even in the constant price environment?

Yes. I mean, that's the, in part, some of the financial results that we saw in 2020 was that we weren't even, even after we made the decision to temporarily mothball Granger, Even at our West Vaco facility, which notionally can produce 3.5 million tons of soda ash, because some of it goes into either to make caustic or specialty products, it doesn't exactly match up to some of the volumes that we report. But we weren't even operating at 100%. And when you're not operating such a massive industrial complex at 100%, you lose the fixed cost absorption value. So in the fourth quarter, we got back to running 100%. And we anticipate at West Bay Cone, we anticipate running 100% throughout. And our team, you know, led by Fred Von Ehrens on the ground and Ed leading our SOTASH business, you know, we're always looking for ways to squeeze that incremental turnout because the variable operating expense is quite low relative to the average fixed cost. And so getting that incremental ton of ash on the belt, as we like to say, is very valuable to us. Yeah, and that's, I mean, so that's kind of the analogy, Schnur, is kind of Granger, and that is that Grainger has the infrastructure and, in essence, the fixed cost almost of a 1.2 but 1.3 million ton a year facility. But because it had inadequate evaporative capacity, for lack of a better description, it was only capable of producing 550,000 tons. So it was kind of inefficient. And by expanding it, we make it the same economics as West Vaco, which we believe is – the cheapest or among the cheapest producing facilities in the world. So Grainger will join that rank when it comes on on an expanded basis.

That makes perfect sense. And one follow-up, do you have a scheduled longwall move this year or next year? Just wondering if that's something that we just need to think about in terms of modeling.

We've just completed a longwall move. It will, to the extent there's any effect, will show up in the second quarter. But we built up as much inventory in the ore pile as we could prior to doing that and continued to have more mining operations while we were doing the long haul moves. So we don't anticipate a significant effect, but it is behind us at this point. And the team did a great job of getting it done safely and within schedule. Perfect. Thank you very much.

That does it for me.

Thank you.

And with that, ladies and gentlemen, we've reached the end of our question and answer session, and I would now like to turn the call back over to management for any closing remarks.

Okay. Well, I think we appreciate everybody's attendance and hope to talk to you in 90 days, if not a little bit sooner. So thanks, everyone.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.