Genesis Energy, L.P.

Greetings. Welcome to the Genesis Energy 2Q 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 will now turn the conference over to your host, Duane Morley, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to the 2021 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'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 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 of Finance and Corporate Development.

Thanks, Troy, and good morning to everyone. As we mentioned in this morning's earnings release, the second quarter was in line with our expectations, but more importantly, the longer-term Genesis story continues to improve as we move through 2021 and into 2022 and beyond. Our two contracted upstream developments in the Gulf of Mexico remain on track for first oil in the front half of 2022 and are expected to ramp to full run rates sometime in late 2022 or early 2023. We also expect a continuing recovery in our soda ash business with longer-term growth driven by a combination of a return to pre-pandemic economic activity a resumption of normalized GDP growth, and the expected demand growth for soda ash, given its critical importance as a fundamental building block for many activities in the unfolding green energy transition. As a result, we believe Genesis is very well positioned to see increased amounts of adjusted consolidated EBITDA, free cash flow, and improving balance sheet over the coming years. Now turning to our individual business segments, our offshore pipeline transportation segment performed slightly ahead of our expectations during the quarter, despite the increased level of maintenance and downtime from our producer customers. While we expect some producer maintenance from the second quarter to cross over into the third quarter, and assuming we experience no worse than a normalized hurricane season, We would reasonably expect our third quarter to come in towards the lower end of our previously announced range of 80 to 85 million of segment margin per quarter. As we look forward to 2022, our two large contracted upstream developments, Argos and Kings Key, continue to move closer and both remain on track. In fact, Murphy recently announced the Kings Key floating production platform is scheduled to sell away to its final home in the Gulf of Mexico sometime this quarter. In anticipation of first oil, BP and Murphy have both a number of wells pre-drilled in each of their respective fields, which should allow for a rapid ramp in anticipated production over a six- to nine-month period. We continue to expect these fields, when fully ramped, will generate an excess of $25 million a quarter, over $100 million a year in additional segment margin and free cash flow. Additionally, we remain in active dialogue and continue to advance our discussions to provide midstream services using our existing footprint, along with the potential to deploy new capital with contracted low single-digit bill multiples with three new standalone deepwater developments in various stages of sanctioning with anticipated first oil in late 2024 to 2025 timeframes. These developments represent up to approximately 200,000 barrels per day of incremental production in the central Gulf of Mexico, and we would anticipate the producers of each of these projects will make their respective final investment decisions in the second half of this year. The producer community in the Gulf of Mexico continues to operate business as usual, and current activity levels continue to suggest – excuse me. that the Gulf of Mexico remains one of the most economically competitive and lowest greenhouse gas intensive basins in North America. Even as major upstream companies continue to focus on the energy transition, we expect to see continued development in the Gulf of Mexico. Evidence of this belief was again on display just last Monday when both Shell and Chevron announced their final investment decision for Whale, another multibillion-dollar deepwater development in the Gulf of Mexico. While this development is unlikely to be tied in to any of our pipelines, we view the decision and their associated commentary, specifically around the lower greenhouse gas intensity of the production and the significant cash flow generation capabilities, as further evidence that activity in the Gulf of Mexico will be around for decades to come. In addition, despite some of the public rhetoric, the regulatory environment continues to be supportive of continued development in the deepwater Gulf of Mexico. The Bureau of Ocean Energy Management has issued over 375 permits since late January to support activity in the Gulf. And then just in June, a federal judge in Louisiana granted a preliminary injunction against the Biden administration's suspension of new oil and gas leases on federal lands and waters While it is our belief that a substantial amount of the highly prospective acreage in the Gulf of Mexico under current technology and economics has already been leased, we believe this ruling will ultimately lead to the resumption of federal lease sales and additional exploration and development opportunities of the vast resources in the Gulf of Mexico. Turning to our second largest segment, the overall macro story in sodash remains intact with, by our estimation, all natural producers being sold out and higher-cost synthetic production being needed to support rapidly increasing demand as we continue to recover from the shutdown of economic activity resulting from early measures to deal with COVID-19. Excuse me. Historically, exports of Chinese synthetic soda ash have cleared international markets at the margin and therefore influenced the price for our export volumes in Asia and Latin America, as well as ultimately our domestic pricing. Recent Chinese export statistics show Chinese export volumes of soda ash are at their lowest levels in over 15 years. This, combined with rising energy input costs and increasing container and shipping rates, that Chinese synthetic producers are facing further supports significantly higher prices for the increased tons being demanded abroad and in the U.S. In response to this dynamic, ANSAC announced another price increase for sodash in early June for the third quarter on all of their non-contract sales of sodash and on contracted sales when contracts allow. ANSAC, as the largest domestic exporter of sodash, uses its scale to manage a laddered portfolio of time charters and certificates of a freightment to hedge against any volatility in dry bulk shipping costs. ANSAC entered 2021 with a full 80% of its 2021 shipping requirements contracted and is currently instituting a fuel surcharge moving forward where contract terms permit. Additionally, NSAC is looking to manage any future volatility in dry bulk shipping costs by including indexing provisions that will pass on increased costs to its customers above a certain level of assumed base freight expense. Due to the nature of our contract structures and geographic sales mix, we do not realistically expect to see a material financial impact of these increasing prices in 2021. However, there is no question in our mind that this increasingly tight supply and demand dynamic will continue to support prices rising throughout the remainder of the year. This is very important, especially towards the end of this year when we would otherwise redetermine most of our contract prices for the contract year 2022 for both our domestic sales, representing approximately 50%, and our international sales through ANZAC. including to Latin America and Asia, representing the balance of our total annual sales. Accordingly, we expect SODASH prices to be sequentially higher in 2022, but our weighted average price will not likely fully return to pre-pandemic levels next year, primarily due to our longer-term domestic contracts containing caps and callers. However, we continue to believe the market dynamic exists where our weighted average price should move increasingly closer to pre-pandemic levels as we enter 2023, or we suppose 2024 at the absolute latest, which would coincide well with our Grainger expansion coming online and be at or above the price deck we originally assumed when we sanctioned the project in the third quarter of 2019. Our Grainger expansion remains on schedule for first production in the third quarter of 2023 and and we would expect production to ramp to its design capacity of 1.3 million tons a year over the subsequent 12 to 15 months. As mentioned on our last earnings call, we continue to evaluate the anticipated cadence of the future spend on the project and the potential to deploy some of our anticipated free cash flow to fund portions over and above the $250 million, which we are obligated to draw under our asset-level preferred funding arrangement. We'd expect to make that decision in the second half of this year. We continue to see increasing demand for sodash as a fundamental, required, and non-substitutable commodity for various green initiatives, in particular lithium battery production that will accelerate over the next few years. As previously discussed, lithium producers utilize two parts sodash to one part lithium, to support their production of lithium carbonate, or in certain technologies, ultimately lithium hydroxide, both of which are building blocks to lithium iron phosphate batteries. While there are various configurations for new generation electric batteries, lithium iron phosphate continues to be a cost-effective solution as it is not dependent on ultra scarce and price volatile raw materials like cobalt and nickel. As a result, we have seen electric vehicle manufacturers state lithium-ion phosphate batteries will be an integral part of their strategy going forward. For example, Elon Musk recently stated Tesla was making a long-term shift towards lithium-ion phosphate battery cells in their energy storage products and entry-level electric vehicles. Furthermore, Ford CEO Jim Farley and the company said the company would also use lithium iron phosphate batteries in some of their commercial vehicles. And Volkswagen CEO Herbert Gies announced that lithium iron phosphate would be used in some of their entry-level batteries. All of these data points further reinforce our belief that demand from lithium producers and battery manufacturers will continue to be a driving force for incremental sodash demand on top of the other green initiatives like solar panels, and retrofitting windows with more energy-efficient glass products. I'll switch gears now and quickly touch on our view for the remainder of 2021. Given our current expectation of no crude by rail activity in the second half of the year, a slightly slower than previously expected recovery in our marine segment, and a non-cash increase in G&A expense associated with long-term incentive-based compensation, We currently expect to come in towards the low end of our previously announced guidance for full-year adjusted consolidated EBITDA of $630 to $660 million, which includes approximately $30 to $35 million of pro forma adjustments. Longer term, however, the outlook has never been brighter as we have clear line of sight to increasing amounts of adjusted consolidated EBITDA, free cash flow, and improving balance sheet. We expect the Gulf of Mexico to see significant near-term volumes increase starting in 2022, and we remain optimistic around several new developments reaching their final investment decisions in the back half of this year for first production of the 2024 to 2025 timeframe. As we move past the demand shock from COVID and the global economies continue to reopen, the sodash market continues to balance and tighten as evidenced by significantly rising export prices. As a leading low-cost producer of natural sodash with hundreds of years of recoverable reserves of trona, we remain well-positioned to continue to benefit from the recovery in demand to pre-pandemic levels, normal future demand growth driven by the inexorable maturation of the world's economy, and the exciting incremental growth driven by the green energy transition. Our team continues to work diligently to position the partnership to fully realize the benefit of the growth in front of us, and I remain confident in the Genesis story and confident that our performance will only improve in the years ahead. 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 health and safety protocols and procedures with no impact to our business partners and customers with limited confirmed cases of COVID-19 amongst our some 2,000 employees. It's 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.

Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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. Our first question comes from Kyle May with Capital One Securities. Please proceed with your question.

Hi, good morning everyone. Grant, you mentioned deploying capital for the offshore developer, potentially deploying capital for the offshore developments in 2024, 2025 at low single digit multiples. Can you give us any idea of the potential capital that would be required to support those projects?

We're not at liberty to disclose that at this point. As I said, we're in active discussions with three standalone significant deepwater developments, and we're not at a position yet where they've been FID'd, and we're in a position to disclose that.

Okay. Maybe asking a different way, I think you mentioned that those producers could make an FID later this year. Will the midstream provider be announced in the same timeframe?

Yes, in all likelihood, that would be the catalyst for full disclosure.

Okay, got it. And then taking into consideration your results for the first half of this year, it suggests that you'll see a meaningful ramp in the back half to reach the lower end of your EBITDA guidance. Can you walk us through where you expect to see this growth and then maybe preliminary thoughts of how this will carry into next year?

Yeah, I think that some of the ramp is because of the increasing pro forma contribution of getting up to the 30 to 35, which we have disclosed and I think was further described on a footnote within the release. But we do anticipate, you know, sequential cadence of positivity as we go through the rest of the year. You know, but I think really our – focus is on, uh, and I think you can tell by the tone of our prepared remarks, our focus really is on 22 and beyond, uh, given the exciting, uh, developments that we have in the Gulf of Mexico, which are contracted, which are backed by take or pay, by the way, uh, as well as, uh, continuing significant recovery and the financial contributions from our, our sodash businesses as same grind tigers. So, I mean, I think that, uh, You know, as we said, second quarter met our expectations internally, and we continued. We anticipated that we would have a slightly quicker recovery in marine as we cadence through 21. We're still, especially on the brown fleet, the inland fleet, given refinery utilization and apparent... Most refineries are maximizing runs of light-ins, so the heavies are not around that we are accustomed to moving. We anticipate, because of some peculiar dynamics, no real movement accrued by rail out of Canada for the rest of the year. Importantly, some significant non-cash movements equity-based compensation, incentive-based compensation that was awarded throughout the organization earlier. Those are kind of what's leading us towards the lower end for 2021. But again, we're not overly concerned about 2021. We're looking very forward to 2022 and beyond.

Got it. That sounds good. I appreciate the additional color. Thanks. Thank you.

Thank you. Our next question comes from Sean Arcosini with UBS. Please proceed with your question.

Hi, good morning everyone. Um, you know, maybe if we can start off on this soda ash business, um, in, in, in terms of the outlooks and so forth, um, I think you've said in prior calls that, um, you didn't expect to get to pre pandemic pricing levels until 2023. So your comments kind of sound pretty consistent. Just wanted to confirm that you still expect to get towards the top end of your callers in terms of on the contracting side. And then also you were talking about the transportation costs you're pushing to get that to be a pass-through. Just wanted to sort of clarify both of those, if that was – did I hear that correctly and if I'm thinking about it correctly? Okay.

Yeah, I think that certainly we would anticipate pricing at the top end, the outer range of the callers domestically. As we've said domestically, there are contracts typically are three to five years in duration with annual redetermination subject to caps and callers. So in entering 21, when prices were set in 2020, That obviously translates into 20% to a third of your domestic contracts are available every year for new contracting purposes. And given some of the dynamics, which we're currently 20, some of those contracts under competitive pressures got reset at lower prices, but again, with caps and collars. So it takes a while to get through. through that, but clearly, given the current dynamics, there's no doubt that we'll be at the top end of our callers under our existing portfolio of contracts. Sorry about that. Yeah, in domestic contracting, we typically All the freight is already passed on. We just act as agent for arranging the freight delivery to our customers in the U.S. market. So it's a direct pass-through of that. Basically, in ANSAC, we typically deliver or price things on a delivered ton basis. So it's good that ANSAC, which is the largest and has a logistical scale, and economies of scale was entered into or had 80% of its transportation needs kind of fixed for 2021. And as everybody is facing this, so we're advantaged in 2021. Everybody is facing the same kind of dry bulk shipping costs. So we are moving quickly to, in essence, pass that, be in a position to be able to pass that on. or volatility in that pass it on to our customers in 22 and beyond.

Okay. And, you know, just one more clarification on the Sodash side. Any volumes that are delayed ship towards the end of this year just because of the UP issues, those would just ship and could fall into 22. So that would just be a revenue shift from 21 to 22. Is that sort of the right way to think about that?

That's a way to think about it, yes.

Okay, great. And then maybe if we can just pivot to the offshore segment for a second. You know, you have some good data points in color about, you know, progress. You sort of expect to get to an incremental $25 million worth of EBITDA on a quarterly basis or $100 million annualized, I believe is your expectation. Can you give us a sense on the cadence of how that will come into your earnings in 22 and 23? At what point do you hit the full $25 million, and when does it start to ramp?

We'll see ramp starting in the first quarter, which is the initiation of production from Pargos, and then in the second quarter, which is the initiation of production from King's Keek. As we've said in our remarks, there are a number of wells that have been pre-drilled at both locations, and so we would otherwise anticipate a fairly rapid rate and could, in fact, be at that quarterly run rate as early as the fourth quarter of 2022.

Okay, but you should see some EBITDA throughout the year as you ramp to that 25. That's correct, yes. Perfect. Thank you very much. Really appreciate all the color today. Thanks, sir.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from TJ Schultz with RBC Capital Markets. Please proceed with your questions.

Great. Thanks. Hey, Grant. Just first on Louisiana, I guess I have two questions. First, you mentioned Raceland in your press release. Just what's moving through there now and kind of your outlook for that to ramp with some of the offshore volumes? And then secondly, on Scenic Station, if you upgrade that for Bidrum, when would you expect that to translate into any new activity? Thanks.

Yeah, I think that as we continue to see ramps in offshore production, you know, the Argos production is all dedicated to Cameron Highway, and the Kings Key is split 50-50, so half of it goes through Poseidon and half of it goes through Cameron Highway, so... We would anticipate everything else, the same additional volumes coming onshore and needing further transportation to refining centers onshore, so we could pick up incremental volumes in onshore Louisiana through the Raceland Terminal, which delivers them to LOCAP, which basically gets them to everybody in the South Louisiana refining corridor. And then in Texas, we have a the facilities in place in Texas City to distribute it both to local Texas City refineries as well as bringing it up to Webster and working on some additional interconnectivity there. So not only do we see the incremental throughputs on the offshore systems, but another bite at the apple, so to speak, with our onshore facilities, which are increasingly integrated with those offshore facilities. So that's a good thing. Relative to upgrading the scenic station, when we originally constructed it, we put in all of the piping and sized the hoses and pumps, if you will, to be able to handle straight-run bitumen, as I say in Canada. But we did not install the heating required to handle it as a non-hazardous material off of the railroad So the timing of that is basically a function of the pace of the development of diluent recovery units, or DRUs, in Canada. There's a number of them under discussion, but we think that that's probably a 24-25 type event at this point in time.

Got it. That's helpful. Just last question is just given where debt leverage is right now, any thoughts on the distribution here or rebasing that to help accelerate some of the delevering or given the outlook you have for 22 and 23, clearly improving, you're comfortable with kind of carrying that bridge. Thanks.

I think we're very comfortable given our outlook for 22 and 23, extremely comfortable of the current level of the distribution and the The ability to – it's a great thing to be in free cash flow mode and to the extent that, you know, we have opportunities to deploy it in high return, long-term valued projects, and we'll take a look at that. But we're very comfortable at the current level and really look forward to increasing financial performance in 22 and 23. Okay. Thanks, Grant. Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I will now turn the call over to Grant Sims for closing remarks.

Okay. Well, thanks, everyone, for participating. I know it was a pretty hectic day given the schedule of other earnings announcements, but we appreciate everybody's attendance, and we look forward to talking soon. Thank you.

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