Genesis Energy, L.P. Common Units

Greetings. Welcome to the Genesis Energy LP3Q 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, Dwayne Morley, Vice President, Investor Relations. Thank you. You may begin.

Good morning. Good morning. Welcome to the 2021 third 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 deepwater Gulf of Mexico to onshore refining centers. The sodium minerals and sulfur services business 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 with the meanings 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. As we mentioned in this morning's earnings release, the third quarter was generally in line with our expectations, but more importantly, we continue to make steady progress towards our goal of building long-term value for all of our stakeholders. As we look forward, we remain on track to see increasing volumes in the Gulf of Mexico in the first half of 2022 and improving market conditions in our sodash business, driven by the ongoing global economic recovery and the tailwinds associated with the energy transition. We're also now less than two years away from first soda ash on the belt from our expanded Granger facility, which is poised to benefit from these ongoing market trends. The next 24 to 36 months will confirm the longevity and resiliency of our world-class leading infrastructure in the Gulf of Mexico, the competitive strengths of our soda ash business, and ultimately the earnings power of our market-leading businesses. Our offshore pipeline transportation segment performed in line with our expectations despite a steady level of maintenance by our producer customers and longer than anticipated downtime associated with Hurricane Ida. We did not experience any damage to our assets, nor did any of our producer customers, but the path of the storm greatly impacted the number of onshore facilities critical to the receipt and downstream movement of offshore oil and gas production. As a result, we did experience longer-than-anticipated downtime during the quarter, primarily on our Poseidon pipeline, which was a direct result of the lack of power at certain third-party facilities and gas processing limitations onshore. Once our CHOPS pipeline resumed service, we were able to divert certain barrels that would otherwise flow on our Poseidon pipeline to our CHOPS pipeline, which allowed certain producers' customers to restart their production earlier than they anticipated. This once again highlights the connectivity and the multi-delivery point optionality of our offshore systems that we provide our producer customers in the central Gulf of Mexico. Because of equity accounting, our third quarter results for Poseidon reflect its financial performance for June, July, and August. Accordingly, this next quarter, we will experience some financial impact from Poseidon being down for the first 11 or 12 days of September as a result of Hurricane Ida. as the distribution we will receive in the fourth quarter covers commercial activities for September, October, and November. As such, we would reasonably expect the fourth quarter to come in at the lower end of our previous guidance range of $80 million per quarter, or even slightly less. The Gulf of Mexico continues to demonstrate its resiliency despite any combination of planned or unplanned downtime associated with producer maintenance or hurricanes. The activity levels remain strong as the vast resources, low carbon footprint, and highly economic drilling activities allow producers to step out further and further to explore around existing fields and exploit the tremendous reserves under their existing and valid leases. Our lateral strategy is proving very valuable as producers pursue the short-cycle, high-return business of tying in subsea development wells to existing production huts. Each deepwater production facility, as a practical engineering and economic matter, has only one oil export pipeline. As a result, to the extent we're directly or indirectly connected to any such hub, all of the production from these incremental tieback developments is destined practically to be forever dedicated for transportation service through our assets. We 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 build multiples with three new standalone deepwater developments in various stages of sanctioning with anticipated first oil in late 2024 to 2025 timeframe. 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 no later than the end of this year or early next. We would also note in late August, the Department of Energy announced it would take steps to restart the federal oil and gas leasing program in the Gulf of Mexico in response to a federal judge's order on June 15th that blocked the current administration's pause in oil and gas leasing on federal lands and waters. At the end of September, BOEM, or the Bureau of Ocean Energy Management, announced that it would hold an oil and gas lease sale, number 257, for the Gulf of Mexico in roughly two weeks, or on November 17. This will once again allow the producer community to evaluate, lease, and explore any currently unleased blocks in the Gulf of Mexico. These incremental subsea tieback and new production hub opportunities, combined with the continued leasing of new blocks and subsequent discovery of new prospects and fields, should provide Genesis with decades and decades of additional visibility of pipeline and opportunities for moving the future crude oil production from the central Gulf of Mexico to refining centers onshore. Now turning to our sodash business. During the third quarter, we saw a continued improvement in overall market conditions for Sodash. We remain very encouraged with the overall supply and demand balance dynamics, and we expect the market to do nothing but grind tighter over the coming years as we continue to recover from the pandemic and the demand tailwinds from the various green initiatives and energy transition continue to build. As we sit here today, Spot export prices, FOB, a Chinese port, have continued to rise throughout the year as Chinese exporters have chosen to supply the Chinese domestic market over exporting soda ash, as well as responded to government mandates to reduce production for environmental reasons and as a result of power shortage. By publicly available accounts, Chinese exports of soda ash are down 45% through August of this year, compared to the eight months ending August of 2020. This is really quite remarkable given the total demand in 2021 is so much higher than the crop experienced during the height of the pandemic and the depths of economic activity a year ago. As we have discussed before, we generally do not place tons into the spot market given the long lead time and logistical challenges. Additionally, Whether domestically or through ANSAC, we sometimes have to respond to what seems like totally irrational behavior on both price and volume. Nonetheless, we believe the current market backdrop positions us very well as we begin in earnest both pricing and volume discussions for 2022. These increases in price have been driven for the most part by a significant recovery in global demand, as well as rising energy input costs in container and bulk shipping rates. All producers of soda ash are experiencing similar cost inflation from their energy inputs, especially synthetic producers, whose chemical process is two to three times more energy intensive than natural producers. One could reasonably infer that synthetic producers are experiencing much greater cost impact from the rise in their energy input costs, and thus need soda ash prices to increase correspondingly to preserve their margins. The market price will need to rise further for more high-cost synthetic tons to enter the market to supply the marginal ton of soda ash demand worldwide. Regarding shipping costs, again, all producers face rising costs. Domestic customers are responsible for all delivery costs, although we often act as agents for them in arranging the delivery options. ANSAC, which typically sells on a delivered bulk basis, has used its scale as well as a laddered approach to contracting marine vessels, which has made managing these rising costs substantially easier than those exporters who have less scale and who have chosen to go it alone. Chinese exporters ship via containers and face both higher cost and availability issues. And remember, Just like taxes, ultimately the consumer will pay for all of the rising costs associated with these escalating shipping rates. The effect of rising energy prices on us is quite manageable. We would note that only about a third of our thermal energy demand for both our steam and process heating requirements is exposed to fluctuations in the spot price of natural gas. We strive to maintain a balanced portfolio of financial hedges for our natural gas volumes as well as pass-through mechanisms in an effort to reduce our exposure to any significant fluctuation in our energy input cost. In fact, NSAC has just implemented a per-ton surcharge in its contracts as applicable to pass on the cost impact of increases in natural gas prices above $5 per mm BTU. Most of our overall contracted tonnage, including domestic and export sales, is already protected by similar provisions. In addition, in the case of ANSAC, a fuel surcharge for increases in bunker fuel related to its cost of marine transportation was implemented earlier this year. As we look ahead, we continue to believe the energy transition will provide the backdrop for meaningful demand growth of SODASH over and above the projected baseline GDP-correlated growth of 2% to 3% per year. SODASH remains poised to play an increasing role important role in the energy transition, and we believe this trend only continues as the world's insatiable appetite for solar panels and new generation lithium iron phosphate batteries increases over time. Genesis remains very well positioned to participate in this market growth, and our global low-cost position, including from an expanded Granger facility, will allow us not only to participate, but also profit from the energy transition moving forward. The Grainger expansion remains on schedule to be the first global expansion of natural sodash in over four years, with the first sodash scheduled to be on the belt in the third quarter of 2023, if not a little sooner, with an expected ramp to its design capacity of 1.3 million tons per year over the subsequent nine to 12 months. As we mentioned, we locked in substantially all of our construction costs prior to this inflationary cycle that has really just accelerated here in the last six months. As a result, we are comfortable the Granger expansion will come in very close to the $350 million estimate envisioned back in September of 2019 when the project was originally sanctioned. We've also preserved the optionality to restart the original Grainger facility and its roughly 500,000 to 600,000 tons of annual production as early as the first quarter of 2023, or perhaps a little sooner if market conditions persist, and specifically if export pricing continues to improve through 2022. We believe the opportunity set within our sodash business is an enviable position by any measure and will ultimately allow Genesis to solidify its position as a leading and low-cost baseload supplier of sodash to the world. Our onshore facilities and transportation segment performed in line with our internal expectations. Looking forward, we continue to expect to see an increasing volumes on our onshore facilities in Texas City and Raceland as incremental volumes from our offshore pipelines come online and need to be routed and further transported by a pipeline to the major refining centers along the Gulf Coast. Our marine transportation segment performed in line with our expectations, except for the effects of Hurricane Ida. we did experience some relatively minor physical damage to 14 of our inland barges and three of our pushboats, all of which broke away from usual and customary fleeting arrangements while riding out the storm. All of these costs were covered by insurance except for a single $100,000 deductible reflected in the third quarter. As a result, however, these assets were unable to work for most of September and even more recently. As of today, Six barges are still in the yard being repaired, but all pushboats have returned to service. That being said, demand for our inland fleet of black oil heater barges seem to have bottomed, and in fact, we have seen a dramatic uptick in the last several weeks to the point recent utilization is in the high 90% range and spot pricing is beginning to move up. We believe this recovery is being driven by increased refinery utilization and, importantly, a widening of the light heavy differentials leading crude slates to return to more historical norms. We have also seen steady activity levels in our blue water fleet as the demand to move refined products from the Gulf Coast to the East Coast remains strong due to certain refinery closures on the East Coast. a not insignificant amount of blue water capacity concentrated along the East Coast has been practically out of the market due to a financial restructuring bankruptcy situation. The petroleum marine sector is seeing an accelerating retirement of older tonnage and virtually zero new build activity across all classes of marine assets, which most certainly will benefit a relatively young fleet such as ours. As the demand for Jones Act tonnage returns to pre-pandemic levels In the face of this absolutely shrinking supply, we believe we are likely to experience accelerating improvement in the financial results from our marine operations in 2022 and beyond. I'll switch gears now and quickly touch on our view for the remainder of 2021. As we look forward, Genesis remains well-positioned to benefit from from pre-cash flow over the coming years, and thus we do not foresee a scenario where we do not comfortably live within our senior secured bank covenants moving forward. As a result of the unplanned downtime in our offshore marine segments associated with Hurricane Ida, we would expect to come in around $620 million of adjusted consolidated EBITDA for all of 2021, which includes approximately $30 to $35 million of pro forma adjustments and which is slightly below our previously announced guidance for the full year. Regardless of 2021, the future remains bright and, importantly, visible. We remain steadfast in our commitment and are working hard to build long-term value for all of our stakeholders through a combination of leverage reduction and meaningful growth in our free cash flow and adjusted consolidated EBITDA. The decisions we are making today reflect this commitment and our confidence in our core market-leading businesses moving forward. 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 that we have safely operated our assets under our own health and safety protocols and procedures with no impact to our business partners or customers. 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'll be conducting a question and answer session. If you'd 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'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 the line of Shanur Gusherni with UBS. Please proceed with your question.

Hi. Good morning, Grant. I was wondering if we can start off with, you know, some of the tailwinds potentially for next year. So you sort of talked about the soda ash pricing and so forth. Also, there's PPI inflators out there as well, too. Can you remind us how many contracts are up for renewal next year on SODASH? On my map, I think it's about 60%. And then secondly, if you have any PPI inflators with respect to your offshore pipeline?

Well, we're just now kicking off in earnest, as we said, the pricing discussions for next year. And generally speaking, the A portion of our domestic sales will come due every three or four years, which will be what we would call a jump ball in terms of pricing in today's kind of price metrics on a prospective basis. The rest of our domestic sales are subject to longer-term contracts, which are have annual price redetermination for the subject, generally speaking, to caps and collars. So those won't be moving up. And the vast majority of our export sales are under less than one year or less contracts. And so those will be available for discussions and repricing in today's market. But again, we have to be mindful of – you know, costs associated with everything in terms of shipping costs and other things, but, you know, the FOB pricing back to the Green River facilities should benefit substantially in 22 as we get through this pricing deal. Relative to PPI inflators, I mean, there are two major systems, and all of our laterals are under proprietary systems, so they're not typical they're not FERC regulated and therefore don't have the typical escalation, although newer generation contracts do, but oftentimes that's capitalized negotiation at 2.5% to 3.5% per year. So we would expect some bump associated with that. Typically those occur on an annual basis, either on the January timeframe or July timeframe. If you're on the cycle of FERC regulations. So we'll get some benefit from that, but really the story out of the Gulf of Mexico is the incremental volumes that we anticipate coming with the developments that we've talked about in the past.

If I can just clarify your comments on SOTASH for a second before my second question. So basically you said 50% is under contract for less than one year, and then a quarter of the NSAC would or roughly a quarter of the ANZAC would come up, so that would be about 62.5% should see a repricing throughout 2022?

That's a quarter of domestic prices. Domestic contracts should come up, and then basically the majority of the 50% of ANZAC sales are one year, vast majority are one year or less from a volumetric point of view, and so those would all come up for and in some cases, the short term is quarterly.

Perfect. You talked about the fact that you've got fuel pass-throughs in your cost structure with certain triggers and so forth. I was just wondering, just on the other side of some of the inflation in terms of costs that we've been seeing, if I recall, but maybe I don't recall correctly, you do have a settled union contract, and so we should only see you know, previously negotiated wage increases at this ODASH business, or does this whole PPI factor going on, you know, potentially change that?

We are in the second year at this point of a five-year collective bargaining agreement with our union employees in this ODASH business, and I believe that has an annual – escalator at 3.5% per annum in that contract. So we have some amount of cost control, yet a fair bargained arrangement with the workforce.

All right. Perfect. Thank you very much. Really appreciate the call today.

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 the line of Teresa Chen with Barclays. Please proceed with your question.

Good morning. Grant, I'd love to follow up on your comments about the Granger facility possibly restarting a little earlier than anticipated. Just curious, you know, if you were to elect a restart in the first quarter 2023, at what point in 2022 would you have to make that decision? How quickly can you do it and what would be the cost of that?

Ultimately, the cost of starting up is going to be absorbed anyway because the cost at the margin is going to be hiring the personnel and training the personnel to operate the expanded or the old Granger facility as the case may be. You know, it's just a matter of, you know, again, don't want to get out too in front, but, I mean, it's, you know, we have to hire. We're going to be very safe and trained and go forward. But really at the margin, it's just an acceleration of the cost that we're going to incur anyway, and that's making the decision to hire and train people the personnel to operate the facility. And, you know, obviously we have, you know, the ability to move people around from our other facilities because on an expanded basis, it is identical to one of our facilities from a technology point of view that we currently operate the LDM facility on our West Vaco facility or West Vaco footprint. So, you know, I think that we could we could probably do it, uh, you know, certainly within, uh, uh, I would think 90 days plus or minus, uh, once we pulled the trigger and made that decision to go forward.

Got it. And then, um, in terms of the onshore segment, um, I was hoping if you could provide some clarity around what the true run rate earnings power is here and going forward, um, Clearly, quarter per quarter, we saw some volumes decline. Was that a result of hurricane impacts? And then, nonetheless, segment margins increased quarter per quarter, stripping out the Denbury payment. Just wanted to understand, from your perspective, what is the true run rate of this segment?

Well, I think that, Teresa, we would rather, when we roll out kind of 22 guidance in our fourth quarter call, I think that we'll have a better idea of what the, uh, or, or be able to communicate to the, to everyone what the, uh, the, the earnings power is. Uh, we've had, uh, uh, we had some, uh, some gains that we didn't kind of expect, uh, in the third quarter. Uh, so I'm not sure that, uh, I would necessarily use that as a, your arithmetic of, of backing out the Denver repayment to look for the fourth quarter. But, uh, You know, I think that we're burning through some of the existing credits that were built up, and we would hope that we're also in the process of amending and extending the agreements with some of our customers onshore, specifically in and around the Baton Rouge area. So I think we'll have a much better idea as we get through this. those discussions, and hopefully that's by the end of the year and we'll be able to talk about that on the fourth quarter call.

Okay, I hear you on the 2022 outlook. I guess maybe just in terms of third quarter results, do you have an idea how much the gains were that were one time in nature?

I don't. Off the top of my head, we can work to get that to you. I mean, order of magnitude, I would say around $3 million.

Okay, thank you.

Okay.

Our next question comes from the line of Michael Bloom with Wells Fargo. Please proceed with your question.

Thanks. Good morning, everyone. I just wanted to understand a little bit better in the SODASH business your exposure to spot natural gas prices and just exactly how that works. I guess, are you saying that you leave one-third of your exposure unhedged or that you do hedge, and then of that third that is unhedged, at least as of now, are you able to pass all of that cost increase on to your customers? Just wanted to better understand how that piece of it all works. Thanks.

Basically, we directly and indirectly get some of our thermal requirements from coal under long-term fixed-price contracts. And so basically, based upon our approach to managing the overall energy input expense, that kind of one-third of the total requirements is subject to the fluctuations in the spot price or current month price of natural gas. So within that one-third, that's where we employ other hedging-type mechanisms as well as have the mechanics in place to pass on at the margin the incremental cost associated with those fluctuations directly to the customers.

Okay. Thank you very much. Appreciate it. Thank you.

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

Well, thanks, everyone, for participating. I appreciate your time. I know it's busy during earnings season, but we'll talk in 90 days, if not sooner. So thanks again.

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