Genesis Energy, L.P.

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.