NuStar Energy L.P.

Good morning. At this time, I would like to welcome everyone to the New Star Energy LP's fourth quarter and full year 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Pam Schmidt, Vice President of Investor Relations. You may begin your conference.

Good morning, and welcome to today's call. On the call today are Brad Barron, New Start Energy LP's President and CEO, and Tom Schultz, Executive Vice President and CFO, along with other members of our management team. Before we get started, I would like to remind you that during the course of this call, NewSTAR management will make statements about our current views concerning the future performance of NewSTAR that are forward-looking statements. These statements are subject to various risks, uncertainties, and assumptions described in our filings with the Security and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements. Also, throughout the call today, when we talk about our results, we will be describing our results from continuing operations. In other words, the results we refer to in this call will exclude the St. Eustatius facility we sold in July of 2019. During the course of this call, we will also refer to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release with additional reconciliations located on the financials page of the Investor section of our website at newstarenergy.com. With that, I will turn the call over to Brad.

Good morning. Thank you all for taking the time to join us. There's no two ways about it. It's good to have 2020 behind us. Perhaps because of the unparalleled challenges that last year presented for all of us, I'm prouder today than at any time in the past seven years since I started this job to report to you on how well NuSTAR has performed. Faced with historically difficult conditions, our employees stepped up and through hard work and prudent planning, including criticizing our capital program and significantly reducing our costs, we generated solid results in 2020. Last year, even though the pandemic depressed activity for much of the globe, we actually increased the number of barrels per day we throughput in both our pipeline and our storage segments over 2019. In fact, in 2020, New Star moved more than 817 million barrels of crude oil and refined products through our pipelines and terminals. That's six million more than 2019. I'm proud of the fact that we handled those barrels safely and responsibly, and once again in 2020, New Star outperformed our industry in terms of safety and environmental stewardship. Our days away, restricted, or transferred, or DART rate for 2020 was eight times better than the terminal industry average and two times better than the pipeline industry average And our total recordable incident rate, or TRIR, was seven times better than the terminal industry average and more than two times better than the pipeline industry average. I'm also proud that during 2020, NuSTAR generated adjusted EBITDA of $723 million, which is more than 8% above our 2019 EBITDA of $668 million. Growing our EBITDA by 8% would have been impressive in a normal year, but NuSTAR accomplished all this in a year that was anything but normal. a year in which the country and the world experienced some of the most difficult conditions in history. Our performance is a testament to our employees' perseverance, as well as the remarkable resilience and quality of our assets and the markets they serve. In our pipeline segment, after seeing refined product demand improve steadily through the summer, we continued to see stable, positive results all the way through December. On average, across our refined product systems for the month of December, we were at about 90% of typical demand. This was largely due to unplanned downtime at one of our customers' refineries, but we were back up to almost 100% in January and in line with pre-pandemic volumes. It's quite remarkable compared to other systems in different markets. We were also very pleased that our Permian crude volumes have continued to improve. Our systems volumes averaged around 418,000 barrels per day for the fourth quarter and rose to an average of 427,000 barrels per day during January. That steady upward trend has continued and we exited January at around 439,000 barrels per day. We believe that the volume we moved on our Permian system in January can be maintained in 2021 with about 16 active rigs, and that's without any ducks. So we've been encouraged that our rig count has risen above that number to around 20 rigs. That brings our systems count to more than 10% of the total number of rigs running across the entire Permian Basin as of the end of January. We believe our system's strong performance, even through the 2020's unprecedented challenges, is a continued reflection of its clear advantages, premier location, lowest producer costs, and highest product quality. It's also worth noting that none of our dedicated acreage is on federal lands. Our system's average barrels per day in 2020 was up more than 9% over 2019, which is more than twice the 4% growth rate average for the Permian Basin as a whole over the same period. Looking out to 2021, we're encouraged by the outsized share of the Permian's ducks that reside on our Permian crude system acreage. Our system typically transports about 10% of basin production, which is impressive, but we have about two times that, or about 20% of the Permian Basin's duck inventory on our footprint. We believe that the volume from completions of a little over half of those ducks, along with volume from rigs running on our system today, should support modest growth in our volumes in 2021, And we expect to exit 2021 between 470 and 480,000 barrels per day. Moving on from the Permian to our Corpus Christi crude system, we're seeing some indications of recovery in exports as well. After seeing our Corpus Christi exports dip below MVC's last May, we've been pleased with the ramp up we saw in the second half of 2020, with throughputs increasing from an average of 306,000 barrels per day in the second quarter to 369,000 barrels per day in January. 2021, we continue to forecast revenues for our Eagle Ford and WTI commitments slightly above the MBC levels. But I'm cautiously optimistic about some initial indications of recovery during January. Shifting over to our storage segment, we benefited last year from contango conditions in the spring. Many of those contracts continue into or through much of 2021. Starting in November, our St. James Terminal has also benefited from the resumption of unit train activity where we received Canadian heavy crude. And our West Coast Renewable Fuels Distribution System continued to grow as we executed on our projects there and further increased our market share. In the first half of 2020, NSAR handled about 5% of California's total biodiesel volumes, over 15% of California's ethanol, and close to 30% of the state's renewable diesel volumes. That's an impressive share of a key market that we've achieved with a relatively modest spend. And our market share along with our revenue is expected to keep ramping up through 2023 as we continue to execute on our planned projects there. In 2020, our West Coast storage assets generated about 20% of our total storage segment revenue, one-third of which was derived exclusively from renewable fuel-related services. As we continue to complete our 2021 West Coast projects, we expect renewable fuel-related services to grow and contribute about 35% of total West Coast revenue by year-end 2021 and approach 40% by year-end 2022. Our West Coast Renewables Network is growing and will continue to be the key to New Star's ability to thrive as we all navigate through the nation's evolving energy priorities. With that, I'll turn it over to Tom to give more details on New Star's fourth quarter and 2020 results.

Thanks, Brad, and good morning, everyone. Just a reminder that the results discussed will be from continuing operations for all periods. To put the quarter-over-quarter comparisons in perspective, fourth quarter 2019 EBITDA was the highest fourth quarter in the company's history compared to the pandemic-strapped fourth quarter in 2020. In addition, for the fourth quarter of 2020, our results include a $35 million non-cash charge related to the sale of our Texas City terminals. As such, fourth quarter 2020 adjusted EBITDA of $181 million excludes this charge and is down $15 million from the fourth quarter 2019 EBITDA of $196 million. However, for full year 2020, and despite the pandemic's impacts, we generated adjusted EBITDA of $723 million, which is an 8% improvement over 2019 EBITDA of $668 million, and at the high end of our previous guidance for the year. As a reminder, our full-year adjusted EBITDA results are adjusted for the charge related to the Texas City sale noted above, the pandemic-related non-cash goodwill impairment charge that we recorded in the first quarter of 2020, and the charge resulting from the repayment of our term loan in the third quarter of 2020. Fourth quarter 2020 DCF available to Commons Limited partners was 63 million compared to 107 million for the fourth quarter of 2019. And our distribution coverage to the common limited partners for the fourth quarter of 2020 was 1.44 times. For full year 2020, adjusted DCF available to common limited partners was 336 million, down 2.6% compared to 345 million for 2019. And our adjusted distribution coverage ratio for the common limited partners for 2020 was 1.92 times. Fourth quarter 2020 EBITDA in our pipeline segment was 130 million, down 12 million compared to the fourth quarter 2019 EBITDA of 142 million, mainly due to COVID-19 related throughput declines across our crude oil pipeline network. However, full year 2020 pipeline adjusted EBITDA was $521 million, up $21 million compared to full-year 2019 segment EBITDA of $500 million. Our fourth quarter 2020 EBITDA on our storage segment was $73 million, up $2 million from the fourth quarter of 2019 EBITDA of $71 million, has strong contributions from our West Coast Renewable Strategy, new storage contracts across our system, and renewals of existing contracts that we executed early in 2020 brought our storage facilities to 100% utilization. These increases more than offset COVID-19-related throughput declines at several locations that support our Corpus Christi crude system and some of our customers' refineries. And full-year 2020 storage segment EBITDA was $289 million, up $37 million, compared to full-year 2019 segment EBITDA of $252 million. Fourth quarter 2020 EBITDA in our fuels marketing segment was $2 million, which was down from last year due to weaker bunker and butane blending margins. Our December 31st debt balance was $3.6 billion. We had no borrowings outstanding under our revolving credit facility, and our debt to EBITDA ratio was 4.2 times. As a reminder... In September 2020, we issued $1.2 billion of new notes at attractive rates to provide us the liquidity to ultimately clear out our bond maturity runway for the next five years. The proceeds were used to repay our term loan, as well as all borrowings outstanding under our revolving credit agreement. And on February 1, we used the revolver availability to pay off our February 2021 bond maturity. Turning to the full year 2021 projections, We expect NuSTAR's 2021 EBITDA to be comparable to our 2020 results after taking into account the EBITDA associated with the Texas City Terminal that we sold in December. With regard to 2021 capital spending estimates, we expect to spend $140 to $170 million on strategic capital. Of that total for the year, about $50 million is our Permian system, which is scalable with throughput, volume, performance. And around $50 million will be invested in our renewable fuel-related improvements on our West Coast storage assets. In addition, we expect to spend $40 to $50 million on reliability capital in 2021. And with that, I'll turn the call back over to Brad.

Thanks, Tom. NuSTAR's solid results in 2020 are a testament to our employees' hard work and to the resilience of our business. We're starting this year encouraged by the rebound we've seen and continue to see across our footprint. January was promising, and we hope to see that steady, stable improvement continue. Given all that we accomplished in 2020, I'm confident that New Star is positioned to build steady, stable value in 2021 and beyond. To do that, we will continue to focus on our strategic priorities, operating safely, reliably, and efficiently, lowering our leverage to further strengthen our balance sheet, and funding all of our 2021 spending from our internally generated cash flows. In closing, we here at New Star want to wish you and your families a very happy, healthy, and safe 2021. Thank you. That will turn it back to the operator for Q&A.

As a reminder, if you have questions, please press Star 1 on your telephone keypad. Once again, that's Star 1. Your first question comes from Theresa Chen from Barclays.

Good morning. It's great to hear the upbeat commentary heading into 2021. I wanted to first touch on refined product demand and to your comments, Brad, about being back to almost 100% in January in line with pre-pandemic volumes. Can you give us any context or contours of what you're seeing by region? Is that pretty uniform? And do you expect any softening into the year as a result of the uncertainty related to the new virus variants and if that's baked into guidance at all?

Teresa, this is Danny. You know, we continue to see a lot of resilience in the markets that we serve. Again, many of our markets tend to be more rural and agriculture-based. Certainly, we've seen, you know, COVID cases spiking in the last couple of months all across the nation, but we continue to, you know, perform pretty close to pre-pandemic levels, aside from the maintenance issues that Brad talked about. But I would say we've seen especially strong demand down in south Texas, which has offset some small declines that we've seen, like up in the central east. But they're pretty small percentages both ways.

Okay. In terms of the 2021 EBITDA guidance, so if I remove the, you know, partial quarter contribution from the Texas City assets from fourth quarter results and annualize that, layering in the Permian growth, layering in that you have, you know, return to almost pre-pandemic volumes of refined products, it seems that 2021 should be net-net higher than 2020. So I'm just wondering, are there other areas of the business that are potentially declining in 2021 versus fourth quarter levels that we should be aware of?

Well, I think there's two things important to remember. One, in 2020, we had a near record quarter in Q1, which we're not having this year. And then also, you know, when you saw volumes dramatically drop off in the second and third quarter because of the pandemic, our revenue wasn't impacted that much because we were protected by MVCs across several of our systems. So that kind of muted it. And even though the volumes are coming back, like in Corpus Christi, for example, we're operating near MVC levels. So year on year, not a lot of change yet.

Okay, and lastly, related to the Permian exit guidance, can you just tell us how many rigs underlie the 470 to 480 expectation?

Yeah, well, so we've got, right now we've got a little over 20 rigs on the system, and that may be, you know, a fluid number with rigs coming on and off of the system. But, you know, I think that number of rigs, given the ducts that we have on the system, is enough to get there.

Thank you.

Okay, your next question comes on the line with Joe for JP Morgan.

Hi, thank you for taking my question. First I wanted to start, it looked like terminal throughput went down a little quarter over quarter. Do you mind talking about what was the driver there and where you expect terminal throughput going longer term?

Yeah, the big, you're talking quarter over quarter, 19 versus 20, the big change is in the Corpus Christi crude system. We were doing pre-pandemic, we were doing in the neighborhood of 650,000 barrels a day through that system for export or to the local refineries. And today we're doing 360, 370 down around our kind of MVC levels. That's both WTI and Eagle Ford.

And I'm also looking, it looks down, I guess, 3Q20 to 4Q20. Is it a similar driver there?

I didn't notice a big difference in the volume there. Let's see in crude. It's still Corpus Christi crude system. a little bit lower. I didn't realize there was much of a difference between 3Q and 4Q, but it is a little bit lower in the Corpus Christi crude system. I think maybe a year ago, I think going forward, to see the export volumes and our throughputs in Corpus Christi increase from where we are back towards the highs that we were seeing pre-pandemic, it's a global refined product demand story. That's why we're encouraged, you know, as we see these vaccines rolling out around the world, especially in the second half of this year, we would expect that demand to pick up and that would drive increases in exports.

Okay, that's helpful. Thank you. And then also I wanted to kind of pick your brain about how you're thinking about the renewable fuels projects and I guess what's the typical multiple return you get on those projects? And do you guys think about the required returns any differently for those projects than more traditional oil and gas projects, just because that can be considered a bit cleaner or maybe even more ESG-friendly?

Yeah, we don't. We consider them just like other projects. And just as a reminder, we started this strategy about three years ago before ESG was a known term, and so we started pursuing these projects just like we would any other project. We've got about a dozen different projects, all but about four or five have already been placed into service. On an average, all of those projects were sub-five multiple, around a four and a half multiple. The way I look at that going forward is we're spending some capital here up front that basically increased our capability to receive these renewables by water for foreign production or by rail for domestic production, and then to be able to segregate that product to a truck rack. Going forward, as the renewable demand grows, we'll simply be just reallocating fossil fuel tanks into the renewable market. system, which will require very little capital going forward.

Okay, great. Thank you for taking my question. Thank you, Joe.

Your next question comes from Yuwal Pradhan from Bank of America.

Good morning, everyone. Thanks for taking my question. I just wanted to follow on the Corpus Christi commentary Would you be able to expand on your cautious optimism around the throughputs hovering over NBC levels there? And maybe if you could talk to the pricing received at Corpus versus Houston recently and how that influences volumes getting there.

Yeah, Corpus and Houston are not that far apart. I think less than, you know, less than half a cent, maybe a quarter, 25 cents, something like that. But yeah, I'm not really up to date on that differential, but that's maybe a month or so old. But I think to expand on what we believe in terms of growth is it's just simply we're already exporting the incremental barrel out of the U.S. The refineries in the U.S. are full. So to encourage more production, yes, it's partly due to price, but eventually that barrel has to go somewhere. And so... Like we were seeing pre-pandemic, those incremental barrels were being exported. And as the refined product demand increases around the world, as we start to get this pandemic behind us, it will drive the exports to feed those markets.

Got it. Thanks for that. And my second question is to Tom. Will you be able to discuss your latest thoughts on enhancing balance sheet and How do you see leverage trending throughout the course of the year?

The balance sheet trending? Well, yeah, you know, we've already said, you know, our main goal is to continue to delever. We've done a really good job of that in the past. You know, going into this 2020, halfway through 2020, we had five consecutive quarters where our debt to EBITDA was below four times. And Due to the pandemic, we've seen that creep up. As we said, we finished this quarter at about 4.2 times, but we think we can get that debt to EBITDA back down again with using various levers. So we're still focused on delevering in terms of debt, how that goes. In terms of maturities, like we said before, we've cleared the runway for about five years, so we don't anticipate needing any more debt. bond issuances in the near term. As far as the PREFs go, we're happy with keeping those out there for now. We continue to look at those, but I'll remind everybody we do get equity treatment on the PREFs from the banks on our covenant, and we do get some equity treatment from the agencies as well. Those currently have a blended coupon of about 8%. Starting at the end of 2021, those press will convert to a floating rate. And when we do that, you'll see that blended rate, based on current rates, you'll see that blended rate go from around 8% back down to about 6.5%. So not planning on doing anything with the A through Cs anytime soon. So pretty happy with the cap structure right now.

Got it. Thanks, Tom. And maybe one question. Generally that you have received on the topic of hydrogen, you know with your ammonia pipe that you operate and and you know recent Conversations in the market around moving hydrogen in the form of ammonia as well Have you? looked at that closely since you know your last public comments or maybe Look to maybe put a pilot project together with any partners or anything along those lines. Any comment would be helpful. Thank you.

Sure. This is Danny again. We are having some conversations with customers or potential customers about hydrogen on that line, and it may not be neat hydrogen. It may be ammonia going to a facility that can process the ammonia into hydrogen. But, yes, we're having very early conversations about that, but I think that's probably pretty far out on the timeline. It's not likely to be a near-term project.

Thanks, Danny. Have a good day.

Thank you.

Okay, your next question comes from Robert Mosca from Mizuho Securities.

Hi, good morning, everyone. Good morning. So I think you touched on this earlier, but with 30-year CapEx going to the West Coast renewable assets, we were just wondering whether all the earnings uplift from that spend is captured in that 5% increase in revenue share at your West Coast terminals in 2022, or if you're also creating some operating leverage for 2023 and beyond.

Well, it is captured in what we're forecasting, but there is some operating leverage there because, as I mentioned, You know, there's some capital spend up front, but going forward to grow with that renewable demand will require very little capital.

Okay, that makes sense. And switching over to your St. James position, I'm wondering in the event of a Dakota access closure, how wide the basis differentials would have to get to move those bopping barrels via rail? And if there were some opportunity there, would you expect it to come in the form of contracted arrangements or something a little less fratable?

So it could be, you know, spot or contract arrangements. But the way I look at it is if DAPL shut down, it's a little bit different math. So we estimate that it probably costs about $9 a barrel to get to take a unit train from the Bakken to St. James. But I think a producer would would not necessarily be looking for a $9 ARB. They would simply be looking at their cost of production versus what they can get for it minus those costs in Louisiana, if that makes sense.

Okay, that's helpful. And that's all I have. Thank you.

Thank you.

Your next question comes from Shunee from UBS.

Hi, good morning, everyone. Before I jump into my questions, I just want to go back to a response you made. I think it was to Teresa. Just a question about revenue recognition there. You had said that because some of your shippers were shipping below MVCs. I just wanted to clarify that you record the revenue at the time that you received the cash for the MVC. and not when the volumes actually ship later on or when the option expires. I just wanted to clarify your revenue recognition policy there.

Yes, that's true on both counts.

Okay, got it. So we could see volumes come back, but they could be shipping on their options, and therefore we won't see any revenue or even impact on the income statement system.

Well, we have true-up periods certainly within the current year, often quarter by quarter. So they true-up any deficiencies they have, and then the next quarter or the next six months or the next year, they don't have a bank that they can go back to.

So we could see some of those true-ups in the first or second quarter this year, but Now that most of your systems are above NBC, that should not be an issue.

No, any deficiencies in 2020 were cleared up in 2020. So going forward into 21, it's a fresh slate. And, you know, we have a different mixed bag, but I'd say most of them true up each quarter. Some go a little bit beyond that, but it's all going to be within 2020 or in 2021. Okay, great.

And so just a few questions that I had here. You highlighted the strength of your 4Q19 results. What does it take from, as you look at your business today, to return to those levels? Is it really just navigator volumes coming all the way back? Is it the Eagleford system? Just wondering, like, what are the things that we should be looking at and what would have the most impact to get you back to those levels?

It's a combination of things. It's Navigator volumes. It's Corpus Christi export volumes. It's Eagle Ford volumes. So a combination of all three of those, increased unit activity at St. James. Those are probably your biggest movers.

Yeah, that's true, the biggest of which is going to be Corpus Christi volumes because we're pretty close to where volumes were in Navigator and 4Q of 19. I don't remember exactly what that number was, but it was 400-something.

Okay, so Corpus is the thing that is the delta we should probably watch the most or the biggest move.

The biggest, but the other ones Brad mentioned are right. Yeah, so we were 435,000 barrels a day in Navigator and Q4 of 19. So we're really close, just under that, but pretty close.

Okay, just two quick ones here as well, too. You highlight the rigs are up to 20 now. You haven't changed your guidance. Is that more because the rigs are kind of consistent with the volume expectations that your producer customers basically illustrated to you so that's kind of in line, or is this actually running ahead of expectations based on what they presented to you late last year?

Right. It's running a little ahead of our expectations, so we're encouraged by that, but we also recognize that You know, things like OPEC is meeting every month now, and so things can change, and COVID's still, you know, something to be concerned about. But generally speaking, I think, especially with our public producers, they're still being very cautious about bringing either new capital into 21 or moving it up the timeline. They want to make sure these prices are here to stay. So we're just waiting on some feedback from producers that, you know, say that they really want to start bringing some more capital in, and they're slow to do that right now.

Okay, so this sort of looks like it's matching their capital plans to begin with. Okay, final question. Costs were down 2020 about, if I did my math correctly, about 5% versus 2019. How sustainable is this improvement? I assume there's got to be some variable costs that come back with volumes. But kind of how sustainable is it, and are there any opportunities that you're looking for to try and, you know, continue that trend and bring it down further in 21? Oh, yeah.

I mean, we're going to continue to look for cost savings, you know, throughout. But our 2021 budget's based on the cuts that we made in 2020. So we carried those cost cuts forward.

So there's no real big, like, optimization effort that's underway where you're reviewing everything again to see if there's, like, another step down?

I mean, we're constantly reviewing our costs to see where we can save.

Cool. Got it. All right. Thank you very much. Really appreciate the call today. Have a safe day.

You too.

As a reminder, if you have a question, please press star 1 on your telephone keypad. Once again, that's star 1. Okay, and your next question comes on the line of Michael Bloom from Wells Fargo.

Thanks. Good morning, everyone. Just had one quick question. Wondering if, as we're going to see Wink to Webster ramp up this year, how you see that if at all, impacting flows to Corpus? And then, so that's more of a macro question, I guess, industry question, but then also just specific to you, do you see that impacting your assets at all in Corpus?

Thanks. Michael, this is Danny again. You know, our customers in Corpus have their own commitments, not just to us, but crude oil purchase commitments to supply their needs in Corpus, and they're committed to bringing those barrels into Corpus to deliver either to those local refiners or for export. So I really don't see it impacting our business.

Great. Thank you very much.

Thank you.

And no further questions at this time.

All right. Thank you very much, Sean. We would once again like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact New Star Investor Relations. Thanks again and have a great day.

This concludes today's conference. You may now disconnect.