NuStar Energy L.P.

Good day. Thank you for standing, Ben. Welcome to the New Star Energy First Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchdown telephone. As a reminder, this conference is being recorded. I would now like to hand the conference over to Ben Schmidt, Vice President of Investor Relations. You may begin.

Good morning, and welcome to today's call. On the call today are Brad Barron, NuSTAR Energy LP's President and CEO, and Tom Shope, Executive Vice President and CFO, along with other members of our management team. Before we get started, we would like to remind you that during the course of this call, NuSTAR management will make statements about our current views concerning the future performance of NuSTAR that are forward-looking statements. These statements are subject to the 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. 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 financial 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. As America recovers from the impact of COVID-19 and returns to normal activity and growth, I'm pleased to report NewSTAR turned in another solid quarter. Before I talk about the green shoots we see for market fundamentals and for improving activity across our system for the rest of the year, I want to touch briefly on the impact of mid-February's severe weather event, winter storm Uri. This made national headlines as it brought extreme temperatures, snow and ice to Texas and nearby states, and left millions of Texans without heat or water for days. Neustar's employees worked tirelessly to keep our assets up and running and brave the frigid weather to help our customers in the region. getting wells going again and installing pumps and generators to help address outages and ensure that the energy we all need continue to flow. As I noted above, despite the lingering effects of the pandemic on the global economy, as well as the unprecedented winter weather event that trimmed our results by a total of about $11 million, I'm pleased to report that New Star turned in another solid quarter. And without the storm's impact, earnings were comparable to the fourth quarter of 2020. As America begins to recover from the impact of COVID-19 and begins returning to normal activity and growth, we're seeing signs of stabilization and improvement across the U.S. and in New Start's footprint. U.S. refined product demand has improved as COVID vaccinations have continued to allow more and more Americans to return to normal day-to-day activities, and demand on New Start's refined product systems has been remarkably resilient. After returning to nearly 100% of pre-pandemic levels, our volumes dropped temporarily during February's storm. However, they recovered quickly. an average 95% of pre-pandemic demand for the first quarter, and that improvement has continued as we average slightly over 100% for the month of April. We continue to expect our refined product systems to perform at around 100% of our pre-pandemic run rate for the remainder of this year. As you would expect, stronger refined product demand is contributing to higher crude prices, which are improving expectations for U.S. shale production, particularly in the Permian Basin. which continues to outshine all other U.S. shale plays. Thanks to our Permian Systems core of the core premier location, lowest producer cost, and highest product quality, our rig count has continued to grow steadily. After dipping to nine rigs in August of 2020, our system's rig count has continued to see strong, steady growth in 2021, growing from 20 rigs in January to around 25 rigs in April. Those 25 rigs represent more than 10% of the total number of rigs running across the entire Permian Basin as of the end of April. Along with rig count, our system's volumes rose to an average 427,000 barrels per day for the month of January, and after dipping during February's severe weather, have gotten back on track, rebounding to an average of over 440,000 barrels per day in March and April. We reached 450,000 barrels per day as April ended. which is back up to the record-breaking quarterly average we saw pre-pandemic in first quarter 2020. Looking out to the rest of the year, we now expect to exit 2021 at around 500,000 barrels per day. Obviously, sustained U.S. shale production growth combined with improving global demand will drive U.S. export growth in the future, which will be positive for volumes on our Corpus Christi crude system. We expect to see volumes for our Eagle Ford and WTI commitments at our MVC levels through the end of 2021. As we've discussed on prior calls, we're also excited about our trajectory for growth from our renewable fuels distribution system on the West Coast. We currently handle an impressive share of California's renewable fuels. According to the latest data available from the state of California, in the first three quarters of 2020, NuSTAR handled about 6% of California's total biodiesel volumes, 18% of California's ethanol, and close to 30% of the state's renewable diesel volumes. We expect New Star's market share and renewable fuels network to continue to grow over time, along with our revenue, as California replaces conventional fuels with renewable diesel and other renewable fuels, and other states in the Northwest and beyond adopt similar low-carbon fuel standards to prioritize the renewable fuels our assets are positioned to facilitate. Our West Coast Renewable Fuels Network is a key component of New Star's plan to thrive as our nation's energy needs evolve. We're proud that New Start generated strong, stable results in 2020 through a global pandemic and market headwinds, and that we were able to do so again in the first quarter, even with the added challenge of a severe weather event. With that, I'll turn it over to Tom to give you more details on New Start's quarterly results.

Thanks, Brad, and good morning, everyone. To put the quarter-over-quarter comparison into perspective, it's important to remember that the first quarter of 2020 was qualitatively and quantitatively very different from first quarter 2021 for the world and for New Star. First quarter 2020 was pre-mask, pre-lockdowns. And for New Star, first quarter 2020 was also a record breaker with all-time high crude oil pipeline volumes on our Permian crude system and on our Corpus Christi crude system. On top of that, as Brad mentioned, Winter Storm Uri and its aftermath drove customer outages and resulted in some short-term disruptions. Even with the $11 million impact to our earnings due to the storm, we were still able to generate first quarter 2021 EBITDA of $169 million. These results demonstrate the solid performance of our assets, even while facing not only the continuing impact of the pandemic, but also severe weather events and its aftermath. Turning now to our segment discussion for the first quarter of 2021. EBITDA in our pipeline segment was $124 million, which is down $21 million compared to the first quarter of 2020's adjusted EBITDA of $145 million. We saw strong quarter-over-quarter improvements on our Permian crude system throughput volumes but that growth was offset by a $10 million segment impact of winter storm URI and decline in volumes on our pre-pandemic first quarter 2020 record levels on our Corpus Christi crude system. Our first quarter 2021 EBITDA on our storage segment was $66 million, down $7 million from the first quarter 2020 EBITDA of $73 million. Strong contributions from our West Coast Region Renewable Fuels Network were more than offset again by $1 million impact of the winter storm URI and throughput declines on our Corpus Christi crude system. First quarter 2021 EBITDA on our fuels marketing segment was $3 million, down from the first quarter of 2020 due to weaker bunker and butane blending margins. First quarter 2021 DCF available to common limited partners was $81 million, and our distribution coverage ratio to the common limited partners was 1.84 times. At the end of the first quarter of 2021, our debt balance was $3.5 billion, and we had $838 million of revolver availability. We ended the first quarter with a debt-to-EBITDA ratio of 4.39 times, which we expect to improve through the end of the year. We also can continue to expect NewSTAR's 2021 EBITDA to be comparable to our 2020 results after taking into account our sale of the Texas City Terminal in December of last year. And we continue to plan to spend $140 to $170 million on strategic capital. Of the total strategic capital spend in 2021, about $50 million is for our Permian system, which is scalable with our producers' needs and with throughput volumes, and around $50 million on our West Coast Renewable Fuels Logistics Network. In addition, we also continue to expect to spend 40 to 50 million on reliability capital spending in 2021. And with that, I'll turn the call back over to Brad. Thanks, Tom.

Last year, our assets, our business, and our employees demonstrated strength and resilience. Faced with the challenges of a global pandemic, we still moved more barrels and generated more adjusted EBITDA in 2020 than we did in 2019. And so far in 2021, Even after layering in the impact of a historically unprecedented winter storm, Neustar remains solidly positioned to fund 100% of our 2021 spending from our internally generated cash flows. As Tom mentioned, we remain on track to generate EBITDA for 2021 comparable to 2020 strong results. Expectations for demand, utilization, and price for 2021 have all improved, and we see signs of recovery on the horizon. We're positioned to benefit from improving fundamentals the green shoots we see across our footprint we will continue to focus on our strategic priorities operating safely and reliably lowering our leverage and funding all of our 2021 spending from our internally generated cash flows so esg seems to be top of mind for everyone these days so let me take a minute to talk about that so long before esg became a buzzword new star always prioritized taking care of our employees our communities and the environment as a result We are best in class when it comes to safety and environmental stewardship, and that's not just lip service. In 2020, our 1,400 employees worked more than 3.2 million hours with only four lost-time injuries. Our incident rate was more than seven times better than the bulk terminal industry average and more than twice as good as the pipeline industry average. Similarly, our environmental performance is just as strong, with releases accounting for less than two ten-thousandths of 1%. of our total annual throughput of 817 million barrels. I should also note that when it comes to protecting the environment, there's no safer way to transport petroleum products than through pipelines. We also support the communities where we live and work with more than 88,000 volunteer hours last year, and our per capita United Way pledge is the highest in the nation. When it comes to investing in our employees, NuSTAR is proud to be recognized for the 12th time as one of Fortune 100 best companies to work for. That just came out recently. One thing I would note about that is NuStar was the only energy company with a traditional or transitional energy company on that list. We were also ranked among the 25 best companies for Latinos to work by Latino Leader Magazine. It was also ranked as one of the best workplaces for working parents. So I'm happy to say that we're very committed to the principles of ESG and always have been. Look forward to publishing our first sustainability report later this year. So with that, we'll open up the call for Q&A.

Thank you, ladies and gentlemen. If you have a question at this time, please press the star, then the number one on your touchtone telephone. Again, that is star one to ask a question. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Teresa Chen from Barclays. Your line is now open.

Good morning, everyone. Great to see the progress on the West Coast biofuel side. And I just wanted to delve into this a little bit more. So far, it seems that most of the work and the incremental cash flows have come on the terminaling side. And I was just wondering, you know, if other states within the MidCon, for example, open up for LCFS where you have more pipeline assets, How easily would it be to transport these types of renewable products within your pipelines in addition to the terminaling movement?

It would be easy to do. I don't know if that would be coming in at origin points to the pipelines or if it would be coming in directly to the terminals, but we could handle it either way.

Thank you. And can you talk about the feedstock side? What kind of logistical services can you offer there? And specifically, you know, what kind of feedstocks will you be handling at Selby? Is there incremental capital costs in handling vegetable oils versus true waste feedstocks, for example?

It's not waste feedstocks, but, you know, we'll be bringing in these feedstocks by rail, and then delivering directly to our customer. But no special handling needs.

Got it. And just lastly, outside of on-road transportation fuels, can you talk about your SAF partnership with Neste and how that came about and where you expect that to evolve?

Yeah, so we began talking to Neste back in about 2017, I believe, when... You may recall there was a time when everybody, including NuSTAR, had a crude by rail project into the West Coast, and we made the decision very early on that that just wasn't going to be executable. So we pivoted pretty quickly and started looking for some alternatives, and we met with Neste, and of course this was long before anybody was talking about ESG and we weren't really checking a green box there. It just looked like a good business plan. We basically worked out a system with them where we could set up a distribution system from Southern California, Northern California, up in the Pacific Northwest, all across our footprint to handle their production coming in from Singapore. and distribute all along the West Coast. And then that springboarded into some other conversations with another producer in the U.S. that's the largest producer in the U.S. and some key West Coast refiner customers that are heavily involved in the renewables and biomarkets. So we're really proud of the system we set up, and it's really starting to pay good benefits. I think our EBITDA on the West Coast since 2017 when we first started signing some of these early contracts is up about 78%, and that's mostly on the back of these renewable projects.

Teresa?

Still there, Teresa?

Teresa has disconnected. The next question comes from the line of Joe Martoglio from J.P. Morgan.

Hi, thanks for taking my question. Wanted to ask about the winter storm URI impact and the $11 million for the quarter. Was any of that shipment below MVCs where a benefit will be recognized later in the year?

No. In the Permian, for example, I can break it out a little bit for you. So about $3.5 million was the freeze-off in the Permian, but our volume average for the month was still well above MVCs. So that was just some lost revenue during that dip. There was another roughly $1.2 million related to our ammonia system because one of the ammonia plants that feeds that system was taken out of service for a week or two because of the storm. And the remaining six or so million dollars was all a slump in refined product demand, mostly in the state of Texas as the state was pretty much shut down for four or five days.

Okay, that's helpful. And then also on the Permian crude system and with the updated exit rate guidance, is there any risk that capital spend will be higher there than originally anticipated, or can you kind of do the increased volumes without kind of additional capital, or are there offsets somewhere else?

Yeah, there's – It moves around a little bit, but our current capital guidance has everything in it to get to that 500 exit rate.

Okay, great. And then if I can just squeeze in one more, kind of interested to hear if you're having any conversations to sell assets, whether that still remains something you're interested in, and just kind of how you're thinking about that generally. Okay.

Yeah, you know, reducing our leverage has been top of mind for us for the past year, and so we're continuing to review our portfolio to see if there are assets that would be appropriate for that. But it's always something that we're looking to do is lower our leverage further.

Okay, got it. Thanks for taking my questions.

Thank you.

If you have a question at this time, please press star 1. Again, to ask a question, please press star 1. Your next question comes from the line of Ryan Levine from Citi. Your line is now open.

Ryan Levine Good morning. I was hoping, I was wondering if you were able to comment on opportunities you see to expand the Linden terminal around any biofuels related projects or any commercial opportunities that you see with that asset?

We very certainly could, you know, do what we've done on the west coast in Linden. What's missing in Linden and most places in the United States other than the West Coast is the mandate. As these states start coming out with their version of LCFS like they have in California, then we can certainly move operations like that into those areas as well.

Is there any way to put numbers around what opportunities that you see there around potential volumes or EBITDA or any type of investment opportunity?

You mean in Linden specifically?

Yes.

Not really. It's too early for that. Again, we don't have a mandate to do that, so nobody's really moving that way yet. But when they do, I'm sure you will be involved.

Okay, great. And then in terms of the quarter specifically, What was the impact of higher electricity costs to your business during the quarter, and what line items in your income statement is that hitting?

It was really immaterial across the board. So we had some puts and takes, but they sort of washed out to an immaterial impact.

Okay. Was there any business interruption as a result of power outages?

Not really. No, not that would result in a business interruption claim. All right.

They were very limited, very short-term in nature. We had, as Brad mentioned in his comments, we had employees out in the middle of that storm getting generators set up and really kept running most of the time. Yeah.

I wish we had more time. I would tell you the extraordinary, the stories about the extraordinary efforts that our employees went to, not only to reconnect the Permian. I mean, all the producers in the Permian, we got, you know, our employees went above and beyond to help them. And then, you know, things like the city of San Antonio. We had crews that worked throughout the night to make sure that there weren't gasoline and diesel shortages in some of the big markets we serve in, particularly here in San Antonio.

Okay, great. That's all for me. Thank you. Thank you.

Your next question comes to the line of from UBS. Your line is now open.

Hi, everyone. You know, maybe to start off, you gave a lot of color today around, you know, your guidance drivers. You know, for example, the recount that's around the navigator assets. You also told us about the utilization expectations on the refined product system. I was wondering if you can give us your assumptions around corpus expectations Um, and you know, kind of when you expect to get back to, you know, 4Q19 type of levels, just given that the port seems to have already come back in terms of volumetrically of what's going in. I'm just wondering any color that you can give around that.

So in my comments, we mentioned that we expect that system to be around MVCs for the remainder of this year. And then I think the important thing to note is, you know, that's export driven. Um, and as we see the emerging economies making progress on the coronavirus, we expect Corpus Christi exports to rebound. And so if you look at it, you look at what's happening in the United States with our economy, I don't think it's much of a stretch to think that the same thing is going to happen on a global level once you see India and some of the larger economies returning to activity. So we think we'll run at NBC levels through the end of the year, and then they'll start picking up along with global demand.

Just to clarify before asking my second question, it's my understanding that the corpus exports themselves out of the port as an entirety is already kind of back to close to those levels. So I'm just kind of curious about, you know, where NuSTAR sits within the stack on that in terms of getting back to your normal levels.

Well, Wade, there's also a piece of our business in corpus that, you know, you don't see. I know a lot of people track exports out of there, but we have a pretty healthy business where we, deliver crude to the local area refiners, and that part of the business has returned to normal. You just don't see that anywhere. I think some of our larger customers there that are involved in the export markets are waiting to see some improvement in these emerging markets to be shipping the volumes that they were. But they were also, you know, when we were at the peak in first quarter of 2020, about half of our volumes that were coming in and exported were coming out of the Eagle Ford as well. So, you know, both of those markets need to see some improvement before we get back to those Q1 2020 volumes.

Okay, so it's not based on other builds in the in the Corpus area that's taking some share?

No, you know, we knew that we would have capacity available in Corpus, but pre-pandemic, we would have assumed today the Permian would be producing somewhere close to 6 million barrels a day, and we would see that capacity kind of filling up faster than it has, you know, with a pandemic. But I think it will... It will come back. I mean, we will get to 6 million barrels a day out of the Permian eventually. And then I think at that point, you know, the glass fill is more half full than half empty.

I think another thing to keep in mind is we have, you know, commitments on our lines through 2023. And beyond. And beyond.

Okay, perfect. Sorry for all the clarifications on just one question. And my follow-up question is just there's been some renegotiation requests around some of the pipelines coming into Corpus. You know, there are some reports out there. Have there been any attempts to renegotiate any minimum line commitments on any of the ports that you've seen or any of the export capacity or everything is kind of status quo?

Yes, we are having those conversations now. We have some significant customers that have extended agreements like you brought up, and so we know that they're going to be there beyond the term of our agreement, so those conversations are taking place now.

And do those conversations involve a shifting of minimum volume commitments, or is it kind of a blend and extend? What's the framework that we should think about?

Yeah, it's a little bit of everything. We're looking to extend, and what volumes and other terms are still being negotiated.

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

Thank you, Schneer.

I'm showing no further questions at this time. I would now like to turn the conference back to Pam Schmidt.

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

This concludes today's conference call. Thank you for participating and have a wonderful day. Email disconnect.