NuStar Energy L.P.

Good day, and thank you for standing by. Welcome to the new STAR Energy LP second quarter 2021 conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Pam Schmidt, Vice President of Investor Relations. Thank you. Please go ahead.

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 Schoaf, 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, 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 risk, 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 financials page of the investors section of our website at NewStarEnergy.com. With that, I will turn the call over to Brad.

Good morning. Thank you all for joining us. We have a lot of positive things to talk about today. The sale of non-core assets and a strong second quarter as well as our outlook for the rest of the year and beyond. First, starting with the sale. On Monday, we announced that we've signed an agreement to sell nine terminal facilities in eight locations in the Northeast, Illinois, and Florida to Sunoco LP for $250 million, and we expect to close on that sale early in the fourth quarter. As we previously discussed, we plan to deploy the proceeds from this sale to further improve our debt metrics. While selling assets is never easy, this transaction is a win-win for all parties, as we're exiting non-core assets at an attractive valuation, which allows NuStar to lower leverage, and Sunoco is adding high-quality infrastructure assets and great employees to its portfolio. With this sale, we're positioned to strengthen our balance sheet further and focus 100% on our core strategic asset footprint. Our refined product systems across the mid-continent, Texas and northern Mexico, Our crude assets, including our Corpus Christi crude system with our North Beach export facility, our flagship St. James crude oil terminal, and our core of the core Permian gathering system. And our renewable fuels business, current and future. Currently, the focus is on the West Coast Renewable Fuels Network, where we are already the leading logistics service provider. And in the future, we plan to focus on our ammonia system, which spans more than 2,000 miles from Louisiana north across much of the Midwest. Now to turn for a few minutes to our strong second quarter results. This quarter, we generated $189 million of EBITDA, which is 17% higher than 2Q 2020's results, and also a 12% improvement over the first quarter of 2021. That strong improvement in EBITDA was driven by outperformance across our core strategic asset footprint, our refined product systems, our crude assets, and our West Coast renewable fuels network. Starting with our refined product systems, refined product demand has continued to improve as more and more Americans have returned to normal day-to-day activities. After dipping to an average of 95% in the first quarter due to the winter storm, our second quarter average rebounded back to 105% of pre-pandemic demand, and we're now forecasting 100% for the full year. Our second quarter refined product throughputs are up 34% over 2Q 2020, and also up 19% over the first quarter of 21. As vaccination efforts progress, we expect to continue to see sustained recovery in refined product demand in the U.S. and in Mexico, and we continue to expect our refined product systems to perform at around 100% of our pre-pandemic run rate for the remainder of 2021. Strengthening refined product demand has also increased U.S. refiner's demand for crude, which has contributed to higher throughputs for our crude pipelines in the second quarter, up 17% over 2Q of 2020 and up 13% over 1Q of 2021. Rebounding crude demand along with tempered global supply has contributed to higher crude prices and improved expectations for U.S. shale production, particularly in the Permian Basin. Thanks to our Permian's core of the core premier location, lowest producer cost and highest product quality, we saw our Permian systems volumes grow in the second quarter to an average of 450,000 barrels per day, up 12% over 2Q of 2020. also up 12% over the first quarter of 2021, and comparable to the record-breaking peak we saw in that system in the first quarter of 20, which, as you know, was pre-COVID. In July, we saw our Permian volumes increase to an average of 481,000 barrels per day, and we're on track to exit 2021 at around 500,000 barrels a day, again, one-third of our pre-COVID volumes. We continue to expect to see Eagle Ford and WTI volumes in our Corpus Christi crude system at our MVC levels for the rest of the year, but we've seen an increase in recent weeks in the number of WTI long-haul barrels we're receiving from the Permian, and we're hopeful that we'll see that trend continue as vaccinations continue to proliferate and global demand improves. Sustained, healthy U.S. shale production growth combined with improving global demand will drive U.S. export growth over time, which we expect to be positive for crude volumes on our Corpus Christi crude system. as well as for our St. James Terminal, where we expect to benefit from our connection to CapLine as that reversal is completed in 2022. Now turning to our renewable fuels business, our West Coast Renewable Fuels Network is already playing an integral role in significant reductions in carbon emissions and offers us a great platform for growth across that region. Newstore already handles an impressive share of California's renewable fuels. According to the latest available data from the state of California for the first quarter of 2021, NuSTAR handled about 5% of California's total biodiesel, close to 20% of California's ethanol, and close to 30% of the state's renewable diesel volumes. We expect NuSTAR's presence to continue to grow as we complete our planned tank conversion projects, and we will continue to transition existing tankage over to a renewable service as customer demand increases. We're also looking at some exciting renewables opportunities for our ammonia system. Our ammonia system has always been a steady, important EBITDA contributor for NuSTAR, but we haven't talked about it much in the past. So for a little context, it's the longest ammonia pipeline in the country, spanning more than 2,000 miles from Louisiana north up through the mid-continent, along the Mississippi, and beyond, where the ammonia we transport is primarily used for fertilizing crops by farmers in the nation's breadbasket. This critical chemical is now experiencing renaissance as an energy source capable of powering zero-carbon heavy-duty engines and marine vessels, as well as for ammonia's ability to offer the safest and most efficient transportation and storage medium for hydrogen. While we all hear about the future of hydrogen as it has emerged as a promising low-emissions energy source, We're excited that there are actionable opportunities for hydrogen for use now, including utilization of hydrogen to generate sustainable electricity for grid stabilization, not to mention as a zero-emission transportation fuel for heavy vehicle fleets. We believe the steps our customers and other ammonia producers are taking toward green ammonia production, as well as increasing demand for renewable alternatives and carbon emission reductions, will drive concurrent demand for growth on our ammonia system, with little or no additional strategic spending. We're developing a number of near and long-term actionable, low multiple, modest spend, high return organic projects for connections and other enhancements to our system to maximize its role in a renewable fuels future. On that note, before I turn the call over to Tom to discuss our second quarter results and full year outlook in more detail, I want to point you to our newly issued sustainability presentation, which you can find on our website. In that presentation, you'll learn more about New Star's culture of responsibility, which has distinguished us throughout our 20-year history. We've always been committed to protecting and caring for our employees, our communities, and the environment. You will see our track record of excellence in health, safety, and giving back, as well as our commitment to sustainability now and in the future. With that, I'll turn it over to Tom to give you more details on New Star's quarterly results.

Thanks, Brad, and good morning, everyone. As Brad mentioned, during the second quarter of 2021, our results reflect the continued global recovery in demand, rebounding from 2020's pandemic lows. During the second quarter of 2021, we generated EBITDA of $189 million, up $27 million, or 17%, over the second quarter 2020 EBITDA of $162 million. Second quarter 2021 DCF available to common limited partners was $97 million, up 35 million or 56% compared to DCF available to common limited partners of 62 million for the second quarter of 2020. And our distribution coverage ratio for the common limited partners was 2.22 times. Turning now to our segments, EBITDA in our pipeline segment was 142 million, which is up 26 million or 22% compared to the second quarter of 2020's EBITDA of 116 million. During the second quarter of 2021, we continued to see strong quarter-over-quarter improvement in our Permian crude system throughput volumes. In addition, we experienced a rebound in our throughput volumes on our Central West, East, and North pipeline systems from increased demand. Our second quarter 2021 EBITDA in our storage segment was $70 million, up $2 million from the second quarter of 2020 EBITDA of $68 million. Continued solid contributions from our West Coast Renewable Fuels Network and improved volumes at some of our Central West throughput terminals from the pandemic recovery were partially offset by the sale of the Texas City Terminal, which was completed in December of last year. Second quarter 2021 EBITDA in our fuels marketing segment was $2 million, slightly down from the second quarter of 2020 due to weaker butane blending and bunkering margins. At the end of the second quarter of 2021, our debt balance was $3.5 billion, and we had $810 million of revolver availability. We ended the second quarter with a debt-to-EBITDA ratio of 4.27 times, which we expect to improve through the end of the year. Turning to our full-year 2021 projections, taking into account both the December 2020 Texas City terminal sale and the recently announced terminal sale, we expect NewSTAR's 2021 adjusted EBITDA to be in the range of 680 to 710 million, in line with our previous expectations. And we continue to expect to self-fund all of our 2021 spending from internally generated cash flows. Moving to strategic capital, we continue to plan to spend 140 to 170 million in 2021. Of our total 2021 strategic spending, Approximately $45 million is for our Permian system and around $50 million is for our West Coast Renewable Fuels Network. In addition, we also continue to expect to spend $40 to $50 million on reliability capital spending in 2021. Based on these projections, we expect our debt to EBITDA ratio at the end of 2021 to be around four times and our common unit distribution coverage ratio to be around two times. With that, I'll turn the call back over to Brad. Thanks, Tom.

Thank you, Tom. We're making good progress on the strategy we've talked to you about over the past several quarters. With the asset sale we announced, we are delivering on our commitment to reduce our debt. Going forward, we plan to continue to focus on low multiple organic growth projects for our core strategic asset portfolio, fully funded with our internally generated cash flows. Our strong second quarter significantly improved over 2Q 2020, and over 1Q21 demonstrate solidly rebounding demand and growth across our business. We're positioned to fund all of our spending from our internally generated cash flows and generate strong results in 2021 and beyond. Our results, as you will see in our sustainability presentation, come from our strategic plan, which includes our commitment to responsibility and resilience. We believe that responsibility meets means being committed to doing the right thing, taking care of our employees, our communities, our unit holders, and our planet. We're also building resilience into our business to assure new star success now and in the future. We believe that traditional sources of energy, like the petroleum products we transport and store, will continue to be an important part of our energy supply, both in the U.S. and across the globe, for many decades to come. We plan to continue to build on our growth opportunities across our traditional energy services assets. At the same time, we are continuing to pursue emerging energy opportunities, as we have done in building our West Coast Renewable Fuels Network and as we are now doing on our ammonia system, to expand our participation in renewable fuel services. By building a financially flexible business that participates in all of the above, we are assuring New Star's ability to grow unit holder value as our industry evolves. And with that, we'll open it up to Q&A.

As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question comes from Teresa Chin with Barclays.

Good morning. Thank you for taking my questions and great to see the strong results. I guess first, maybe if we can revisit the terminal fail. Just wondering, you know, what kind of EBITDA did that contribute to your system previously? And I imagine that's accounted for in terms of the annual guidance, the portion that would be missing from early fourth quarter onwards.

Yeah. We don't typically break that out on asset sales, but it is accounted for in the guidance going forward.

Okay. Maybe just on the crude side, Ben, what are you seeing as far as producer activity goes into 2022 and just, you know, the outlook for volumes on your system at that point?

So in terms of activity, Teresa, this is Danny. We continue to see the publics being very disciplined in their capital spend, and so far what they've communicated to us, we expect to see that in 2022, we continue to see the privates being much more aggressive and acting like you would expect in this price environment. But it'll be interesting to see if we get up into the 80s, if that continues or improves. I think there would be some upside if the public start to release more capital, but we haven't seen that yet.

Thank you.

Thank you.

And your next question comes from the line of Jeremy Tonnet with J.P. Morgan.

Hi. This is Joe on for Jeremy. First, I wanted to ask on the ammonia system renewable opportunities, do you mind just kind of talking more about what's involved there? Is it just connecting your system to different facilities? kind of like what could be the rough range of where capital requirements for that would be?

Sure. This is Danny again. So what we're looking at is, first of all, we have existing customers or potential new customers that either already are producing green ammonia or blue ammonia or will be in the near future, and that we're looking at serving on our near-term opportunity, which is still a couple of years out, serving a niche market up in the Midwest where we'll be moving that green or blue ammonia up the line, and they will be using the hydrogen out of that ammonia to fuel fleet vehicles. So that's our nearest term opportunity. Some connections to be made. We're not giving any guidance on it because it's too early to talk about CapEx, but it's going to be very low.

Yeah, there's existing capacity on that line, so it's really more about filling that line, line optimization than it is, you know, heavy capital spent.

Okay, that's helpful. And then I also want to ask kind of on storage, do you mind just kind of going through what you were seeing in the quarter were kind of like corpus exports, are they still around MVCs, anything on kind of Upcoming contract roles, you know, is kind of like where to cue a good run rate for the rest of the year or kind of anything to keep in mind there?

Yeah, in our forecast we have, you know, well, the MVCs, which is about Q2 levels, forecasted for the rest of the year. We did see in July we've started to see some volumes pick up, and so we're hoping, you know, as global demand improves around the globe, going forward that we'll see those volumes continue to increase, but that's not what we're forecasting. And in terms of contract turnover, we don't have anything in the near term.

Okay. That's helpful. Thank you. That's all for me.

And once again, to ask a question, press star 1 on your telephone keypad. Your next question comes from Robert Mosca with Mizuho SEC.

Hi, everyone. Just wanted to touch on the asset sale to Sunoco, and I understand that it makes sense or seems to make sense from company-specific standpoints for both you and Sunoco, but just wondering if there's anything we should read, if we should read anything more into the transaction, considering that refined product terminals on the East Coast have changed hands here. Just curious to hear your general market commentary there.

I don't think there's a whole lot more to read into it. I mean, we've talked for you know, quite a while about lowering our leverage. And we've talked about, you know, focusing on our core assets, you know, which, you know, focused around our Permian crude system and our renewables fuels network and our big crude storage terminals, you know, our pipelines in the central east. So, you know, it's something that we've signaled for quite a while that we're looking at. And there's really not much more to read into it. They have some synergies with those assets. They're getting a great set of infrastructure assets and a great set of employees. So, like I said at the very beginning, it's a win-win for you know, everyone.

That's fair. And maybe just to jump off that, you know, are there any remaining assets in your portfolio that you would view as less core? It seems like the remainder of the portfolio fits nicely. Just wanted to hear your thoughts on that.

Yeah, we feel really comfortable with what we have, you know, going forward. And we see opportunities at all of our assets. So we'll continue to pursue those.

Okay, great. And then just one final one from me. It seems like the near-term CapEx opportunities are going to center mostly around the West Coast assets, possibly the ammonia pipeline, and I imagine any growth on PCS. Just wondering if you're seeing any more traditional opportunities for the remainder of your hydrocarbon asset base, or if it really is kind of a focus on the – has more of an ESG texture with some PCS well-connects.

Robert, this is Danny again. We have a pretty diverse system, both pipelines and storage assets, both in crude and refined products. We always seem to be able to put together a pretty good-sized basket, what we call singles. We don't talk about them individually much, but we will have a basket of CapEx projects across our systems in in every segment.

Okay, got it. Thanks for taking my questions, everyone.

Thank you.

And we have no further questions. I will now turn the call back to Pam Schmidt.

Thank you, Teresa. 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 call. Thank you for participating, and you may now disconnect.