NuStar Energy L.P.

Good day, and thank you for standing by. Welcome to the New Star Energy LP second quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Pam Schmidt, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to today's call. On the call today are NuSTAR Energy LP's Chairman and CEO, Brad Barron, and our Executive Vice President and CFO, Tom Schoaf, as well as our Executive Vice President of Business Development and Engineering, Danny Oliver, 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 Securities 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 alternative to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release And if applicable, additional reconciliations may be 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 joining us today to hear about our solid quarterly results, our progress on our strategic initiatives, and our positive outlook for the rest of 2023. Let's get started with a few highlights of our second quarter results. We generated $169 million of total EBITDA in the second quarter. comparable to second quarter 2022 adjusted EBITDA of 174 million. Our pipeline segment EBITDA was up around 5% in the second quarter over the same period in 2022. Our fine product systems and our ammonia system continues to deliver solid, dependable revenue contributions in the second quarter, with throughputs up around 3% compared to the same period in 2022, reflecting the strength of these assets in our position in the markets we serve in the mid-continent and throughout Texas. Our McKee system continued to perform well with higher revenues and throughputs versus the same period last year due to increased demand across the system, as well as the customer's maintenance issues in 2Q22. Moving on to our Permian crude system, our Permian crude system's volumes averaged 508,000 barrels per day, down slightly compared to the same quarter last year. Our 2Q Permian volumes reflected some producer-specific operational issues and delays, as we've seen in the first half of the year that we expect to be resolved as we move into the back half of 2023. As those issues are resolved and those producers ramp up activity, we expect volumes to pick up. In fact, we've already seen an uptick in July with volumes averaging near 530,000 barrels per day, and yesterday's volumes were close to 540,000 barrels per day. We continue to expect to exit 2023 in the range of 570 to just under 600,000 barrels per day. Since our system's capex scales up and down with our producer's needs, if our exit rate comes in at the lower end of that range, we would expect reduced capex to mitigate the impact of lower volumes. Turning to our fuels marketing segment, after a near record-breaking 2022, our fuels marketing segment is at 223, generating 7 million EBITDA, comparable to the segment's second quarter 22 results. With that, a few observations about 2023 before I turn it over to Tom. looking to the full year for our business as a whole. Even though macroeconomic uncertainty has persisted so far this year, Neustar continues to expect to generate total adjusted EBITDA of $700 to $760 million. As we've mentioned in prior calls, we proactively mitigated some of the impact of inflation in 23 through the $100 million expense optimization initiative we kicked off in early 2022. And Neustar's results will again benefit from provisions of our pipeline tariffs and contracts that provide for annual rate escalations linked to the preceding year's PPI or the FERCS index. Through optimization and careful planning, we've been able to continue to meaningfully reduce our leverage, and we are ahead of schedule with our plan to simplify our capital structure. In June and July, we repurchased another one-third of the remaining Series D preferred units, leaving only about a third of the original issuance still outstanding. Last quarter, We mentioned we were planning to redeem all the remaining Series D by the end of 2024, which was already about two years ahead of our original schedule. By accelerating the repayment of the Series D preferred units over the course of this past year, while at the same time taking necessary steps to protect our healthy debt to EBITDA metric, we have demonstrated our commitment to continuing to improve our balance sheet. You can expect us to remain focused on that improvement in the second half of 23 and 24 and beyond. Once again, in 2023, We expect to self-fund all of our spending, including all of our OPEX, all of our growth capital, and our distributions. And we also continue to expect to finish the year with a healthy debt to EBITDA ratio or metric below four times. And with that, I'll turn the call over to Tom.

Thanks, Brad, and good morning, everyone. As Brad mentioned, our second quarter EBITDA was comparable to our second quarter 22 adjusted EBITDA. Our second quarter adjusted DCF was 73 million, and our adjusted distribution coverage ratio was 1.64 times. Turning now to our segments, in the second quarter, our pipeline segment generated 152 million of EBITDA, up 7 million, around 5% over second quarter 22 EBITDA of 145 million, thanks in large part to our McKee system pipelines and our ammonia pipeline, as well as annual rate escalation. Turning next to our storage segment, our EBITDA for second quarter 23 was $40 million, which is about $9 million lower than the second quarter 22 EBITDA. That decrease was mostly due to an amendment and extension of a customer contract at our Corpus Christi North Beach terminal and customer transitions and required tank maintenance at our St. James terminal, as we've talked about. But that was offset by a solid performance of our West Coast region, where due to our West Coast renewable fuel strategy, we handle a large portion of the region's renewable fuels in our renewable fuels logistics network, including almost three-quarters of California's sustainable aviation fuel and nearly one-fifth of its renewable diesel. In the second quarter, thanks to our renewable fuels market leadership that we have built, our West Coast region generated about 30% higher revenue in the second quarter than second quarter 22. Our fuels marketing segment, which had a near record breaking year in 22, continued to deliver great results in second quarter. Fuels marketing generated $7 million of EBITDA, which is comparable to the segment strong showing in second quarter 22 and driven by strong butane blending and bunkering margins. I'm also pleased to report on our continued progress in building our financial strength and flexibility. As Brad mentioned, in June and July, we repurchased another $8.1 million of our Series D preferred units. We ended second quarter with a debt to EBITDA ratio of 3.73 times and with $750 million available on our $1 billion unsecured revolving credit facility. As you may have seen, we announced that on June 30th, we renewed our unsecured revolving credit facility, maintaining the facility's $1 billion capacity and extending the maturity of the facility to January 2027. Moving now to our outlook for 23, as Brad mentioned, for the full year, we continue to expect to generate adjusted EBITDA in the range of 700 to 760 million. We now plan to spend 125 to 145 million on strategic capital this year. While we continue to expect to exit the year with our Permian volumes between 570 and 600,000 barrels per day, we are now forecasting lower spending for our Permian system in the range of 35 to 45 million. And we continue to expect to spend around 25 million to expand our West Coast Renewable Fuels Network. Turning to reliability capital, We still expect to spend between $25 and $35 million on reliability in 2023. And even with the acceleration of our Series D redemption in 2023, we're still on track to finish the year with a healthy debt-to-EBITDA ratio below four times. Now I'll turn the call back over to Brad.

As you've heard, we had a solid second quarter, and we're on track to deliver another solid year. Last quarter, we announced a project to connect our ammonia system to OCI's state-of-the-art ammonia products facility in Iowa, supported by a long-term revenue commitment. That project is on track to be in service next year when we expect this healthy return, low capital project to begin meaningfully increasing utilization of our system. We hope to be announcing other projects this year as we continue actively working with several potential customers interested in connections to our ammonia system across our footprint for a variety of opportunities. As we mentioned in past calls, we're seeing burgeoning interest in lower carbon ammonia. Interest from the companies developing blue and green ammonia production facilities that need market access, as well as from the companies interested in supply of lower carbon ammonia to make fertilizer, DEF, and other important products. We're also talking to a number of potential customers who are looking at new uses for lower carbon ammonia, including as a low-cost, safe way to transport hydrogen for fuel. In addition to the greening of ammonia in the domestic ammonia market, international ammonia demand is also driving interest in building or converting logistics to export ammonia produced here in the United States. Our ammonia pipeline system currently supplies the nation's breadbasket, primarily with domestically produced ammonia. But growing interest in export capabilities could drive additional utilization of not only our ammonia pipeline system, but also potentially our St. James facility which has dock capacity and a footprint to support ammonia storage and export. We're excited about this growing interest in ammonia and the actionable opportunities that that interest is generating for our ammonia pipeline system and beyond in the near term and over the next several years. Rest assured, in the meantime, as we work with potential ammonia customers, we are continuing to work to build unit holder value through advancing our core strategic objectives, increasing our cash flows through organic projects and optimization of our business, fortifying our financial strength by improving our capital structure while maintaining a healthy debt metric, and providing the safest, most reliable transportation and storage of the essential energy that fuels our lives. We look forward to talking with you next quarter about our progress. With that, I'll open up the call for Q&A.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. We will pause for a moment while we compile our Q&A roster. Our first question comes from Michael Blum with Wells Fargo. Your line is open.

Great. Good morning, everyone. Good morning. First question I just wanted to ask about the CapEx and the Permian volumes for the year. The fact that you've lowered CapEx slightly, does that suggest that you think you're going to come in towards the lower end of that Permian range of 570 to 600? Yeah, I think we're, you know,

Probably no better than the midpoint is what we see now, but we can be, I'm surprised sometimes, to the upside as well as the downside. So we'll probably tighten that up next quarter, but I think anything's possible within that range.

Okay, great. And then I just wanted to ask about the ammonia opportunity. You seem extremely excited about the possibilities there. I'm just wondering if you could just kind of bracket the size of this, the potential invested capital you could spend here and what returns could look like over, you know, over whatever timeframe you want to frame that.

Right. Well, I think for, you know, relatively small amount of capital, we can certainly fill the line. You know, we're currently running about 65%. I think with the OCI deal that we announced and the other deal Brad mentioned that we expect to announce a little later this year, we'd probably fill up the line. And then there's actually some pretty low-cost projects that we could do to expand the line and get above our current capacities. And then, as Brad mentioned, there's multiple conversations going on. You know, if we did them all, it could be, you know, more significant. And if we move into St. James and start, you know, building new refrigerated storage to export some of these products, then, you know, it could get bigger. But we're not going to have a problem, and it's not going to take a lot of capex to fill the line and even, you know, increase current capacities. And then we'll just see how much bigger it gets than that.

Thank you very much. Thank you, Michael. Our next question comes from Gabriel Marie with Azuho.

Your line is open.

Hi, everyone. This is Chris on for Gabe. Just maybe following up on the Permian conversation, you know, maybe your early days, but as you look at 24, do you kind of expect to have that similar flexibility or kind of how you're gauging it with your expectations for volume pickup, you know, and carry through to that year?

Yeah, we are expecting volumes to pick up. And, you know, of course, as it relates to CapEx, Brad said this before, our CapEx is scalable based on the activity that's going on. But I think we'll do a little better next year than we did this year. We've been plagued also by a bunch of, I'm sorry, we've been plagued also this year by really since the spring by a bunch of unusual operational issues, not on our side, but operational issues either on our producer's side or in some gas plants. We've had several unanticipated gas plant outages, and that's hampered our volumes in the first half as well.

Got it. Maybe just kind of an update on any inflationary impacts that you're seeing in that system as well. I know that was kind of more of a theme a few years ago, but are you still kind of seeing elevated prices for equipment and maybe that coming into the CapEx picture as well?

Yeah, generally speaking, it's really starting to calm down. We still have some You know, supply chain issues, not that we can't get something. We've learned how to deal with those, but there's longer leads on certain types of equipment, mostly on the electrical side. But we've certainly seen pipe costs come off significantly since the beginning of the year. Labor costs have started to level off. So it's not gone away, but I think it's really flattened out.

Great. And then just last one maybe on the renewable fuels business. With the update from the RFS from the EPA as far as quote as renewable diesel, just curious if you're hearing any changes from producers as far as supply and demand impacts in California.

Generally speaking, they want more storage.

Yeah.

That's it for me. Thanks, everyone.

Thank you. Thanks.

One moment for our next question. Our next question comes from Selma Nicole with Stiefel. Your line is open.

Thank you. Danny, just following up on your last comment there, you talked about more demand for storage. You're seeing additional opportunities to invest in renewables in California in 24?

Yes, we are. We've got several. Some are repurposing existing assets. I think there's a couple of locations we could potentially even build more storage. That being said, the West Coast, kind of regardless of which state you're in, is challenging, to say the least, in terms of the permitting environment to build new assets. I think we'll continue to see EBITDA growth in that segment for years to come just as we transition into these higher margin products.

Understood. Thank you. And then you guys also talked about continuing to pursue or realize benefits from your optimization, your expense optimization program. And I'm wondering if there's more to do there. Are you guys finding more opportunities?

You know, that's something that we're continually looking at, and we'll be looking at that hard as we go into the 2024 budgeting cycle. So I do expect there's more that can be done there, though.

Okay. Thank you very much.

Thank you. And I'm not showing any further questions this time. I'd like to turn the call back over to Pam.

Thank you, Kevin. 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 NewSTAR New Star Investor Relations. Thanks again and have a great day.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.