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USD Partners LP
5/4/2023
Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP first quarter 2023 results conference call. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the prepared remarks. If you would like to ask a question at that time, please press star 1. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. When asking a question, we ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Jennifer Waller, Senior Director of Financial Reporting and Investor Relations, for opening remarks. Please go ahead.
Good morning, and thank you for joining us. Welcome to our first quarter 2023 earnings call. With me today are Dan Borgen, our Chief Executive Officer, Adam Altzler, our Chief Financial Officer, Brad Sanders, our Chief Commercial Officer, Josh Ruppel, our Chief Operating Officer, as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the three months ended March 31, 2023. If you would like a copy of the press release, you can find one on our website at usdpartners.com. Before we proceed, please note that the Safe Harbor Disclosure Statement regarding forward-looking statements in last night's press release applies to the statements of management on this call. Also, please note that information presented on today's call speaks only as of today, May 4, 2023. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today's call will include discussion of non-GAAP financial measures. Please see last night's press release for reconciliations to the most comparable GAAP financial measures. And with that, I'll turn the call over to Dan Borgen.
Thank you, Jennifer. Good morning, and thank everyone for joining us on the call today. During the quarter, the partnership continued to see challenging market conditions surrounding the Canadian heavy crude oil macro. Short-term market for Dilbit has continued to be difficult and volatile. but we are still working to secure drill bit business to fill current and near-term capacity at the Hardesty Terminal. We remain primarily focused on transitioning from transloading drill bit to transloading longer-term, more sustainable drill bit at the Hardesty Terminal through expansions to our sponsor's Diluent Recovery Unit joint venture. Over the years, we've experienced fluctuations in the demand for our drill bit by rail egress solution during similar cycles within the industry. As a reference, examples of this include the lower volumes transloaded at our hardship terminal in both 2016 and 2020, respectively, when market conditions were also challenging. However, we recovered and renewed our volumes, and life to date, we have improved. transloaded approximately 158 million barrels of crude oil at the Hardesty Terminal, and we remain confident in the value that the Hardesty Terminal has to offer to the industry. We've progressed our discussions with multiple potential customers regarding the expansion of our Drew Bitt by Rail network and remain encouraged that these discussions could lead to additional long-term take-or-pay commitments that will benefit the partnership. The successful completion of the first phase of our sponsor's Hardesty DRU joint venture project enhanced the sustainability and quality of the partnership's cash flows by significantly increasing the average tenor of a portion of the terminal services agreements at the partnership's Hardesty terminal. As a reminder, Drewbit creates enhanced blending and net-back opportunities for our customers with a lower carbon footprint and offers an egress solution that moves a safer, non-hazardous, non-flammable product to new end markets. We remain encouraged and are pleased with the great customer that we have that helped pioneer this program. To date, we've moved approximately 22 million barrels of Drewbit through the Harder C Terminal, Pending our successful planned 50,000 barrel a day expansion of the DRU, we'd be handling approximately 30 million barrels of Drew Bit per year through the Hardesty Terminal. Brad will talk more about the Stroud Terminal in a moment, but I would just like to remind everyone that we've handled approximately 48 million barrels of crude oil at the terminal since we acquired it in 2017. The Stroud Terminal has more than paid for itself during our ownership, but we're not done there. Like at Hardesty, discussion with potential customers are underway to transition the shroud terminal to heavier grades of crude oil. As we continue to navigate the recontracting cycle, the Board of Directors of the partnerships, General Partner, made the difficult decision to suspend the partnerships' quarterly distribution and to utilize free cash flow to support the partnerships' operations and to potentially pay down debt. Given all of this, we believe this proactive measure, coupled with management's review of strategic alternatives, was the prudent thing to do and will best position the partnership for both recontracting or for refinancing or replacement of our senior secured credit facility before it matures later this year. This wasn't a decision we made lightly by any means. As a reminder, the sponsor currently owns approximately 51% of the partnership. and is very aligned with other unit holders, both in seeing the partnership continue to return cash to unit holders, as well as, more importantly, in seeing the partnership achieve long-term, sustainable success. While this was a difficult decision, we remain steadfast in our commitment to providing value to our unit holders, as we have in the past, and are hopeful that we will be able to restore our distribution in the future if we are able to renew or replace customer agreements at our terminals. Next, Adam is going to give an update on the partnership's financial results and our liquidity position. Then we'll jump back, and Brad will talk about recent market and commercial developments. Adam.
Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our first quarter earnings release, which included the details of our operating and financial results for the first quarter of 2023. We plan to issue our first quarter 10Q with additional details after market closed today. The partnership reported net income of $2 million, net cash used in operating activities of $600,000, adjusted EBITDA of $3.3 million, and distributable cash flow of negative $1.6 million. Adjusted EBITDA included the impact of approximately $1.9 million of transaction costs associated with the sale of the Casper Terminal. We successfully closed on the sale of the Casper Terminal for $33 million on March 31st. which was the first phase of our plan to strengthen the partnership's balance sheet and liquidity position during this recontracting cycle. As Dan mentioned, the Board of Directors of the partnerships, General Partner, approved the suspension of the partnership's quarterly distribution and the utilization of free cash flow to support the partnership's operations and to potentially pay down debt as we consider strategic alternatives. The Board of Directors also approved the engagement of financial advisors and counsel to assist the Board and senior management with evaluating and pursuing strategic options and alternative financing sources. We believe in the long-term viability of the partnership's assets as key components of our sponsor's DRU network and Clean Fuels Initiative. We are committed to rationalizing our capital structure and securing long-term financing as we grow these next phases of the partnership's business. We look forward to sharing more updates on this in the coming months. And now for the details from the quarter. The partnership's revenues for the first quarter of 2023 relative to the same quarter in 2022 were lower primarily as a result of lower revenues at the Hardesty terminal due to a reduction in contracted capacity. Revenues were also lower at Hardesty due to an unfavorable variance in the Canadian exchange rate on the partnership's Canadian dollar denominated contracts during the first quarter of 2023, as compared to the first quarter of 2022. Revenue was lower at the Stroud terminal due to the conclusion of the partnership's terminal link services contract with its sole customer effective July 1, 2022. Partially offsetting this decrease was a slight increase in revenues at the partnership's Casper terminal due to an increase in throughput in the current period as compared to the prior year period. The partnership achieved lower operating costs during the first quarter of 2022 as compared to the first quarter of 2022. SG&A costs and pipeline fees associated with the Partnerships Hardesty Terminal were lower, which is directly attributable to the associated decrease in Hardesty Terminal revenues already mentioned, as compared to the first quarter of 2022. In addition, subcontracted rail services costs were lower due to a decreased throughput at the Partnerships Terminals. Depreciation and amortization expenses were also lower in the first quarter of 2023, primarily associated with the decrease in the carrying value of the assets at the Casper Terminal, resulting from the impairment that was recognized in September 2022. In addition, the partnership discontinued the depreciation and amortization of its Casper Terminal assets during the quarter, as the assets were classified as held for sale in January of this year. Partially offsetting the decrease in SG&A costs were transaction costs incurred during the first quarter of 2023 related to the partnership's divestiture of the Casco Terminal, partially offset by expenses incurred in the first quarter of 2022 associated with the Hardesty South acquisition, with no acquisition expenses incurred in 2023. The partnership generated net income of $2 million in the first quarter of 2023 as compared to net income of $7.5 million in the first quarter of 2022. The decrease is primarily due to the factors already discussed, coupled with higher interest expense incurred during the first quarter of 2023, resulting from higher interest rates and higher balance of debt outstanding as compared to the first quarter of this year. The partnership also had non-cash loss associated with the partnership's interest rate derivatives recognized in the first quarter of this year as compared to a non-cash gain during the comparative period. Partially offsetting this reduction in net income, the partnership recognized a lower foreign currency transaction loss in the first quarter of this year as compared to the first quarter of 2022. The Partnership had net cash used in operating activities of $600,000 for the three months ended March 31st as compared to net cash provided by operating activities of $9.2 million for the prior year period. The decrease in the Partnership's operating cash flow resulted from the factors already discussed. Net cash used in operating activities was also impacted by the general timing of receipts and payments of accounts receivable, accounts payable, and deferred revenue balances. Adjusted EBITDA for the first quarter decreased by 67% when compared to the same period in 2022 due primarily to the factors already discussed. Distributable cash flow decreased to negative $1.6 million for the current quarter and also includes the impact of higher cash paid for interest and taxes when compared to the prior year. As of March 31st, the partnership had approximately $11 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of approximately $60 million on its $275 million senior secured credit facility, subject to the partnership's continued compliance with financial covenants and borrowings of $215 million. Per the terms of the amended credit agreement, the partnership's available borrowings was limited to 5.5 times its 12-month trailing consolidated EBITDA. As such, the borrowing capacity and available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents, was approximately $41 million as of March 31st. In April of 2023, the partnership used approximately $19 million of the net proceeds from the sale of the Casper Terminal to repay borrowings under its senior secured credit facility and retained the remaining proceeds to support general partnership purposes. As of April 30th, the partnership had borrowings of approximately $196 million under its senior secured credit facility and unrestricted cash and cash equivalents of approximately $9 million. The partnership was in compliance with its financial covenants as of March 31st. And lastly, as Dan mentioned, we are encouraged by and remain focused on converting the partnership's existing drill bit capacity to our longer-term sustainable drill bit by rail program. As always, we look forward to sharing more updates with you on that in the future. And with that, I'd like to now turn the call back over to Dan.
Thank you, Adam. I'll appreciate the update there. We'll pitch it over to Brad for the commercial update, Brad.
Thank you, Dan. Excuse me. As you mentioned in your opening dialogue, the Canadian macro conditions continue to be challenging. Spreads between Canada and the US Gulf Coast continue to price at or near pipeline economics. This indicates Canadian supply is equal to or less than pipe egress capacity. As we've stated, though, on previous calls, It is projected that 2023 Canadian supply growth should be sufficient enough to transition this macro environment to one where supply should exceed pipe egress capacity. The biggest unknown, of course, is not only does the production show up, but when. Given the current high Canadian inventory levels, should this growth materialize, and it now appears to be more likely in the second half of 2023, then the market has the potential to return to crude by rail parity. Therefore, given these conditions and timing issues, renewing contracts in our traditional dilbit business remains challenged, and our ability to possibly commercialize our hard-to-see capacity is more likely in the second half of 2023. Let me give a quick update on DRU. Effectively, there's really nothing to add to what Dan messaged earlier, so let me simply restate what is critical. One, we continue to have advanced discussions with potential customers and are encouraged with their momentum and progress. And two, we are purposed and committed to transitioning our DILBIT business to a more competitive and sustainable DRIBIT by rail solution. Now I'd like to ask Josh to provide an update regarding our operating performance at the DRU.
Thanks, Brad. In regards to DRU operations, that unit operated by our partner, Gibson's, is performing quite well. Our rateability, run rates, percentages are per plan. Yields for both Drubit and Condensate are also per plan, both on volume and spec. And I'd also like to mention, aligned with our commercial efforts, we've recently completed a test on an alternative feed, an alternative Dilbit feed. That test was successful and proved our goal of designing and operating a DRU unit that was flexible to handle a multiple range of Dilbit feedstocks. So overall, we're quite happy with the DRU unit, and it's doing what we expected and planned for it to do.
I'll hand it back to you, Brad. Thanks, Josh. That's great news, great update. Appreciate it. Finally, I'd like to provide a quick update on our Cushing rail asset, the Stroud Rail Terminal. As a reminder, Cushing is the largest crude hub in North America, providing advantage connectivity and tankage capacity for both producers and refiners. And more importantly, our Stroud Terminal is the only rail asset supporting the hub. As the largest hub in the U.S., Cushing provides access to tankage, blend stocks, refiners in the Midwest and the U.S. Gulf Coast. Our rail connectivity then provides advantage access to cushion markets during both macro cycles, as Dan mentioned in his opening statement, but also, and more importantly, advantage access for unique production that does not have access to pipe egress at origin and relies on rail for its egress and market access. In that vein, beginning in the third quarter of 23, we expect to begin throughputing waxy crude from the U.N. to Basin as part of the new and scalable destination solution for this growing production. The Basin's growth ability is primarily constrained by access to rail logistics at destinations. At Cushing via our rail asset, the market access is rateable and unlimited. So we're excited about this initial new business startup and its potential and look forward to providing updates and next steps. Dan, I'll pass it back to you. Thank you, Brad.
With that, we'll open the call up for any questions. Thank you.
Thank you. If you would like to ask a question, please press star 1. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. When asking a question, we ask that you please pick up your handset to allow optimal sound quality. And our first question will come from Kyle May with Sidoti & Company. Your line is open.
Hi. Good morning, everyone.
Morning.
Good morning. I was wondering if we could start with the distribution. And just wondering if you could maybe provide some color around when you would potentially plan on reinstating that. Maybe just would it take, you know, progress on the contracts, refinancing, any additional details would be great.
Sure, Kyle. Happy to address that. You know, obviously that's something we never liked doing, but we felt like it was prudent given the recycled state that we're in with the on the renewals. So clearly, as we see hopefully soon, the renew and extension of existing contracts and or our new DrewBit extension, both of which, one being DrewBit, one being DillBit, that we would look to increase our distributable cash flow and look then to be able to to get our distribution back up to speed. So I think this year, not only do we have the recycling of the season, the market seasons here, but we also have our long-term, our revolver up for renewal at the end of the year. And so we kind of have a double this year that we're just trying to be prudent about. But as soon as we can see the highlights of the renewals, then we would look to increasing. And Adam, go ahead.
Yeah, no, I think that's exactly right. I mean, we did it to preserve our liquidity position, you know, reduce our net debt, and as Dan said, get us through this recontracting cycle. And just as a reminder, this is something that's evaluated every quarter by our board, and we'll obviously continue to do that every quarter.
Does that help, Kyle, or do you need further comments?
No, that's very helpful. I appreciate it. Sure. And then for the next question, you definitely touched on some of the conversations that you're having about the Truebit terminal or network. And just wondering if you can maybe talk and give us a little bit more detail about kind of what you're seeing in those recent discussions, kind of maybe your confidence in winning new agreements, just any more details would be really helpful.
Yeah, I would say, and then I'll ask Brad to jump in if I don't cover it completely, but I would say we remain very confident. When we say we have active discussions, we're having, I mean, weekly discussions on that with existing customer as well as new customers to increase their size and volume. And, you know, we wish obviously it would happen faster. We had anticipated that it would happen faster, but we believe we'll see a result of that very soon. And, you know, we look forward to being able to share that news, you know, as quickly as we can.
Brad? Hey, Kyle. This is Brad. I would say the most important maybe messaging and feedback would be that, one, is our customer is happy with our performance and reliability. I would say that overall they're happy with performance financially as well. So the two of those things are really critical. And what we can't control is their decision process and authority process and how they get things across the line and what their competing capital challenges are. So that obviously impacts timing. But I think from a performance and validation of sustainability and being competitive, which is what's most critical to us, we're really pleased with those type of discussions. And, therefore, that's what gives us the confidence that we think we can grow our capacity and grow our relationship not only with existing customers but new.
Yeah, with over 22 million barrels, already handled through that facility and growing every day, it continues to prove its importance in the industry and giving the additional, as one of the elected officials in Canada said, not only does it give us additional egress, but it gives us a new market destination, which has also been proven. So, you know, not only is an origination play coming out of Canada, but it has established a new market destination that gives our customers, customer and customers better netbacks and more competitive alternatives, again, with a lower carbon footprint. And obviously, with the GHG greenhouse gas emissions in Canada being a pressure point for most producers, those are important pieces of that as we lower that over 30% relative to other means of transportation. All of that adds up to positive impacts for the customer. That's why Multiple customers are at the table. That's why we feel good about renewing. And as Brad said, the proven rate of building success of the program is evident.
Okay, great. I appreciate the additional color. Sure. Thanks.
Thank you. At this time, we have no further questions, so I would like to turn the call back over to Dan Borgen for additional and closing remarks.
Thanks, everybody. I know it was a tough call, but know that as your partner, as your roughly 50% partner here, we are committed to see this thing produced, get back to strong production of cash flow. That's our intent, both for all of us on the phone. and we appreciate the patience obviously we have to remind ourselves that quite often that as brad said the the customers and customers move in different approval processes but they are highly engaged and again we feel good about about that happening you know i think that with the volumes that we shared today just as a reminder these assets are important to the industry they serve a need They'll continue to serve a need, and we look forward to being able to share that evidence by some of the commitments that we've been talking about. As we continue to grow and transition our business into a safer and cleaner grades of heavy crude through our DrewBit program, it's the right long-term strategy for the partnership. Transition's tough, but it is the right thing to do to assure long-term sustainability with cleaner transportation and safer transportation methods. So with that, we'll look forward to sharing additional updates with you. We don't think it'll be too far in the future, and we look forward to being able to share that exciting news with you. Thanks again for being on the call.
Thank you, ladies and gentlemen. This concludes today's call, and we appreciate your participation. You may disconnect at any time.
Thank you.