Genesis Energy, L.P. Reports Third Quarter 2019 Results

HOUSTON–(BUSINESS WIRE)–Genesis Energy, L.P. (NYSE: GEL) today announced its third quarter results.

We generated the following financial results for the third quarter of 2019:

• Net Income Attributable to Genesis Energy, L.P. of $17.6 million for the third quarter of 2019 compared to Net Loss Attributable to Genesis Energy, L.P. of $0.3 million for the same period in 2018.
• Cash Flows from Operating Activities of $136.1 million for the third quarter of 2019 compared to $156.7 million for the same period in 2018.
• Total Segment Margin in the third quarter of 2019 of $175.8 million.
• Available Cash before Reserves to common unitholders of $82.5 million for the third quarter of 2019, which provided 1.22X coverage for the quarterly distribution of $0.55 per common unit attributable to the third quarter.
• We declared cash distributions on our preferred units of $0.7374 for each preferred unit, which equates to a cash distribution of approximately $18.7 million and is reflected as a reduction to Available Cash before Reserves to common unitholders.
• Adjusted EBITDA of $162.8 million in the third quarter of 2019. Our bank leverage ratio, calculated consistent with our credit agreement, is 4.91X as of September 30, 2019 and is discussed further in this release.

Grant Sims, CEO of Genesis Energy, said, “For the quarter, our diversified businesses performed consistent with our expectations, especially given some of the factors we discussed on our previous quarterly call. We generated total Segment Margin of $175.8 million, up sequentially after adjusting for the one-time cash payment we received in the second quarter associated with the resolution of a crude oil supply agreement.

During the third quarter, we experienced significant disruptions to the throughput on our offshore pipelines as the producing community shut in production for Hurricane Barry. Coupled with the slower than expected return of a third-party provided communication system, our segment margin in our offshore group was several million dollars below our expectations.

We also mentioned in our previous quarterly call the supply chain disruptions some of our customers for sodium hydrosulfide were experiencing in July and August. While since resolved, their duration in the third quarter, along with production issues at several of our host refineries, negatively affected the financial performance of our refinery services business by several million dollars.

Subsequent to our previous call, on August 20, 2019, the provincial government of Alberta announced its intent to extend the self-imposed production curtailments, not only through 2019 but also through the entirety of 2020. Our affirmation of guidance for fiscal 2019, albeit at the lower end of the range, assumed, as many in the industry did, that the provincial government would continue on its path to reduce the curtailments linearly by the end of 2019. Because of these actions, the movement of crude from Canada to our facilities on the Gulf Coast for all of our shippers became uneconomic in the third quarter, and total volumes we received began to ramp down in August and were near zero in September and have continued near zero in October. The lower than expected volumes negatively impacted our reported segment margin by several million dollars for the third quarter.

As a result, and driven in large part by non-recurring items, in addition to the changed incentives for the movement of crude out of Canada in the second half of 2019, we must reduce our full year 2019 guidance for Adjusted EBITDA to a range of $660-$670 million¹, or around 3-4% below what we reasonably expected ninety days ago. Unfortunately, the quarterly results, net of all these negative items, mask, what we believe is, the strength of the underlying fundamentals of our businesses and their future prospects.

During the quarter, we experienced throughput on our offshore pipelines consistent with our expectations, independent of unexpected downtime associated with Hurricane Barry, and we remain excited about the level of drilling and development activities in the central Gulf of Mexico. We have recently entered into agreements to move forty thousand barrels per day on CHOPS and twenty thousand barrels per day on Poseidon that are delivered to us by a third-party pipeline that has insufficient capacity to deliver such volumes all the way to shore. The agreements include ship-or-pay provisions, have terms as long as five years and required no capital on our part. Most of these volumes were flowing in the third quarter.

We are finalizing agreements to move a total of what is anticipated to be twenty-five to thirty-five thousand barrels per day of new production on Poseidon. These will be life-of-lease dedications from several new tie-back developments, with five to ten thousand barrels per day anticipated by the end of this year and twenty to twenty-five thousand barrels per day anticipated in mid-2020. The volumes expected mid-next year will flow through one of our wholly-owned laterals that connects subsea into Poseidon. No capital will be required by us to provide these movements.

Additionally, we are finalizing agreements with the operator of a new deepwater floating production unit designed to exploit local reserves and serve as a production hub for sub-sea, tie-back opportunities. The total design capacity of the new facility is eighty thousand barrels of oil per day and one hundred million cubic feet of gas per day. No capital will be required by us, as the producers are obligated to build to our existing facilities for downstream transportation. The oil will be one hundred percent dedicated to one of our wholly-owned laterals and split almost evenly for transportation to shore on CHOPS and Poseidon. The gas will be one hundred percent dedicated to our Anaconda gas pipeline. The agreements will contain ship-or-pay provisions, dedicate all known and future production through and across the facility to us, and have a term coincident with the useful life of the floating production unit which is designed for a minimum of forty years. First deliveries of oil and gas from this new development into our facilities is anticipated in mid-2022. This is just six months behind the anticipated first deliveries from Argos (formerly Mad Dog 2) of up to one hundred and forty thousand barrels a day into CHOPS. However, unless and until the parties enter into definitive agreements, there is no guarantee that we will be successful in capturing some or any of these volumes.

On September 23rd, we announced our final investment decision to expand our Granger soda ash facility by approximately 750 thousand tons per year. The expansion, through a combination of the incremental tons and margin improvement on the existing production, is expected to generate approximately $60 million in incremental annual EBITDA¹ beginning in mid-to-late 2022 for a total anticipated capital expenditure of $330 million (including contingency) to be spent over the next three years. We estimate the Granger production facility, as expanded to approximately 1.3 million tons per year, has a minimum reserve life of well in excess of 125 years.

In conjunction with such decision, we entered into agreements with funds affiliated with GSO Capital Partners LP for the purchase of up to $350 million of fully redeemable, preferred interests in all of our soda ash operations, thereby providing an external source for up to all of the anticipated capital expenditures of the expansion. The structure of the financing arrangement is credit neutral to Genesis and requires no cash outlays or payments by us during the anticipated 36 month construction period. After exhaustive evaluations, we concluded this was the best way to pursue such an accretive opportunity given the current state of capital markets and allow Genesis to maintain its position as North America’s largest producer of natural soda ash. We believe the structure provides Genesis with significant optionality over the construction period to use excess cash flow to pay down borrowings under our senior secured credit facility or internally fund a portion of the expansion or any future opportunities across our diverse and market leading business segments.

Looking towards 2020, on October 31st, the provincial government of Alberta announced, that beginning in December, curtailment relief will be granted to operators for incremental production that is shipped by rail. We view this as a potential catalyst going in to 2020 as certain of our customers have incremental rail capacity and the ability to increase production that otherwise would not get produced.

As we near the end of 2019 and begin focusing on 2020 and beyond, the fundamentals of our businesses remain solid and our prospects are exciting and increasingly clear as discussed above. We reasonably expect Segment Margin in our offshore pipeline transportation segment to be up $20-$30 million year over year in 2020. With the production hiccups behind us and assuming no significant slowdown in economic activity, we would expect our sodium minerals and sulfur services Segment Margin to be stable to slightly up year over year. Likewise, we expect stable to marginally improved performance in our marine transportation segment in 2020. We also believe, based on the curtailment relief described above, that we should average at least one train a day, approximately less than half of our capacity, at our Scenic Station facility in Baton Rouge, which would increase Segment Margin in our onshore facilities and transportation segment by approximately $10 million in 2020 over 2019. Outside of our Granger expansion project, which is fully committed to be funded by GSO, we do not currently anticipate any significant growth projects in 2020 and we expect our maintenance capital expenditures to be consistent with prior years.

Independent of achieving the above, we believe that in 2020, based on our current expected cash outflows, including all interest, cash distributions, and capital expenditures, we will be cash flow positive. If some or all of the margin improvements above come to fruition, we will have even stronger cash flow and higher coverage of our current cash distributions and will be able to proceed more rapidly with de-levering our balance sheet towards our long-term leverage target of 4.0 times.

As always, we intend to be prudent, diligent and intelligent in achieving and maintaining the financial flexibility to allow the partnership to opportunistically build long-term value for all our stakeholders without ever losing our commitment to safe, reliable and responsible operations.”

¹ We are unable to provide a reconciliation of the forward-looking Adjusted EBITDA, a non-GAAP financial measure, to the most directly comparable GAAP financial measure without unreasonable efforts. The probable significance is that such comparable GAAP financial measure may be materially different.

Financial Results

Segment Margin

Variances between the third quarter of 2019 (the “2019 Quarter”) and the third quarter of 2018 (the “2018 Quarter”) in these components are explained below.

Segment margin results for the 2019 Quarter and 2018 Quarter were as follows:

Offshore pipeline transportation Segment Margin for the 2019 Quarter increased $10.1 million, or 14%, from the 2018 Quarter, primarily due to higher volumes on our crude oil pipeline systems. These increased volumes are the result of (i) the ramping of volumes from the Buckskin and Hadrian North production fields to expected levels, both of which are fully dedicated to our SEKCO pipeline and further downstream, our Poseidon oil pipeline system, and (ii) the continued receipt of volumes on our CHOPS and Poseidon pipeline systems due to deliveries from a third party pipeline that has insufficient capacity to deliver its committed volumes to shore.

Sodium minerals and sulfur services Segment Margin for the 2019 Quarter decreased $8.7 million, or 14%. This decrease is primarily due to lower NaHS volumes during the 2019 Quarter in our refinery services businesses. The lower volumes are attributable to supply chain disruptions some of our customers experienced during the 2019 Quarter along with production issues at several of our host refineries. Soda ash volumes increased in the 2019 Quarter relative to the 2018 Quarter primarily due to the timing of planned maintenance activities, which had a negative impact to the 2018 Quarter. During 2019, all major planned maintenance activities were completed in the first half of the year. Overall, the contributions from our Alkali Business have continued to exceed our expectations and the volumes during the third quarter of 2019 returned to expected levels.

Onshore facilities and transportation Segment Margin for the 2019 Quarter decreased $11.4 million, or 31%. This decrease is primarily due to lower crude oil pipeline and rail unload volumes during the 2019 Quarter. The lower volumes in the 2019 Quarter are due to the divestiture of our Powder River Basin midstream assets in the fourth quarter of 2018 and the continued effects of production curtailments by the Canadian government during 2019 impacting our Louisiana pipeline and rail unload volumes. Additionally, while the volumes on our Texas system increased during the 2019 Quarter, we were only able to recognize our minimum volume commitment because our main customer utilized its remaining prepaid transportation credits.

Marine transportation Segment Margin for the 2019 Quarter increased $2.6 million, or 21%, from the 2018 Quarter. This increase in Segment Margin is primarily attributable to higher average day rates in the inland and offshore markets that have been advantageous for both spot and term contracts, while our utilization was relatively flat between the 2019 and 2018 periods. While we have seen a slight uptick in day rates, we have continued to enter into short term contracts (less than a year) in both the inland and offshore markets because we believe the day rates currently being offered by the market are still near cyclical lows. This was partially offset by an increase in operating costs during the 2019 Quarter relative to the 2018 Quarter due to an increase in dry-docking costs in both our inland and offshore fleet.

Other Components of Net Income

In the 2019 Quarter, we recorded Net Income Attributable to Genesis Energy, L.P. of $17.6 million compared to Net Loss Attributable to Genesis Energy, L.P. of $0.3 million in the 2018 Quarter. Net Income Attributable to Genesis Energy, L.P. in the 2019 Quarter benefited from: (i) an unrealized gain from the valuation of the embedded derivative associated with our Class A Convertible Preferred units of $8.0 million compared to an unrealized gain of $1.8 million during the 2018 Quarter; (ii) lower interest expense of $4.1 million attributable to our lower average outstanding indebtedness relative to the 2018 Quarter; (iii) lower depreciation, depletion and amortization expense by $8.4 million due to the 2018 Quarter including the write-off of certain ARO assets associated with the abandonment of gas assets in our offshore segment; and (iv) lower general and administrative expenses of $9.2 million primarily due to the 2018 Quarter including certain dispute costs. These increases were offset by lower segment margin reported during the 2019 Quarter of $7.4 million and a gain on asset sales of $3.4 million reported during the 2018 Quarter.

Earnings Conference Call

We will broadcast our Earnings Conference Call on Wednesday, November 6, 2019, at 8:30 a.m. Central time (9:30 a.m. Eastern time). This call can be accessed at www.genesisenergy.com. Choose the Investor Relations button. For those unable to attend the live broadcast, a replay will be available beginning approximately one hour after the event and remain available on our website for 30 days. There is no charge to access the event.

Genesis Energy, L.P. is a diversified midstream energy master limited partnership headquartered in Houston, Texas. Genesis’ operations include offshore pipeline transportation, sodium minerals and sulfur services, onshore facilities and transportation and marine transportation. Genesis’ operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and the Gulf of Mexico.

Contacts

Genesis Energy, L.P.

Ryan Sims

SVP – Finance and Corporate Development

(713) 860-2521

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