Genesis Energy (GEL) Misses Q1 EPS by 1c, Revenues Miss

Genesis Energy (NYSE: GEL) reported Q1 EPS of $0.05, $0.01 worse than the analyst estimate of $0.06. Revenue for the quarter came in at $539.92 million versus the consensus estimate of $640.07 million.

Grant Sims, CEO of Genesis Energy, said, “For the quarter, our diversified businesses delivered financial results consistent with, if not slightly greater than, our expectations. The results were positively driven by solid pipeline volumes out of the Gulf of Mexico, strong crude-by-rail volumes out of Canada and robust demand for marine transportation across our different classes of assets. During the quarter, however, we began to recognize the prospective challenges from two exogenous events.

While we are not directly impacted by the price of crude oil, when the OPEC Plus deal fell apart around March 1, the differential between Canadian barrels at their source and the Gulf Coast collapsed, making crude-by-rail out of Canada uneconomic. Volumes have gone to zero as of April 1, and we would expect them to remain so for the rest of the year. We do have certain protections to the downside in terms of minimum take-or-pay volumes, but we expect to experience some $15-$20 million less in terms of reported margin than what we would have otherwise expected for the remainder of 2020.

Of more significance to us, and what should be to virtually every other energy/industrial company, is the across the board demand destruction resulting from shutting down substantial economic activity worldwide as we deal with COVID-19. This demand destruction will, in our opinion, significantly pressure crude prices worldwide for an extended period of time, notwithstanding the apparent production cuts that are scheduled to occur. It will also pressure the demand for finished products for which soda ash and sodium hydrosulfide are building blocks.

Because of the challenges presented by these events, which are by no means unique or necessarily any more challenging to Genesis, we made the pro-active decision to reduce our quarterly distribution, saving approximately $200 million a year for the foreseeable future which will be used to directly pay down debt and manage and maintain our financial flexibility. We also amended our senior secured revolving credit facility to give us more flexibility in managing our total outstanding debt. Finally, we amended our agreements with GSO Capital Partners to allow us to delay the expenditures associated with our Granger optimization project by as much as twelve months. We still believe in the economics of the expansion but felt it was appropriate in the current operating environment to somewhat delay the date of first production. We believe these actions and lack of future capital needs give us all the flexibility we need to manage throughout the rest of this year and successfully into the future.

We expect volumes out of the Gulf of Mexico to remain strong and growing through this year and in the years to come. We currently do not know of or expect any significant production that flows on our systems to be intentionally shut in due to the current crude oil price environment. While certain new projects that have yet to be sanctioned might be delayed under the current circumstances, we see little risk to the completion of, or significant delays, in the contracted and known/sanctioned projects in progress like Atlantis Phase 3, Argos and King’s Quay that will flow exclusively through our pipelines for decades to come.

In onshore facilities and transportation, for the remainder of the year, there are contango opportunities that will help to offset, but by no means totally make up for, lost margin from crude-by-rail out of Canada. In addition, we expect marine fundamentals to remain relatively consistent with the first quarter, and any future softening, especially in the brown water world, might lead us to redeploying our assets as floating storage to take advantage of contango.

The second quarter for certain is going to be challenging from a volume perspective for our sodium and sulfur businesses. Our legacy refinery services business has experienced some short term volume loss, especially in South America as mining activities have been curtailed or shuttered in response to mitigating COVID-19. We expect these volumes to come back as soon as more and more of the activity restrictions are lifted. Volumes in the soda ash business are challenged because of dramatic reductions in demand, including primarily export markets. We have reacted to this demand destruction by putting our Granger facility in “hot hold” mode, probably through the end of September, thereby reducing our total production by some 300,000 tons. We believe this is necessary to balance our annual production with our total anticipated sales, both domestically and internationally for 2020.

Looking forward for the remainder of 2020, and assuming a challenging operating environment for the second and third quarters, we would reasonably expect to finish the year at the bottom end of our previous guidance for Adjusted EBITDA, if not below, primarily due to the mitigation efforts and demand impacts related to the COVID-19 pandemic. However, given the action we took on our distribution in late March, it is important to point out that our annual fixed obligations are now approximately $410-$420 million, before growth capital and ARO. Given our de minimis growth capital requirements for the foreseeable future, outside of the Granger expansion which can be funded through our agreements with GSO Capital Partners, we have no need to access the capital markets and expect to be a net payer of debt in 2020 and beyond.

Therefore, we believe we have taken all the necessary steps and have all the tools we need in place to navigate through the challenges ahead and manage our balance sheet, especially compliance with our total funded debt covenant. There will be a recovery. The only question is when and whether such recovery is V-shaped, U-shaped or like the “Nike swoosh”. We have confidence in the resiliency of our businesses. They have existed, survived and thrived for many decades, across and through numerous previous cycles. There’s no reason to doubt that they will again.

I would like to recognize our entire workforce, and specifically our miners, mariners and offshore personnel during this time of social distancing. I am proud to say we have safely operated all of our assets under our own COVID-19 safety procedures with no impact to our customers and limited confirmed cases amongst our 2,200 employees. As always, we intend to be prudent, diligent and intelligent in achieving long-term value for all our stakeholders without ever losing our commitment to safe, reliable and responsible operations.”

For earnings history and earnings-related data on Genesis Energy (GEL) click here.

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