Genesis Energy (GEL) Misses Q4 EPS by 80c, Revenues Beat

February 18, 2021 6:23 AM EST

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Genesis Energy (NYSE: GEL) reported Q4 EPS of ($0.85), $0.80 worse than the analyst estimate of ($0.05). Revenue for the quarter came in at $453.14 million versus the consensus estimate of $437.18 million.

We generated the following financial results for the fourth quarter of 2020:

  • Net Loss Attributable to Genesis Energy, L.P. of $85.2 million for the fourth quarter of 2020, compared to Net Income Attributable to Genesis Energy, L.P. of $22.4 million for the same period in 2019.
  • Cash Flows from Operating Activities of $1.1 million for the fourth quarter of 2020 compared to $50.6 million for the same period in 2019.
  • Total Segment Margin in the fourth quarter of 2020 of $137.0 million.
  • Available Cash before Reserves to common unitholders of $52.4 million for the fourth quarter of 2020, which provided 2.85X coverage for the quarterly distribution of $0.15 per common unit attributable to the fourth 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 $134.6 million in the fourth quarter of 2020.
  • Adjusted Consolidated EBITDA of $602.4 million for the year ended December 31, 2020 and a bank leverage ratio of 5.57X, both calculated in accordance with our credit agreement and are discussed further in this release.

Grant Sims, CEO of Genesis Energy, said, “2020 was understandably a challenging year for our businesses due to the Covid-19 related demand destruction, lower refinery utilization and crude differentials as well as an unprecedented hurricane season. Despite these challenges, we were able to generate approximately $602 million of Adjusted Consolidated EBITDA, as calculated under our senior secured credit facility, hitting the mid-point of our previously announced guidance. In fact, we were able to reduce Total Adjusted Debt by approximately $62 million despite having to pay approximately $45 million of financing fees associated with two unsecured re-financings and $50 million from the fourth quarter of 2019 common unit distributions that was actually paid in the first quarter of 2020.

To better position the partnership for long term success, we took several proactive steps during the year, including significantly reducing our common distribution, implementing significant cost cutting measures and opportunistically refinancing two of our near term unsecured maturities. While we expect 2021 to be somewhat a year of transition as our base businesses continue to recover and we move ever closer to the significant contribution from several contracted offshore projects, we are increasingly confident in the long-term fundamentals of our businesses and our significant operating leverage to the upside as the global economy continues to improve.

Our offshore pipeline transportation segment was challenged in 2020 from an unprecedented hurricane season, but the outlook remains strong. Over the last ten years through 2019, Genesis had never experienced more than 13 days of named storm downtime in a single year. This past year, we experienced approximately 28 days of named storm downtime and minor structural damage to one of our platforms. This downtime and the non-recurring costs associated with platform inspections and repairs, negatively impacted 2020 Segment Margin by some $40 million. That being said, the CHOPS pipeline was up and running as of February 4th and the first quarter of 2021 remains on track to generate a more normalized earnings profile of approximately $85 million per quarter from our industry critical infrastructure assets in the central Gulf of Mexico.

In regards to the new administration’s most recent Executive Order, which directs the Department of the Interior to temporarily pause new oil and natural gas leasing on federal lands, it is very important to note the targeted pause by the Department of Interior “does not impact existing operations or permits for valid, existing leases, which are continuing to be reviewed and approved.” From January 21st to February 16th, the Bureau of Ocean Energy Management has issued 63 new permits, including 38 revised new well permits and 4 new well permits.

In fact, each of the operators of our larger, contracted offshore projects, Argos and King’s Quay, has just recently publicly confirmed that both projects remain on track for first oil in 2022. We anticipate that these two fields, when fully ramped up, will generate in excess of $25 million a quarter, or over $100 million a year, in additional segment margin. Also, we remain in active discussions with three separate new stand-alone deepwater production hubs, in various stages of sanctioning and with first oil starting in the late 2024-2025 time frame totaling more than 220,000 barrels a day of potential new Gulf of Mexico production.

If the temporary ban on new leases were to be extended or become permanent, which we believe would require a change in the law, we have the equivalent of hundreds of thousands of acres that are dedicated to our offshore pipeline systems under life of lease dedications, all of which are existing, valid leases under primary term, previously granted extensions of their primary term or held by production in perpetuity, alone or in recognized units. We believe there is a tremendous inventory of incremental drilling and sub-sea tie back opportunities on these existing, valid leases that can keep our base production levels flat to slightly growing for many years, if not decades, to come.

Our soda ash business continues to improve from one of the most challenging operating environments in recent history with soda ash sales volumes down approximately 23% year over year. To put it in perspective, this was the first year since 2010 that we did not run at 100% utilization. Global demand for soda ash continues to recover but total demand remains below pre-pandemic levels driven by the wide ranging impact on demand from Covid-19. As a result, we expect both domestic and export prices in 2021 will be marginally lower than those we experienced this past year.

That being said, we were sold out in the fourth quarter and currently expect to be sold out of 100% of our production from our Westvaco facility in 2021. This incremental volume over 2020 will drive a growth in Segment Margin contribution and allow for greater fixed cost absorption and an improved cost structure. We believe all natural producers globally are in a similar situation. As we progress through this year and demand continues to recover, the incremental tons must be supplied with synthetic production, which in general is twice as expensive to make as natural soda. This dynamic is why we believe prices will rise as we go through the year and the market will continue to tighten, especially towards the end of the year when we would otherwise re-determine most of our contract prices for the majority of our sales in 2022.

Our legacy refinery services business continued to improve during the quarter, as we have moved past certain supply disruptions in our supply chain caused by the active hurricane season along the Gulf Coast. Demand for NaHS has returned almost all the way to pre-pandemic levels, driven in large part by pulp and paper as well as our mining customer’s production levels returning to pre-pandemic levels driven by the recent dramatic run up in copper prices, which we think is driven by rapid economic recoveries in the world’s economies.

Our onshore facilities and transportation segment was challenged in 2020 from lower upstream activity around our legacy systems, unfavorable crude-by-rail economics and lower refinery utilization. Looking forward, we continue to see steady crude-by-rail volumes at our scenic station as the differential between WCS and the Gulf Coast continues to support rail movements. While we do not expect any financial impact to us in the first half of 2021 as our main customer works through pre-paid credits, if the current market conditions persist we could see incremental margin contribution from these activities in late 2021 and potentially on into 2022.

Despite a relatively strong first half of 2020, our marine transportation segment continues to be negatively impacted by lower refinery utilization in the Midwest and Gulf Coast which has pressured both rates and utilization within our brown water fleet. The tight supply and demand dynamic that drove our improved results in the first half of the year could return as refineries return to more normalized run rates in the second half of 2021 and more intermediate products need to be moved from location to location. The pace of this recovery could potentially be aided by the equipment retirements that took place in 2020 along with the limited number of new builds over the past few years. As we have mentioned in the past, 2020 was also a challenging contracting environment for the American Phoenix, and we contracted her at a lower rate during the fourth quarter of 2020 and first quarter of 2021. More recently, we were able to re-contract her at a higher rate starting in the second quarter of 2021 through the first quarter of 2022 with an investment grade refining company.

In addition to the successful refinancing of our 2022 notes earlier in the year, in December 2020 we successfully accessed the unsecured bond market and completed an upsized $750 million note offering to fully call and redeem our 2023 notes. The remaining proceeds were used to pay down our senior secured credit facility by approximately $350 million, leaving us with ample capacity heading into 2021. Our nearest unsecured maturity is now June of 2024. Our senior credit facility matures in May of 2022, and we anticipate extending it during the first half of this year.

Our reported leverage ratio increased in the quarter primarily due to the $40 million in weather related impacts we incurred in the second half of the year in the Gulf of Mexico. If only we had experienced a more “normalized” hurricane season, our total leverage ratio at the end of 2020 would have been closer to 5.22X versus the reported 5.57X.

Looking forward to 2021, we would reasonably expect to generate Adjusted Consolidated EBITDA in 2021, as calculated under our senior secured credit facility, between $630 and $660 million1, which includes some $30 to $40 million of pro forma adjustments. We currently expect cash obligations for 2021 totaling approximately $500 million, which includes all, among others, cash taxes, interest on bank debt and bonds, all maintenance capital spent, growth capital spent, asset retirement obligations, financing fees, estimated changes in working capital, preferred cash distributions and common distributions at the current $0.15 per unit quarterly payout. At this point, we have budgeted approximately $40 million of growth capital outside of the Granger expansion, which dollars are expected to be paid via the redeemable preferred structure at the soda ash operational level. This minimal growth capital is predominantly allocated to the offshore segment for additional upgrades to our existing system for anticipated future volumes. Importantly, we expect to generate free cash flow after these identified cash obligations of $80 to $110 million which we intend to use to repay debt.

Turning to the increasingly important topic of the energy transition, while we are highly confident that crude oil will have a significant role to play for the foreseeable future, we continue to look at ways to position ourselves to operate and participate in a lower carbon world. The Gulf of Mexico is already one of the most highly regulated upstream basins in North America, with no fracking or flaring, and has some of the lowest carbon intensity on a per barrel basis of any production in the world. Our soda ash business should increasingly participate in multiple renewable energy themes moving forward including the production of new LEED certified glass windows to retro-fit older buildings, manufacturing of glass for solar panels and the production of lithium carbonate and lithium hydroxide, some of the building blocks of lithium ion/phosphate batteries used in both the electrification of vehicles and long-term battery storage. Our refinery service business continues to help its host refineries lower their emissions by processing their sour gas stream using our proprietary, closed-loop, non-combustion technology to remove sulfur from their H2S stream. In addition, we sell both produced soda ash and sodium hydrosulfide from our sulfur removal services into certain downstream applications that help reduce customer’s carbon footprints. We are also pleased to announce that we are very near to launching our ESG web site which will greatly increase our disclosures and illustrate to investors that we are committed to operating our business in an ESG responsible manner.

In summary, we are highly encouraged by the rebound in our businesses, and we still believe we have a clear line of sight to $700 million1 plus in annual Adjusted Consolidated EBITDA in the coming years. Just a return to 2018-2019 soda ash pricing combined with the incremental contribution margin from our contracted offshore volumes, would add upwards of $100 million of additional Segment Margin to the 2021 guidance described above. With this accelerating ability to pay down debt and with relatively de minimus capital requirements to realize the financial benefits of these improving business conditions, we remain steadfast in our commitment to achieving our long-term target leverage ratio of 4.0X.

I would like to once again recognize our entire workforce, and especially our miners, mariners and offshore personnel who live and work in close quarters during this time of social distancing. I am extremely proud to say we have safely operated our assets under our own Covid-19 safety procedures and protocols with no impact to our business partners and customers. As always, we intend to be prudent, diligent and intelligent and focus on delivering long-term value for everyone in our capital structure 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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