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Genesis Energy (GEL) Misses Q4 EPS by 2c, Revenues Miss

February 19, 2020 6:12 AM EST

Genesis Energy (NYSE: GEL) reported Q4 EPS of $0.03, $0.02 worse than the analyst estimate of $0.05. Revenue for the quarter came in at $604.33 million versus the consensus estimate of $697.5 million.

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

  • Net Income Attributable to Genesis Energy, L.P. of $22.4 million for the fourth quarter of 2019 compared to Net Loss Attributable to Genesis Energy, L.P. of $24.8 million for the same period in 2018.
  • Cash Flows from Operating Activities of $50.6 million for the fourth quarter of 2019 compared to $82.5 million for the same period in 2018.
  • Total Segment Margin in the fourth quarter of 2019 of $179.8 million.
  • Available Cash before Reserves to common unitholders of $87.7 million for the fourth quarter of 2019, which provided 1.30X coverage for the quarterly distribution of $0.55 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 $167.6 million in the fourth quarter of 2019. Our bank leverage ratio, calculated consistent with our credit agreement, is 5.11X as of December 31, 2019 and is discussed further in this release.

Grant Sims, CEO of Genesis Energy, said, “For the quarter, our diversified businesses in total performed slightly better than our expectations, and we ended the year towards the high-end of our revised annual guidance for Adjusted EBITDA.

In our offshore pipeline transportation segment, we saw strong volumes across our platforms and pipelines as newer projects continued to ramp and sub-sea tiebacks and infield drilling more than offset any natural decline in our dedicated fields. We continue to actively pursue and contract new developments which can access our existing capacity and represent meaningful margin contribution to us at minimal or no capital, such as BP’s Argos platform, coming on in 2021, and Murphy’s King’s Quay platform, coming on in 2022.

The offshore midstream infrastructure business is significantly different than that in most onshore basins given, among other things, its cost of entry. Additionally, our systems in the central Gulf of Mexico have available capacity, and very economic capacity expansions, that can offer new shippers firm capacity to shore with the flexibility to go to multiple markets in either Louisiana or Texas. Generally speaking, our rates per barrel in our new contracts are going up, we have terms that are typically for the life-of-lease (some 30 to 40 years), and we are able to include annual escalators, which, due to the mechanics of compounding, tend to flatten out the financial contributions over time, even as volumes decline in the later contract years.

In our onshore facilities and transportation segment, we experienced a ramp in crude-by-rail volumes throughout the quarter as a result of curtailment relief granted in Alberta, Canada and we exited the year averaging approximately one train a day. We have experienced a continued ramp above that in January and February, and would otherwise anticipate these levels at least through March. The provincial government of Alberta is scheduled to review its self-imposed production curtailments policies in the March/April 2020 time frame. Additionally, the practical capacity of existing pipelines out of Canada increases in the second and third quarter as less diluent is needed to move the same amount of bitumen due to higher ambient temperatures. As a result of these two items, we could possibly see a reduction in volumes mid-year before a reasonably expected re-ramp into the end of 2020. We also saw increased volumes in the fourth quarter on our Texas pipeline. Otherwise, the rest of our businesses reported in onshore facilities and transportation segment performed consistent with our expectations.

Our marine transportation segment continued to perform as expected and reported increased segment margin for the eighth consecutive quarter. We experienced strong utilization and improving day rates across our inland and offshore fleets. IMO 2020 appears to be having a positive impact on our inland, black oil barges as refiners need to get the intermediate refined barrel to the right location. Upwards of 90% of our barges are typically contracted to provide services to refiners moving their intermediate products from one location to another.

We see improving fundamentals into 2020 for both fleets. The Army Corps of Engineers is undertaking significant repair and maintenance of locks on the Mississippi River and its major tributaries this summer. As a result, we anticipate a near-term reduction in “practical supply” as movements in and out of such region take longer and are less efficient than normal. As a result, demand and day-rates in our brown water fleet should improve. We are also seeing increased demand for our blue water vessels. Our clean fleet is benefiting from certain competitive dynamics on the East Coast as well as more required product movements because of the closure of refining capacity in Philadelphia. Our larger offshore vessels are benefiting from increased movements of crude oil as more and more barrels reach the Gulf Coast, where the Gulf Coast refiners basically have limited incremental demand for those types of barrels.

In our sodium minerals and sulfur services segment, our legacy refinery services business performed as expected in the quarter, and importantly it appears most of the production and market interruptions it faced in the second half of 2019 are largely behind us as we move into 2020.

Turning to sodium minerals, as we mentioned on our third quarter call, we were then seeing signs of slowdown in the demand for soda ash globally, particularly in Asia. We believed this was tied mainly to the ongoing economic uncertainty around the US-China trade war, but also to decelerating GDP resulting from tightening monetary policies by most central banks in early 2019, which policies appear to have been reversed in the second half of last year.

Nonetheless, this demand trend accelerated into the end of the quarter as customers continued to have excess inventory of soda ash and their respective finished goods, like flat glass. At the same time, it appears that Genesis and the other domestic producers made more soda ash for export in the fourth quarter compared to earlier quarters. As a result, price fell in the export markets to clear this demand/supply imbalance, and we experienced our lowest quarter of financial contribution from our soda ash operations, of just over $38 million, since we acquired the business in 2017.

Unfortunately, most contract prices for a subsequent year are negotiated in the prior December and January of that year. Even though most domestic prices are set on a multi-year basis, many subject to caps and collars, our export contracts and negotiated prices are much shorter in duration. Given the dynamics going into the price negotiations described above, we expect export prices, which represent approximately half of our total annual sales, to be significantly lower in 2020 than they have been in the prior two and half years since we acquired the operations. Experience has shown, because of the nature of the mix of contracts, it can take anywhere from 4-8 quarters for the underlying fundamentals to get prices back on historical trend. We would point out that the effects of the coronavirus on global demand and supply are not yet quantifiable, and this exogenous event could impact that historically observed time interval.

Having said that, we continue to believe in the long term fundamentals of the business and the cost competitive advantage natural soda ash enjoys over synthetically produced product. We remain confident that the market will need, and we can easily and profitably place, the incremental tons coming from our Granger expansion beginning in mid-2022.

When we purchased this business, we analyzed the previous twelve years of its financial history back through 2006, including how it performed during the Great Recession. The annual EBITDA ranged from approximately $120 million to $190 million, with an average of approximately $160 million. Our view then was, and still is, if around $120 million is the downside on a $1.2 billion acquisition, net of the working capital acquired, we would make that investment anytime, especially for a business that has over 70 years of operating history and a remaining reserve life of potentially 300-400 years.

Looking forward into 2020, we see Adjusted EBITDA coming in a range of $640-$680 million. This assumes the margin contribution from our soda ash operations is some $35-$45 million below the $165 million it earned this past year.

As you can therefore surmise, we feel reasonably positive about our other businesses and their prospects. We would reiterate we expect the offshore pipeline transportation segment to be $20-$30 million above 2019 levels. The marine transportation segment is budgeted to improve some $2-$6 million and our legacy refinery services business could be up a similar amount. Finally, the onshore facilities and transportation segment is forecasted to be flat to up $10 million, but such improved results are primarily dependent on the economics of crude-by-rail out of Canada staying constructive throughout this year.

As we analyze our financials, we identify recurring cash obligations for 2020 totaling approximately $620 million, which includes, among others, cash taxes, interest on bank debt and bonds, all maintenance capital spent, preferred cash distributions at the current $0.7374 per unit quarterly payout, and common distributions at the current $0.55 per unit quarterly payout. At this point, we have budgeted approximately $25 million of growth capital outside of the Granger expansion, which dollars are paid via the redeemable preferred structure at the soda ash operational level, which requires no cash payments from Genesis during the 36 month estimated construction period. We do have approximately $20 million of non-recurring asset retirement obligations (“ARO”) budgeted in 2020. However, we reasonably expect to be able to monetize one of the retired assets by the end of this year or certainly sometime in 2021 for a multiple of these 2020 ARO expenditures.

As we look beyond 2020, we have a very good line of sight on significantly improving financial performance. First, we would reasonably expect our existing soda ash operations to return to trend and add some $40-$50 million a year by 2022 at the latest. Argos is scheduled to come on-line in the second half of 2021, which represents potentially $30-$40 million of incremental annualized EBITDA. King\'s Quay is scheduled to come on-line in the first half of 2022, which represents potentially $50-$60 million of incremental annualized EBITDA. Finally, assuming a return to trend on soda ash pricing, the Granger expansion is expected to add potentially $60 million of incremental annualized EBITDA beginning in mid-2022. Therefore, given a starting point of being very close to cash flow neutral this year and taking into account the meaningful new EBITDA discussed above, we believe we will be able to de-lever our balance sheet and restore and maintain our financial flexibility to capitalize on future discretionary opportunities, 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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