Shell Midstream Partners Q3 2021 Earnings Call Transcript

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October 28, 2021

There are 9 speakers on the call.

Operator

Good morning. My name is Jeff, and I will be your conference operator today. At this time, I would like to welcome everyone to today's webcast for Shell Midstream Partners. There will be a question and answer session. Call.

Operator

I will now turn the call over to Mr. Jamie Parker, Investor Relations. Call. You may begin your conference.

Speaker 1

Thank you, Jeff. Welcome to today's webcast for Shell Midstream Partners. With me today are Steve Ledbetter, CEO Sean Carsten, CFO and Sean Guillory, VP, Commercial and Business Development. Slide 2 contains our Safe Harbor statement. We will be making forward looking statements related to future events and expectations during the presentation and Q and A session.

Speaker 1

Actual results may differ materially from such statements and factors that could cause actual results to be different are included here results in today's press release and under Risk Factors in our filings with the SEC. Today's call also contains certain non GAAP financial measures. Please refer to the earnings press release and Appendix 1 of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. We will take questions at the end of the presentation. With that, I'll turn the call over to Steve Ledbetter.

Speaker 1

Thanks, Jamie. Good morning, and welcome to

Speaker 2

our Q3 earnings webcast. First, let me start by saying how proud I am of our entire Shell Midstream team. We continue to show grit and resilience in the midst of adversity. As you know, Hurricane Ida impacted the United States Gulf Coast, With the most significant impacts being in Louisiana, an area where many of our staff live. Their ability to bring back our assets normal operations in a short timeframe, while dealing with impacts to their own homes and families is truly remarkable.

Speaker 2

And I would like to express my sincere gratitude to those who worked and continue to work to bring our assets back online. Sean will address the short term impacts in a bit and I will focus on the longer term outlook. As you recall, last quarter, we introduced an updated financial framework, which will drive our capital allocation into the future. Today, building upon this framework, we want to align our strategic intent for Shell Midstream Partners, which we believe will drive long term sustainability. As we move forward, our decisions will support fueling stable and ratable cash flows with moderate growth to the partnership.

Speaker 2

This will be delivered by optimizing our diversified strategic asset base to increase value added services to our customers, investing selectively to further strengthen our current positions and take advantage of evolving market dynamics, evaluating opportunities to expand logistics services into energy transition themes like CCS or clean fuels And all the while continuing to focus on competitiveness and costs and capital efficiency in our decision making. Shell Midstream Partners continues to benefit from its core fundamentals upon which we always deliver And which drive confidence in our ability to deliver value to unitholders year over year. We believe in our portfolio and the capabilities of our people To execute safely and responsibly and with respect and care for each other in the environment in which we live and work. Holding diversified assets with exposure to efficient and competitive basins such as the Gulf of Mexico, offering optionality to multiple market centers and having access to cost advantage supply are all key benefits we enjoy. A strong financial footing complemented by a refreshed framework, which offers options for cash deployment and drives resilience through cycles and a track record of operational delivery with the expectation that we will continue to deliver stable and ratable cash flows With moderate growth for the long term.

Speaker 2

Our cash delivery will be driven mainly by our offshore and onshore Crude and Product Systems. With our assets and the ongoing activity in the Gulf of Mexico, we believe the region will continue to grow. In the near term, the story will be tiebacks with flat production across our assets. In the midterm, we anticipate Vito, PowerNap and Anchor to flow into our systems to not only replenish, but also to grow our cash flows. And longer term, we expect producers to remain active as the basin continues to be one of the most economic areas to explore and should provide long life cash flows.

Speaker 2

A few specific examples to share. RMAR's expansion is progressing well And we'll stand ready for 1st oil from Vito and PowerNap in 2022. We also intend to expand in the Auger corridor, Capturing new production in the area that is ready to come online in the midterm. We expect that opportunity to have a capital outlay of between $35,000,000 $45,000,000 and to deliver an anticipated annual EBITDA value of between $15,000,000 $20,000,000 with an FID timeline of 2022 and expectation to come online in 2025. Both projects are examples of continued investment strategic areas of our business and will provide value to unitholders.

Speaker 2

Moving onshore, we expect demand to continue to return to pre COVID levels. As we've discussed in the past, our cash flows are expected to be ratable and growing with inflation. And I will note that our assets should have minimal contractual risk as we move forward. What will drive onshore growth Will be selective investments in core positions such as our intended Lockport expansion, which we anticipate will reach FID early next year. This opportunity allows us to take advantage of Canadian crude movements into the Midwest markets and staging to move into St.

Speaker 2

James and Clovelly for exports. We expect that project CapEx to be between $20,000,000 $25,000,000 and to deliver an annual take or pay EBITDA value of between $3,000,000 $6,000,000 And further downstream in Southeast Louisiana, we look to utilize our asset positions to link St. James to Clovelly, all with the intent of providing an efficient path to the water for the Midwest. Additionally, We see strategic growth opportunities in our non operated refined products portfolio, namely The previously announced Explorer project to expand the system in the North Dallas market. And although we will continue to take advantage of our portfolio position and the continued need for fossil fuels well into the future.

Speaker 2

In time, we will look to leverage our footprint and expand into alternative energy transition themes such as renewable fuels, hydrogen and CCS solutions. One potential opportunity in this space would be Shell's recent announcement to explore potential CCS project in the Gulf Coast, where we could be well positioned to provide the midstream solution. This is our core base plan, which provides stable and ratable cash flows With moderate growth, all with small levels of CapEx required and we anticipate having excess cash above our distribution levels, Which will allow us to weather uncertainties like Hurricane Ida and deliver upon our strategic intent as we move forward. With this excess cash flow, we will follow the framework we discussed last quarter to drive further value to the company. 1st, we will maintain our balance sheet strength in order to remain resilient and pursue additional growth opportunities aligned with our view of the market.

Speaker 2

And we will look to return dollars to unitholders. It is my belief that the market is undervaluing our units and ability to deliver over the long term. As such, we are evaluating options such as using excess cash for a potential buyback program or increasing distributions in the future. Finally, we continue to have access to a runway of assets where we could opportunistically Pursuadrop to provide additional ratable cash flows and unlock future growth opportunities if it makes sense from a market and unitholder value perspective. Now as I close, we believe in our diversified asset base, which connects key supply areas to strategic market centers across the country.

Speaker 2

The long term resilience of the Gulf and our advantageous position there will continue to serve us well. And when combined with our onshore Gulf Coast logistics assets. We believe our partnership remains well positioned to fuel stable cash flows and moderate growth well into the future. With that, I will now hand the call over to Sean.

Speaker 3

Thanks, Steve, and good morning, everyone. I think we can all agree, it's been quite a ride over the past 18 months, But we've proven our capability and strength multiple times over. I really can't say enough about the resilience of our staff and our assets, which continue to deliver best in class performance. Now all this resilience is underpinned by our strong and diversified asset base. It's my view that the United States and the world will have a need for the hydrocarbons that we transport for many years to come.

Speaker 3

And we believe that even as the energy transition evolves, our assets will be some of the most resilient in the infrastructure space. So with our strong set of assets to build upon, our financial framework now in place and more details on how we intend to continue to move forward, I'm confident in the partnership's ability to deliver consistent cash returns to our unitholders. So now let me cover a few of our key financial metrics for the quarter. For the quarter, even with the storm impacts and Colonial's decision to not declare a 3rd quarter dividend, our partnership was able to meet its commitments. This speaks to our financial strength.

Speaker 3

Our total revenue was $128,000,000 a decrease of about $20,000,000 for the 2nd quarter. This was primarily related to lower throughput on Zydeco and the offshore as we experienced downtime related to Hurricane Ida. This decrease was partially offset by higher product revenue. Operating expenses were $79,000,000 down about $4,000,000 from the prior quarter, Mostly related to the timing of project spend as some work was delayed, which was partially offset by higher cost of allowance oil sales. Income from equity investments was $86,000,000 down about $19,000,000 from the prior quarter, mostly due to storm impacts and lower volumes on Explorer.

Speaker 3

So with all this, adjusted EBITDA attributable to the partnership, it was about $145,000,000 And after interest expense, maintenance capital and other adjustments, total cash available for distribution was $122,000,000 Our partnership declared a distribution of $0.30 per LP unit. Now this resulted in a coverage ratio for the quarter of 1 times. So now let me turn to the partnership's balance sheet and liquidity. As of September 30, the partnership had total debt outstanding of $2,700,000,000 and approximately $1,200,000,000 in available liquidity. We believe in the strength of our balance sheet as it provides us both the flexibility to effectively navigate events like Hurricane Ida and the ability to pursue opportunities as they arise.

Speaker 3

So now let me quickly provide a few updates for the rest of this year. In the Gulf, we expect to see an impact of roughly $10,000,000 to $15,000,000 to both net income and CAFD in Q4, all relating to the repairs on West Delta 143 platform, which we anticipate being completed around mid November. It's important to understand that the IDA impacts are not expected to have the long term effects on our company. And once the fields are back up, they should resume a normal production profile. And finally for a little housekeeping, we expect to file a renewal of our shelf registration statement, which is set to expire in the near future.

Speaker 3

Although we do not anticipate any near term needs to issue units, we believe it prudent to keep our shelf registration active. As I close, we're optimistic about the future of the partnership and we believe in our ability to drive long term value for unitholders

Operator

Your first question comes from the line of Shneur Gershuni from UBS. Your line is open.

Speaker 4

Hi, good morning, everyone. I just wanted to go back to your comments specifically about kind of the return of capital discussion. When do we start that thought process? Does the Colonial Way case have to be decided, you have to know exactly what that's in place? And so that's something that We should be thinking about is kind of that is the triggering event, or is it something that you're already evaluating today?

Speaker 4

You cut the distribution, you've sort of right sized The cash inflow and outflow and so forth, relative to the highly accretive projects that you're working on. I'm just trying to understand kind of your thought process about when that Is something that we should be thinking about as a near term event?

Speaker 2

Hey, Shneur, this is Steve. I'll take that one.

Speaker 5

It's a

Speaker 2

good question. I wouldn't link it to any one event. I think what we have done in terms of our refreshed financial framework has allowed us to weather The headwinds that we see just like Hurricane Ida and over time will allow us to build excess cash and that along with the strength of our balance sheet will allow us to take opportunities to deploy that capital and as part of that grow value in the name. And one of those items is looking at a buyback program or returning dollars to shareholders. Timing of that will be as we move along and grow excess cash through the cycle.

Speaker 2

We're not talking about a specific point in time today.

Speaker 4

Okay. And just a quick clarification, like when you wrote the slide on Slide 7, you did write buybacks first, distribution second. Is there something for Just a read into that, is that your preference right now or, they're both viewed equally?

Speaker 3

Hey, Shneur, this is Sean. No, there are just two options of ways To return cash to unitholders.

Speaker 4

Great. And maybe one final question, if I can slip one in. Is there any risk that You would have to put any capital into Colonial, like a capital injection or the fact that it's not paying a distribution for the last few quarters, it's building up capital in case earnings release.

Speaker 2

Yes. Good question. As we view it and as we discussed last quarter, The risk associated with the rate case as well as the 100 bill incident could impact forward distributions and here we sit with the second quarter in a row where they didn't declare a distribution. However, we believe that Colonial will be able to manage that within strategic nature of Colonial is still there. We believe in our investment and we believe that it will turn to a distribution in time and are happy with our position there.

Speaker 4

Perfect. Thank you very much. Really appreciate the color and have a great weekend.

Speaker 3

Thanks, Sharon.

Operator

Your next question comes from the line of Theresa Chen from Barclays. Your line is open.

Speaker 6

Good morning. I'd like to follow-up on Shneur's question related to Colonial, if you don't mind. Can you just remind us from here what are the next steps as far as the sequence of events go? And what kind of outcome do you expect as far as the rate resolution?

Speaker 2

Hi, Theresa. Yes, I mean as far as the next Stapsco, we'd point you back directly to, Colony on that. As you know, there was an ALJ decision scheduled For November, we understand that that has been pushed just a bit. But again, we put you back or point you back to Colonial for any of the specifics.

Speaker 6

Okay. And in terms of your potential participation in the sponsors' efforts in energy transition. Can you talk more about the CCS option and what exactly would that entail from your end?

Speaker 5

Hey, Theresa, this is Sean Guillory. I'll go ahead and take that. I think from a CCS perspective. You may have seen some of the recent announcements from the sponsor about work that They're looking at to have in the Gulf Coast. I think what we said before, we'll continue to look at is what makes sense for us At the pace of society, we would look at things like carbon capture, storage, hydrogen, low carbon fuels, Anything that would use pipelines or terminals to get value and possibly invest in that for the partnership.

Speaker 3

And Teresa, this is Sean, Carson. Just to add a little bit, these will however we participate, these will be backed by more traditional mid stream contracts as you've seen in the past. So we our objective is to support our affiliates and play that integrated play, But also ensure that value returns to our unitholders.

Speaker 6

Thank you.

Operator

Your next question comes from the line of Doug Irwin from Credit Suisse. Your line is open.

Speaker 7

Hey, thanks for the question. Just wondering around the hurricane impact, if you can help frame that from a cost perspective in terms of kind of how much costs went into the quarter on repairs? And then to the extent that you're able to, are you able to talk about, what might be recoverable under insurance policies. I guess it's too early to say on that.

Speaker 2

All right. Doug, this is Steve. I think I heard the question. You were a little bit quiet there, but around the costs, around assets And then potential insurance recovery. If that's correct, I can frame that up.

Speaker 2

Is that right?

Speaker 7

Yes. Yes.

Speaker 2

Okay. Yes. I mean, I think as far as the hurricane goes, the minimal repair costs to our assets and our assets held up very well. As you know, the impact to our business was associated with the damage on West Delta 143 And those while we operate and man those assets, we do not own them. They are owned by our affiliate.

Speaker 2

And so the cost to repair those will be borne By our affiliate. Just a plug, I don't see any lasting damage for our assets and I'm extraordinarily proud of the team And how they dealt with this and in fact bringing Platform C up in October and Platform A up mid November to get the flows going back Through our Mars corridor system. Sean, do you want to talk about the insurance? Sure.

Speaker 3

Thanks, Steve. So Doug, I think with regards to insurance, we have, as Steve highlights, minimal in terms of property damage. Mars is the only asset that we would qualify under the 60 day waiting period for the business interruption insurance today is that day. As we highlighted earlier, we expect that platform to return in the relatively near future. And so we'll see what the claims might be.

Speaker 3

I'm not making any predictions. However, you shouldn't expect them

Speaker 4

to be

Speaker 3

significant if it comes up quickly.

Speaker 7

Okay. That's helpful. Thanks. And then I think you'd previously guided to kind of expected maintenance costs throughout the second half of the year. And you mentioned some of that might have been pushed out from 3Q.

Speaker 7

Is that baked into the $10,000,000 to 15,000,000 4Q impact you've talked about or is there going to be some incremental maintenance on top of that in the Q4?

Speaker 3

Yes. So Doug, I mean, we always have maintenance every quarter. The $10,000,000 to $15,000,000 is almost all related to revenue, which is just lost production. And from a capital standpoint, Right now, we have about we're about $5,000,000 short for the entire year around maintenance capital, just because these were projects that were delayed Due to the hurricanes, we were just canceled due to more efficiency. And so overall, I think we're relatively on track with our maintenance, We pushed a little bit of activity over to the New Year.

Speaker 7

Okay. That's all for me. Thanks.

Operator

Your next question comes from the line of Derek Walker from BOA. Your line is open.

Speaker 8

Hey, good morning guys.

Speaker 2

Good morning. Hey, Derek.

Speaker 8

I apologize if you guys said this, my call dropped during your formal remarks. But I know you previously, you talked about $30,000,000 to $40,000,000 sort of cost reductions by the end of this year. I guess, ex sort of the impacts related to weather. I guess, how are you guys looking at that cost structure? Do you see any opportunities in 2022 to further reduce costs?

Speaker 2

Yes. As we've talked about in the past, that $30,000,000 to $40,000,000 run rate as we exit 2021 was our objective and what we had guided towards. And I'm happy to say that we are on target to meet that leading 2021. Those are structural and sustainable elements where we take advantage to optimize what we do in the marketplace, different procurement strategies and we see that those are sustaining and lasting, but we don't stop there. We continue to, as we talked about, focus on our competitiveness and our position in the marketplace and we'll continue to look for opportunities to optimize and keep a lid on costs as well as our capital discipline as we move forward.

Speaker 8

Got it. Thanks. And then I know it's perhaps an immediate thing, but just on the drop downs, I mean, you talked about potentially evaluating buybacks. I think in the past you talked about if you were to do buybacks to be sort of Interest on assets you already own. But just have you had recent discussions?

Speaker 8

I guess is there anything there that has evolved, I guess on the drop down front and sort of your funding strategy around that.

Speaker 2

Yes. I mean, so one of the benefits of being LinkedIn having access to being associated with the sponsors, having access to those assets that could make sense in the drop structure. If and when it made sense financially, We would entertain doing that. At this point, we don't think it makes sense currently As far as the best value and growing value in the name.

Speaker 3

Just to build a little on Steve's comment, look, We have no intention to issue new equity, particularly in these markets when it's awfully expensive. And so as we move forward, whether we do it through our balance sheet or through cash on hand, we'll Look to leverage some of our excess cash to take advantage of all the opportunities, which will include organic growth and this other slate of options that we've reviewed both returning cash to unitholders as well as possibly drop down. But that's a longer term issue.

Speaker 8

Got it. And then maybe just a quick one On the Augur opportunity, I think you mentioned the FID in 2022. I guess how would that opportunity develop? And I guess any other

Speaker 5

This is Sean Guillory. I'll go ahead and take that Thanks for the question. And what I would say about the Auger opportunity is it continues to show the continued investment and the belief that we have in the Gulf of Mexico as one of the most resilient basins in the United States and In a basin that actually over the last couple of cycles have gone through some quite some difficulty, but has come out Very much ahead and we've seen producers want to continue the investment there. And our desire to go to expand that system. We see that as very similar to the Mars expansion.

Speaker 5

We will be able to provide The necessary producer solution that will allow the export of those Gulf of Mexico barrels We think we'll play a vital role in delivery of cash. And in terms of the process going forward, as we get More through our own internal evaluation process. We'll come back to the market with a bit more details at a later time.

Speaker 8

Got it. That's helpful. I appreciate it, guys. Thank you very much.

Speaker 4

Thanks.

Operator

Thank you. We have no further questions. I will now turn the call back over to Mr. Jamie Parker.

Speaker 1

Thanks, Jeff. Thank you very much for your interest in Shell Midstream Partners. If you have any additional follow-up questions following today's presentation, please feel free to call me directly. My contact information can be found on the presentation materials as well as on our website, shellmidstreampartners.com.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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