Genesis Energy, L.P. Reports Fourth Quarter 2022 Results
HOUSTON–(BUSINESS WIRE)–Genesis Energy, L.P. (NYSE: GEL) today announced its fourth quarter results.
We generated the following financial results for the fourth quarter of 2022:
- Net Income Attributable to Genesis Energy, L.P. of $42.0 million for the fourth quarter of 2022 compared to Net Loss Attributable to Genesis Energy, L.P. of $68.3 million for the same period in 2021.
- Cash Flows from Operating Activities of $81.8 million for the fourth quarter of 2022 compared to $95.6 million for the same period in 2021.
- We declared cash distributions on our preferred units of $0.9473 for each preferred unit, which equates to a cash distribution of approximately $24.0 million and is reflected as a reduction to Available Cash before Reserves to common unitholders.
- Available Cash before Reserves to common unitholders of $83.1 million for the fourth quarter of 2022, which provided 4.52X coverage for the quarterly distribution of $0.15 per common unit attributable to the fourth quarter.
- Total Segment Margin of $197.1 million for the fourth quarter of 2022.
- Adjusted EBITDA of $180.2 million for the fourth quarter of 2022.
- Adjusted Consolidated EBITDA of $736.3 million for the trailing twelve months ended December 31, 2022 and a bank leverage ratio of 4.14X, both calculated in accordance with our senior secured credit agreement and discussed further in this release.
Grant Sims, CEO of Genesis Energy, said, “We are once again very pleased with the financial performance of our market leading businesses for the fourth quarter. Our reported Adjusted EBITDA of $180.2 million exceeded our internal expectations, despite being negatively impacted by approximately $10 million during the quarter as a result of certain unplanned downtime from our producer customers in the Gulf of Mexico, all of which have since returned to normal operations. For the full year, we generated Adjusted EBITDA of $717.1 million, which exceeded the high end of our thrice upwardly revised full year guidance range for Adjusted EBITDA of $700 – $710 million that we issued last quarter, ending up approximately 25% over our initial 2022 guidance, or up approximately 18% over such initial range, even if you exclude the $41 million of non-recurring income we recognized in 2022. Importantly, we once again saw a reduction in our quarter-end leverage ratio, as calculated by our senior secured lenders, to 4.14 times, which is down in less than fifteen months from our third quarter 2021 leverage ratio of 5.51 times.
As we look forward to 2023, the fundamentals and macro conditions across our largest businesses continue to be as positive as we have ever seen them in our careers, and we believe this backdrop provides the foundation for us to continue to improve our balance sheet, generate increasing amounts of free cash flow from operations and deliver value for everyone in our capital structure in the coming years. We continue to see a significant amount of activity in the Gulf of Mexico, including new in-field development wells and new sub-sea tiebacks to existing deepwater production facilities for which we are the exclusive provider of midstream services. Additionally, we will benefit from a full year of volumes from both King’s Quay and Spruance, both of which continue to perform ahead of producer expectations, along with new volumes from Argos, which is currently expected to start up in the middle of the year. The soda ash market remains structurally tight which provided us with a constructive backdrop for our price negotiations on our uncontracted volumes as we entered 2023. We can now report that we have contractually agreed on the pricing for approximately 85% of our anticipated sales volumes of soda ash (including the additional 600,000 – 700,000 incremental tons from Granger expected in 2023) and related products for 2023. As a result, we expect that our weighted average realized price for the full year will exceed the weighted average realized price we received in 2022. Our marine transportation segment also continues to see at or near 100% utilization across all our asset classes, and we are seeing spot day rates and longer term contracted rates approaching levels not seen since 2014 and 2015.
Based on what I mentioned above, and our visibility into 2023, we now expect to generate Adjusted EBITDA this year in the range of $780 – $810(1) million and to exit 2023 with a leverage ratio, as calculated by our senior secured lenders, at or below 4.0 times. The mid-point of this range represents growth of approximately 18% over our 2022 Adjusted EBITDA, excluding the $41 million of non-recurring income we recognized in 2022. We have built into our guidance the potential negative effects if a significant worldwide recession were to unfold as we move through the year. Should that not be the case, or even if there is indeed a recession, but it is milder than we have currently modeled, there could be bias to the upside of even the top end of our 2023 Adjusted EBITDA guidance range provided herein. This anticipated financial performance will provide a clear future path for increasing financial flexibility and opportunities to continue to build long-term value for all our stakeholders.
Given this backdrop, in mid-January we opportunistically accessed the capital markets and successfully priced an offering of $500 million of 8.875% senior unsecured notes due 2030, using the net proceeds from the new notes to redeem in full our 5.625% senior unsecured notes due 2024, with the remainder being used to repay borrowings outstanding under our credit facility. In addition, on February 17, 2023 we successfully syndicated and closed on an extension and upsizing of our existing revolving credit facility with $850 million in commitments from both existing and new lenders with an initial maturity date of February 13, 2026. The relevant covenants contained in the new facility will remain materially the same as our previous facility, although, prospectively, we will have expanded general and permitted investment baskets which will give us increased flexibility to potentially purchase existing private or public securities across our capital structure that we might then perceive to be a high-valued use of our capital. We very much value the relationships with the banks in our bank group and are very appreciative of their continued and increased support of Genesis.
Importantly, with these steps, we now have no maturities of long-term debt until late 2025, and when combined with our clear line of sight to increasing amounts of free cash flow from operations, we believe we are well positioned with ample liquidity and financial flexibility to complete the remaining spend associated with our Granger soda ash expansion project in 2023, as well as complete the construction of the SYNC lateral and CHOPS expansion projects in the Gulf of Mexico in the second half of 2024. As we then start to harvest the incremental cash flow from these growth projects along with the continued strong performance of our base businesses, we believe we are in very good shape to begin simplifying our capital structure and perhaps even start looking at ways to return capital to our bond and common equity holders in one form or another, all while maintaining a leverage ratio at or below 4.0 times.
With that, I would like to next discuss our individual business segments and focus on their recent and expected performance in more detail.
Our offshore pipeline transportation segment performed in-line with our expectations despite experiencing more than expected producer downtime and maintenance at multiple major production facilities connected to our systems which negatively impacted our financial results by approximately $10 million for the quarter. More importantly all of these facilities have since returned to normal operations and we would expect a more normalized level of activity in our offshore segment during the first quarter.
Volumes from Murphy Oil’s operated King’s Quay development continued to exceed our expectations with production from their initial 7 well program producing approximately 115,000 barrels of oil equivalent per day, which is some 15% higher than the original design capacity of 85,000 barrels of oil and 100 million cubic feet of gas per day. Furthermore, Murphy has stated they are forecasting to maintain these production levels at King’s Quay for approximately three years without any additional field development. Meanwhile, Murphy is currently drilling an additional well at their operated Samurai field following the discovery of additional pay sands during their initial phase of development, and they expect this well to be turned to production and flow through King’s Quay starting in the second quarter. First oil from BP’s operated Argos floating production facility and the 14 wells pre-drilled and completed at the Mad Dog 2 field development is currently expected towards the middle of the year, but we are awaiting final confirmation from BP and their partners. We continue to expect volumes from Argos will ramp close to its nameplate capacity of 140,000 barrels of oil per day over the nine to twelve months subsequent to the date of initial production. As a reminder, 100% of the volumes from Argos will flow through our 64% owned and operated CHOPS pipeline for ultimate delivery to shore.
These larger developments, along with other in-field development drilling and other sub-sea tiebacks to production facilities connected to our critical infrastructure, will provide a bridge to the next wave of volumes which includes the approximately 160,000 barrels of oil per day of production handling capacity we expect in late 2024 and early 2025 from our recently contracted developments, Shenandoah and Salamanca. The corresponding construction of the SYNC lateral and CHOPS expansion to support these new volumes in late 2024 and early 2025 remains on schedule, and we currently estimate a total project cost of approximately $550 million, net to our interest. Through the end of last year, we had spent approximately $150 million on this project and would expect to see most of the remaining capital spent this year and the first half of 2024, as we get ready for first oil later that year and early 2025.
We continue to pursue multiple in-field, sub-sea and/or secondary recovery development opportunities representing upwards of 150,000 – 200,000 barrels of oil per day in the aggregate that could turn to production on our pipeline systems over the next two to four years, all of which have been identified but not yet fully sanctioned by the operators and producers involved. The combination of a growing, steady and stable base of production combined with the large scale contracted projects that have or will come on-line every year from 2022 through 2025 demonstrates the stability, longevity and future potential of the deepwater areas of the central Gulf of Mexico and its ability to continue to regenerate itself and support long-term, stable and growing cash flows for many years and decades to come.
Our sodium minerals and sulfur services segment again exceeded our expectations, driven in large part by strong operating performance and the steady increase in soda ash prices throughout 2022. The global supply and demand balance for soda ash has remained tight as global demand has continued to rise at the same time no new natural production has come on-line and the cost structure of synthetic production has continued to remain elevated throughout the year. This increasingly tight market dynamic provided the framework for steadily increasing soda ash prices throughout 2022. We saw this firsthand with our quarterly contract prices increasing by approximately 40% from the first quarter to the fourth quarter 2022, during the same period that soda ash exports out of China actually increased.
The market dynamic at the end of last year provided a very constructive backdrop for our contract pricing negotiations for our 2023 volumes. We have successfully locked in the price for approximately 85% of our anticipated sales volumes of soda ash and related products in 2023, including our new soda ash volumes from Granger, and our weighted average realized price for the full year is expected to exceed the weighted average realized price we received in 2022 as many customers continue to focus on security of supply versus price. In addition, the re-opening of China after the Chinese New Year and the abandonment of their zero-covid lockdowns in early January should mirror the covid reopenings in the U.S. and EU and should provide some tailwinds for soda ash demand within China, which could reduce exports and thus provide some upward bias for prices in our export markets in the back half of the year, all of which we will be actively monitoring throughout the year.
We safely and responsibly re-started our legacy Granger production facility ahead of schedule and had first soda ash “on the belt” on January 1, 2023. We expect production from the legacy Granger facility to ramp over the first part of the year to its nameplate capacity of 500,000 tons of annual soda ash production. Furthermore, our Granger expansion project remains on schedule for first soda ash “on the belt” sometime in the second half of 2023. Through the end of last year we had spent approximately $275 million on the Granger expansion project and would expect to spend another $75 – $100 million over the remainder of 2023 to complete the project.
The net result of our original Granger facility coming back on-line in January and the Granger expansion starting up in the second half of the year means we would expect to see a net increase in production of around 600,000 – 700,000 tons, for total production capacity of approximately 4.2 million tons in 2023. It is important to note 2023 will not fully reflect the true total average cost structure of Granger as we will be operating a largely fixed cost production facility at roughly 50% of design capacity. However, we expect to exit 2023 at or near the full production rates for Granger and thus would expect an additional net increase in production of approximately 500,000 – 600,000 tons, at relatively minor incremental production cost relative to 2023, for total production capacity of approximately 4.7 – 4.8 million tons in 2024 and beyond. Once fully ramped, we would expect our total average cost per ton at Granger to be one of the lowest cost soda ash production facilities in the world.
Our legacy sulfur services business performed slightly ahead of our expectations during the quarter. We were able to utilize our diverse supply network and storage footprint to mitigate the impacts of our largest host refinery taking an extended maintenance outage during the fourth quarter. As a result, we were able to capture an additional vessel loading beyond our expectations and secure additional sales volumes to our South American copper mining customers during the quarter. The steady demand for our sulfur-based products from our copper customers further reinforces our belief that copper demand will be inelastic to any potential economic slowdown given its importance as a fundamental building block of the global economy and its vital role in the green energy revolution. While we anticipate our sales volumes of sulfur-based products to experience a slight decline in 2023 as a result of the partial conversion of one of our host refineries to a biodiesel processing facility, we continue to expect to be able to comfortably supply the steady demand from our copper mining, as well as pulp and paper customers, which will support steady earnings from our refinery service business for many years ahead.
Our marine transportation segment exceeded our expectations as market supply and demand fundamentals continue to remain very strong. During the fourth quarter, we saw tremendously high utilization rates, at or near 100% of available capacity, for all classes of our vessels as demand for Jones Act tanker tonnage remained extremely robust, driven in large part by the significant reduction in marine vessel construction over the last three years and the necessary retirement of older tonnage. This lack of new supply of marine tonnage, combined with strong refinery utilization rates and increasing demand to move intermediate products and refined products from one location to another, has driven spot day rates and longer term contracted rates in our brown water and blue water fleets to levels approaching those last seen in 2014 and 2015. Similarly, the American Phoenix started its twelve-month charter last month with an investment grade counterparty that will run into January 2024 at a day rate comparable to the original rates it commanded when we first purchased the vessel in 2014. Given the increased cost of steel and long-lead times to build new equipment, and regardless of any slowdown in the broader economy, we believe the supply and demand fundamentals for our marine transportation segment will remain strong for the foreseeable future and certainly over the next two to three years.
Our onshore facilities and transportation segment performed in-line with our expectations. During the quarter we saw steady and stable volumes and demand from our refinery customers in and around our Baton Rouge and Texas City corridors. We continue to expect our onshore facilities and transportation segment will benefit as additional offshore volumes come on-line and make their way to our onshore terminals and pipelines for further delivery to refining and other demand centers along the Gulf Coast.
In 2023, we expect growth capital expenditures to range from approximately $400 – $450 million as we finalize the spending on our Granger soda ash expansion project and progress the construction of the SYNC lateral and CHOPS expansion in the Gulf of Mexico. As we complete the spend on Granger this year and on our offshore expansion projects in mid-to-late 2024, absent any unforeseen events, we would reasonably expect to start generating free cash flow after all estimated fixed charges and growth capital expenditures in late 2024 and continuing thereafter, all while maintaining our leverage ratio, as calculated by our senior secured lenders, at or below 4.0 times.
I am also pleased to announce that we will be releasing our initial ESG report in the coming weeks. This inaugural report highlights our commitment to the principals of ESG. We believe we have a responsibility to conduct our business in a socially, economically and environmentally responsible manner and will endeavor to enhance our disclosures over time.
The management team and board of directors remain steadfast in our commitment to building long-term value for everyone in the capital structure, and we believe the decisions we are making reflect this commitment and our confidence in Genesis moving forward. I would once again like to recognize our entire workforce for their efforts and unwavering commitment to safe and responsible operations. I’m proud to have the opportunity to work alongside each and every one of you.”
(1) Adjusted EBITDA is a non-GAAP financial measure. We are unable to provide a reconciliation of the forward-looking Adjusted EBITDA projections contained in this press release to its most directly comparable GAAP financial measure because the information necessary for quantitative reconciliations of Adjusted EBITDA to its most directly comparable GAAP financial measure is not available to us without unreasonable efforts. The probable significance of providing these forward-looking Adjusted EBITDA measures without directly comparable GAAP financial measures may be materially different from the corresponding GAAP financial measures.
Financial Results
Segment Margin
Variances between the fourth quarter of 2022 (the “2022 Quarter”) and the fourth quarter of 2021 (the “2021 Quarter”) in these components are explained below.
Segment Margin results for the 2022 Quarter and 2021 Quarter were as follows:
|
|
Three Months Ended December 31, |
||||
|
|
2022 |
|
2021 |
||
|
|
(in thousands) |
||||
|
Offshore pipeline transportation |
$ |
82,087 |
|
$ |
74,140 |
|
Sodium minerals and sulfur services |
|
87,575 |
|
|
45,210 |
|
Onshore facilities and transportation |
|
6,259 |
|
|
26,312 |
|
Marine transportation |
|
21,220 |
|
|
9,972 |
|
Total Segment Margin |
$ |
197,141 |
|
$ |
155,634 |
Offshore pipeline transportation Segment Margin for the 2022 Quarter increased $7.9 million, or 11%, from the 2021 Quarter primarily as a result of first oil achievement during the second quarter of 2022 from the King’s Quay floating production system (“FPS”) and the Spruance development (which all volumes are fully dedicated to our 64% owned Poseidon pipeline), which both successfully ramped up to their expected capacities in the 2022 Quarter. The King’s Quay FPS supports production from the Khaleesi, Mormont and Samurai field developments and is life-of-lease dedicated to our 100% owned crude oil and natural gas lateral pipelines and further downstream to our 64% owned Poseidon and CHOPS crude oil systems or our 25.67% owned Nautilus natural gas system for ultimate delivery to shore. During the 2022 Quarter, production volumes at King’s Quay reached in excess of 100,000 barrels of oil equivalent per day. In addition to this, we have contractual minimum volume commitments that began in 2022 associated with the Argos FPS (which supports the Mad Dog 2 development) that are included in our reported Segment Margin during the 2022 Quarter. Argos is anticipated to have first oil in the middle of 2023. These increases were partially offset by approximately $10 million as a result of certain unplanned producer downtime at numerous fields connected to our pipeline infrastructure in the 2022 Quarter, which returned to normal operations by the end of the year, and the effects to reported Segment Margin from our decrease in ownership of CHOPS, as we sold a 36% minority interest on November 17, 2021.
Sodium minerals and sulfur services Segment Margin for the 2022 Quarter increased $42.4 million, or 94%, from the 2021 Quarter primarily due to higher export and domestic pricing and higher sales volumes in our Alkali Business as well as increased volumes and pricing in our refinery services business. In our Alkali Business, we have continued to see strong demand improvement and growth as a result of the global economic recovery and the continued use of soda ash in the production of everyday end use products along with increased demand for products associated with the energy transition, including solar panels, and the use of soda ash in the production of lithium carbonate and lithium hydroxide, which are some of the building blocks of lithium batteries. This continued demand improvement, combined with flat or even slightly declining supply of soda ash in the near term, has continued to tighten the overall supply and demand balance and created a higher price environment for our tons and increased contribution to Segment Margin during the 2022 Quarter. We have contractually agreed on the pricing for approximately 85% of our anticipated sales volumes of soda ash and related products for 2023, and as a result, we expect that our weighted average realized price for 2023 will exceed the weighted average realized price we received in 2022. Additionally, we successfully re-started our original Granger production facility on January 1, 2023 and are still on schedule to complete our Granger Optimization Project in the second half of 2023, which represents an incremental 750,000 tons of annual production capacity that we anticipate to ultimately ramp up to.
Contacts
Genesis Energy, L.P.
Dwayne Morley
VP – Investor Relations
(713) 860-2536
