Genesis Energy, L.P. Reports Second Quarter 2022 Results
HOUSTON–(BUSINESS WIRE)–Genesis Energy, L.P. (NYSE: GEL) today announced its second quarter results.
We generated the following financial results for the second quarter of 2022:
- Net Income Attributable to Genesis Energy, L.P. of $35.3 million for the second quarter of 2022 compared to Net Loss Attributable to Genesis Energy, L.P. of $41.7 million for the same period in 2021.
- Cash Flows from Operating Activities of $104.0 million for the second quarter of 2022 compared to $111.0 million for the same period in 2021.
- 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.
- Available Cash before Reserves to common unitholders of $121.2 million for the second quarter of 2022, which provided 6.59X coverage for the quarterly distribution of $0.15 per common unit attributable to the second quarter.
- Total Segment Margin of $219.3 million for the second quarter of 2022.
- Adjusted EBITDA of $210.1 million in the second quarter of 2022.
- Adjusted Consolidated EBITDA of $646.4 million for the trailing last twelve months ended June 30, 2022 and a bank leverage ratio of 4.49X, 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 extremely pleased with the financial performance of our market leading businesses for the second quarter. Our reported Adjusted EBITDA of $210.1 million, which included a $32 million gain on sale of assets and some $5 million of other non-recurring income, exceeded our internal expectations. Even if one were to disregard these one-time benefits, our second quarter results came in approximately $30 million, or some 20%, over our reported Adjusted EBITDA for the first quarter. Importantly, we achieved a quarter-end leverage ratio, as calculated by our senior secured lenders, of less than 4.5 times for the first time since the fourth quarter of 2014.
These results were largely driven by a return to normal operations and increasing volumes in our offshore pipeline transportation segment relative to the first quarter, as well as sequential quarterly growth in each of our other segments, reflective of the positive backdrop for each of our specific businesses. Because of our financial performance in the first half and our expectations for the remainder of 2022, we are today raising our full year guidance for Adjusted EBITDA(1) to a range of $670-$680 million, which includes the one-time benefits recognized in this quarter I mentioned above. We would also expect to exit 2022 maintaining a leverage ratio, as calculated by our senior secured lenders, at or below 4.5 times.
As we look ahead to 2023, we expect sequential growth in our full-year financial results driven primarily by significantly growing volumes out of the Gulf of Mexico as well as significantly growing volumes of soda ash as we re-start our Granger facility in January and bring the full expansion on-line in the third quarter. While we will go into more detail below, given the fixed cost economics in the Gulf of Mexico and the structural undersupply in the world-wide soda ash market, it’s our view as we sit here today that virtually any sort of “normal”, policy driven economic slowdown or recession, will have a limited, if not negligible, impact on the upward trajectory of our businesses. Accordingly, we do not see any reasonably likely scenario where we do not generate Adjusted EBITDA(1) next year in the low-to-mid $700 million range and exit 2023 with a leverage ratio, as calculated by our senior secured lenders, near, or potentially even below, 4.0 times.
With that, I would like next to discuss our individual business segments and focus on their recent and expected future performance.
Our offshore pipeline transportation segment out-paced our internal expectations. Not only did we return to normal operations, given some of the non-recurring issues experienced in the first quarter, but we benefited from the beginning of the ramp in production from King’s Quay. Murphy, as operator, is expected to bring on the remaining wells that have already been drilled and ramp to King’s Quay’s design capacity of 85,000 barrels of oil and 100 million cubic feet of gas per day over the remainder of the year. BP’s operated Argos floating production facility and the 14 wells pre-drilled at their Mad Dog 2 field development is expected to achieve first oil later this year, although we are awaiting an update of when that might be, and we continue to expect volumes to ramp to its nameplate capacity of 140,000 barrels of oil per day over the subsequent 9 to 12 months after first production.
While we have been talking about King’s Quay and Argos for quite some time as high profile, new stand-alone developments, there’s an exciting amount of in-field drilling and subsea tie-backs that have started production and/or are expected to come on-line in the back half of 2022. In late June, Spruance, operated by LLOG, initiated production at approximately 15,000 barrels of oil per day from a two well subsea tie-back development. We have knowledge of, and have contracts in place for another 5, and possibly 6, in-field/sub-sea wells that will initiate production over the coming months representing approximately 50,000 barrels of oil per day of incremental production that will flow through our pipelines, including in all cases through a 100% Genesis owned lateral prior to transportation to shore through either of our 64% owned and operated Poseidon or CHOPS pipeline systems as the case may be.
The operators of these developments and their partners have already spent hundreds of millions, if not billions, of dollars on constructing and installing these deepwater production facilities and drilling and completing these new wells. No broader economic slowdown or precipitous drop in oil prices is going to affect the pace of these developments, including the some 160,000 barrels of oil per day we expect in late 2024 and early 2025 from our recently contracted developments, Shenandoah and Salamanca, which we announced last quarter. We are in various stages of commercial discussions with multiple in-field, sub-sea and/or secondary recovery development opportunities representing upwards of 200,000 barrels of oil per day that could turn to production over the next 2 to 4 years, all of which have been identified but not yet fully sanctioned by the producers involved.
Given this contracted and identified runway of new developments, we could not be more excited about the coming years and decades in the central Gulf of Mexico. This is especially true given the Gulf’s importance to secure domestic oil production, its proximity to Gulf Coast refinery complexes and the fact it has the lowest carbon footprint of any barrel of oil refined and consumed in the United States.
Our sodium minerals and sulfur services segment continues to exceed our expectations. The market for soda ash is structurally short of supply. This tightness is fundamentally the result of some 2 million tons a year of supply having been taken offline since 2019 (pre-Covid) and has recently been exacerbated by multiple production disruptions and force majeure events experienced and declared by other natural producers in the United States, while demand (ex-China) is exceeding 2019 levels. The supply shortfall means prices must rise to allocate scarce tons and ultimately solicit incremental high cost synthetic production to balance the market at the margin, all at a time when the synthetic producers’ costs have increased dramatically, primarily as a result of rising energy costs.
As a result, we do not foresee a realistic scenario where the remainder of 2022 and 2023 do not meet or exceed our expectations, regardless of any potential headwinds associated with a slowdown of the broader economy. Inventories currently are at or approaching historical lows and have never been so low immediately prior to entering a policy induced, cyclical slowdown. Furthermore, the soda ash market today has incremental demand associated with the green transition, specifically from solar panel and lithium battery manufacturers, that hasn’t existed to this degree prior to previous slowdowns and recessions. Our contracted soda ash prices for the third quarter of 2022, in fact, are higher than the second quarter, and this is in a macro environment where, technically, at least the EU and the United States may be or already are in a recession. We fully expect this structural tightness and corresponding high price environment to continue to exist as we discuss price redetermination for our non-contracted 2023 sales later this year, independent of broader economic conditions.
Our Granger expansion continues to be on schedule and on budget. We will start incurring certain start-up expenses later this year, primarily hiring and training costs, in order to be in a position to bring our original Granger facility on-line in January 2023 and the expanded Granger facility on-line sometime in the third quarter. We expect a net increase in production of some 700,000 tons in 2023 with the full 1.2 to 1.3 million tons from the original and expanded Granger facilities available in calendar 2024. Once expanded, Granger will join our Westvaco facility among the handful of absolutely lowest cost soda ash production facilities in the world. Once Granger is on-line we will become the only U.S. soda ash producer with multiple production sites along with an unrivaled supply chain network from mine to customer. We see no other meaningful expansions of production capacity in the ex-China market before late 2025, or more realistically 2026. This is in a market that has a long-term, normalized growth of some 700,000 to 1 million tons a year, prior to the 500,000 or so tons a year of recent incremental demand for soda ash as a necessary input into products leading the transition to a lower carbon world.
Our legacy refinery, or sulfur services, business also exceeded expectations for the quarter. During the quarter, we were able to leverage our market leading, geographically diverse supply and terminal sites to manage our inventory and, in fact, capitalize on spot volumes, domestically and in South America, as certain of our single or dual point competitors experienced production issues. Despite copper prices falling from recent highs, we do not believe this will slow down activity levels of our mining customers unless and until copper prices were to fall significantly below $2 a pound and were expected to stay there for a long period of time. This is highly unlikely, even in a slowing economy or world-wide recession, given copper’s fundamental uses and especially given its key uses as a critical and necessary input into products leading the green transition. We could possibly see some marginal demand destruction, especially if the consumer makes a significant pullback, but nothing that gives us pause for concern. We would point out that we do see some temporary reductions in supply over the next several quarters as several of our refinery hosts go through major turnarounds. These planned supply reductions will continue to keep the market for our sulfur based products well balanced, even if there is some demand softening over the next several quarters.
Market conditions in our marine transportation segment continue to remain strong. We are seeing tremendous demand for all classes of our vessels with utilization at or near 100% across the fleet, and in some cases we are seeing day rates approaching those we commanded in 2015. The supply of maritime equipment is extremely tight as a result of the net equipment retirements over the last few years, the increasing cost of steel and extended timelines to build new vessels. At the same time, demand for maritime equipment is increasing with increased refinery utilization and widening crack spreads for clean and refined products to move from the Gulf Coast to the East Coast, primarily as a result of regional refinery shut downs and certain unforeseen geopolitical events and economic sanctions related thereto. We do not believe a compression of refinery crack spreads or other demand responses to a policy induced slowdown or recession will cause a meaningful change to the current supply and demand dynamic around marine vessels. As a result, we have confidence these market conditions will continue to support stable to increasing financial performance from our marine transportation segment in coming quarters and reasonably normal cyclical markets. We would expect the third quarter to be slightly less than second quarter results as the American Phoenix will be out of service for some 4 to 6 weeks as a result of a scheduled dry-docking. However, upon returning to service she is then scheduled to go on charter with an investment grade counterparty through the end of this year at a rate meaningfully higher than that prior to such scheduled outage.
Our onshore facilities and transportation segment performed in-line with our expectations. During the quarter, we received certain crude by rail volumes at our Scenic station as our main customer looked to source volumes to replace certain international volumes that were impacted by geopolitical events and economic sanctions related thereto. We expect these rail volumes to continue at least through the third quarter. We continue to expect to see increasing volumes at our terminals and pipelines in both Texas and Louisiana as the significant new volumes in the Gulf of Mexico come on-line and need to be further transported to refineries and market demand centers along the Gulf Coast.
Finally, during the quarter we also made the strategic decision to simplify our capital structure. In late May, we were successful in redeeming 100% of the Alkali asset-level preferred units that were originally issued in 2019 to fund the expansion of our Granger soda ash facility. This transaction represented an attractive opportunity to simplify our corporate structure while enhancing the credit support for both our secured lenders and unsecured bond holders. We were able to re-finance all of the asset-level preferred units, which carried an implied 12% – 13% cost of money, and replace it with much more attractively priced 20-year capital with a coupon of 5.875% per annum. Additionally, the transaction allowed us to address any perceived refinancing risk and removed a bullet maturity due in 2026, in the middle of our laddered bond complex, while remaining leverage neutral under our calculated bank leverage ratio and preserving all of the upside to Genesis from increasing soda ash prices.
The last two and a half years have been interesting to say the least, but as we sit here today, I have never been more excited about the future of Genesis. The continued performance of our market leading businesses combined with our contracted growth projects in the Gulf of Mexico and the Granger expansion have positioned the company for continued growth in the coming years. This expected financial performance will provide us with the flexibility and liquidity to fund our remaining capital expenditures as well as the flexibility to manage and hopefully further simplify our capital structure in the coming years.
The management team and board of directors remain steadfast in our commitment to build long-term value for all of our stakeholders, 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 be associated with 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 second quarter of 2022 (the “2022 Quarter”) and the second 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 June 30, |
||||
|
|
2022 |
|
2021 |
||
|
|
(in thousands) |
||||
|
Offshore pipeline transportation |
$ |
118,980 |
|
$ |
83,106 |
|
Sodium minerals and sulfur services |
|
71,701 |
|
|
38,194 |
|
Onshore facilities and transportation |
|
11,018 |
|
|
22,368 |
|
Marine transportation |
|
17,573 |
|
|
8,468 |
|
Total Segment Margin |
$ |
219,272 |
|
$ |
152,136 |
Offshore pipeline transportation Segment Margin for the 2022 Quarter increased $35.9 million, or 43%, from the 2021 Quarter primarily as a result of: (i) distributions received from one of our unrestricted subsidiaries, Independence Hub LLC, of $32 million for the sale of our 80% owned platform asset; (ii) increased crude oil and natural gas activity and associated revenues during the 2022 Quarter, primarily as a result of first oil being achieved on April 12, 2022 at the King’s Quay floating production system; and (iii) contractual minimum volume commitments (“MVCs”) at King’s Quay and Argos that began in the 2022 Quarter and contributed to our reported Segment Margin. The King’s Quay floating production system, which is supporting the Khaleesi, Mormont and Samurai field developments, 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. While the volumes during the 2022 Quarter from King’s Quay were below the contracted MVCs, we were still able to recognize our MVCs in Segment Margin. We expect King’s Quay to ramp up to its design capacity over the remainder of the year as the operator brings the remaining wells on-line. In addition, we have contractual MVCs that began in the 2022 Quarter associated with the Argos floating production system (which supports the Mad Dog 2 development), and are included in our reported Segment Margin during the 2022 Quarter. Argos is expected to have first oil in the second half of 2022. These increases more than offset the effects 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 $33.5 million, or 88%, from the 2021 Quarter primarily due to higher export pricing in our Alkali Business and 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 application of soda ash in everyday end use products and in products such as solar panels and lithium batteries that are expected to play a large role in the anticipated energy transition. This continued demand, combined with flat or even slightly declining supply of natural soda ash in the near term, has tightened 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 from our Alkali Business. We expect to continue to see this favorable price environment throughout 2022 and until there are significant changes to the supply level entering the market. To take advantage of the existing market conditions, we made the decision and are still on schedule to re-start our original Granger production facility and its roughly 500,000 tons of annual production in the first quarter of 2023 in advance of the completion of our Granger expansion project, which represents an incremental 750,000 tons of annual production, and is expected to have first production in the third quarter of 2023. In our refinery services business, we had an increase in NaHS sales volumes and the corresponding pricing of these sales volumes in the 2022 Quarter due to an increase in demand from our mining customers, primarily in South America, as a result of the continued global economic recovery and the use of NaHS in products, such as copper, that are a key part of the anticipated energy transition. Additionally, during the 2022 Quarter, we were able to leverage our multi-faceted supply and terminal sites in our refinery services business to capitalize on incremental spot volumes as certain of our competitors experienced supply challenges.
Onshore facilities and transportation Segment Margin for the 2022 Quarter decreased $11.4 million, or 51%, from the 2021 Quarter. This decrease is primarily due to the 2021 Quarter including cash receipts of $17.5 million associated with our previously owned NEJD pipeline. The last principal payment associated with our previously owned NEJD pipeline was received in the fourth quarter of 2021. This decrease was partially offset by higher rail unload and pipeline volumes, primarily associated with our assets in the Baton Rouge corridor. Our increase in rail volumes was a result of our main customer sourcing volumes to replace international volumes that were impacted by certain geopolitical events and we expect these volumes to continue into the third quarter of 2022. Additionally, we had higher volumes on our Texas pipeline, which is a destination point for various grades of crude oil produced in the Gulf of Mexico including those transported on our 64% owned CHOPS pipeline.
Marine transportation Segment Margin for the 2022 Quarter increased $9.1 million, or 108%, from the 2021 Quarter. This increase is primarily attributable to higher utilization and day rates in our inland business and higher day rates in our offshore business, including the M/T American Phoenix, during the 2022 Quarter. We have continued to see an increase in demand and utilization of our vessels as refinery utilization has increased and the supply of like maritime equipment is tight due to net equipment retirements. While we have continued to see increases in our day rates from both the 2021 Quarter and sequentially from the first quarter of 2022, we have continued to enter into short term contracts (less than a year) in the inland and offshore markets, including the M/T American Phoenix, because we believe the day rates currently being offered by the market have yet to fully recover from their cyclical lows.
Other Components of Net Income (Loss)
We reported Net Income Attributable to Genesis Energy, L.P. of $35.3 million in the 2022 Quarter compared to Net Loss Attributable to Genesis Energy, L.P. of $41.7 million in the 2021 Quarter.
In addition to the increases to Segment Margin discussed above, Net Income Attributable to Genesis Energy, L.P. in the 2022 Quarter was impacted by: (i) an unrealized (non-cash) gain from the valuation of the embedded derivative associated with our Class A Convertible Preferred Units of $10.7 million in the 2022 Quarter compared to an unrealized (non-cash) loss of $14.3 million during the 2021 Quarter recorded within “Other income (expense)”; and (ii) cancellation of debt income recognized during the 2022 Quarter of $4.
Contacts
Genesis Energy, L.P.
Dwayne Morley
VP – Investor Relations
(713) 860-2536
