Genesis Energy, L.P. Reports Third Quarter 2022 Results
HOUSTON–(BUSINESS WIRE)–Genesis Energy, L.P. (NYSE: GEL) today announced its third quarter results.
We generated the following financial results for the third quarter of 2022:
- Net Income Attributable to Genesis Energy, L.P. of $3.4 million for the third quarter of 2022 compared to Net Loss Attributable to Genesis Energy, L.P. of $20.9 million for the same period in 2021.
- Cash Flows from Operating Activities of $94.3 million for the third quarter of 2022 compared to $54.2 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 $92.6 million for the third quarter of 2022, which provided 5.04X coverage for the quarterly distribution of $0.15 per common unit attributable to the third quarter.
- Total Segment Margin of $196.2 million for the third quarter of 2022.
- Adjusted EBITDA of $183.6 million in the third quarter of 2022.
- Adjusted Consolidated EBITDA of $692.3 million for the trailing twelve months ended September 30, 2022 and a bank leverage ratio of 4.27X, 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 third quarter. Our reported Adjusted EBITDA of $183.6 million exceeded even our internal expectations. The fundamentals and macro conditions for our business segments continue to remain strong, and we believe this backdrop provides the foundation for us to continue to improve our balance sheet, generate increasing amounts of discretionary cash flow, and create value for everyone in our capital structure in the coming years. Importantly, we delivered yet another sequential reduction in our quarter-end leverage ratio, as calculated by our senior secured lenders, to 4.27 times. This is also a significant improvement from the 5.51 times reported in the third quarter last year.
Our financial results were driven by strong operating performance across all of our business segments with steadily increasing volumes in our offshore segment, as well as strong soda ash prices in all regions, especially in our export markets. Based on our financial performance over the first three quarters and our expectations for the remainder of 2022, we are today again raising our full year guidance for Adjusted EBITDA(1) to a range of $700 – $710 million for 2022, which includes approximately $41 million of non-recurring income for the year, of which the majority is associated with the gain on the sale of the Independence Hub platform, and expect to exit 2022 with a leverage ratio, as calculated by our senior secured lenders, at or below 4.25 times.
As we look ahead to 2023 and what risks might be on the horizon, we remain confident our market leading businesses are well positioned to navigate any reasonably expected policy induced recession or potential economic slowdown. We have a tremendous amount of momentum supporting volume growth and increasing financial results out of the Gulf of Mexico, none of which should be impacted by an economic slowdown or a near-term reduction in oil prices. The current structural tightness in the soda ash market combined with the rapidly increasing demand for soda ash as a fundamental building block for the transition to a lower carbon world will, in our opinion, to continue to provide support for soda ash prices, even if all or parts of the world see a slowdown in economic activity. It appears to us that this structurally tight market will persist over the course of 2023 during which time we expect to be increasing our ability to produce and sell soda ash by some 700,000 tons with the full 1.2 to 1.3 million tons annually from our Granger facility available in 2024. Our remaining business segments remain steady, and we believe each will continue to benefit from their respective market dynamics over the next year. Accordingly, we continue to anticipate generating Adjusted EBITDA(1) next year in the mid $700 million range and exit 2023 with a leverage ratio, as calculated by our senior secured lenders, below 4.0 times. With this anticipated financial performance and clear line of sight to increasing free cash flow in the years ahead, we believe we have all the flexibility we need, and in fact have multiple options, to address any near-term maturities in our capital structure under virtually any operating, financial, or economic environment.
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 continued to exceed our expectations. During the third quarter, and so far in the fourth quarter, we have experienced de minimus weather related downtime and thus have benefited by some $8 – $9 million dollars versus our original 2022 budget, which assumed 10 days of downtime during the third and fourth quarters. Volumes from Murphy’s King’s Quay development continued to ramp ahead of our internal expectations and according to Murphy’s latest public disclosure, is currently producing volumes in excess of 90,000 barrels of oil equivalent per day from only 5 of the 7 original wells. They are expected to bring on-line both the 6th and 7th wells in the near future and are continuing to work on increasing the capacity of King’s Quay beyond the original design capacity of 85,000 barrels of oil and 100 million cubic feet of gas per day over the remainder of the year. We remain encouraged with Murphy’s operating performance and continue to believe we will see strong volumes from King’s Quay through the remainder of the year and into 2023 as well as for years and years to come.
As we look ahead, we continue to anticipate first oil from BP’s operated Argos floating production facility and the 14 wells pre-drilled and completed at their Mad Dog 2 field development in the coming months. The volumes from Argos are expected to ramp close to its nameplate capacity of 140,000 barrels of oil per day over the subsequent 9 to 12 months after first production and will provide a steady bridge to the incremental 160,000 barrels of oil per day we expect in late 2024 and early 2025 from our recently contracted developments, Shenandoah and Salamanca. We also continue to pursue multiple in-field, sub-sea and/or secondary recovery development opportunities representing upwards of 200,000 barrels of oil per day in the aggregate that could turn to production over the next two to four years, all of which have been identified but not yet fully sanctioned by the operators and producers involved.
Our sodium minerals and sulfur services segment continues to perform ahead of our expectations. The macro story for soda ash remains intact as worldwide demand, ex-China, continues to outpace supply, despite any concerns of a slowdown of the broader economy. Demand growth for soda ash, ex-China, is expected to remain in excess of one million tons per year over the next several years, which is driven by a combination of industrial production growth and increasing demand associated with the green transition, specifically from solar panel and lithium battery manufacturers at the same time there is no new supply available to the market outside of higher cost synthetic production.
As a result of this structural tightness and the cost structure of the synthetic producer, our non-contracted export soda ash prices have steadily increased throughout 2022, and this again held true as our fourth quarter soda ash prices are expected to be higher than our third quarter prices. Given this starting point and the nature of our contracts, we currently expect, and all of our recent pricing conversations thus far would confirm, that our weighted average soda ash price will be higher in 2023 versus 2022. This will be true even if we were to see a decline in market-clearing spot prices over the course of 2023, which is not impossible but is dependent on a number of negative dynamics all playing out together.
We remain on schedule to have first production from our original Granger facility as early as January 2023 with the expanded Granger facility expected to be on-line sometime in the third quarter of 2023. We continue to expect a net increase in production of around 700,000 tons in 2023, which will be contracted at current market prices, with the full 1.2 to 1.3 million tons from old and new Granger available for sale in 2024. Once expanded, Granger will join our Westvaco facility as one of the lowest cost soda ash production facilities in the world.
Our legacy sulfur services business also exceeded our expectations for the quarter. We benefited from a strong operating performance combined with steady volumes to our mining and pulp and paper customers. As a result of certain vessel loading schedules, we were able to take advantage of the opportunity to secure the sale of incremental volumes to our South American copper mining customers during the quarter. Despite any concerns of a potential recession, copper remains a fundamental building block of the global economy and specifically the green energy revolution given its importance in the manufacturing of solar panels and lithium batteries for electric vehicles and battery storage. We continue to expect global demand for copper to remain inelastic to any broader slowdown in economic activity and thus will provide us with steady, if not growing, demand for our sulfur based products moving forward.
As referenced last quarter, our largest host refinery is taking an extended maintenance outage during the fourth quarter. As a result, we are simultaneously taking an extended outage at our sulfur removal unit to conduct a variety of scheduled and long-term maintenance items during this period. This planned outage will impact certain production volumes during the quarter. At the same time, we would reasonably expect our costs to be higher than normal, both of which would be expected to negatively impact our segment margin in the fourth quarter. In advance of this scheduled downtime, we proactively increased our inventory levels of our sulfur based products to ensure we had adequate volumes to fulfill all of our contracted sales volumes during the fourth quarter and would otherwise expect to return to normal operations in the next couple of weeks. However, we are expecting an overall negative impact of around $5 million on fourth quarter segment margin relative to the quarter just ended. We continue to remain encouraged about the future prospects from our refinery services business and believe it will continue to be a steady contributor for us through all economic cycles.
Our marine transportation segment performed in-line with our expectations as market conditions continue to remain strong. During the third quarter, we continued to see tremendously high utilization for all classes of our vessels as demand for Jones Act tanker tonnage remains extremely robust due to strong refinery utilization and the increasing need for movements from the Gulf Coast to the East Coast for certain products. As a result of these conditions, and no availability of equipment in the spot market, the demand for both our inland and offshore vessels, especially our larger horsepower vessels, continued to increase, thus allowing us to operate at effectively 100% utilization while also steadily increasing our day rates. This structural tightness has recently been exacerbated by record low water levels on the Mississippi River, which has caused increased traffic, navigational delays and longer than normal wait times to move through locks, and thus further reduced the practical availability of marine equipment available to make moves up or down the Mississippi River. It is important to note that we have not experienced any negative financial effects as a result of such conditions on the Mississippi River since we operate on a day rate plus fuel basis without going “off the clock” due to navigational issues, whereas traditional dry cargo or line-haul carriers generally operate on a per ton mile rate structure.
The American Phoenix completed her scheduled dry-docking near the end of the third quarter and started her most recent charter with an investment grade counterparty through the end of this year at a rate meaningfully higher than her previous charter. We also recently entered into a longer-term contract with another investment grade counterparty starting in January 2023 at a rate equal to or better than her current charter. These contracted day rates are fast approaching the original rates she commanded when we first purchased the vessel in 2014. This new arrangement will last at least six months and more likely than not throughout calendar 2023. Regardless of a slowdown in the broader economy or a policy induced recession in the United States, we expect the Jones Act compliant marine vessel market to remain tight, driven in large part by the lack of new construction, regardless of class, and the normal retirement of older tonnage.
Our onshore facilities and transportation segment performed in-line with our expectations. During the third quarter we were able to capture certain crude by rail volumes which increased segment margin, but we do not anticipate any of these volumes to continue during the fourth quarter. We are scheduled to complete a number of planned maintenance projects on our onshore facilities and transportation assets during the fourth quarter and would otherwise expect segment margin to reflect these increased costs and lower utilization. In other words, this segment could reasonably be expected to be down some $4 million relative to the third quarter. Longer term, we continue to believe our onshore facilities and transportation segment will continue to 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.
As we have said in the past, we continue to be very excited about the future of Genesis. The decisions we have made over the last few years, combined with the recovery in our market leading businesses off the double black swan bottom of 2020 and the expected growth we have in front of us, all combine to provide the foundation for increasing amounts of discretionary cash flow and an improving credit profile in the coming years. Our current expectations for 2023 will not only allow us to exit the year with a leverage ratio, as calculated by our banks, at or below 4 times, but will also allow us to manage our capital structure to the extent the regular way capital markets remain closed for any extended period of time. Along these lines, we have demonstrated time and time again we have tremendous support from our banks and that we are fairly creative in terms of executing on structured finance or asset sale opportunities. As a result, we are absolutely confident we have the flexibility and multiple ways to deal with any near-term maturities as well as extend, and possibly even expand, our senior secured credit commitments.
The board of directors and management continue to deliver on our stated goals. At times, it seems the market may not understand or appreciate what we see as the tremendous opportunities in front of us. However, we believe the fundamentals behind each of our businesses have never been better, and we continue to believe any recession or period of economic slowdown will not materially impact the trajectory of our financial performance. We fully intend to keep our heads down and continue to work tirelessly to deliver for all of our stakeholders now and for many years and decades to come.
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.”
Financial Results
Segment Margin
Variances between the third quarter of 2022 (the “2022 Quarter”) and the third 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 September 30, |
||||
|
|
2022 |
|
2021 |
||
|
|
(in thousands) |
||||
|
Offshore pipeline transportation |
$ |
91,402 |
|
$ |
76,045 |
|
Sodium minerals and sulfur services |
|
80,067 |
|
|
39,649 |
|
Onshore facilities and transportation |
|
9,442 |
|
|
29,145 |
|
Marine transportation |
|
15,279 |
|
|
9,023 |
|
Total Segment Margin |
$ |
196,190 |
|
$ |
153,862 |
Offshore pipeline transportation Segment Margin for the 2022 Quarter increased $15.4 million, or 20%, from the 2021 Quarter due to increased crude oil and natural gas volumes (on a 100% basis) 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. 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. During the 2022 Quarter, the volumes at King’s Quay increased significantly from the second quarter of 2022 as the operator continued to bring additional wells online and ramp up activity. In addition to this, we have contractual minimum volume commitments (“MVCs”) that began in 2022 associated with the Argos floating production system (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 coming months. Lastly, the 2021 Quarter had more downtime compared to the 2022 Quarter as a result of Hurricane Ida. These increases more than offset 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 $40.4 million, or 102%, from the 2021 Quarter primarily due to higher export pricing and increased 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 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 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 expect to continue to see this favorable price environment for the remainder of 2022. 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 the Granger Optimization Project (“GOP”), 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 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 continue benefiting from favorable index pricing.
Onshore facilities and transportation Segment Margin for the 2022 Quarter decreased $19.7 million, or 68%, 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. Additionally, the 2021 Quarter included the effects of and benefited from a one-time contractual billing of approximately $10 million. These decreases were partially offset by higher rail unload, terminal, and pipeline volumes associated with our assets in the Baton Rouge corridor as well as increased volumes on our Texas pipeline. 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 through August 2022. Our Texas pipeline had increased activity during the 2022 Quarter as it is a key 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 $6.3 million, or 69%, 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 (while it was on hire), during the 2022 Quarter. We have continued to see an increase in demand and utilization of our vessels due to increased refinery utilization and the increased need for movements from the Gulf Coast to the East Coast for certain products. While we have continued to see increases in our day rates from both the 2021 Quarter and sequentially from the second quarter of 2022, we have continued to enter into short term contracts (less than a year) in the inland and offshore markets because we believe the day rates currently being offered by the market have yet to fully recover from their cyclical lows. These increases were partially offset by the contribution to our reported Segment Margin from the M/T American Phoenix, as it was in its planned mandatory regulatory dry-dock from July 21, 2022 to September 16, 2022, at which time it went back on hire and is under contract for the remainder of 2022 with an investment grade customer at a more favorable rate than 2021 and the first eight months of 2022.
Other Components of Net Income (Loss)
We reported Net Income Attributable to Genesis Energy, L.P. of $3.4 million in the 2022 Quarter compared to Net Loss Attributable to Genesis Energy, L.P. of $20.9 million in the 2021 Quarter.
In addition to the overall increase to Segment Margin discussed above, Net Income Attributable to Genesis Energy, L.P. in the 2022 Quarter was impacted by: (i) the redemption of the Alkali Holdings preferred units in the second quarter of 2022 resulted in no net income attributable to redeemable noncontrolling interest compared to net income attributable to redeemable noncontrolling interest of $7.1 million in the 2021 quarter; and (ii) cancellation of debt income recognized during the 2022 Quarter of $3.9 million associated with the open market repurchase and extinguishment of certain of our senior unsecured notes.
Contacts
Genesis Energy, L.P.
Dwayne Morley
VP – Investor Relations
(713) 860-2536
