Tuesday, February 27, 2024

Genesis Energy Limited ($GEL)

We mentioned Genesis Energy (GEL) in one of the earnings notes earlier this month. Genesis has four segments: offshore pipelines in the Gulf of Mexico, carrying crude and natural gas produced offshore to refineries along the Gulf Coast; a soda ash business in Wyoming (like the business where NRP owns an interest); sulfur services (which removes sulfur from refinery inputs and sells it as sodium hydrosulfide); onshore pipelines and terminals; and a marine transportation business with boats and barges to transport crude oil and refined products.

The offshore pipelines contributed $407 million of operating income for 2023, soda and sulfur contributed $282 million, marine transportation did $110 million, and the onshore pipelines and terminals $28 million. Adjusted EBITDA for 2023 was $756 million. 

The market capitalization of the partnership (at $11 per unit) is $1.35 billion. Genesis has quite a bit of leverage: $3.75 billion of debt, and $814 million of convertible preferred units. (The distribution rate on the preferred units is 11.24%.) The enterprise value is thus $5.9 billion, and the EV/EBITDA is 7.8x. Guidance for 2024 is $680-$740 million of EBITDA and $200-$250 million of capex, which would mean anywhere from $430 to $540 million of cash flow, which is a range of 7% to 9% on the enterprise value. 

Management thinks that cash flow is going to "ramp" from 2025 onwards as offshore volumes grow (with two new platforms coming online) as well as additional soda ash earnings. 

In addition to our record results in 2023, we also achieved some significant project milestones that will continue to benefit the partnership for many decades to come. First and foremost, we reached substantial completion and commissioned our Granger expansion project. This almost four-and-a-half-year construction project overcame many challenges and delays as a result of the Covid-19 pandemic, but I could not be prouder of our team on the ground in Green River, WY for their tireless effort getting this project to the finish line. This project will add approximately 750,000 short tons per year of additional soda ash production capacity at Granger, bringing its total production capacity to approximately 1.25 million short tons per year, and significantly lower Granger’s operating cost per ton, making it one of the most efficient and lowest cost production facilities in the world. I would also point out that Granger has multiple decades of reserves in the current seam at these new production rates along with hundreds of millions of tons of additional measured and indicated trona resources in those same seams.

As we mentioned last quarter, we also successfully laid the 105 miles of the SYNC pipeline in over 5,000 feet of water, which as many of you can imagine is an engineering marvel. This was a tremendous achievement and a testament to our offshore engineering, construction and operation’s teams that helped complete this portion of the project on schedule. In addition, we made significant strides in advancing our CHOPS expansion project, which includes installing pumps at certain strategic junction platforms. These offshore projects are long-term investments that are underpinned by existing upstream developments which have production profiles going out multiple decades, not years, and have ample capacity to handle much more than the currently discovered and contracted volumes.

Regarding uses of capital:

We opportunistically accessed the capital markets on two separate occasions in 2023 and successfully issued $500 million in new 8.875% notes due 2030 in January and $600 million in new 8.25% notes due 2029 in December, which allowed us to re-finance our 2024 and 2025 unsecured maturities, respectively. More importantly, the combination of these two re-financings ultimately triggered an automatic 12-month extension of our senior secured facility’s maturity date, which now expires in February 2026. These transactions have provided us with the financial flexibility and liquidity to complete our remaining spend on our major capital growth projects in 2024 and bridge us to 2025 when we expect to begin harvesting increasing amounts of free cash flow driven by both earnings’ growth and materially reduced growth capital expenditures. In addition, we utilized a portion of our available liquidity to opportunistically re-purchase $75 million of our Class A convertible preferred units throughout the year at a discount to the contracted call premium as well as purchase 114,900 of our Class A common units at an average price of $9.09 per unit.

Concluding an investment cycle is very powerful if it works: you get higher earnings and the capital expenditures decline, resulting in a big increase in free cash flow.

Wanted to add some highlights from the Q3 investor call - another instance of a quarterly call with no questions.

* Regardless of the makeup of our 2024 results and any uncertainty that might exist today, it is important to remember that the long-term outlook for Genesis remains intact and as strong as I have seen it during my tenure at the company. In fact, 2024 should really be viewed as a transition year for Genesis, as we expect to complete our ongoing growth capital expenditures in mid-to-late 2024, in advance of the significant step changes in offshore volumes and corresponding segment margin contributions beginning in late 2024 and accelerating into 2025, as the Shenandoah and Salamanca developments are expected to come online. The combination of these events will provide us with increasing amounts of cash flow after all of our cash obligations and generate increased financial flexibility to continue to simplify our capital structure, return capital to our stakeholders and ultimately allow us to continue to build long-term value for everyone in the capital structure for many years ahead.
* To put this in perspective, the 9.4 million acres of leased but as yet undeveloped acreage is more than 6.5 times the size of ExxonMobil’s total gross acreage position in the Permian Basin post their recent acquisition of Pioneer. Suffice it to say, there is a tremendous resource in the Gulf of Mexico that has yet to be explored under existing and valid leases, and it should undoubtedly provide for decades and decades of drilling inventory and future production volumes, a large percentage of which should find their way to our industry-leading infrastructure in the Central Gulf of Mexico
* The sheer size and scale of the resource in the Gulf of Mexico being produced from such a relatively small percentage of the existing and valid leases, its proximity to the Gulf Coast refinery complexes and its industry-leading low greenhouse gas footprint is extraordinarily impressive and fascinating to us. And some of us have been working this basin from an infrastructure point of view for well over 30 years. All of these attributes provide further evidence as to why we have seen a number of operators turning their focus away from onshore shale basins, as these basins have seen or will soon see peak production and they have instead started to focus on the Gulf of Mexico, where production is increasing, there is a vast swath of undeveloped acreage and countless new large-scale developments both sanctioned and yet to be sanctioned on the horizon.
* Along these lines, we have successfully laid the 105 miles of the sink lateral and remain on schedule and importantly on budget with this project and our CHOPS expansion project, both of which we expect to be ready for service in the second half of 2024. The contracted Shenandoah and Salamanca developments and their combined 160,000 barrels of oil per day of incremental production handling capacity remain on schedule and will be additive to our then base of volumes in 2024. These two new projects, combined with our steady base volumes and increasing inventory of identified subsea tiebacks, provides us with the visibility to generate north of $500 million per year of segment margins starting in 2025. All of this is to say, we remain well positioned to deliver steady, stable and growing cash flows from our offshore pipeline transportation segment for many years to come.
* All natural producers of soda ash, which only supply approximately 28% of global demand, enjoy this advantage, with operating costs of about half of the costs of synthetic producers, which supply the other 72%, and in general, a significantly smaller environmental footprint relative to synthetic producers. Furthermore, those natural producers with solution mining operations have the absolute lowest cost of production and thus continue to have a competitive advantage over all producers during periods of excess supply and or lower demand. Increasing our exposure to low-cost solution mining was a central investment thesis in our Grainger expansion project and once fully ramped, roughly half of our total production capacity will be from solution mining.
* Our Marine Transportation segment continues to meet or exceed our expectations as market conditions and demand fundamentals continue to remain steady. As mentioned in the release, we continue to operate with utilization rates at or near 100% of available capacity for all classes of our vessels, as the supply and demand outlet for Jones Act tanker tonnage remains structurally tight.
This structural change in market dynamics has been driven by a combination of steady and robust demand, the continued retirements of older equipment and effectively zero new construction of our types of marine vessels. This lack of new supply of marine tonnage combined with strong demand continues to drive spot day rates and longer term contracted rates in both of our fleets to record levels. To provide some additional context, we along with other industry participants, continue to believe that current day rates that are still not — are still not yet high enough to justify the construction of new marine equipment. In addition to the significant cost of a new vessel, the long construction period, which can be three plus years to four plus years in some cases for larger vessels, the lack of available shipyards to build a new vessel and the need to keep day rates elevated through the construction period and for a prolonged period of time once underwater to justify construction, all point to a market that should remain structurally tight for the foreseeable future.
* In advance of this additional cash flow, we have utilized a portion of our available liquidity this year to opportunistically repurchase $75 million of our Series A Preferred Equity at a discount to the contracted call premium, as well as purchase 144,900 of our common units at an average price of $9.09 per unit. As we have stated in the past, we will continue to be opportunistic in acquiring any security across our capital structure to the extent we feel they remain mispriced on the market. As we have an increasingly clear sight — clear line of sight to generating roughly $200 million to $300 million or more per year of free cash flow starting in 2025, we will continue to evaluate the various levers we can pull to return capital to our stakeholders, including paying down debt, raising our common distribution, repurchasing additional amounts of our corporate preferred security or continuing to purchase our common unit or mispriced debt security.

And then from the Q4 call:

*We remain focused on completing our growth capital program in the next nine to 12 months, all while having no debt maturities until 2026 and an increasingly clear line of sight to generating roughly $250 million to $350 million or more, of free cash flow on an annualized basis after all cash obligations starting in 2025. I would also point out, that this expectation remains on track even if, it might take a little bit longer than we expect for the inevitable recovery in soda ash export prices off the lows we're seeing here in early 2024. We will continue to evaluate the various levers we can pull to return this capital to our stakeholders including paying down debt, raising our common distribution, repurchasing additional amounts of our corporate preferred security, continuing to purchase our common units or any mispriced debt securities all while maintaining an appropriate level of liquidity and of course maintaining a focus on our long-term leverage ratio.

No comments: