Blueknight Energy Partners, L.P.

Alex Stallings - Chief Financial Officer & Secretary Mark Hurley - Chief Executive Officer

Gabriel Moreen - Bank of America Merrill Lynch Tristan Richardson - SunTrust Robinson Humphrey Inc Matt Schmid - Stephens Inc Mike Gyure - Janney Montgomery Scott LLC

Thanks, Brian. It’s my pleasure to welcome you to today’s conference call where we will discuss Blueknight’s financial and operating results for the second quarter ended June 30, 2017.

I will provide a brief update on financial results, and Mark Hurley, our Chief Executive Officer, will update you on our operational performance, projects, opportunities and external factors influencing our business. We will then take your questions after our prepared comments.

Before we begin, I would like to remind everyone that information on this call may contain certain forward-looking statements. Statements included in this call that are not historical facts including, without limitation, any statements about future financial and operating results, guidance projected or forecasted financial results, objectives, project timing, expectations and intentions and other statements that are not historical facts, are forward-looking statements.

Such forward-looking statements are subject to various risks and uncertainties. These risks and uncertainties include, among other things, uncertainties relating to the partnership’s debt levels and restrictions in its credit facility, its exposure to the credit risk of our third-party customers, the partnership’s future cash flows and operations, future market conditions, current and future governmental regulation, future taxation and other factors discussed in the partnership’s filings with the SEC.

If any of these risks or uncertainties materializes or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those expected. The partnership undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Blueknight Energy Partners is a publicly traded master limited partnership with operations in 26 states. We provide integrated terminalling, storage, gathering and transportation services for companies engaged in the production, distribution and marketing of crude oil, asphalt and other petroleum products.

We manage our operations through four reporting segments: asphalt terminalling services, crude oil terminalling and storage services, crude oil pipeline services and crude oil trucking and producer field services. Yesterday, we reported financial results for the quarter ended June 30, 2017.

Overall, the quarter was in line with our expectations. Net income for the three months ended June 30, 2017 was $6.4 million on total revenues of $43.9 million, which compared to a net loss of $18.9 million on total revenues of $43.4 million for the same period in 2016.

Operating income for the three months ended June 30, 2017 was $6.5 million, which compared to an operating loss of $15.3 million for the same period in 2016. Net loss in operating income for the three months ended June 30, 2016 were impacted by an impairment expense of $22.6 million, primarily related to the cancellation of the Knight Warrior East Texas Eaglebine crude oil pipeline project.

Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA was $19.2 million for the three months ended June 30, 2017, as compared to $16.2 million for the same period in 2016, an increase of 18.5%. Distributable cash flow was $12.7 million for the three months ended June 30, 2017, as compared to $9.2 million for the same period in 2016, an increase of 38%.

Distributable cash flow for the three months ended June 30, 2016, was impacted by $0.3 million of fees related to the Ergon transactions. Adjusted EBITDA and distributable cash flow, including a reconciliation of such measures to net income is contained in our earnings release issued yesterday under the section entitled Non-GAAP Financial Measures.

Second quarter 2017 distribution coverage ratio was 1.03 times, as compared to 0.82 times for the second quarter of 2016. Additional information regarding the Partnership’s results of operations will be provided in the Partnership’s Form 10-Q for the quarter ended June 30, 2017, to be filed with the SEC later today.

A few highlights for each of our segments. First, asphalt terminalling services.

Our operating margin, excluding deprecation and amortization increased $3.3 million, or 28% for the quarter ended June 30, 2017, as compared to the quarter ended June 30, 2016, primarily due to the Ergon 9 terminal acquisition that we made in October 2016. Crude oil terminalling and storage operating margin, excluding depreciation and amortization decreased $0.4 million, due to a decrease in market rates for short-term monthly storage contracts and a decrease in throughput fees, as lower volumes were transferred in and out of our facilities during the quarter.

As of July 27, 2017, we have approximately 6 million barrels of crude oil storage under service contracts with remaining terms of up to 53 months. Crude oil pipeline operating margin, excluding depreciation and amortization expense decreased $1.9 million from 2016 to 2017, due to the following.

Results continue to be impacted by the suspended service on our Mid-Continent pipeline system, due to a pipeline exposure caused by heavy rains and erosion of a riverbed in southern Oklahoma, which occurred in late April of 2016. We are currently operating one Oklahoma mainline system, which is a combination of both the Mid-Continent and Eagle Pipeline systems instead of two separate systems, providing us with a current capacity of approximately 20,000 to 25,000 barrels per day.

Mark will provide some further updates on our plans for the Oklahoma system in his commentary. In addition to three months ended June 30, 2016 results included $1.6 million of crude oil sales arising from accumulated product loss allowances.

There were no such similar PLA sales during the three months ended June 30, 2017. Crude oil trucking and producer field services operating margin, excluding depreciation and amortization decreased $1.3 million for the quarter ended June 30, 2017, as compared to the quarter ended June 30, 2016, which is due to continued pressure on service rates and increased competition in the areas in which we serve.

Few other items of note. General and administrative expenses decreased about a $0.5 million for the three months ended June 30, 2017, as compared to the same period in 2016, as a result of Ergon transaction fees, which were incurred in the second quarter of 2016.

From a liquidity perspective, our consolidated total leverage ratio has remained fairly flat at 4.2 times since year-end 2016. We amended and upsized our revolving credit facility during the second quarter.

We increased our overall commitments by $50 million to the total of $450 million and extended our maturity date to May 11, 2022. The amended credit facility gives us additional flexibility to capitalize on future opportunities.

As of July 27, 2017, we have aggregate unused commitments under our revolving credit facility of approximately $148 million, which is subject to financial covenant limits. From a capital investment perspective, our net maintenance capital expenditures for the quarter ended June 30, 2017 totaled $3.2 million.

We expect maintenance capital expenditures to be $9.5 million to $10.5 million, net of reimbursable expenditures for all of 2017. Net expansion capital expenditures totaled $2.9 million for the quarter.

We’re currently estimating an expansion capital expenditures of $8 million to $10 million for all of 2017. With that, I’ll turn it over to our CEO, Mark Hurley.

Mark?

Hey, thank you, Alex, and thanks to everyone who called in today. Following our slow start to the year due to wet weather in much of the country, we had a very good quarter in our Asphalt segment.

Our operating margin for the segment increased $3.3 million, or 28% quarter-over-quarter, delivering the growth we anticipated with the acquisitions we have made over the last couple of years. The 9 Ergon terminals acquired late last year, of course, drove a good portion of 2017 growth.

We’re also seeing strong volumes through our entire network. And as we look ahead, we anticipate an even stronger third quarter when we traditionally see an uptick in activity.

Our asphalt business is benefiting from the increased spend on the infrastructure, mainly driven by state funding initiatives. Since 2012, 31 states have passed transformation infrastructure bills, with much of the spend focused on roads.

In vision, there are currently 16 states with active proposed infrastructure legislation in process. This activity is aside from the significant federal infrastructure initiative we hear so much about.

We think the federal program, when it rolls out will be an additional boost to our business. Bottom line, we’re well-positioned to take advantage of this trend, and our goal is to further expand our asphalt footprint through both acquisitions and newbuilds.

We now have several potential projects under consideration. Our crude oil terminalling and storage segment performed in line with expectations during the first-half of the year.

Our business at Cushing remains fully contracted and inventories remain well above five-year average. So we do see good demand for storage into the future.

We’re seeing a flattening of the forward curve, which has resulted in a slight decrease in our overall storage rates, and customers moving less products through the terminal, which impacts our throughput fees. Of course, we have seen these cycles before, but we have a first-class terminal with great connectivity and excellent blending capability and we strive to provide our customers with the best service they can get.

And for these reasons, we have an excellent track record of keeping our terminal fully contracted. Our crude oil trucking and field services segment continues to be hampered by a sustained lower-price crude oil environment and flatter forward – and a flatter forward curve resulting in increased competition and lower margins.

This is an area where the market has impacted our business, but fortunately, these are now very small segments for us. The crude oil trucking market has been particularly challenging with rates going below break-even for the industry in some markets.

We’ve worked to size our fleet to 50 overall crude oil business we have in Oklahoma and Kansas, and that is a part of our long-term plan in addition to ensuring that we have a fleet operating as safely and efficiently as possible. Our crude oil pipeline segment results were affected by an out of service pipeline due to the wash-out of a riverbed in 2016.

However, we now have a clear path forward to restarting this line and we expect to resume this service in the fourth quarter of this year. We’re looking forward to the start of our condensate pipeline, which will primarily serve the SCOOP play in Oklahoma.

The SCOOP and STACK continue to be very attractive shale plays in U.S., along with the Permian, of course. In fact, there are certain areas in these plays that compare very favorably with the Permian.

So we expect to see continued producer investment in Oklahoma all around our crude oil assets. We’re also continuing our efforts to grow our transportation business in the STACK play.

We closed on the divestiture of two non-core assets, our East Texas crude oil pipeline and terminal assets and our 30% ownership in Advantage Pipeline. We received cash proceeds of approximately $30 million from the sale of these two assets and are actively working to reinvest these proceeds into future growth projects.

The gain of 4.2 on the divestitures of the Advantage Pipeline and the East Texas system will partially offset by expense of $800,000 related to a disposal and sale of other assets during the quarter. During our first quarter earnings discussion, we mentioned three areas of strategic focus for 2017, and I’m pleased to report we’re making progress in each of these areas: The first was focused resources on the completion of our crude oil condensate project and increased utilization of our crude transportation assets, both pipeline and trucking.

As mentioned, we anticipate completion of our condensate project and expect to have in the service by the end of the year. We also expect to capture – recapture the volume along our Mid-Continent pipeline and increase the overall efficiency and operating margin of our transportation assets.

The second area was to continue to identify and execute strategic growth projects, including potential future acquisitions of additional product terminals or synergistic crude oil pipeline assets. As we continue to evaluate a number of complementary acquisitions, we are optimistic we will be successful on one or more of these projects during the second-half of the year.

We intend to continue to upgrade our asset portfolio with growth projects we can execute at a sub 10 times EBITDA multiple. I hope the market appreciates the significant transformation the company has undergone over the last several years.

We have moved from a company that was much more dependent on volume-sensitive crude oil businesses to one that now has much more stable, highly contracted cash flows. While we enjoy the benefits of these businesses in the past, these businesses are much more volatile or earnings can be very short-lived.

The third strategic area was to continue to maintain a solid financial position and balance sheet. The current uncertain geopolitical environment and the overall MLP equity market continues to be quite challenging.

However, we believe we are well-positioned to navigate through the market and sustain a reasonable balance between growth and overall financial strength. As we focus on these strategic areas, we know our top priority, as a management team, is to increase long-term value for our unitholders regardless of the prevailing market conditions.

That is our goal. It is what drives our decisions.

We have a business with good – a good balance sheet, strong, stable, highly contracted cash flow, and excellent growth opportunities. I’m very optimistic heading into as that is typically our best.

Brian, that concludes my prepared comments. I’m happy to turn it – open for Q&A.

Hi, good afternoon, everyone.

Hi, Gabriel.

I just wanted to ask about, I think, you mentioned the weather a bit impacting asphalt results for the quarter, is it possible to quantify that at all?

Look, we have a number on it. It slowed – it kind of slowed the season down by, I would say, about three to four weeks.

So the revenue that we normally see maybe in – early in the second quarter occur probably mid-second quarter. But these are things that do tend to normalize out over the course of the year.

We always caution folks about reading too much into an individual quarter, because you do have these seasonal impacts. The other thing we did a few of our sites, we did a little more annual maintenance in the second quarter than we’re actually in the first-half of the year than we had planned to.

But again, this is something that these things are done on an annual basis – or planned on an annual basis, and it tends to equalize itself out over the course of the year. I don’t know, Alex, you want to…?

Yes, I think, Dave, I mean, that remark really comes from when we started having some facilities exceed kind of minimum throughputs probably in the month of June last year. So we would have recognized some, probably not significant dollar amounts, but call it, $1 million range of probably incremental kind of throughput revenue.

And to Mark’s point, I think we’re seeing that be delayed by a month or two this year. So – and I think Mark’s point is, I’d say that, in addition to some maintenance capital, I would say that, we also saw a little bit heavier maintenance expense for the first-half of the year than what we did last year.

So, again, we expect all of that to moderate as we go through the back-half of the year. And again, we think that third quarter will ramp up nicely as it typically does.

So that’s really what we’re looking for.

Got it. Thanks, guys.

And then I’ll touch on the dropdown. But just in terms of additional dropdowns and getting it done this year, is there anything you would or would not be looking to whether it’s external capital markets, or whatever that would impact the scheduling of additional dropdown sort of the remaining asphalt terminals that are [indiscernible]?

I don’t – I mean, again, the stuff that we’re looking at Dave, and again, we are continuing to evaluate kind of the dropdown that we’ve talked about. That that’s a fairly small deal.

But I’ll tell you and Mark alluded to and I think we’ve talked about, I mean, we are looking at a couple of third-party deals as well. Everything that we’re looking at is really in kind of that bite-size portion for us, I mean, call it everything from – call it, $10 million to $30 million range, so it was all really nice sized bolt-on acquisitions for us and a good mix between the dropdown-type assets, as well as the – as well as third-party deal.

So, again, we’re very in tune with what’s going on with the overall capital markets, the MLP market has been pretty choppy. So we’re keeping that all in mind and all that may play into timing, but we’re hoping to get something done in the second-half.

Great. And then the last one for me, and obviously, the crude oil trucking at this point is pretty small.

But you’re able to, I think, sell some assets that are good valuation that were considered non-core. I was wondering your rationale for keeping trucking, any other strategies you’re potentially trying there?

Does it – is it needed, for example, for your condensate projects, any additional color there?

Yes, on the crude trucking side, what we like is to be able to bundle our pipeline transportation business with our crude trucking business, as well as a little bit of small amount of marketing activity that we do. And so, that keeps things in a well managed segment, where we have control over really every step in the value chain.

And so that’s what we have done with our – essentially what we have done with our trucking piece is pulled out of the areas, primarily where it was a pure third-party play, because we just don’t see the ability to make a lot of money there. The field services activity that we have is still cash flow positive.

It’s been under some pressure by producers trying to get cost out of the system, what we’ve been able to maintain that cash flow positive kind of situation. So I see us – I really see us sizing our fleet, as I mentioned in my comments, for the crude business that we do in Oklahoma and Southern Kansas kind of keeping it there.

Got it. That’s helpful.

Thanks, guys.

Thanks, Gabe.

Hey, good afternoon, guys.

Hi, Tristan.

Just to clarify when you talk about potentially being successful on something in the second-half. Is that outside the planned drop, or does that sort of that’s an all encompassing?

No, no, it’s outside of the planned drop. We do plan to do our dropdown as we have announced previously, one this year and one next year.

But in our history, you’ve seen us do some third-party acquisitions, or really pure third-party acquisitions where we can go buy a terminal and have it contracted out for anywhere from five to ten years. And those are some things that we’re working on right now.

And we’re far enough along in those – on some of those projects, where we do. We would very – be very hopeful when we get, at least, some of those executed this year.

Okay. Thank you, Mark.

That’s helpful. And then also in your prepared comments, you talked about assessing potential for newbuilds on the asphalt side.

Curious sort of what dynamics in the market would drive that? I mean, is it just infill within a given state, because I guess, we just think of state budgets is pretty stable.

But what would drive the decision to pursue a newbuild?

Yes, generally speaking the asphalt footprint across the U.S. is pretty complete.

But there are some areas, particularly in areas or particularly in states that are a little more well funded than others maybe where there are some – there are just some holes, where the world could use a little more asphalt terminalling capacity. And we think we’ve found a couple of those in some potential customers.

And so we are working to develop those. It just has to be the right fit with, obviously, what the market wants, where the customer is located, where they get their raw material supply and that sort of thing.

But there are a few of those opportunities out there that we’re looking at.

Okay, that’s helpful too. And then just lastly, not to harp on the weather, but curious you talk about things potentially normalizing out through the remainder of the year.

So is that to say that, if you’ve got a delay in the normal civil construction season by a few weeks because of weather, will activity be able to sort of catch up in a given year, and thereby helping out throughput in the second-half or…

Yes.

Is it tend to get pushed out to the next season?

Yes, that’s exactly what I mean. I mean, history will show you that you’ll get some weather-related changes in revenue.

It can be positive or it can be a little negative for a given year, right? And I always caution people that that’s why looking at a particular quarter for us can have those fluctuations in it.

And I always feel better we can budget the entire year better than we can budget a quarter for those reasons. And so, for example, last year we had a lot of – where our plants are located, we had a lot of fairly clear warm weather, and so the year actually started pretty early.

This year, we – it was pretty wet in the areas where our terminals are located, and so the year started a little bit later. So, obviously, in a three or four-week fluctuation in when the volume picks up, can have a big impact on the quarter.

But we had a – we’ve got a good track record of the industry just catching up later in the year.

Yes, the other thing I mentioned, Tristan, is I mean, we’re trying to give you a little bit more background there. But I mean, at the end of the day, I mean, we’re still up 30% in our asphalt business kind of quarter-over-quarter and six months to six months.

So which is actually a little north – it’s a little bit more than just the Ergon facility. So, 30% is still pretty good jump even though we did and we obviously did acquire some more terminals, but it is a little bit north – of just accounting for the Ergon acquisition.

So…

That’s great. Thank you guys very much.

Hi. Good afternoon, guys.

Good afternoon.

Just thinking about the start-up of the Oklahoma pipeline project, maybe you could just give us a little more color about where you all are in the process and the confidence about getting it up and going in the fourth quarter?

Yes, I’d be happy to do Matt. So – and give you a little more background.

When we had the line wash-out, the simplest quickest thing to do is just go relay the line in the existing right away you have, and you can do that actually pretty quickly. However, this particular river and a lot of these rivers, the shallow rivers in Oklahoma have a history of kind of moving around.

And so we don’t want to go back and do something and have to – and repeat ourselves two years from now. So we actually did some analysis and ended up deciding to take a different route across the river.

Well, I mean, I think that’s the right decision longer-term. However, you got to go through the right away acquisition process again.

And so that’s that slows you down, that slowed us down. But it was very intentional, because we didn’t want to again be repeating ourselves in the same problem in the near future.

And so that whole process of acquiring that right away can be done – that can be done very reliably, but it just takes more time than reboring the same spot that we had. And so we have gone through that process.

We actually have a firm timeline now. And we have started with the process of scheduling contractors and making sure that when the right away acquisition is complete, we will be able to start right away on the construction.

And once we start on a construction, it’s actually a pretty quick project lasts six to seven weeks. And so that that gives us some certainty around our fourth quarter start-up.

Does that help?

Okay, great. Yes, that was a good detail.

That was very helpful. Thank you.

And then just thinking about 2018 appreciating the fact that you’re probably looking at some third-party acquisitions and you’ll likely have there Ergon drop next year as well. Other than the acquisitions, how should we think about organic growth CapEx next year is far just modeling purposes we think about it pretty minimal as you focus on sort of working down leverage a little bit more outside of any potential acquisitions?

Yes, really right now we don’t have a lot scheduled for kind of organic need for capital. So most of what we’re doing, the project condensate pipeline back and SCOOP in service is a fairly minimal expense to kind of do to just kind of a base case model.

If for whatever reason that were to take off, where we were to have a customer that would like something else, then that might drive some incremental expansion capital. But currently, we really don’t think we have a tremendous need for a significant expansion capital in 2018, and we feel like we can continue to grow the volumes on our system quite nicely.

So I mean, really, we have very minimal actual needs that we’re currently forecasting.

But you’re talking about organic growth, but we do have an active process around the potential acquisitions. And so…

Right, right more M&A [indiscernible].

Right.

But in terms of – we don’t have to have those. We don’t have to invest a lot of incremental capital to get incremental capacity on our system.

So, that – so, we should have a pretty good ramp in 2018. It will really be more about building back volumes unless or so about continued spend.

Okay, great. Well, I appreciate the color, guys.

Thanks, Matt. I appreciate it.

Yes, I have a couple of quick questions about the washed out pipeline. Number one is, is any portion of the cost of rebuilding that, including the right away covered by insurance?

Second question is, is there any insurance covering the loss income from that pipeline? And the third question is, have you, as of yet, taken any steps to re-contract it?

There are no insurance proceeds available for it, Elliot. Unfortunately, you can’t get really business interruption on that pipeline system.

That was a pipeline system that we originally had contracted and we ended up reversing it. And the timing of when the wash-out happened was just not very good timing for us.

So – but anyway, we don’t have any assumed insurance proceeds coming back from that. So, Mark, I don’t know, if you want to talk about it.

Yes, as far as contracting the pipe, we – this pipe serves the SCOOP, and it’s a very cheap project to do less than $5 million.

Yes, I remember you mentioned that in Orlando.

Yes.

But I was wondering if there was any insurance on the cost of rebuilding it maybe the new right away, et cetera?

No, there was not. We did not meet those kind of thresholds.

Okay. Next is – my next and last question is, have you yet taken any steps to re-contract?

We’ve been talking to a number of producers and marketers. Honestly, we have not put a lot of effort into re-contracting prior to start-up, because it’s located in such a desirable area right there in the SCOOP – at the edge of the SCOOP that our effort has been to just get it done back in service, we think the volumes will come.

And again, had it been a larger expenditure, we would have put more upfront effort into contracting it. But our priority has been on just getting it up and running.

And as I recall, you thought that once you got the pipeline up and running by the end of this year that by the end of next year, you’ll fully contracted. Is that still you’re feeling?

Well, we wanted to be fully…

Utilized.

…utilized not necessarily fully contracted, but fully utilized.

By the end of next year?

Yes, the commentary of systems that’s open to any qualified shipper.

Okay.

Yes, that’s our goal by the end of next year.

Great. Thank you very much.

Thank you, Elliot.

Yes. Can you guys talk a little bit about, I guess, how you’re thinking of leverage with the, I guess, upsized revolving credit facility, the potential to do some acquisitions here in the back-half of the year, and maybe ultimately kind of what your leverage ratio you are thinking of?

Sure. Yes, I really think with the upsized in the facility, our thoughts around leverage really don’t change a whole lot.

So I think we’ve stated our target as something, call it, 3.5 to 4 kind of on a longer-term basis. But I think, we’re willing to go a little bit above kind of 4 for the right types of growth projects.

Obviously, it’s our cheapest form of capital. And the other thing is as we’ve got some nice kind of bite-sized opportunities, we think, in front of us.

So, we might for in near-term go a little bit above where we are today, but not meaningful – not meaningfully above where we are today. But I mean, overall, we would like to be 4 or less.

Okay, great. And then maybe on the potential for acquisitions, the third-party ones, I guess, you’re looking at.

Should you think about in – basically staying in the same segments that you’re in today, or would you sort of venture out into something different if you think it’s kind of synergistic there?

Yes. We – first of all, we love the asphalt acquisitions that we’ve done.

And so we’ve got a couple of those deed up that we’re trying to complete, because those are virtually fit our model as far as being contracted out for multiple years and having nice great escalators and that sort of thing. But one of the things we realized is that, we have developed really a huge terminalling footprint across the U.S.

We’re up to 54 terminals, I think, we’re in 25, or 26 states. And so we developed a lot of competency just around operating terminals.

And so we have this year started to look outside the asphalt window to see if there are other things that hit our footprint nicely. And we have found some of those that we’re taking a serious look at, because we just think it fits our footprint and it gives us a little higher potential for growth.

If we limit ourselves to asphalt, we think the opportunities will be there. But not to the extent that they will – if we were to consider some other product areas.

So we are looking at some other product areas right now.

Great. Thanks very much.

Thank you.

Yes. Well, first of all thank you everybody for dialing in.

We appreciate your attention and your support. We feel really good about the portfolio that we have created for ourselves.

We really love the third quarter, because it’s our best quarter. So we’re looking forward to having a successful third quarter and getting that crude pipeline back up and running here pretty shortly.

So, again, thank you very much. And as always, if you have any follow-up questions, please contact Alex and myself.