USD Partners LP

Thank you, Holly. Good morning, and thank you for joining us.

Welcome to our fourth quarter 2020 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; Josh Ruple, our Chief Operating Officer as well as several other members of our senior management team.

Yesterday evening, we issued a press release announcing results for the three months and year ended December 31, 2020. If you would like a copy of the release, you can find one on our website at usdpartners.com.

Before we proceed, please note that the safe harbor disclosure statement regarding forward-looking statements in last night's press release applies to the statements of management on this call. Also, please note that information presented on today's call speaks only as of today, March 04, 2021.

Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today's call will include discussions of non-GAAP financial measures.

Please see last night's press release for reconciliations to the most comparable GAAP financial measures. And with that, I am happy to turn the call over to Dan Borgen.

Thank you, Jennifer and good morning, and thanks everyone for joining us on the call today. We appreciate your ongoing support and we hope everyone is staying healthy and safe during these challenging times.

The partnership had another strong quarter as our terminals continued to perform well under our long-term take-or-pay contracts. In addition, we had a very constructive year 2020.

Our terminals perform safely and reliably throughout the year, our financial performance continued to be strong and steady generating a significant amount of free cash flow. We were successful in optimizing our operations and have seen benefit from that in our recent quarterly earnings and we follow through with our previously stated guidance to delever by approximately $20 million to $25 million on an annualized basis.

In fact, we exceeded that and have paid down more than $30 million on a revolving credit facility since the first quarter of 2020. As we've referenced in previous calls, our strong contract structure and our customer's investment-grade credit profile continued to provide the foundation for our business.

We also continue to make progress on our sponsor previously announced Diluent Recovery Unit or DRU project, which we expect will be placed into service in the second quarter or early in the third quarter of this year. The Partnership sponsor has secured the necessary financing, obtained all material permits and entered into fixed price EPC contracts regarding the construction of the project.

There been references made to the DRU on other public company earnings calls and we are pleased to see the industry begin to get behind the program. We look forward to becoming an industry standard as more customers start to adopt a strategy.

Josh will also give us an update later on this call detailing where we are with our sponsors development activities. As a reminder, while the DRU project is at the sponsor, the longer-term contracts at the DRU benefit the partnership because those contracts will be matched up with the Terminalling services agreements at the partnership's Hardisty terminal.

Upon the successful construction and completion of the DRU approximately 32% of the partnership's Hardisty terminal capacity will be automatically extended on a long-term committed agreement through mid-2021. Additionally, USD and our partner, Gibson are in meaningful commercial discussions with other potential producer and refiner customers to secure additional long-term take-or-pay agreements to support future expansions of capacity at the DRU and extend the associated contracted cash flows at the partnership's Hardisty rail terminal assert.

The DRU is also a critical part of our sustainability and ESD initiative, which will remain a key focus of our business as we continue to deliver innovative solutions for our customers. The DRUbit that our customers intend to transport in the future is considered a non-regulated commodity and is not considered hazardous as this does not fall under the US DOT hazardous materials regulation and Canada's transport of dangerous goods regulations.

We look forward to updating the market about the progress of our DRU project over the next several months as we expect the DRU to have a material impact on the long-term sustainability of our business and specifically on our operating cash flow. Also before handing the call over to Adam, I do want to mention the growth we are seeing at the sponsor level.

As the role of biofuels continues to expand and the clean energy transition, we are committed to offering new capabilities and services across growing demand for clean fuels to include ethanol, renewable diesel and biodiesel. We believe our Terminalling assets are strategically located to address some of the expansion in the clean fuels transition and we believe our relationship in the industry including the railroads uniquely position USD to be a strong player in this sector going forward.

In addition, we continue to develop our refined products program out of Texas Deepwater and servicing the demand pull from Mexico. Lastly, as we have always done, we continue to grow our presence in the storage and transit by working with the railroads and our customers to develop strategic, logistic assets and infrastructure.

As some of these assets are potential drop down candidates for the partnership, we look forward to keeping the market updated on our progress. Adam is going to start us off with an update on the partnership's latest financial results and outlook for the reposition and we'll jump back into the recent market and commercial outlook.

Adam, please go ahead.

Thank you Dan and thank you for joining us on the call this morning. Yesterday afternoon we issued our fourth quarter earnings release, which included the details of our operating and financial results for the fourth quarter and full year 2020 and we plan to issue our 2020 10K with additional details after close of market today.

With our take-or-pay contracts and primarily investment grade customers, the partnership had another strong quarter and relatively steady and resilient year in 2020 given all the challenges the country had faced over the last 12 months. For the quarter we reported net income of $6.5 million, net cash provided by operating activities of $12.1 million, adjusted EBITDA of $14.9 million and distributable cash flow of $12.9 million.

In addition, our efforts to strengthen our balance sheet continue to produce results as we pay down more than $30 million of revolver debt since the first quarter of 2020 which is above our previous guidance of approximate $20 million to $25 million on annualized basis. This has created additional liquidity to the partnership and has helped position us for a potential refinancing of our revolving credit facility in November.

Notably our credit facility leverage ratio is currently 3.5 times and trending lower and our distributable cash flow yield over the last 12 months continues to be strong and greater than 30% based on our current unit price. As Dan mentioned, the partnership's terminals continue to perform well and we continue to generate a significant amount of free cash flow as evidenced by our strong DCF coverage of over four times during the quarter.

And now I'll go into details of the quarter, the partnership's operating results for the fourth quarter of 2020 relative to the same quarter in 2019 were primarily influenced by higher revenue at the Stroud terminal due to higher rates that are based on crude oil index pricing differentials. The partnership experienced lower operating cost during the fourth quarter of 2020 as compared to the fourth quarter of 2019 due primarily to lower subcontracted rail services costs associated with lower throughput.

Net income for the quarter increased as compared to the fourth quarter of 2019 primarily as a result of the operating factors discussed already coupled with lower interest expense incurred resulting from a lower weighted average balance of debt outstanding and lower interest rates during the quarter as well as foreign currency transaction gains. Net cash provided by operating activities for the quarter increased relative to the fourth quarter of 2019 primarily due to the operating factors already discussed and the general timing of receipts and payments of accounts receivable, accounts payable and deferred revenue balances.

Adjusted EBITDA and distributable cash flow increased by 16% and 36% respectively for the quarter relative to the fourth quarter of 2019. The increase in adjusted EBITDA was primarily a result of the operating factors are discussed and DCF was also positively impacted by a decrease in cash paid for interest and income taxes during the quarter.

As of December 31, 2020 the partnership had approximately $3 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $188 million on its $385 million senior secured credit facility, subject to the partnership's continued compliance with financial covenants. As of December 31, the partnership had amounts outstanding of $197 million under the revolving credit facility.

Pursuant to the terms of the partnership's credit agreement, the partnership's borrowing capacity is currently limited to 4.5 times to trailing 12 months consolidated EBITDA as defined in the credit agreement. As such the partnership's available borrowings under senior secured credit facility including unrestricted cash and cash equivalents was approximately $56 million at the end of the fourth quarter.

The partnership was in compliance with its financial covenants as of December 31, 2020. On January 28, the partnership declared a quarterly cash distribution of $0.111 cents per unit or $0.444 per unit on an annualized basis.

The same amount is distributed in the prior quarter. The distribution was paid on February 19 to unitholders of record at the close of business on February 10.

We continue to be excited about the future and we are happy to see our efforts to strengthen our liquidity position producing results and we continue to believe our efforts will enhance long-term value for all stakeholders. And with that, I'd now like to turn the call back over to Dan.

Thank you, Adam. Now I'll Brad to give us a quick commercial update regarding the Western Canadian Select market and the impact of the recent market events.

Brad?

Dan, thank you. So as a reminder in the early COVID days, demand for crude oil decreased late in the first and into the second quarter of 2020.

Lower demand led to lower prices and the eventual shut-in production of approximately 2 million barrels a day in US and a million barrels a day in Canada. Today due to the efforts to reopen the economy and the accelerated rollout of vaccinations, we have seen almost a full recovery in demand and the stabilization of oil prices.

As an example EIA Energy Information Administration of the US, recently projected demand in 2021 versus 2019 as follows; gasoline down 7%. This list is effectively unchanged and shut down 20%.

So as you can see, the trend back to 2019 levels is fully in, in 2021 projected to be a strong demand year. All of this has led to a current price levels for WTI of $62 a barrel.

Now this is relative to our last earnings call we actually shared with our listeners a price for WTI of 38,000 barrels. So we had the $24 plus or minus increase in prices just since 90 days ago.

So a significant change all led by this supplier rationalization event and then ultimately a return trend and return to normal on demand. So starting in early third quarter, producers in Canada and US started to bring back production that was temporarily shut in.

Additionally, in January of 2021 CAPP which is the acronym for the Canadian Association for Petroleum Producers announced that they are forecasting more than a $3 billion increase in plant upstream oil and gas spending as compared to 2020 levels. The outcome of all that is particular to Canada.

Canada has returned to pre-COVID production levels and with this new announcement of spending, our expectations are that in 2021 we will actually be producing at higher levels than we did pre-COVID levels. So return to normal in Canada is actually returning at a pace faster than the US.

The outcome of all that is that in the key indicators that we watch first and foremost, substantiate that this is in fact happening is that we observe the apportionment levels for all egress types that ensure that this production can exit Canada on a ratable and efficient basis and in fact what has happened is the three main pipelines of all experience proportionate levels TMX, Express and Ambridge and Ambridge in particular has reported proportionate levels at 53% as recent as February which is a historical high level. This naturally then leaves barrel stranded potentially in Canada, which then drives inventory levels higher and as we observe inventories we've seen them trending higher starting late last year and continuing here in the first quarter of 2021 and our expectation is they will continue to trend higher.

All of this will lead to the following; prices will reflect the need to incent continued growth and crude by rail egress and that is evident by the fact that the utilization at our Hardisty asset in particular is beginning to increase and growing on a monthly basis. So what this is all mean based on forecasted increase in spending by producers in Canada and the forecasted WCS and WTI forward curve spread levels, then we expect throughput levels at Hardisty, at Casper and at our Stroud terminals will continue to trend upwards through 2021.

Before I leave this market update section, I'd like to say something quickly about Cushing. As I mentioned earlier, supply hasn't returned in US at the same rate as it has in Canada.

So subsequently, the production and supply available at the Cushing hub, which is the largest hub in the US had a reduced level and therefore Cushing inventories have been on a steady draw beginning late last year and is forecasted to continue to draw to the balance of 2021. Should that happen, that leads to two things.

One is a very supportive price for WTI which is important to our customers and just business in general. And then secondly, that the values at Cushing relative to other domestic locations will carry occurring them and that will be important as that move into our update on commercial activities.

So as we think about, we are now moving into where crude by rail matters and as I just stated, where values at Cushing are important, then that's very supportive of our activities at Hardisty, Casper and our Stroud asset which supports Cushing terminal. First and foremost our focus will be on servicing our existing customers.

We recognize that our customers will be -- their demand for utilizing our assets will be trending higher as we move into the second quarter and our focus will be first and foremost on being able to service our customer's needs. Additionally, then we'll identify what incremental capacity that might be available at any of these facilities and work with existing and new customers to either use that spot activity to generate incremental revenues and/or continue to work to the new and extend existing and incremental capacity at either of these terminals as we move into a high demand period of 2021 and naturally because we are in a crude by rail environment, we'll continue to work to as Dan said, identify and commercialize and grow our DRU and Port Arthur network, so we are currently in active and detailed discussions with existing and new customers to commercialize the DRU in the current 50,000 barrels a day that we've announcement with Conoco Phillips.

USD also believes that the DRU is extremely well-positioned to be a competitive long-term egress solution as Canada and the US continue to experience environmental, regulatory and political challenges as it relates to Canadian heavy egress options, macros alternatives and as Dan mentioned in addition to the environmental and safety benefits to the DRU, we believe the DRU is when you consider cost and values that are created in its process that is competitive to alternatives and again equally important provides scalability advantages. So once again what we mean by that is during these periods of high uncertainty, the DRU solution, egress solution is one that you can right size, you can write from a timing standpoint and you can solve with less of a balance sheet burden for our customers.

So we think all of that is positive, so do our customers and we feel really good about the opportunity to find our second and third customer at DRU and Port Arthur. Finally I'd like to talk briefly about our clean transport fuels initiatives that Dan mentioned.

As we know transportation fuels in the United States in a state of transition as a result of societal norms and corresponding policy, the outcome of which will determine the vehicles driven, the fuel that is consumed and the quality. USD believes that its transition will result in increased demand for octane while requiring a lower carbon footprint of the fuel itself, a combination that is challenging to achieve.

USD also believes biofuels will play a continued and critical role in achieving these requirements, facilitating expansion into new products such as renewable diesel and further penetration into the market via existing solutions like ethanol as a result of potential higher plans. So what are we focused on, as a reminder it was Colton we currently are the solutions for our customers in California who are in need of low-carbon blend stocks, low carbon intensity blend stocks.

In our facility in what's called the widespread solution via rail and connectivity to ethanol producers in the US who specifically are focused on producing ethanol with low carbon intensity. So we currently provide a clean solution to our customers in Southern California.

Our plan is to grow that business. In addition that footprint in what's Colton will allow us to grow into a renewable diesel solution for existing and new customers and we'll continue to work with producers.

The renewable space is much like the ethanol space where producers are fragmented and depend heavily on real solutions to get to where the market will provide the best solution, industry solution is what we call it and Colton is uniquely positioned for that in our relationships with existing customers, with the railroads were uniquely positioned and given our experience, we're uniquely positioned to work with these new producers of renewable diesel to create origin and destination solutions on their behalf. So we're very focused on this.

Let me quickly give an update then on what's happening at our Houston Terminal our Texas Deepwater facility update. To set a very high level from a development perspective, we continue to leverage our existing connectivity, rail infrastructure in access to the Houston ship channel to drive meaningful and ongoing detailed discussions with Houston where producers and consumers of crude, light products petrochemicals and NGLs to uniquely solve their distribution and export needs and we're pleased that we're actually in detailed discussions in every one of those commodities and we look forward to sharing more on progress and opportunities in each one of those in future discussion.

So still very excited about what's going on at Texas Deepwater. At this time, I'd like to pass the discussion over to Josh Ruple, our COO and ask him to provide updates on our construction activity at the DRU and at Port Arthur in addition to updates on our commercial rail development initiatives.

Josh?

Thanks Brad. As Dan mentioned previously in our coordination efforts with our customers, the railroads and our DRU origin partner Gibson our Phase I DRU initiative is tracking slightly ahead of plan, which is good news.

Again we're fully permitted and are deep into both the design and construction processes with our EPC vendors. Our COVID-19 HS&E protocols and our procurement strategies have proven to be effective and currently, we are progressing on schedule and on budget at both ends of the DRU network at Hardisty and PAT or Port Arthur respectively.

With substantial completion planned late Q2 and formal commissioning in early Q3 of this year, we are right on track with our project execution goals and our teams are focused and poised to deliver Phase I successfully in the coming months and I just know with our patented DRU process, we are currently permitted for growth at both DRU, at Hardisty and at Port Arthur, enabling us to immediately engage with our customers and quickly provide an improved takeaway option for their Canadian heavy barrels as a Phase 2 to our current DRU initiative. Finally with regard to DRU just to echo both Dan and Brad's previous comments, we are very well positioned to provide a competitive long-term solution to Canada's market excess needs.

The benefit of the DRU are material and provide a safer, nonhazardous egress solution that optimizes the cost of diluents, reduces the cost of freight and improves the value of bitumen in the value chain. Not to mention as Brad previously mentioned, the scalability advantages associated with DRU.

So again we're super excited about our efforts, where we're at and where we plan to go with DRU. And Brad, to your point if I may, I'd like to just mention quickly some updates in regards to our rail development efforts around storage and transit and first and last mile services to include transloading.

As both you and Dan have mentioned on the call today, this is a space we participated for quite some time and currently have operating assets at Texas Deepwater and Bayport to provide services to both the railroads and our collective customers. We continue to work with our railroad partners on a regional basis and as an update regarding this initiative we're very close on a few new asset development efforts in Canada, the Midwest, the Southwest and on the East Coast.

As we continue to support the railroads in their PSR transition efforts, we focus on growth, we look forward to sharing a bit more detail on these developments in the very near future. And with those comments, I'll hand it back to you Dan.

Thank you Brad and Josh for an exciting update of our current business our future business. So with that, we'll open up the call for any additional questions.

Thanks so much. Appreciate the information that you all shared, sound like a successful 2020 and some good projections for 2021 and I was curious if you all have any insight as to any update or change to the distribution plans for 2021 that you envision?

Similar emphasis on possibly paying down the revolver or perhaps consideration on returning the distribution to slightly higher level, understanding none of us can predict the future but just wasn't sure if you have any thoughts at this time on that, and that's the only question thanks.

Hey John, this is Adam Altsuler. Thanks for the question, that's a great question.

We feel good about what we've done over the 12 months by meeting, exceeding guidance with regard to paying down debt. Obviously the distribution question is subject to the board's discretion on a quarterly basis, but I think I can say that the fact that there were 3.5 times and trending lower, generating a significant amount of DCF coverage and DCF yield.

So only those things help the discussion with regard to distribution policy going forward. So it's nice to see those things trending in the right direction.

Again we'll address that on a quarterly basis, but feel much better about our position with regard to that discussion going forward.

Thank you, Holly and first let me say thank you for your continued support and confidence in USD Partners business. We appreciate it very much, it's been a challenging year for all of us, but I do feel good about where we came out in '20 and the actions we took in '20 to strengthen the balance sheet, to increase our strategic position in the market and prepare for the increase in activity as the market continues to return to pre-COVID levels hopefully mid to later this year.

We'll continue to keep you updated and look forward to additional announcements regarding our progress on the DRU and Port Arthur and other growth initiatives we have in the future. Again thanks again.

We appreciate the support and thanks for joining the call today.