Genesis Energy, L.P. Reports Second Quarter 2023 Results

Genesis Energy, L.P. (NYSE: GEL) today announced its second quarter results.

We generated the following financial results for the second quarter of 2023:

• Net Income Attributable to Genesis Energy, L.P. of $49.3 million for the second quarter of 2023 compared to Net Income Attributable to Genesis Energy, L.P. of $35.3 million for the same period in 2022.

• Cash Flows from Operating Activities of $157.7 million for the second quarter of 2023 compared to $104.0 million for the same period in 2022.

• We declared cash distributions on our preferred units of $0.9473 for each preferred unit, which equates to a cash distribution of approximately $23.3 million and is reflected as a reduction to Available Cash before Reserves to common unitholders.

• Available Cash before Reserves to common unitholders of $96.3 million for the second quarter of 2023, which provided 5.24X coverage for the quarterly distribution of $0.15 per common unit attributable to the second quarter.

• Total Segment Margin of $214.6 million for the second quarter of 2023.

• Adjusted EBITDA of $198.0 million for the second quarter of 2023.

• Adjusted Consolidated EBITDA of $778.7 million for the trailing twelve months ended June 30, 2023 and a bank leverage ratio of 4.00X, both calculated in accordance with our senior secured credit agreement and discussed further in this release.

Grant Sims, CEO of Genesis Energy, said, “Our financial results for the second quarter were generally in-line, if not slightly ahead of our internal expectations and once again demonstrated the resilient earnings power of our diversified market leading businesses. During the second quarter, our offshore pipeline transportation segment benefited from steady volumes across our footprint, along with a quicker than anticipated ramp in volumes from BP’s Argos facility, but was partially offset by longer than anticipated planned producer downtime at one of our major host fields in the Gulf of Mexico. We also saw our soda ash business return to normal operating levels as rail service in and out of Green River, WY was restored to adequate levels. Our marine transportation segment also continued to perform in-line with our expectations as the market for Jones Act equipment continues to remain fundamentally short, which is leading to strong utilization and strong day rates across all our classes of vessels. Our strong performance in the second quarter resulted in our leverage ratio, as calculated by our senior secured lenders, ending the quarter at 4.00 times.

Looking at the back half of the year, we expect the increasing contributions from our offshore pipeline transportation and marine transportation segments will be offset by softer than previously expected soda ash prices, in some of our export markets. Slowing global industrial production and a slower than anticipated re-opening of China’s economy, post their Covid lockdowns, combined with the anticipation of new supply in China is leading many customers to work through their existing soda ash inventories and ultimately take a wait and see approach with respect to any new purchases. To ensure the movement of our volumes, we have made the proactive decision to adjust pricing on these potentially stranded volumes for the back half of the year so we can operate at full utilization and optimize our fixed costs for the full year.

As a result, we are today adjusting our full year guidance for Adjusted EBITDA⁽¹⁾ to a range of $725 - $745 million, which is only approximately 5-6% below our original guidance, if you exclude the $15 million we lost in the first quarter due to factors outside of our control. While less than originally anticipated, it is important to remember that this year will still result in record annual Adjusted EBITDA⁽¹⁾ for the partnership, record segment margin for our offshore pipeline transportation segment and record contribution from our soda ash business. We are also still delivering sequential growth of approximately 8-10% over our normalized 2022 performance at the midpoint of our revised guidance. Importantly, we continue to expect to exit the year with a leverage ratio, as calculated by our senior secured lenders, at or near our long-term target leverage ratio of 4.00 times.

The long-term outlook for Genesis remains constructive and we are excited about the ramp in earnings expected in the coming years. Even with an anticipated softer macro environment, we currently expect financial performance in 2024 to be greater than 2023 driven by a continued ramp in offshore volumes along with the additional volumes expected from our Granger expansion. In 2025, we would expect a significant step change in offshore volumes and segment margin contributions as both Shenandoah and Salamanca are expected to come on-line. Even with some expected volatility in soda ash prices, we continue to have a clear line of sight to generating cash flow of roughly $200 million to $300 million per year after certain cash obligations (including interest payments, preferred and existing common unit distributions, maintenance capital requirements, principal payments on our Alkali senior secured notes, and cash taxes) starting in 2025 once our current growth capital program is complete. This will increase our financial flexibility and afford us the opportunity to simplify our capital structure, return capital to our stakeholders in one form or another and ultimately allow us to continue to build long-term value for everyone in the capital structure in the coming years.

With that, I would like to discuss our individual business segments in more detail.

Our offshore pipeline transportation segment again performed in-line with, if not slightly ahead of, our internal expectations despite longer than anticipated planned producer downtime at one of our major host platforms. The extended downtime was partially offset during the quarter by a quicker than anticipated ramp in volumes from BP’s Argos facility and steady volumes from King’s Quay and our other host fields. As we look out over the remainder of the year, we continue to expect volumes from Argos to ramp towards its nameplate capacity of 140,000 barrels per day along with steady volumes from King’s Quay and new volumes from additional in-field development wells, field extensions and sub-sea tiebacks to existing production facilities connected to our leading midstream infrastructure in the Gulf of Mexico.

We remain on schedule and importantly on budget with our CHOPS expansion and new SYNC lateral with completion for both expected 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 are underwriting this investment with both life of lease dedications and firm take-or pay agreements that will provide Genesis with an expected minimum 5 times construction multiple. This incremental cash flow starting in 2025 combined with an expected fully ramped Argos, strong volumes from King’s Quay and steady base volumes on our existing infrastructure should provide for steady, stable and growing cash flows from our offshore pipeline transportation segment for many years ahead.

Our soda and sulfur services segment performed in-line with our expectations during the quarter. As I mentioned earlier, our soda ash business returned to normal operations in the second quarter as rail service in and out of the Green River basin recovered, which allowed us to run our production facilities at full utilization and optimize our operating costs. Over the last 12 to 18 months we have seen unprecedented demand for soda ash which drove pricing and margins to all-time record levels. It has never been realistic to expect to continue at these margin levels for a prolonged period of time and we have always believed the recent pricing environment was not sustainable and that soda ash pricing, and ultimately margins, would return to historical averages at some point. As we sit here today, the combination of slowing global industrial production, a slower re-opening of China’s economy and anticipated new supply in China would suggest that pricing and margins will in fact return to historical norms. Despite the softer outlook for the remainder of 2023, we still expect to achieve the highest Segment Margin in the history of our soda ash business this year.

While we do in fact have approximately 90% of our volumes priced for the full year, several of our customers have opted to take a wait and see approach with their purchasing efforts and continue to reduce their existing inventories in lieu of purchasing new volumes. As a result of this delay in purchasing and to keep our cost structure as low as possible, we have made the proactive decision to protect market share and adjust prices on these effectively stranded volumes for the second half of the year, ultimately so we can run at 100% utilization and ensure the highest level of fixed cost absorption rates across our operations for the full year.

Our legacy Granger production facility is running at or above its original nameplate capacity of approximately 500,000 tons of annual soda ash production, and the Granger expansion project remains on schedule for first soda ash “on the belt” sometime over the next few months. Once fully on-line and ramped in 2024, we will have approximately 4.7 million to 4.8 million tons of annual soda ash production capacity and will be one of the largest natural soda ash producers in the world, representing approximately 13% of the total world’s supply of soda ash outside of China. Furthermore, both our Westvaco and expanded Granger production facilities will be some of the lowest cost production facilities in the world, which will importantly ensure we will continue to be a baseload supplier of natural soda ash to the world regardless of the macro environment.

While there will always be some expected volatility in the business given soda ash is a commodity, I would like to give some historical context that got us comfortable when we purchased the business in 2017. Looking at historical segment margin per ton sold from 2007 to 2023, pro forma for the Granger expansion and the expected cost savings, the business has averaged approximately $50 per ton sold. With approximately 4.8 million tons of expected production capacity, we would reasonably expect the business to average approximately $240 million of segment margin over the cycle. I would also point out that soda ash is a commodity that has no known substitutes, and we compete with synthetically produced soda ash which basically costs twice as much as our production from natural sources. Given this dynamic and an estimated remaining reserve life of over 100 years related to the seam currently being mined, we remain extremely bullish with the long-term cash flow characteristics of the business, regardless of the expected volatility.

During the quarter, our legacy sulfur services business was impacted by certain operational issues at our host refinery partners which resulted in lower NaHS production during the quarter. Lower production levels at geographically advantaged sites required us to source our sulfur-based product from our others production sites, which led to increased costs and lower margins.

Our marine transportation segment continues to meet or exceed our expectations as market supply and demand fundamentals remain steady. We continue to operate with utilization rates at or near 100% of available capacity for all classes of our vessels as demand for Jones Act tanker tonnage remains extremely robust, which continues to be driven in large part by effectively zero construction of our types of marine vessels over the last few years and the continued retirement of older tonnage. 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 their highest levels we have seen during our ownership of the marine business.

To give some context to the tightness we are seeing, today we are announcing that we recently entered into a new three-and-a-half-year contract starting in January of 2024 on the American Phoenix with a credit-worthy counterparty. The new contract term will begin immediately following its current contract that runs through mid-January 2024 and has the highest day rate we have received on the American Phoenix since we first purchased the vessel in 2014. With the American Phoenix now effectively contracted through the middle of 2027 and our belief the broader supply and demand fundamentals and structural tightness will remain favorable for both our brown and blue water fleets for the foreseeable future, we believe our marine transportation segment is set up to deliver marginally growing and steady earnings over the next few years.

Turning now to our balance sheet. While our outlook for the remainder of 2023 is slightly below our original expectations, we are less concerned with the short-term fluctuations in our earnings profile each quarter and more focused on building long-term value for everyone in the capital structure. Regardless of these quarterly fluctuations and based on our current expectations for the remainder of the year, we continue to expect to exit 2023 with a leverage ratio, as calculated by our senior secured lenders, at or slightly above 4.0 times. We are confident the decisions we are making will put us in an enviable position with significant cash flow, especially given our size, starting in 2024 and accelerating into 2025. This central thesis has not changed and will undoubtedly give us tremendous flexibility to optimize our capital structure and return capital to our stakeholders, all while maintaining a focus on our long-term leverage ratio.

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.”

(1) Adjusted EBITDA is a non-GAAP financial measure. We are unable to provide a reconciliation of the forward-looking Adjusted EBITDA projections contained in this press release to its most directly comparable GAAP financial measure because the information necessary for quantitative reconciliations of Adjusted EBITDA to its most directly comparable GAAP financial measure is not available to us without unreasonable efforts. The probable significance of providing these forward-looking Adjusted EBITDA measures without directly comparable GAAP financial measures may be materially different from the corresponding GAAP financial measures.

Financial Results

Segment Margin

Variances between the second quarter of 2023 (the “2023 Quarter”) and the second quarter of 2022 (the “2022 Quarter”) in these components are explained below.

Segment Margin results for the 2023 Quarter and 2022 Quarter were as follows:

Offshore pipeline transportation Segment Margin for the 2023 Quarter decreased $25.7 million, or 22%, from the 2022 Quarter primarily due to the distribution received from one of our unrestricted subsidiaries, Independence Hub LLC, of $32.0 million in the 2022 Quarter from the sale of its platform asset. Excluding this distribution, segment margin in our offshore pipeline transportation segment increased during the 2023 Quarter as a result of higher overall crude oil and natural gas volumes, which more than offset the additional producer downtime we experienced during the period, most of which was planned, that impacted volumes on one of our deepwater lateral pipelines and further downstream on our Poseidon pipeline. The increase in our overall volumes during the 2023 Quarter is a result of the King’s Quay Floating Production System (“FPS”), which achieved first oil in the 2022 Quarter, and has since ramped up production to a level of approximately 130,000 barrels of oil equivalent per day in the 2023 Quarter, and the Argos FPS, which achieved first oil in April 2023. The King’s Quay FPS, 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. The Argos FPS supports the 14 wells pre-drilled and completed at BP’s operated Mad Dog 2 field development, of which 3 wells began producing in the 2023 Quarter, with 100% of the volumes flowing through our 64% owned and operated CHOPS pipeline for ultimate delivery to shore. We expect to continue to benefit from King’s Quay FPS and Argos FPS volumes throughout 2023 and over their anticipated production profiles.

Soda and sulfur services Segment Margin for the 2023 Quarter increased $17.6 million, or 24%, from the 2022 Quarter primarily due to higher domestic and export pricing and an increase in sales volumes in our Alkali Business. We successfully restarted our original Granger production facility on January 1, 2023 and, during the 2023 Quarter, ramped up the production to its original nameplate capacity of approximately 500,000 tons on an annual basis. Additionally, we are still on schedule to complete our Granger Optimization Project in the second half of 2023, which represents an incremental 750,000 tons of annual production that we anticipate to ramp up to. As noted above, the 2023 Quarter benefited from higher domestic and export pricing as compared to the 2022 Quarter as we continued to see a balanced supply and demand market. While we continue to expect our weighted average sales price for 2023 to exceed our weighted average sales price in 2022, we are beginning to see a level of volatility in pricing as a result of a slower than anticipated re-opening of China’s economy combined with the anticipation of new global supply entering the market. In our refinery services business, we experienced lower than expected production due to unplanned operational and weather-related outages at several of our host refineries during the 2023 Quarter. In addition, a host refinery partially converted their facility into a renewable diesel facility, which was completed in the fourth quarter of 2022. This partial conversion resulted in lower NaHS production and sales volumes during the period when compared to the 2022 Quarter, which also experienced higher NaHS sales volumes from our mining customers, primarily in South America. Additionally, during the 2022 Quarter, we experienced an increase in NaHS sales volumes due to our ability to leverage our multi-faceted supply and terminal sites to capitalize on incremental spot volumes as certain of our competitors experienced one-off supply challenges.

Onshore facilities and transportation Segment Margin for the 2023 Quarter decreased $4.7 million, or 43%, from the 2022 Quarter primarily due to a decrease in rail unload volumes. The 2022 Quarter had an increase in rail volumes as a result of our main customer sourcing volumes to replace international volumes that were impacted by certain geopolitical events in the period. The rail unload volumes during the 2022 Quarter also increased our Louisiana pipeline volumes in the respective period as the crude oil unloaded was subsequently transported on our Louisiana pipeline to our customer’s refinery complex. In addition, there was a decrease in volumes on our Texas pipeline system during the 2023 Quarter.

Marine transportation Segment Margin for the 2023 Quarter increased $8.2 million, or 47%, from the 2022 Quarter. This increase is primarily attributable to higher day rates in our inland and offshore businesses, including the M/T American Phoenix, during the 2023 Quarter. Demand for our offshore barge services to move intermediate and refined products from the Gulf Coast to the East Coast remained high during the 2023 Quarter due to the continued strength of refinery utilization rates as well as the lack of new supply of similar type vessels (primarily due to higher construction costs) as well as the retirement of older vessels in the market. These factors have also contributed to an overall increase in spot and term rates for our services.

Other Components of Net Income

We reported Net Income Attributable to Genesis Energy, L.P. of $49.3 million in the 2023 Quarter compared to Net Income Attributable to Genesis Energy, L.P. of $35.3 million in the 2022 Quarter.

Net Income Attributable to Genesis Energy, L.P. in the 2023 Quarter was impacted primarily by: (i) an increase in operating income associated with our operating segments primarily due to increased volumes and activity in our offshore pipeline transportation segment, increased volumes and pricing in our Alkali Business, and higher day rates in our marine transportation segment, as discussed above; and (ii) a decrease in income attributable to our redeemable noncontrolling interests of $22.6 million as the associated Alkali Holdings preferred units were redeemed during the 2022 Quarter. These increases were partially offset by higher interest expense of $5.7 million in the 2023 Quarter. Additionally, the 2022 Quarter included a gain of $40.0 million, or $32.0 million net to our interests, associated with the divestiture of our previously owned Independence Hub platform and an unrealized (non-cash) gain from the valuation of the embedded derivative associated with our Class A Convertible Preferred Units of $10.7 million in the 2022 Quarter recorded within “Other income (expense)”.

Earnings Conference Call

We will broadcast our Earnings Conference Call on Thursday, August 3, 2023, at 8:00 a.m. Central time (9:00 a.m. Eastern time). This call can be accessed at www.genesisenergy.com. Choose the Investor Relations button. For those unable to attend the live broadcast, a replay will be available beginning approximately one hour after the event and remain available on our website for 30 days. There is no charge to access the event.

Genesis Energy, L.P. is a diversified midstream energy master limited partnership headquartered in Houston, Texas. Genesis’ operations include offshore pipeline transportation, soda and sulfur services, onshore facilities and transportation and marine transportation. Genesis’ operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and the Gulf of Mexico.