CorEnergy Infrastructure Trust, Inc. (NYSE:CORR) Q2 2022 Results Conference Call August 11, 2022 11:00 AM ET
Company Participants
Matt Kreps – IR
Dave Schulte – CEO
John Grier – COO
Robert Waldron – CFO
Conference Call Participants
Operator
Hello, and welcome to CorEnergy’s conference call to discuss the Second Quarter 2022 Results. [Operator Instructions]
I would now like to turn the call over to Matt Kreps, Investor Relations for CorEnergy. Please go ahead.
Matt Kreps
Thank you, Holly, and thank you, everyone, for joining today’s core Energy Infrastructure Trust Conference Call. With me today are Dave Schulte, CEO; John Grier, Chief Operating Officer; and Robert Waldron, CFO.
Earlier this morning, we published a press release announcing the second quarter results for 2022. We expect to file our Form 10-Q this afternoon. I would like to remind everyone that the statements made during the course of this presentation that are not purely historical may be forward-looking statements and are subject to the safe harbor protection available under the applicable securities laws.
Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our filings with the SEC. These documents are available on the Investor Relations section of our website. We do not update our forward-looking statements.
During this call, we will also make reference to certain forward-looking non-GAAP metrics, which will be reconciled in subsequent filings as part of our results reported. We encourage all of you to review our complete disclosures risk factors GAAP financial figures and those non-GAAP metrics with the related reconciliations.
With that, I would like to now turn the call over to Dave Schulte. Please go ahead.
Dave Schulte
Good morning, everyone. I’ll spend a couple of minutes updating our operations, then John Grier will discuss Crimson’s recent results, and then we’ll turn the call over to Robert for financial comments and outlook.
The second quarter saw continued steady performance from our predictable Missouri natural gas operations, but also a reduction in volume in our California crude oil operations as a result of disruptions in the global oil supply chain. However, in July, a third-party operational issue reversed our drop in volumes, a benefit which is expected to persist throughout Q3. We believe we have a plan to offset the potential for lower volumes for the next several quarters through a combination of cost efficiency and pricing increases on our California pipelines.
Our company story remains relatively simple. We own and operate regulated oil and gas, transportation and storage assets under revenue structures that help to mitigate risk. We have a longer-term opportunity to repurpose assets into lower carbon services in California and add assets to expand and diversify our tax-efficient platform. We believe that our REIT status is a business model advantage as it lowers cost in a maturing industry.
Just taking a moment to recap our key assets and opportunities we see in them. With our natural gas business, MoGas and Omega pipelines, we support residential, commercial and industrial demand under long-term take-or-pay capacity contracts. Demand for natural gas is growing in the areas we serve as demonstrated by our need to recently install new facilities to accommodate shipper demand. There could be incremental organic projects within our footprint to support further expansion of our systems.
We are also engaged with the U.S. Department of Defense at Fort Leonard Wood, Missouri, to provide scoping for the Utility Energy Services contract, or USEC, which we were awarded several years ago and which could add revenue for us.
With Crimson, we gather and transmit crude oil to refineries in California. These assets also provide service under fixed fees for volumes transported with long-term investment-grade customers. We have a track record of excellence in safely managing our network, ensuring reliability of supply for our customers. We’re managing challenges in the market and do see a number of opportunities to extend the life of our critical transportation assets.
Now I’ll turn the call over to John Grier, the founder of Crimson Midstream, to elaborate further.
John Grier
Thanks, Dave. Our pipelines are critical links in California’s oil infrastructure. And if we are successful, our pipelines and rights of way will also be important to its future carbon reduction efforts since they connect large point sources of CO2 emissions with world-class reservoirs for sequestration.
The second quarter volume decline, Dave mentioned was not representative of natural production decline, but rather disruptions in the global oil supply chain. In particular, disruptions to overseas production from Russia and Ecuador that caused a ripple effect stretching into California. These events exacerbated the continued permitting impasse in the state, making it more difficult to lift the rich California oil reserves produced under some of the most environmentally stringent conditions anywhere in the world.
There are 2 specific issues, our volumes — affecting our volumes in the second quarter. First, a customer decided to take its own produced barrels into its refinery in order to secure supply in this volatile market. Second, for temporary logistical reasons, a Bay Area refinery took some incremental San Joaquin Valley barrels, which largely came from production being transported in our pipeline.
We have hosted meetings with our customers, and they continue to assure us that our pipelines are critical to their assets and they support our continued operations. We do not believe the current situation is the new normal, but rather that short-term crude oil supply disruptions, which can — which should largely be resolved over the next several quarters.
The reduction in volumes in the second quarter was reversed in July by volumes gained as a result of third-party operational issues, which we expect to last at least through most of the third quarter. The net effect is that volumes that decreased in the second quarter are expected to be at or above first quarter levels in the third quarter. As a result, we’re maintaining our outlook for the year, and it’s just coming in a slightly different way than we originally expected.
But that is only the current part of the story. Looking to the future, our Crimson assets have a significant untapped value in the energy transition, and we continue to advance those efforts. Our pipelines are the most carbon efficient means for transporting large volumes of crude oil in the market today. And local California production is the most carbon efficient source of that same crude oil for the state, maybe the world.
I mentioned last quarter that ships waiting offload — waiting to offload crude oil in ports of L.A. Long Beach or San Francisco burn an estimated 4 tons of fuel a day. And more went in transit, emitting CO2 into the year throughout the journey, including a significant amount into the communities we serve. This incurs a far greater carbon footprint versus our more efficient pipelines, but that is just 1 piece of the puzzle.
The emissions from California’s producers are among the lowest in the global oil industry. And its refineries produce the cleanest burning formulation of gasoline in the world by virtue of being a highly efficient transportation system, connecting in-state production to in-state refining, we already helped provide the greenest barrel of oil and transportation fuels in the world. However, we’re taking steps to move into the next phase of the energy transition. Our California footprint is perfectly positioned to help reduce greenhouse gas emissions through carbon capture and sequestration or CCS. The commercial case for CO2 capture is better in California than any other state, which provides us with longer-term growth potential as part of the network connecting emissions capture with storage.
The recent federal legislation addressed energy and climate by further increasing carbon capture credit from $50 a ton to $85 a ton, subject to some employment criteria. For direct air capture, the new credit will be $180 a ton. Also, California Air Resources Board report recently confirmed their new aggressive climate goals of 40% reduction in carbon emissions by 2030 and achieving carbon neutrality by 2045.
We also believe there are other low-carbon energy transition-related storage and transportation opportunities in California in addition to CCS, which we will continue to pursue. With our expertise in operating California pipelines and existing physical assets, including our easements and rights of way, we believe we are in the best position to help accelerate development time lines and minimize overall costs of these projects.
In the second quarter, we announced that we signed our first nonbinding MOU with a carbon sequestration project developer to provide a transportation solution from origin to destination with several opportunities to expand both in reach and volume. We continue to move forward on those efforts, and we are in discussions with other developers for the transportation of their CO2 and in assisting with their CCS plans. We expect that agreement will be the first of many and enable us to deploy our assets in new profit earnings models as a part of the next generation energy economy that is being created now.
With that, I’ll turn it over to Robert to address the financials.
Robert Waldron
Thanks, John. Looking at the results. Second quarter revenue was $31.5 million, down slightly from the $32.9 million last quarter, with steady performance from MoGas and Omega, but lower overall volumes in California from the disruptions John and Dave referenced.
We do see near-term opportunities benefit in Q3 and the back half of the year transportation volumes, as previously described. Plus we anticipate the return this fall of the Amplify offshore production volumes that feed into our system. As a reminder, prior to the pipeline shutdown, the Amplify pipeline accounted for 1.2 million barrels of annual volume and a sizable boost to our cash flows of approximately $1.1 million per year.
I want to address the financial implications of the supply disruptions that have been discussed. Due to what we believe is the temporary nature of these disruptions, we cannot be sure how long these conditions will persist. What we can be sure of is that the cost of service framework of our regulated pipelines will enable Crimson to earn a reasonable return even in low volume conditions.
The 10% tariff increase announced earlier this month across the majority of our California system was justified by the lower volumes, but still results in an under-earning situation. The timing and extent of future tariff increases to eliminate the under-earning will be a function of both natural decline rates and base volume changes caused by previous market conditions as well as our operating costs. We constantly monitor our cost of service and will pursue future rate tariff increases when they’re justified.
Long term, by that, I mean possibly late 2023. The planned shutdown of the P66 Rodeo refinery in California is expected to shift more volumes onto our lines and others into the state. P66 announced last month that they have reached final FID on that project. The benefit of this volume shift will be taken into account in future tariff scenarios, hopefully mitigating our needs for significant increases in rates.
As to dividend coverage. For the 3 months ended June 30, 2022, we had adjusted EBITDA of $10 million, adjusted net income of $2.4 million. And after providing for maintenance capital and debt amortization, adjusted cash available for distribution or adjusted CAD of approximately $270,000.
Despite the volume decrease in Q2, we partially covered our common dividend due to lower-than-expected costs and higher realized crude oil prices on our net pipeline loss allowance. As mentioned, we have filed a 10% increase on virtually all of our CPC regulated pipelines, and are actively engaged in a number of cost efficiency programs across our business.
The company’s Board declared dividends on all preferred obligations during the second quarter and a $0.05 per share dividend on our common stock. No dividend was declared on the Class B common stock, which is owned by management and feature subordinated dividend rights that are specifically designed to prioritize the dividend to our external stockholders. We will only begin paying the Class B dividend once we’re confident the Class B dividend can be maintained in the foreseeable future at the minimum 1.25x required coverage ratio of all common and Class B.
As a reminder, we expect to characterize at least some percentage of our 2022 dividend as a return of capital due to our losses from 2020 rather than as ordinary dividends for tax purposes, which may provide favorable tax circumstances to many of you.
Net of the volatility, rate increase and cost efficiency programs, we are maintaining our 2022 adjusted EBITDA outlook of $42 million to $44 million. We also still expect $8 million to $9 million of maintenance capital expenditures in 2022. Our outlook and dividend assumptions anticipate there will be some quarterly variability in our dividend coverage due to timing of maintenance spend and other adjustments as we saw this quarter.
On Page 53 of our 10-Q to be filed later today, we have provided a table of quarterly expected maintenance capital expenditures and also maintenance expense, which is included in our operating expense for the remainder of 2022 to help in understanding some of the variability. Our board takes us into consideration each quarter in evaluating our dividend declarations. We finished the quarter with $17.8 million of cash and $23 million of undrawn revolver availability.
At this time, we’ll take questions from our covering analysts or institutional stockholders before closing the call. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question for today is coming from Selman Akyol.
Unidentified Analyst
This is Tim on for Selman with Stifel. First one, I just wanted to talk about the third-party issue that kind of reversed the decline in California volumes. Just wondering if you could expand on that. And then also, just curious on some of the cost efficiency measures you guys are taking with Crimson and potentially any goalposts you could provide there.
Dave Schulte
We’re — beyond what we’ve said in the release and on the call, we’re not going to comment on the operational issues with third parties. And on the cost efficiencies the main ones are things that are really a result of operating changes that have — we’ve been able to implement post the COVID wave where we’re reducing our footprint in our offices.
We’ve had significant work from home programs in place now for a while and have had some redundant space. So as leases are rolling off and that’s visible in the next year. We’re reducing our space footprint. We’re also taking steps to just review every cost item we have and make sure that there isn’t something that we couldn’t do better.
Not that we don’t try to manage cost otherwise, but when your revenue is compressed, you have greater urgency to implement changes. And the magnitude of that could be in excess of $1 million a year just in the rent reductions across our footprint and other similar cost related — I mean, fixed cost-related reductions.
Unidentified Analyst
Got it. And I guess switching over to carbon capture. Just wondering how latest conversations are going, when should we maybe think about reaching FID? Is this kind of a ’23 event or potentially a little bit longer? Just wondering any updated thoughts there.
John Grier
The update on that — this is John Grier, is that we continue the conversations and there are companies that are in California that have submitted for the EPA permits to sequester. And as we move those things forward, it is — we continue to make process — progress. There’s a willingness — and I’ll say, significant willingness to move forward with us and our company and our assets to make progress on that, but we’re not in a place where we can make announcements about exactly what we’re doing. We can only say, yes, in fact, we are making good progress and having very constructive conversations.
Unidentified Analyst
Got it. And I guess, switching over to MoGas. Just wondering if you guys are seeing any inflationary pressures there and if you guys have any like levers you can pull on to kind of offset any cost creeps?
Robert Waldron
Sure. The normal pricing or expense pressures that you see. But that business is pretty stable, very stable. And so we haven’t seen anything that really compresses the margin on that business thus far.
Unidentified Analyst
Perfect. And then last one for me. Anything on the business development side, anything in the M&A market you guys are kind of looking at. Any updated thoughts on that would be nice.
Dave Schulte
Well, we’ve got the same program of incremental step outs in our existing footprint as our first priority that leverages our operating costs and our regulatory relationships and has the most upside and risk mitigation for our current stockholders. And we’ve got several activities underway commercially there.
Secondly, would be platform-related acquisitions that help diversify the business and include an enhanced scale. As we’ve said in the past, those transactions would require the sellers or our partners to take our equity. And those are, therefore, more negotiated style transactions. We are starting to see some pickup in auctions coming across our desk with assets that are qualifying and would be suitable.
In those cases, we would need to raise incremental equity. So we’re circumspect about being able to participate in those unless they are of a size that we could finance relatively easily with our existing revolver and some incremental capital that might be available to us. So those would be — if it’s an auction-related asset, smaller.
Our main goal, therefore, is to entertain and we are initiating or have initiated in the past, negotiated transactions that we believe have the opportunity to increase scale and diversification. And so that’s been our goal for the last year since the merger was completed and we got through our proxy.
We’re still hopeful of some progress being made during the course of 2022. We’re, of course, awaiting CPUC approval of the original transaction, which has taken longer than we thought, but we expect to have achieved that. We’ve answered all questions and we’ve been notified that there are no further questions. So we expect that process to come to conclusion later this year, which would also enhance our ability to complete other acquisitions.
Operator
There are no further questions in queue. I would like to turn the floor back over to David Schulte for any closing remarks.
Dave Schulte
So our combined leadership team has adopted a vision statement. I think as you’ve heard, we’re delivering on it, which is to safely deliver energy that empowers homes, businesses, schools, transportations, even hospitals to function, raising the standard of living in our communities. And we’ve been operating safely for a very long time. And with our lower carbon activities, we’re also managing our environmental stewardship for future generations. Please contact our IR team if you’d like to arrange a meeting time, and thanks for being with us today.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
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