Description

Genesis Energy LP boasts a collection of extremely high-quality assets, that should come out of the current turmoil in the energy markets and world economies without material impairment to any of its businesses. I believe that the worst-case scenario is more than reflected in the current stock price. 73% distribution cut to $0.15/unit/quarter dividend was announced last week. Cash flow should not decline more than 10% from 2019 levels due to the contractual and mission critical nature of its services with investment grade counter parties. The Company has no liquidity issues with $700MM availability on its revolver, no maturities until 2022 and minimal capex. The stock also provides a hedge for those of us who are long storage, in case oil stabilizes at higher levels. I expect the stock to trade above its 52-week high of $24 in a 2-3 years as $200MM of expected incremental cash flow is realized and debt to EBITDA reaches its 4X target through highly accretive purchases of its bonds in the open market. In the meantime, collecting a 16% safe yield is not too shabby. Management and insiders own ~14% of outstanding common units. There are no IDRs or GP. Existing asset footprint has significant upside with expected volume growth in 2020 and beyond with little to zero growth capital required.

BUSINESS OVERVIEW

Genesis operates in four segments –

Deepwater Gulf of Mexico ("GOM") pipeline transportation - Practically irreplaceable integrated asset footprint focused on transporting crude oil produced from the GOM to multiple onshore markets. Contracts are structured as life of lease dedications to individual platforms & pipelines. It is uniquely positioned with available capacity to capture volumes from incremental deepwater production with 2,400 miles of pipelines and platforms focused on GOM. Major crude systems have been in operation for decades across a range of crude oil prices from $10 to $140 per barrel. CHOPS is only system in the Central Gulf of Mexico with delivery onshore to Texas. These wells would be among the last to shut down in a reduction of US production. In fact, this segment is expected to grow its cash flow in 2020 because of prior committed volumes. Accounts for 45% of total segment margins.

Onshore Facilities and Transportation - Refinery-centric onshore terminals and pipelines and Integrated suite of refinery-centric onshore crude oil and refined products pipelines, terminals and related infrastructure. It is the leading 3rd party facilitator of feedstocks to ExxonMobil’s Baton Rouge refinery with assets underpinned by take-or-pay contracts with ExxonMobil. Expected volume growth from offshore volumes delivered to integrated onshore assets. Newly constructed pipeline and terminal assets at Texas City and Raceland integrated with Genesis' offshore footprint helping transport medium sour Gulf of Mexico production further downstream to Gulf Coast refineries. Legacy assets underpinned by long-term contracts and demand pull from refineries. Cash Flow expected to be stable in 2020 due to take or pay contracts. Accounts for 16% of total segment margins.

Sodium Minerals and Sulfur Services – Consists of two business units, a) natural soda ash and b) Refinery sulfur removal. Genesis is the global low-cost producer of natural soda ash with world class facilities and reserves located in world’s largest economic natural trona deposit. Soda ash facilities and mines have been in continuous operations since 1953 and have a remaining reserve life of 100+ years. Average cost to produce natural soda ash is ~50% of the cost to produce synthetic soda ash – synthetic soda ash consumes substantially more energy, incurs additional costs associated with by-products and has a greater carbon footprint. Low cost natural production is only 28% of global supply and allows Genesis to sell out its 4mtp every year as it has done for each of the last 10 years. Over 75% of global demand from glass, chemicals and soaps and detergents. Global demand (ex. China) expected to grow 2 – 3% per year. However, pricing has been weak, first due to the trade war and now expected to trend lower due to Covid.  GEL experienced their lowest quarter of financial contribution from its soda ash operations since the business was acquired in 2017 in the last quarter. The second business unit is a leading refinery sulfur removal business with consistent cash flow profile. Sulfur services operates critical infrastructure inside the fence at 10 refinery locations and has 30+ years of operating history. Market leading position and significant barriers to entry to replicate both asset and marketing footprint with highly consistent cash flow generation through all economic cycles. These two business units accounts for 31% of total segment margins. Management had expected soda ash contribution to be $35-$45 million less than 2019 last month.  I’m plugging in a number twice that. A number of large synthetic soda ash factories located in Wuhan were shut, so their could be some offsets here. 

Marine Transportation. Young, modern fleet of inland boats and heated barges, all asphalt capable, with almost exclusive focus on intermediate refined products ("black oil"). 330 kbbl ocean going tanker American Phoenix built in 2012 and under term contract till September 2020. Nine ocean going barges / ATBs ranging in size from 65 - 135 kbbls each. Young, efficient fleet with useful life of 30+ years, well positioned to benefit from likely retirement of a significant amount of market capacity. Upwards of 90% of barges are typically contracted to provide services to refiners moving their intermediate products from one location to another. Poised to benefit from increased infrastructure spending and storage demand. Accounts for 8% of total segment margins.

PROJECTIONS

Taking the baseline numbers for 2019, I’ll bridge what I think this year and 2023 (assuming a normalized world) could look like. Because of the reasons described above, I do not expect a material change in Offshore, Onshore and marine cash flows. Offshore expects $20MM additional contribution (low end of guidance) from an incremental 20,000 barrels per day to 25,000 barrels per day of new production on Poseidon, additional volumes from BP’s Atlantis Phase 3 development in the second half of 2020, an additional 60 kbd of oil (including Atlantis Phase 3, which is contracted) and benefit from a full year production from LLOG’s buckskin development this year. No capital will be required to provide these incremental movements in 2020. These volumes are expected to come online in mid-2020 and will be life of lease dedications. For onshore, I've assumed elimination of CBR volumes from Canada. Looking forward beyond the current disruption, its reasonable to expect existing soda ash operations to return to trend and add some $40 million or $50 million a year by 2022 at the latest. Argos is scheduled to come on-line in the second half of 2021, which represents potentially $30 million to $40 million of incremental annualized EBITDA. King's Quay is scheduled to come on-line in the first half of 2022, which represents potentially $50 million to $60 million of incremental annualized EBITDA. Finally, assuming a return to trend on soda ash pricing, the Granger expansion is expected to add potentially $60 million of incremental annualized EBITDA beginning in 2023. Genesis is looking to identify and implement cost reductions, but I have not given them credit for those. I have run this stressed scenario with management as well as what the Company may look like under normalized conditions in a couple of years, and received no push back.

For a little color on Granger expansion, Genesis announced plans to expand its Granger soda ash facilities by approximately 750k tons per year – Anticipated construction period of 30-36 months. Attractive construction multiple – approximately $60 million of expected annual EBITDA on approximately $330 million (includes contingency) of estimated project capital. In conjunction with the expansion, Genesis  entered into agreements with funds affiliated with GSO Capital Partners LP (“GSO”) for the purchase of up to $350 million of preferred interests in an unrestricted subsidiary (“Alkali Holdings”) of Genesis which will hold 100% of Genesis’ alkali business. Select features of the preferred include: – Payment-in-kind in lieu of any cash distributions during anticipated 36-month construction period. No cash distribution payments from Genesis to preferred holder during construction period and 10% cash coupon on preferred amount outstanding thereafter. No change in current cash flows and distribution policy at Granger which allows a sweep of cash flow to Genesis. Low double-digit cost of capital based on actual dollars invested (excluding PIK amounts) with six-year investment horizon. Delayed draw feature allows Genesis to draw funds during anticipated construction period on a “just-in-time” basis, with flexibility for Genesis to contribute capital to the expansion – No impact on Genesis’ senior credit facility covenant calculations – Genesis owns 100% of the common equity of Alkali Holdings. Company is considering delaying Granger expansion by 12 months to 2023 vs. 2022. Soda ash demand outside of China is estimated to increase approximately 4 million tons between 2019 and 2023 and approximately 9 million tons between 2019 and 2028. To put it in perspective, Granger expansion of an incremental 700,000 or so tons per year represents less than 20% of the estimated demand increase between now and 2023 and only some 8% of the estimated demand increase through 2028. No significant other capacity additions globally are expected currently. Outside of Granger expansion project, which is committed to be fully funded by GSO, there are currently no significant growth projects in 2020.

Dividend Cut

Genesis cut its dividend last week to save approximately $200MM of cash flow. As the Company, outlined in its press release, the cut was not driven by a deterioration in its business or any liquidity concerns, but by a desire to get to 4X debt to EBITDA ratio sooner. Genesis was not being rewarded for their dividend yield and it seems prudent to de-lever in the current environment. Genesis highlighted that it received consents from its bank group to amend its credit facility to allow for opportunistic unsecured note purchases in the open market. The cash savings from purchasing debt trading in the 60s/70s combined with a reduction in interest expense would mean that every $1 spent on leverage reduction receives a multiplier effect. With GEL's notes due 2023 trading in the mid-60s, it would be a roughly 1.5x multiplier. The Company ended the year with $3.4 billion in debt and Debt/EBITDA of 5.1X. Assuming, in 2020, the Company uses its $150MM of free cash flow and $200MM of its revolver (Availability of $740MM) to retire $500MM of debt (70% of face), that’s an accretion of $150MM for a sub $500MM market cap Company. By 2023, assuming two more years of at least $400MM cumulative free cash generation used to pay down debt at par, we would end 2022 with $2.7 billion in debt or approx. 3X 2023 EBITDA.

Valuation

The Company currently trades at 7.8X my trough 2020 EBITDA estimate (Includes $850MM preferred) and 48% FCF yield to equity (including dividend). Free cash flow is a more applicable valuation metric due to the favorable capex profile of the Company. This multiple implies the company is distressed and does not reflect the balance sheet strength of Genesis to ride out the worst storm in its industry. 8X multiple on 2023 EBITDA, gives us a $24 per share stock price. A 10X multiple, lower than historical multiple, (10% FCF to equity), gives us a $38 per share stock price.

Catalysts

-          Normalization of market conditions

-          Deleveraging

-          Proof of cash flow stability

Risks

-          Headline risk of oil prices going lower

-          Federal shutdown of GOM production

-          Closure/bankruptcy of refineries

-          Global recession/depression extending for several years

L

Catalyst

-          Headline risk of oil prices going lower

-          Federal shutdown of GOM production

-          Closure/bankruptcy of refineries

-          Global recession/depression extending for several years