Emerge Energy Services LP Citi MLP Conference August 2015

Transcription

1 Emerge Energy Services LP Citi MLP Conference August PAGE 1

2 Forward Looking Statements This presentation contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including may, believe, will, expect, anticipate, or estimate. These forward-looking statements involve risks and uncertainties, and there can be no assurance that actual results will not differ materially from those expected by management of Emerge Energy Services LP. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in our annual report on Form 10-K filed with the SEC. The risk factors and other factors noted in our Form 10-K could cause our actual results to differ materially from those contained in any forward-looking statement. Except as required by law, Emerge Energy Services LP does not undertake any obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after the date hereof. In this presentation, we present Adjusted EBITDA, a non-gaap financial measure. Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors and commercial banks, to assess the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets; the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; our liquidity position and the ability of our assets to generate cash sufficient to make debt payments and to make distributions; and our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure. We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliations, it provides a more complete understanding of our performance than GAAP results alone. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business. We define Adjusted EBITDA generally as: net income plus interest expense, income tax expense, depreciation, depletion and amortization expense, noncash charges and losses that are unusual or non-recurring less interest income, income tax benefits and gains that are unusual or non-recurring. We report Adjusted EBITDA (which as defined includes certain other adjustments, none of which impacted the calculation of Adjusted EBITDA herein) to our lenders under our revolving credit facility in determining our compliance with the interest coverage ratio test and certain senior consolidated indebtedness to Adjusted EBITDA tests thereunder. Adjusted EBITDA should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP. Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. PAGE 2

3 Competitive Strengths High Quality, Strategically Located Assets Stable Cash Flow Significant Organic Growth Capacity Intrinsic Logistics Advantages Strong Reputation w/ Customers and Suppliers Experienced Management Team Low Cost Operating Structure PAGE 3

4 Strengthening the Partnership Formed by the sand and fuel segments, the Emerge Energy Services partnership provides significant EBITDA scale and balance, while also enhancing diversification benefits as the market evolves. Sand Fuel Leading manufacturer of Northern White silica sand, ~ 99% sold as a proppant for hydraulic fracturing Diversified customer base with an attractive mix of contracts Four sand plants backed by several mines with high quality reserves Direct rail access on four Class I railroads, with numerous logistics and transload solutions Primarily consists of processing & selling transportation mixture ( transmix ) Also includes wholesale, terminal, and biodiesel operations Operations in Dallas / Fort Worth, Texas and Birmingham, Alabama Located adjacent to major common carrier pipelines PAGE 4

5 Strong Track Record of Growth Over the past three years, EMES has grown sand and fuel volumes at a substantial rate; consequently, total adjusted EBITDA has increased by a 142% CAGR from 2011 to Volume Growth: Sand and Fuel Sold Adjusted EBITDA Growth: Sand, Fuel, and Total Tons of Sand Sold (millions) Tons of Sand Sold Refined Fuels Sold Fuel Gallons (millions) ($ in millions) $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $ $9.3 $33.8 $3.9 $5.4 $4.9 $38.6 $85.2 $121.9 $66.6 $23.1 $ (1) Sand Fuel Total $131.9 (1) Sum of Sand + Fuel does not equal total due to corporate costs beginning in PAGE 5

6 2Q15 Summary Performance The energy market downturn has created difficult market conditions for frac sand in 2Q15 compared to those in 1Q15 and However, the fuel division experienced stronger performance sequentially in 2Q15 vs. 1Q15, while 2Q14 was a difficult comparison given high fuel prices. 2Q15 Actuals vs. 2Q14 and 1Q15 $ in millions, except per ton 2Q Variance 1Q Variance Value % 2015 Value % Sand Segment: Tons Sold (tons in 000s) 861 1,045 (184) (17.6%) 1,151 (290) (25.2%) Revenue $ 68.1 $ 77.5 $ (9.4) (12.1%) $ 96.2 $ (28.1) (29.2%) Average Revenue per Ton $ $ $ % $ $ (4.48) (5.4%) Adjusted EBITDA $ 13.9 $ 23.2 $ (9.2) (39.7%) $ 26.3 $ (12.4) (47.2%) EBITDA per Ton $ $ $ (6.00) (27.0%) $ $ (6.65) (29.1%) Fuel Segment: Volume of Refined Fuel Sold (gallons in millions) (7.1) (10.1%) % Revenue $ $ $ (88.1) (39.9%) $ $ % Adjusted EBITDA $ 5.4 $ 9.8 $ (4.4) (44.9%) $ 4.1 $ % Consolidated: Revenue $ $ $ (97.4) (32.7%) $ $ (3.1) (1.5%) Adjusted EBITDA $ 17.0 $ 30.1 $ (13.2) (43.8%) $ 28.4 $ (11.4) (40.2%) PAGE 6

7 Conservative Capitalization EMES has a strong balance sheet, which provides financial stability in the current turbulent market conditions, and the Company s $350 million revolver has availability of $86.8 million as of 2Q15 end. At 2.2x as of 2Q15, we are well under our current bank covenant of 3.5x Debt / LTM Adjusted EBITDA EMES Capitalization ($ in millions) 2Q15A Cash (Unrestricted) $3.2 (1) Revolving Line of Credit (Matures 6/27/2019) $253.9 Other Long-Term Debt / Capital Lease 11.7 Total Debt $265.6 Debt / LTM Adjusted EBITDA 2.2x (2) Market Capitalization as of 8/13/2015 $413.2 (3) Total Debt / Total Capitalization 39.1% LTM Adjusted EBITDA / LTM Interest Expense 12.4x (1) Carrying value of $249.1mm, net of deferred financing costs (2) 24.1mm units * closing price of $17.13 per unit on 8/13/2015 (3) Total Capitalization defined as Total Debt plus Market Capitalization PAGE 7

8 Favorable MLP Structure Strong Distributions per Unit Growth $1.50 $1.38 $1.41 $1.25 $1.00 $0.75 $0.70 (1) $0.86 $1.00 $1.13 $1.17 $1.00 $0.67 $0.50 $0.25 $0.00 2Q Q Q Q Q Q Q Q Q 2015 ( 1) Full quarter results based on pro rated distribution of $0.37 Simplified MLP Structure All units are Common Units Non-economic General Partner No Incentive Distribution Rights (IDRs) No Minimum Quarterly Distributions (MQD) Our Sponsor, Insight Equity, which owns 30% of the Common Units, has fully aligned its financial interests with our Public Unitholders EMES pays out 100% of its Available Cash to Common Unitholders We seek to capture cash flow stability through long term contracts, a low-cost operating structure, and indexed pricing Unlike a typical variable rate MLP, our gross margins are not based on the spread between two commodities that may or may not be correlated Our current credit facility allows us to borrow at favorable rates, and we are within our financial covenants We anticipate that our near term growth opportunities can be financed through modifications of our current credit facility PAGE 8

9 Expanding Strong Logistics Platform Our Wisconsin sand facilities have direct access on four Class One rail lines and can reach all major shale plays in North America on single-line hauls. Logistics Highlights Wide Geographic Presence Emerge Energy currently has 15 transload locations positioned in seven key North American Shale plays Focus on exclusive partnerships Minimize capital investment / maximize ROIC Expanding unit train capabilities (currently in 6 locations) Emerge Energy has approximately 5,000 customer and leased railcars We can store approximately 1,070 railcars in our Wisconsin facility rail yards Dry Plant Transload Location Corporate Headquarters PAGE 9

10 Weathering the Cycle - Downturns Comparison The current precipitous rig count decline is one of the most severe of the recent downturns as measured by decrease from peak to trough. However, many analysts believe that we are nearing the trough given a comparison of this cycle to history. Indexed Total US Rig Count (Peak=100), Updated 8/7/15 (200) (400) Rig Count (600) (800) (1,000) (1,200) (1,400) Week Since Peak '98 99 '01 02 '08 09 '12 13 '14 15 Source: Baker Hughes PAGE 10

11 Focusing on Basins with Strong Economics The sand segment sells product into oil and gas basins that have strong economics, even with the sharp decline in commodity prices over the past six months. WTI Oil Breakeven Price ($ per Bbl) For 15% ATAX ROR $3.00/Bbl Natural Gas with Cost Deflation vs 2014 $ $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 EMES Focus Plays 10% cost deflation 20% cost deflation 30% cost deflation Source: Credit Suisse PAGE 11

12 Driving Proppant Usage Emerge Energy s key plays have experienced increased sand usage. Total Frac Sand Consumption by Basin (mm pounds) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 The primary driver has been increased sand intensity. Frac Sand Consumption per Horizontal Well (mm pounds) Eagle Ford Appalachia Permian Bakken 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 Eagle Ford Appalachia Permian Bakken 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 Source: PacWest Consulting Partners Source: PacWest Consulting Partners PAGE 12

13 Improving Market Share The downturn in the energy market is favoring the large sand providers as customers are demanding competitive prices with complete logistics solutions. Taking the Lead Customers are gravitating to the top 6-8 frac sand producers due to: Consistent high quality and more reliable delivery Railcar availability Broad footprint of storage and transload terminals near the drilling sites Lowest cost production and logistics economics Stronger financial position Improving Contract Profile (2014) Solid Long-Term Sales We have long-term contracts with several customers We sell to the largest pressure pumpers in North America, which we believe significantly reduces any counterparty risk Highly rated by customers for sand, service, and reliability Our customers have a track record of working with us to adjust to changing market conditions EMES Market Share of Northern White % 6.8% 8.4% E (1) EMES Rest of Market Millions of Tons Under Contract (1) Industry estimates from Cowen and Company and PacWest PAGE 13

14 Improving Market Share (cont.) 1H15 vs. Peers The EMES sand segment picked up market share amongst the four publicly-traded frac sand providers as our volume declined 15.4% in 1H15 vs. 2H14 while the total of the four declined 16.3%. Our sand segment revenue decreased by 17.8% in 1H15 vs. 2H14 while our public competitors experienced steeper revenue declines as we continue to shift volume towards in-basin sales. Tons Sold: 1H15 vs. 2H14 Total of the Peer Group Down 16.3% Tons Sold (000s) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, (12.1%) (25.0%) FMSA (1) SLCA (2) HCLP EMES 2H14 1H15 (10.4%) (15.4%) Revenue ($'s in mm's) Revenue: 1H15 vs. 2H14 Total of the Peer Group Down 29.0% $700.0 $600.0 $500.0 $400.0 $300.0 $200.0 $100.0 $ (30.7%) (37.4%) (1) (2) FMSA SLCA HCLP EMES 2H14 1H15 (20.2%) (17.8%) Notes: (1) Total Proppant Solutions segment (2) O&G Segment only Source: SEC filings PAGE 14

15 Significant Capital Invested & Underutilized Assets The company has invested a significant amount of capital in its sand facilities. With moderate utilization in the current market, the sand segment has a tremendous amount of room for growth with minimal new growth capital. Capital Invested to Date by Facility ($ in mm s) Dry Plants $60.0 $50.6 $50.0 $43.8 $40.0 $32.2 $30.0 $20.0 $17.5 Wet Plants $17.3 Current Dry Plant Capacity = 6.8mm tons $10.0 $ 2015E Utilization by Facility Dry and Wet Plants (mm tons per year) Dry Plants % 62% 43% % % PAGE 15 61% 0.7 Wet Plants 34% % % 2.0 New Auburn Barron Arland Kosse CRM FLS / Barron LP Mine TH Mine Weber $6.3 New Auburn Barron Arland Kosse CRM FLS / Barron LP Mine TH Mine Weber $4.1 $ E Tons Produced* Capacity 2015E Utilization* 0.9 $1.7 (utilization) 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% *Midpoint of mm tons range Est Sales Volumes = mm tons

16 Summary of Sand Segment Initiatives In light of the current market downturn, the management team is working on a number of revenue and cost initiatives to help mitigate the impact of pricing and volume pressure. Increasing Kosse Capacity Customers are now keenly focused on all-in delivered prices to the wellhead Our Kosse, TX facility is strategically located near strong liquids production regions in West and South Texas, minimizing transportation costs The Company plans to increase capacity by approximately 33% to meet this demand while also introducing a new product to the facility s mix 40/70 Increasing Market Share The EMES sand sales team has increased market share by expanding its sales efforts The Company has made significant progress in establishing new relationships Upgrading Logistics Network Cost Reductions Recover Pricing Opportunistically Strategic Capacity Expansion Customers are requesting more than just sand as a product they now want a comprehensive sand delivery and replenishment program Our logistics and sales teams have met this need by committing to transload site expansion, thereby simplifying our customers supply chain Our operations team is developing a new mining technique that could help reduce our per ton costs We are also making progress on rate concessions from some of our largest vendors, such as trucking providers, railroads, and general contractors, and are working on railcar subleases We have negotiated with certain contracted customers to index sand prices to a WTI-based mechanism Although pricing pressure remains high, we anticipate being able to partially recover Average Selling Price if commodity prices increase in the near term EMES is negotiating with a major service customer to acquire mining rights at a high-quality reserve in WI, which would supply a new dry plant with 2.5mm TPY of production We expect the arrangement would include a 10 year commitment from this current customer to buy a significant portion of the new dry plant s capacity PAGE 16

17 Summary of Fuel Segment Initiatives The recent volatility in fuel prices has created obstacles in the fuel segment, but the team has developed a number of answers for the current market conditions. Transmix and Throughput Leverage strong relationships and existing pipeline connectivity Expand into adjacent geographies Birmingham facility has significant unused capacity Hydrotreaters Current transmix streams often have high diesel content because of the presence of jet fuel Two hydrotreaters currently under construction at our two facilities (one hydrotreater at Direct Fuels and one at AEC) should allow us to solve the sulfur problem and capture additional base margin Terminalling Opportunities New additive systems in place at both terminals, allowing us to terminal and sell branded as well as unbranded petroleum products Shipper status on Colonial and Plantation provides additional gross margin opportunities Organic Growth and Acquisitions Opportunity to acquire additional transmix operations and terminal sites Space for expansion at both sites Focus on additional cost reductions PAGE 17

18 APPENDIX PAGE 18

19 Management and Board of Directors Name Title Years of Professional Experience Senior Management Team Rick Shearer Chief Executive Officer of EMES; CEO of Sand Division 41 Warren B. Bonham Vice President, Fuel; President of Fuel Division 30 Jody Tusa Chief Financial Officer 35 Richard DeShazo Chief Accounting Officer 41 Board of Directors Ted W. Beneski Warren B. Bonham Kevin Clark* Peter Jones Mark Gottfredson* Francis Kelly* Eliot Kerlin Rich Shearer Victor L. Vescovo Chairman of the Board, Partner and Co-Founder, Insight Equity Vice President, Fuel and Partner, Insight Equity Associate Professor, Corporate Strategy and Accounting, Vanderbilt University President and CEO, Flanders Corporation Director, Bain & Company President and CEO, CEOVIEW Branding Partner, Insight Equity President and Chief Executive Officer, Emerge Energy Services Partner and Co-Founder, Insight Equity * Denotes Independent Board Member PAGE 19

20 APPENDIX: SAND SEGMENT PAGE 20

21 From Mine to Railcar Extract Wash Dry Ship PAGE 21

22 Diversified Sales Portfolio LTM 2Q15 Tons Sold by Basin LTM 2Q15 Tons Sold by Customer 6% 4% 2% 1%1% 1% 18% 28% 9% 35% 1% 2% 3% 11% 3% 4% 4% 14% 12% 18% 10% Eagleford Marcellus Permian Canada Bakken Kosse Mid Con Barnett Haynesville Other Rockies 13% Cust A Cust B Cust C Cust D Cust E Cust F Cust G Cust H Cust I Cust J Other Basin and customer listed in order of largest to smallest PAGE 22

23 Sand Asset Summary Wet Plant Location Proven Recoverable Reserves (1) Primary Reserve Composition Plant Capacity (Thousands of Tons) 2014 Production (Thousands of Tons) New Auburn, WI 27.8 mm tons mesh 2,000 1,332 Thompson Hills, WI 49.6 mm tons mesh 1, FLS (Wisconsin) 13.7 mm tons mesh 1,200 1,189 LP Mine (Wisconsin) 7.4 mm tons mesh 1,000 1,005 Church Road (Wisconsin) 7.0 mm tons mesh 1, Kosse, TX 27.8 mm tons 100 mesh 1, Total mm tons 8,600 4,532 Dry Plant Location On-site Railcar Storage Capacity Plant Capacity (Thousands of Tons) 2014 Production Volumes (Thousands of Tons) Barron, WI 650 cars 2,400 2,224 New Auburn, WI 420 cars 1,400 1,394 Kosse, TX N/A Arland, WI (2) N/A 2, Total 1,070 6,900 4,041 (1) Reserves are estimated as of December 31, 2014 by third-party independent engineering firms based on core drilling results and in accordance with the SEC's definitions of proven recoverable reserves and related rules for companies engaged in significant mining activities and represent marketable finished product. Estimates for Wisconsin reserves exclusive of sand smaller than 65-mesh. (2) We load sand from Arland onto rail at Barron, New Auburn, and at a third rail loadout near St. Paul, Minnesota PAGE 23

24 Current Operations Process Flow Thompson Hills FLS/Arland LP Mine Church Road Barron Arland CN New Auburn New Auburn MNNR UP BNSF, CN, CP, UP Kosse Kosse PAGE 24

25 North American Sand Markets EMES has single-line access to four Class One railroads, which provide direct rail access to every major basin in North America National Network BNSF CN/GTW CP/SOO CSX /NS KCS/KSCSM UP Basin Highest Quality Sand Source: Association of American Railroads & U.S. Geological Survey. Mine Locations SSS Transload Sites Corporate HQ PAGE 25

26 APPENDIX: FUEL SEGMENT PAGE 26

27 Fuel Segment Operations Fuel Segment provides a stable base with meaningful growth opportunities. (millions of gallons) Transmix Processing Capacity Terminal Tankage Capacity 2014 Wholesale Fuel Sold 2014 Fuel from Transmix Sold 2014 Terminal Throughput Volume Dallas Fort Worth, TX Birmingham, AL Pipeline Connectivity Explorer/Eagle/ Proprietary Refiner Colonial/ Plantation Transmix Refining Distillation of comingled refined products Primarily sourced from pipelines Minimal commodity exposure (typically one week on average) Terminalling Fixed-fee revenue for storage and/or transfer to truck rack Revenue enhancement through blending and vapor recovery Wholesale Distribution Diesel and gasoline sales to local customers Product sourced from terminal customers and connecting pipeline Minimal commodity exposure (typically less than 2 weeks) PAGE 27

28 Overview of Fuel Segment Business Fuel segment revenue comes from a diverse mix of stable margin and fixed-fee activities. Product Source EMES Consumer Wholesale and Terminal Gasoline Diesel Vapor Recovery Unit Pipeline Transmix Gasoline Gasoline Diesel Truck Distillation Diesel Terminalling Truck Rack Facility Trains Truck Biodiesel Blending Gasoline Additives Automobiles Biodiesel Facility Gasoline Additives EMES uses throughput contracts, indexed pricing, and hedging to minimize spread volatility EMES holds product for 7-10 days to minimize exposure to price fluctuations PAGE 28

29 Refined Product Pipelines in the US Transmix facilities are primarily located along major refined products pipelines Direct Fuels AEC Refined Products Pipeline Transmix Facilities EMES FP&D Facilities PAGE 29

30 Fuel Volumes by Quarter and Product (Thousand gallons) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Q Q Q Q Q Q Q Q Q Q 2015 Refined Fuels Sold Terminal Throughput Transmix Refined Volumes do not include Direct Fuels volumes prior to acquisition on May 14, PAGE 30

31 Per Gallon Fuel Margins Rapid 2H 2014 backwardation compressed fuel margins; current market has reversed recent trends. Aggregate per Gallon Fuel Margin $0.200 $0.150 $0.100 $0.050 $ $(0.050) $(0.100) $(0.150) Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Blending Costs & RINS Effect of pricing volatility Base Margin PAGE 31

32 APPENDIX: FINANCIAL OVERVIEW PAGE 32

33 Recent Financial Results Unaudited Quarterly Financial Results for Emerge Energy Quarter Ended, June 30, 2015 Mar 31, 2015 Dec 31, 2014 Sep 30, 2014 Jun 30, 2014 Mar 31, 2014 Revenue $ 200,852 $ 203,961 $ 242,562 $ 296,338 $ 298,273 $ 274,081 Cost of Goods Sold 176, , , , , ,796 DD&A 7,355 6,440 6,901 6,421 5,711 5,770 SG&A 8,179 9,603 11,695 9,559 8,994 8,475 Project Termination 2,693 6,719 Income from Operations 5,692 12,869 26,917 28,592 22,173 20,040 Interest Expense 2,632 3,129 2,388 1,479 1,943 1,584 Other (15) (29) (13) 775 (32) (119) Provision for Income Taxes Net Income (Loss) $ 2,884 $ 9,491 $ 24,418 $ 26,083 $ 20,092 $ 18,486 EPU (Diluted) $ 0.12 $ 0.39 $ 1.01 $ 1.08 $ 0.83 $ PAGE 33

34 Non-GAAP Reconciliation: Adjusted EBITDA The following table presents a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measures for each of the periods indicated. Quarter Ended, June 30, 2015 Mar 31, 2015 Dec 31, 2014 Sep 30, 2014 Jun 30, 2014 Mar 31, 2014 Net income $ 2,884 $ 9,491 $ 24,418 $ 26,083 $ 20,092 $ 18,486 Interest expense, net 2,632 3,129 2,388 1,479 1,943 1,584 Other loss (15) (29) (13) 775 (32) (119) Provision for income taxes Operating income 5, ,917 28,592 22,173 20,040 Depreciation, depletion and amortization expense 7,355 6,440 6,901 6,421 5,711 5,770 Equity-based compensation expense 935 2,292 2,316 2,396 2,193 2,137 Loss (gain) on disposal of equipment (15) 19 - Provision for doubtful accounts Accretion of asset retirement obligations Project Termination 2,693 6, Adjusted EBITDA $ 16,953 $ 28,385 $ 36,311 $ 37,439 $ 30,137 $ 27,979 PAGE 34