Genesis Energy, L.P. (NYSE:GEL) Q3 2026 Earnings Call

0:00 Greetings. Welcome to the Genesis Energy L.P. Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Dwayne Morley. Thank you. You may begin. Good morning and welcome to the 2026 third quarter conference call for Genesis Energy. Genesis Energy has three business segments. The offshore pipeline transportation segment is engaged in providing the critical infrastructure to move oil produced from the long-lived world-class reservoirs in the deepwater Gulf of America to onshore refining centers. The marine transportation segment is engaged in the maritime transportation of primarily refined petroleum products.

0:54 The onshore transportation and services segment is engaged in the transportation, handling, blending, storage, and supply of energy products, including crude oil and refined products primarily around refining centers, as well as the processing of sour gas streams to remove sulfur at refining operations. Genesis's operations are primarily located in the Gulf Coast states and the Gulf of America. During this call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those safe harbor provisions and directs you to its most recently filed and future filings of the Securities Exchange Commission. We also encourage you to visit our website at genesisenergy.com where a copy of the press release we issued this morning is located.

1:45 The press release also presents a reconciliation of non-GAAP financial measures to the comparable GAAP financial measures. At this time, I would like to introduce Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims is joined by Kristen Jesulaitis, Chief Financial Officer and Chief Legal Officer, Ryan Sims, President and Chief Commercial Officer, and Louie Nicol, Chief Accounting Officer. And with that, I will now turn the call over to Grant. Good morning, everyone, and thanks for joining us today. As noted in our earnings release this morning, our third quarter results came in modestly ahead of where we thought we would be internally. In broad terms, the third quarter played out consistent with what we described in August, with the back half of the year being shaped by two things largely outside of our control, hurricane season and the timing of producer activity in the deepwater Gulf of America.

2:35 The weather cooperated in the third quarter as we had no weather-related disruptions during what is typically the most active part of hurricane season. Unfortunately, the benefit we would have otherwise expected to see was partially offset by lower than anticipated volumes from certain production facilities which flow exclusively through our pipelines. While volumes from a couple of these deep water facilities are expected to be lower than originally anticipated in the fourth quarter, and in all likelihood last through the early part of 2027, it is important to remember we have visibility to at least four new high impact wells that are scheduled to be completed and turned to production over the coming quarters. Ultimately, none of these temporary impact changed the amount of oil in the ground, the acreage that is dedicated to our pipelines, or the fact that none of this incremental production requires any additional capital from Genesis.

3:27 It simply becomes a discussion around timing and when, not if, we will move the volumes who are off for infrastructure. In the Gulf, things can slide to the right. but rarely, rarely is there a total geophysical bust and if there is, lost volumes are virtually certain to be replaced by new discoveries that are developed in the same geographic neighborhood. Elsewhere, our onshore transportation and services segments once again performed ahead of our expectations and our marine transportation segment was generally in line with our expectations despite our final blue water dry docking of the year unexpectedly extending into the third quarter. Both of these businesses are being supported by the same set of macro fundamentals.

4:12 Strong Gulf Coast refinery runs, shifting crude and product flows into and around the Gulf Coast, and in marine, a Jones Act market that is anything getting tight. Taken together, we are pleased with the quarter. And regardless of the timing of certain new wells or remediation work of existing wells, we're encouraged by the level of activity around our irreplaceable midstream infrastructure in the Gulf of America as well as the macro fundamentals driving our other businesses. With that, let me turn quickly to the balance sheet. Following the significant financing activities we completed in the first half of the year, there's very little new to report this quarter. We ended the quarter with no borrowings, outstanding $900 million senior secured credit facility, approximately $41.5 million of unrestricted cash on hand, No debt maturities until 2029 and a bank calculated leverage ratio of approximately 5.03 times.

5:11 In February, we issued $750 million of 6.75% senior unsecured notes due 2034 and used the proceeds to take out in full the higher cost 7.75% notes due 2028, which pushed our nearest senior note maturity out to 2029. We also upsized and extended our revolving senior secured credit facility with our extremely supportive bank group. Additionally, as a reminder, we entered this year with approximately $529 million of our Series A corporate preferred outstanding, paying a current cash rate of 11.24%, clearly the most expensive current pay paper anywhere in our capital structure. In nine months, we have retired roughly 40% of it.

5:58 taking the remaining face amount down to approximately $311 million. I would point out, had we paid down debt rather than retiring this very expensive security, our bank calculated leverage ratio would have been closer to 4.7 times. We think running a little higher leverage ratio in the near term to get rid of such high cost security is in the best interest of everyone else in the capital structure. We will continue to focus on right-sizing and optimizing our capital structure, and we expect to be able to drive future cash savings over the next several years from three places. We will focus on reducing debt in absolute terms, opportunistically refinancing our higher coupon senior unsecured notes with lower coupons and extended maturities as they become callable at more attractive premiums beginning in the first half of 2027, and redeeming the remaining approximately $311 million of the 11.24% Series A corporate preferred, still outstanding, all as we work towards our ultimate long-term leverage target of around four times.

7:07 Consistent with the all-of-the-above approach to capital allocation that we have discussed both prior to and since turning cash flow positive, our board of directors declared a quarterly distribution of $0.20 per common unit. That is unchanged from last quarter, but represents an increase of approximately 21% as compared to the third quarter of last year. We would otherwise expect to thoughtfully and prudently grow distributions to our common unit holders over time, all while preserving our financial flexibility to pursue attractive organic and inorganic opportunities as they may emerge in the future. With that, I will go into a little more detail on each of our business segments. Let me start with the offshore.

7:52 As I mentioned earlier, our offshore pipeline transportation segment operated without any weather-related downtime during the quarter. The offset was lower than anticipated volumes. Specifically, that included unplanned curtailments at a couple of our legacy connected fields, the continuing challenges from two of the initial wells at Shenandoah, and a planned turnaround at Salamanca that the operator moved forward from the fourth quarter into the third quarter. As we said last quarter, we do not believe any of these items have long-term negative implications for the ultimate recovery reserves already discovered and being developed. In the operator's view, and we would concur, these impacts are transitory and simply result in timing differences for when those reserves are produced and when those barrels enter our pipeline for transportation to shore.

8:45 In this pricing environment, the producers are clearly incented to figure it out. They do, however, tend to play the long game, accepting lower current production in order to maximize total ultimate recoveries from these world-class hydrocarbon reservoirs. So things can indeed shift to the right, but that's precisely why we have minimum volume commitments, or MVCs, in most of our new contracts. We are protected to the downside. even if it takes longer than expected for them to execute. Owing to certain things about which we are not in position to go into a lot of detail, Shenandoah operated at or slightly below the MVC level in the third quarter and is expected to do so until several new wells come on.

9:33 A rig is on location drilling a second well at the Monument Field and both wells will be tied back to Shenandoah at the producer's expense. It is now projected that production from the first well has slipped into early next year, but we would expect additional throughput from these two monument wells to be in the range of 20 to 25 KBD, or 1,000 barrels a day of oil, reaching that level sometime in the first quarter of 2027. The rig will then return to Shenandoah and drill a fifth producing well with initial production from it expected to be plus or minus 20 KBD. A subsea pumping system is scheduled to be installed in 2028, improving well performance and most importantly, maximizing the ultimate reserves to be recovered from Shenandoah.

10:23 Beyond 2028, there are at least four and possibly as many as eight additional locations at Shenandoah proper. Possibly another location at Monument, two, maybe three locations at the Shenandoah Southfield, and as we understand it, there are already four additional exploratory prospects that have been identified within a 30 mile radius of the Shenandoah Production Facility. Suffice it to say, regardless of near term challenges, we expect significant volumes to flow across the Shenandoah Production Facility and exclusively into our 100% owned sink pipeline and onto shore through our 64% owned chops pipeline for decades and decades to come without requiring any additional capital from us.

11:13 At Salamanca, there are currently two rigs on location, drilling wells to be completed and tied into the Salamanca facility, the production from which will flow through our 100% owned Seiko lateral and onto shore through our 64% owned Poseidon pipeline. We expect both of these wells at Salamanca to come online early in 2027. which should move total production closer to the facility's design capacity of 60 to 70 KBD. Harbor Energy, doing business in the U.S. as log, has added a second rig to their Gulf of America program. And this activity at Salamanca, as well as the expected additional activity there and at Buckskin, which also is transported exclusively through our facilities, is consistent with their stated goal of doubling their production out of the Gulf by the end of 2028. Elsewhere across our connected fields, the expansion of BP's Atlantis facility, which I mentioned last quarter, came online in July.

12:17 A new development well at one of our legacy connected hubs is expected to be turned to production during the fourth quarter, and multiple well intervention and remediation projects are scheduled before year end that, if successful, could add meaningfully to the volumes moving across our infrastructure. Stepping back from the individual fields for a moment and focusing rather on the macro, there are 16 deepwater drilling units currently active in the Gulf of America, and nine of them are working on leases contractually dedicated to flow through our existing pipelines, even though we moved just a third of the current production out of the Gulf. Our pipelines are in the sweet spot for future activity. especially the rapidly developing deep Wilcox or high pressure high temperature geologic play and yet we believe there is a lot of runway left in the more mature myosin play in the central gulf there is no doubt the deep water gulf is a world-class basin our infrastructure is in the right place at the right time and is already paid for producer interest remains robust interestingly Every single one of the new nine-square-mile blocks leased by the federal government in the Central Gulf in its most recent sale sits within tieback range, within a 30-mile radius of an existing production facility connected exclusively to our existing pipeline.

13:47 The resource underneath and around our dedicated acreage, both discovered and yet to be found, is vast. The pace at which it gets developed will be set by our producer customers, not by us. But whenever those barrels are produced, they will move to shore through our pipelines under existing or new life of lease dedications and without the need for any growth capital from us. This is exactly what has supported our offshore business for the last three decades, and we will continue to support it for decades and decades to come. Turning to marine, our marine transportation segment performed in line with our expectations during the quarter, despite the dry docking of one of our larger offshore units that began in the second quarter and extended further into the third quarter than originally planned.

14:39 There are no dry dockings for offshore vessels expected for the rest of this year, so the fleet is back at full capacity in the fourth quarter. We are experiencing, in essence, 100% utilization of available capacity, and negotiated spot rates for all classes of vessels are extremely robust, which we believe will ultimately allow term contracts to follow higher. Demand continues to be supported by strong Gulf Coast refinery runs. And in particular, we are beginning to see the impact of increased volumes of Venezuelan crude being run at Gulf Coast refineries and the derivative effect that heavy crude is having on demand to move intermediate refined products from one location to another along the Gulf Coast and connected inland waterways.

15:30 Our fleet of inland heater barges is specifically designed to transport exactly these heavy intermediate refined products, and we are well positioned to benefit as that demand continues to develop. On the supply side, nothing has changed. There is essentially no net new construction of Components Act tonnage. and we see very little on the horizon that could significantly affect this tight supply and demand balance for marine tonnage. Our onshore transportation services segment once again performed ahead of our expectations. We continue to see strong volumes through our Texas City Terminal and associated pipeline systems as well as through Raceland and South Louisiana supported by increasing volumes offshore moving onshore. In addition, certain of the opportunistic marketing opportunities that arose last quarter continued into the third quarter.

16:31 We believe that we could possibly benefit from such opportunities in 2027 and perhaps beyond as some of the dislocations caused by the uranium situation, the required reinjection of barrels previously withdrawn from the U.S. Strategic Petroleum Reserve, as well as the resumption of significant crude imports from Venezuela, We are not building a business plan around it, or are we budgeting for it in future periods, but we will capture such opportunities as they present themselves. Our legacy sulfur services business performs slightly below our expectations as operational issues at our largest host refinery reduce the supply of sour gas available for our sodium hydrosulfide or NASH production.

17:19 Much of that seems to be behind us and we are currently seeing higher operating rates as well as additional sulfur removal requirements as our two largest host refineries start running more sour crudes. We also remain in active dialogue with multiple parties to diversify our host refinery locations and restore our supply flexibility to historical levels. Looking ahead, we believe the market opportunity for Nash will increase in future periods. In a post-COVID world, we lost market share in South America to low-cost flake Nash coming out of China. More and more of our historical copper mining customers are starting to realize the apparent short-term cost savings simply are not worth the operational headaches they have encountered from their trials of the inferior Chinese flake product.

18:16 Taken together, We are hopeful we will be able to recapture a meaningful portion of the NASH segment margin that we have lost in prior years, but that we know is there, given our historical level of activity and financial performance from this market-leading business. As we look towards the remainder of the year, we will likely be near or even possibly below the low end of our original guidance for adjusted EBITDA for the year. Having said that, I would reiterate that coming in at or below the low end of 2026 guidance has little to do with the underlying fundamentals and the ultimate cash flow generating capabilities of our businesses, especially in our largest segment. In any event, we will remain disciplined and focused on what we can control.

19:06 Stepping back and keeping everything important and focused, 2026 has indeed turned out to be a transformational year for Genesys. just as we anticipated. Our businesses, while not without third-party operational challenges relative to our and our producer customers' expectations at the beginning of the year, have performed well enough to allow us to make meaningful progress on right-sizing our balance sheet and reducing the ongoing cash cost to run our business. This has been a very solid year under almost any objective metric, and we are proud to have delivered it. The operational side has simply taken a little longer than we and our producer customers had reasonably expected.

19:52 We believe in the long-term value of our franchises, and we intend to execute the next phase of rightsizing our balance sheet and go after those additional cash savings available to us. Rather than focusing on what could have been this year, our attention is squarely on executing that plan. and we believe it represents a compelling setup to continue creating value for everyone in the capital structure. Finally, I would like to say that the management team and the board of directors remain steadfast in our commitment to building long-term value for all our stakeholders, regardless of where you are in the capital structure. 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 individual efforts and unwavering commitment to safe, reliable, and responsible operations. I'm extremely proud to be associated with each and every one of you. With that, I'll turn it back to the moderator for any questions.

20:56 Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Your first question comes from Wade Suki with Capital One. Please proceed with your question. Good morning, everyone. Appreciate you all taking my question. Just quickly, Grant, Kristen, maybe you might be able to elaborate a little bit on some of these disruptions maybe spilling into next year, I guess. I know you haven't put out 27 guidance yet, but to the extent that you could sort of bracket what you think the impact might have been relative to your prior expectations on, let's call it just segment profit or something, that would be very helpful.

22:03 Well, again, we haven't rolled out 27 yet at this point, but I would say that consistent with our prepared remarks, we think that we'll be at the MVC level at Shenandoah for the rest of this year and until the two monument wells come on, one of which is because of using the rig to do some work on one of the Shenandoah wells. The first monument well has been pushed back into the first quarter. So as I said, we anticipate both of those coming on within the first quarter, but slid a little bit to the right. Additionally, we had anticipated another well from Salamanca to be on by the end of the year, but we think both of them that are currently drilling are going to be first quarter events. So that's kind of what we meant by Slipping in a little bit, sliding to the right in the first quarter.

23:01 But again, everything seems to be on track at this point. And we're pretty excited about what 27 looks like. Understood. Thank you. Appreciate that. And I guess not to dwell on it, but I'm just kind of curious, take a step back. We've seen some reservoir issues, it seems, maybe some well issues, mechanical issues, some infrastructure issues, obviously all out of your control. But I'm just wondering, not speaking to any specific operator, but I'm just curious what your thoughts are here. It's hard to imagine these operators are getting up the learning curve. Is there something deeper going on here in the background, pun not intended, that you could sort of share with us? I'd be very interested, thank you.

23:54 No, I don't think it's any specific operator. These are complicated, especially kind of the frontier play of the high pressure, high temperature, deep Wilcox play. This is a new frontier. People are figuring it out. I know that other deep water operators that are there on an unnamed basis or on the early stages of development have run into some issues and primarily around completions designed in a new high pressure world. So it's taken and those other operators actually go through other competitive Thank you so much. Appreciate it.

25:13 As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Your next question comes from Elvira Scato with RBC Capital Markets. Please proceed with your question. Hey, thanks. Good morning. I understand that the long-term outlook remains intact, robust growth for decades to come. But just looking at 2026, and really just for modeling purposes, you talk about being near or possibly even below the low end of the original guidance.

25:58 You gave some rationale there, the four days of hurricane downtime, a month of partial curtailment. at a major legacy facility from gas pipeline maintenance in October. What could drive the results higher or lower than the low end? And what are some of the milestones we should be watching? And again, I understand the long term is intact, but this is just purely more for when we think about the rest of this year. Yeah, we're pretty far through the quarter, and a number of these things are behind us, especially the issue associated around the legacy field, which again, for purposes, when 80,000 barrels a day goes off because of issues in the gas export line, and when they're resolved, it turns right back on, that's just simply a fact of sliding to the right. You know, as we see it today, I think that, you know, we would be plus or minus 570 for the year.

27:02 But, you know, we'll keep an eye on that. And but, you know, so it's a little bit at or below, I guess, original expectations. But yeah. Again, we think 27 is set up to be better than that, hopefully, based upon the known additional wells. But we'll see when we talk again after the fourth quarter, we'll have a better idea on how to discuss 27. Great, thank you. And then on the marine segment, you know, the margin was up year over year. Utilization is effectively, I think you said, 100%. And then you notice that the spot rates are robust and term contracts should follow higher. Can you provide any quantitative framing around that gap between the current negotiated spot rates where legacy term contracts are rolling off?

27:59 And then what percent of your fleet reprices to spot or new term over the next 12 months? Yeah, I would say that certainly in the latter part of the quarter and continuing on into the early part of fourth quarter, we are seeing rates firm well over 10% on a spot basis. in some cases even higher than that. We have on our inland fleet, I think we have basically only 10% of our inland fleet is contracted beyond December 31st. And so we think that a large portion of that is going to get recontracted at higher rates.

28:55 So that's a good situation to be in probably. Half of our offshore fleet is also going to be repriced, we think, into a substantially higher market. And then, as we've mentioned before, there is robust demand for the American Phoenix, which comes off of long-term contract in the third quarter of 27, and we would fully expect after she finishes a 45-day dry dock for her to potentially repriced into a 15% plus to 20% higher value than what she's currently working for. Okay, that's great.

29:42 And then I guess just really a long-term question because it does sound like there's A lot of growth potential over the next several years. And I think you mentioned, you know, there's nine of the 16 active deepwater gulf rigs are working on leases dedicated to your systems. And two new rigs are expected to enter service over the next several years. Is there any incremental color on timing of those couple new rigs? And then can you size the potential throughput uplift if and when all of those nine currently active rigs complete their current wells and those wells reach peak production.

30:28 I'm just trying to understand what is the real potential upside here, understanding that it could take a while. I mean, I think there's one rig is coming in, expected to come into the Gulf, I believe, in 29 and another in 2030. So, you know, not going to have any near-term implications on that. As a general proposition, rigs that are deepwater drilling units, which we're drilling today, can take 120 plus or minus days to drill and complete a well. Most of these wells would be anticipated to have IPs in the 10,000 to 15,000 barrel a day range and ultimate recoveries of plus or minus 25 to 30 million barrels per well bore. So you can do a little bit of arithmetic around that.

31:21 Now obviously you do have some amount of decline from legacy fields and wells that have been previously drilled. You know, it's certainly the level of activity in our view is more than adequate to offset the decline. And so we should see, we are hopeful to see a net increase in total production and we'll give you a better idea of what 27 looks like, as I said, when we have a discussion around the fourth quarter. Great. Thank you very much. Thank you. This now concludes our question and answer session.

32:06 I would like to turn the floor back over to Mr. Sims for closing comments. Again, thanks, everyone, for listening in this morning, and we look forward to visiting with you in future periods. Thanks again. Bye-bye. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.