Genesis Energy, L.P. 2026 Q2 Earnings Call

Thanks, Rob. Good morning and welcome to the 2026 second 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 of the deepwater Gulf of America to onshore refining centers. The Marine Transportation segment is engaged in the maritime transportation of primarily refined petroleum products. 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' operations are primarily located in the Gulf Coast states and the Gulf of America.

During this conference 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 with the Securities and 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. The press release also presents the reconciliation of non-GAAP financial measures to the most 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 Kristin Jesulaitis, Chief Financial Officer and Chief Legal Officer, Ryan Sims, President and Chief Commercial Officer, and Louie Nicol, Chief Accounting Officer.

With that, I will now turn the call over to Grant.

Thanks, Dwayne. Good morning to everyone, and thanks for joining us. As noted in our earnings release this morning, the second quarter's results were broadly in line with, and in some respects slightly ahead of, where we thought we'd be internally. Most importantly, we made additional progress on right-sizing, simplifying, and strengthening our balance sheet. In that regard, let me walk through what we accomplished on the capital structure during the quarter and so far in the first half of 2026. In early June, we sold certain non-core and underutilized offshore natural gas assets to a third party for $95 million. That transaction did three things for us.

It simplified our offshore footprint, it eliminated future operating expenses we were incurring on assets that were not profitable nor core to us, and it pre-funded a portion of the asset retirement obligations on certain related natural gas assets we retained in the transaction. In late June, we closed on a $99.5 million non-recourse accounts receivable securitization facility priced at SOFR plus 137.5 basis points, or roughly 200 basis points inside of where we would be charged today for any borrowings under our senior secured credit facility. In addition, given the AR collateral, borrowings under said facility will not count as funded debt under our bank-calculated leverage ratio. This facility represented a new source of relatively inexpensive liquidity, which we found attractive as we continue to focus on reducing the cash cost of the capital supporting our underlying businesses.

We used the net proceeds from these two transactions to repurchase approximately $83 million of our 11.24% Series A preferred securities in a negotiated transaction at 102% of par. We also opportunistically purchased 250,000 common units in the open market at a weighted average price of $14.57 per unit. We used the remainder to pay the then outstandings under our committed $900 million senior secured credit facility down to zero by the end of the quarter, with the balance held as cash in the interest-bearing account. If we take a step back and look at the first six months of 2026, you will see the tangible progress we have made on our balance sheet objectives. Entering this year, we had approximately $529 million of our Series A corporate preferred outstanding, paying a current cash rate of 11.24%.

That is, by a very wide margin, the most expensive current pay paper anywhere in our capital structure. Since the beginning of the year, we have retired approximately $218 million of the high-cost preferred, roughly $135 million in the first quarter, and another $83 million, as I mentioned above, in the second quarter. That brings the remaining face amount down to approximately $311 million, a reduction of about 40% in six months. When you combine that with the refinancing transactions we completed in the first quarter, i.e., the new $750 million six and three-quarter percent senior unsecured notes due 2034, and the tender for and full redemption of the higher cost seven and three-quarter percent notes due 2028, we estimate we have reduced the all-in annual run rate cost of capital underlying our existing businesses by approximately $25 million.

As we look ahead, as I said on the call last quarter, we believe we have line of sight to another potential $50 million-$60 million of annual cash savings we can realize over the next several years as we continue to rightsize and optimize the balance sheet through a combination of paying down debt in absolute terms, redeeming additional preferred and/or subject to future market conditions, refinancing our then existing near term unsecured maturities at coupons in the same zip code as our most recent offering of our longest dated bonds due 2034. Consistent with all of the above approach to capital allocation we have talked about previously, and in addition to the common unit purchases I mentioned earlier, in mid-July, our board of directors declared a quarterly distribution of $0.20 per common unit, up from $0.18.

This is an 11% increase over the immediately previous quarter, a 21% increase over the second quarter of last year, and a 33% increase over the same quarter just two years ago. As we generate additional amounts of free cash flow in future periods, we will continue to focus on and execute our three-pronged capital allocation strategy. First, continuing reducing debt in absolute terms, working towards our long-term leverage target of around four times. Second, continue retiring the high-cost Series A corporate preferred with free cash flow and available liquidity. Finally, look to further grow the common unit distribution or purchase undervalued equity, all while maintaining the financial flexibility to capitalize on organic and inorganic opportunities as they may arise. With that, I'll go into a little more detail on each of our business segments.

Our Offshore Pipeline Transportation segment performed slightly below our expectations during the quarter, as certain operators experienced operational challenges and unplanned downtimes at several of the key fields connected to our offshore infrastructure. Despite us providing our producers with over 99% uptime availability across our pipeline systems during the quarter, we were not immune to fluctuations in production volumes that are entirely beyond our control, mainly resulting from changes in the timing of new wells coming online or wells needing intervention or remediation. Any of these items by themselves are not overly impactful or uncommon. To the extent we have multiple instances occurring at high-margin fields within the same reporting period, the financial impact to us can be notable. Having said that, let's keep all of this in perspective. Midstream operations focused on the deepwater Gulf is a long-term business.

Not at all like the treadmill of chasing drilling rigs all over the place in onshore shale plays. Quarter-to-quarter or year-to-year for that matter means little to us. I'll tell you why. Short-term blips, generally speaking, just means we'll get paid for that barrel or some other barrel somewhere down the road. Today, in round terms, 250,000 barrels of oil per day flow through our pipelines from deepwater production facilities that started operations between 20-30 years ago. Around 250,000 barrels a day from facilities that started up between 10-20 years ago. Around 250,000 barrels a day from facilities that started in the last 10 years. These are multi-decade, if not multi-generational plays.

Once our initial investment is made and our pipelines are in place, it takes no additional capital by us to capture these long-term, in essence, annuity-like cash flows. A good example of this is the expansion activity that BP just announced at its Atlantis production facility, which actually started initial operations 19 years ago. Contractually, all production that ever comes across it is dedicated to go to shore through our CHOPS pipeline. BP, along with its partners Chevron and Woodside, announced adding two new subsea and water injection wells to help increase the pressure of target reservoirs, unlocking additional barrels to be recovered from the original oil in place and extending the producing life of one of BP's flagship U.S. offshore assets.

This project is expected to add approximately 10,000 barrels of oil equivalent per day of gross peak annualized average production and adds tens of millions of barrels of additional ultimate recoveries and once again, requires no capital from us. As an aside, water floods, whether mechanical, as in the case of Atlantis, or naturally occurring, as is the case at Shenandoah that we discussed last quarter, are very good from our perspective. They expand and extend the annuity payment to us as the exclusive conduit to shore for the millions and millions of additional barrels. Taking the proper long-term perspective, we remain extremely encouraged with the pace and sanctioning of additional activity around our infrastructure in the deepwater Gulf of Mexico.