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The 4 Dimensions Of Value Investing

Summary Value investing can be much more than just calculating the intrinsic value of a business. The more traditional value investing tends to focus only on quantitative metrics, such as P/E, P/B, EV/EBIT or EV to maintenance cash flow. Buffett and his followers introduced a new value investing approach which is more scalable and in longer term, which I call “quality-value investing”. Besides quantitative metrics and qualitative factors, there is the 3rd dimension: the certainty or the information edge. Finally, the 4th dimension is not about monetary gains, but about the emotional gains in the investment process, as well as an investment in the investor himself/herself. The Two Camps in Value Investing When Benjamin Graham wrote his famous book “The Security Analysis” 82 years ago, he built the foundation of value investing approach. This book became a timeless piece, and is still being followed everyday by many famous value investors. Interestingly, although all the value investors seem to be under the same title of “value investment”, their approaches could be dramatically different. One major and obvious difference is the focus on quality. Graham had his deep belief that any forecast is unreliable, and therefore we should always fallback to the “facts”, which are the numbers we have seen in the past. Apparently, this is a pure quantitative approach. On the other hand, Buffett and his followers started to deviate from Graham’s traditional approach, and started to focus on the quality side of the business. As Buffett said, he would rather invest in a great business at a fair price, than invest in a fair business at a great price. In reality, deep value investors (Graham’s followers) would not only invest in a fair business, but also often invest in a poor business with a poor management. Another difference is on the time horizon. While value investors are usually the long term investors, and have much longer time horizon than the other market participants, Buffett usually has even longer time horizon than the deep value investors. As he said, his favorite holding period is “forever”. However, many famous deep value investors clearly said they would sell when the stock price reaches its intrinsic value. Some of these deep value investors even criticized Buffett’s saying, or at least didn’t really understand the logic behind it. In my understanding, this difference comes from the roots of different focus. Deep value focus on pure quantitative metrics, such as P/B, P/E, EV/FCF, EV to maintenance cash flow, current ratio, debt ratio, growth rates, and dividend yield. There are two benefits of this kind of pure quantitative approaches: 1. It is objective. In investing, one of the biggest enemies of investors is their emotion, or their behavioral bias. Not only we are emotionally influenced by the price actions, the changes of fundamentals and recent events can also have a great influence on the perception of investors. Because of this influence, investors tend to focus more on the recent events, or more on the outlooks, and less on the historical facts. This kind of over-reaction or behavioral bias is often the reason why deep value investing worked. There are numerous research papers which showed that simple quantitative metrics such as P/B or P/E can generate a significant edge for investors. The pure quantitative approach is not limited to Graham’s formulas either. The famous “Magic Formula” only had two quantitative metrics in it: P/E and ROE. 2. It is easy to be well diversified. Since it is a pure quantitative approach, it doesn’t really need to analyze the business or understand the industry. Therefore, it is very easy to pick many different stocks and achieve high diversification. While I acknowledge the merits of deep value investing, it is also my belief that the pure quantitative approaches will be less effective in the future. This is because information is more available today, and there are more quantitative algorithms being created by backtesting the historical data. It is also easier to implement these investment approaches in an automated algorithm, which takes emotions completely out of the game. In other words, the competition on the deep value approach will be more intensive, and any deep value investment opportunity you can find is more likely to be a value trap, especially when that stock is a large cap or mid-cap. That said, Graham’s basic philosophy is still valid today: we have to focus on facts and avoid any over-confidence in our ability to forecast. This fact makes the first dimension (the quantitative metrics) to be the most important and most basic element of value investment. Without these metrics, we should not talk about “value” at all. While the quantitative metrics are important, we should also not underestimate the importance of qualitative factors (the 2nd dimension), such as the competitive advantages, the management’s ability and integrity, the pricing power of a business, and the industry outlooks. Not only these qualitative factors can give us more assurance of the business’ future, it also makes an exit strategy less important. As we all know, it takes a lot of work to understand an industry and a business. If we have to constantly find new opportunities after exiting the previous investment, it could be very tiring and it also increases the risks of misunderstanding the new opportunity. Beyond that, there is also the impact of taxes when you realize the capital gains. That is why Buffett said his favorite holding period is forever. After all, it is very hard to find a really good investment opportunity, and it takes a lot of effort to truly understand it. Plus, if you know you have to find the best exiting point, you will be tempted to sell too soon. When you increase your investment time horizon, it can also help to create a more scalable strategy, since you only need to slowly build the positions, and not worry too much about the need of liquidating the position with the best timing, or responding to any events quickly. The longer time horizon can also make qualitative factors much more important than quantitative factors. For example, if a stock is being traded at P/E 5, a deep value investor might get it and fetch a quick 100% gain within 1-2 years when the sentiment recovers. However, when you have to hold onto a poor business for 10 years, the poor business, even if it is not bleeding (losing money) every year, could be destroying value by reinvesting earnings with very low ROIC. So over a long period of time, any discount can be superficial and eventually get wiped out by the poor economics or poor management of the business. That is why when Buffett said “if you don’t want to hold it for 10 years, you shouldn’t hold it for 10 minutes”, many deep value investors couldn’t agree, simply because that philosophy doesn’t really apply to many deep value cases. On the other hand, for a good business with a good manager, even if you have to pay some premium for it, because of the good ROIC and high growth, your “sin” will often be more than covered by the good economics of the business when you hold it for many years. For example, a lot of investors were hesitating to buy Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ) 20 – 30 years ago, when its P/B was more than 2. But at least in retrospect, that seemingly overpayment would be more than paid off later. The same thing can be said for many great businesses in their early stages, such as Microsoft (NASDAQ: MSFT ), Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), and Wal-Mart (NYSE: WMT ). Even today, when Berkshire Hathaway is already too big to grow very fast, the smart capital allocation along with many high quality world class businesses in its holdings make it an attractive investment for people who seek stable growth. Therefore, I believe it still deserves some premium in its valuation. For sure, today’s deep value investment can be much more than just a pure quantitative strategy. Deep value investors do often understand the business very well, and they often pay attention to the quality factors as well. However, their primary focus is still on the quantitative metrics, and they don’t require the business being a high quality business and don’t often require the business having a good management. Furthermore, even Buffett himself still invested in some low quality businesses from time to time. For example, after he had remained pessimistic on newspaper industry for many years, he still purchased many small newspaper businesses a couple of years ago, knowing that these businesses would slowly decline and could eventually die. Still, when the valuation was attractive from a discounted cash flow perspective, he felt that was a sensible thing to do. The 3rd Dimension: Certainty and Edge If the quantitative metrics can give us a view of the past, the qualitative factors should give us a “flavor” of the future (of course, investment is all about estimating the future). However, these two views can be totally unreliable if we don’t know enough about the business and the industry, and all our calculations could be based on imagination rather than facts. That is why we need the 3rd dimension: the certainty and the information edge. Every investment thesis is about finding and filling-in the missing pieces of a big puzzle. Investment, like any other business, is also highly competitive. Good businesses are unlikely to be sold cheap, and cheap ones are very likely to be value traps. The key about solving this big puzzle is about collecting as much information as you can. It is also about interpreting the basic information you collected, which requires some insights of the economics and the industry. In order to beat the market, we should also have an information edge, some unique insight or deep understanding that can help us to find the value discrepancy, and help us to maintain the confidence when facing emotional challenges. Buffett likes to call this as “The Circle of Competence”. It is a field where we can have an edge, a field where we can have more certainty than the other investors. After all, the term “uncertainty” is not equivalent to “true randomness”. When you try to guess the color of a ball in a box, that color is not a “true” random variable, since it is already fixed and known to some people, but just not known to you because you don’t have that information. Therefore, “certainty” is directly related to how much information we have. One obvious question following this is: how can we invest if we don’t have any circle of competence? Or what if all the stocks in my circle of competence are too expensive? I think there are several answers to this question: The first and the most important method to tackle this problem is to learn as much as you can. After all, nobody started with a circle of competence. It is all about constant learning over one’s lifetime. Learning has also become increasingly easier in this internet era as more and more information becomes easily available online. If we don’t have time to learn a new field, we could also simply wait until the opportunity shows in our existing circle of competence. Or try to copy a “superinvestor”, but I am not sure if that approach really works or not. Finally, less certainty in an investment means that we need to rely more on diversification, which again falls back to the more quantitative approach I have mentioned above. As I said, this approach may still work, but I would expect its effectiveness gets weaken over time. The 4th Dimension: Emotional Rewards While investors are normally only concerned about the potential monetary rewards in any investment, there is another hidden element in the investment process which is just as important: the emotional rewards. As a human being, the ultimate goal an investor seeks or should seek is always the “happiness”. While the investment profits can help us to get more happiness, we shouldn’t forget that much of our happiness is not related to money at all. Much of our pleasure directly comes from a constructive process. Much like a businessman who enjoys building his/her business, investors like to find the next gold mine or solve the next grand puzzle. It is a game they love. But beyond that, investors are also partners in a business. They are the owners of a business, even if they may only own a small fraction of it, and may not have any control on the business decisions. Nevertheless, just like a fan of a NBA team, the investors can enjoy seeing the business growing, and enjoy seeing the constructive process of building a business. This also makes a “quality-value” approach more attractive than a deep value approach. When you invest in a high quality business with a good manager, you often end up being happier in your investment life. You would worry less about management cheating on you or destroying value. There are less uphill battles against a deteriorating industry trend, or poor economics of the business. There is less energy spent on a proxy fight with a bad management. Besides the emotional rewards, there is another important side effect coming out of happy investing: when you truly like a business or a industry (not just because of the potential profits), you will spend a lot more time to learn about that business and industry. This will boost your edge in the 3rd dimension: your information edge. More importantly, this will become a very rewarding learning process that will be beneficial in the long run. In other words, when you invest on something that is truly interesting to you, you also invest in yourself by increasing your expertise in that industry. This benefit can be as significant as any monetary gains you could get from the investment itself, because just as Buffett said, “the best investment is always investing in yourself, it is the investment in education.” Summary The reason I call these 4 elements as 4 dimensions is that they are mostly uncorrelated factors. As investors are busy hunting their next best opportunity every day, it is also important to sit back and think through the process on a very high level. After all, it is more important to head in the right direction than moving at an amazing speed.

ONEOK’s (OKE) CEO Terry Spencer on Q2 2015 Results – Earnings Call Transcript

ONEOK, Inc. (NYSE: OKE ) Q2 2015 Earnings Conference Call August 05, 2015 11:00 AM ET Executives T.D. Eureste – Manager, Credit and Finance Terry Spencer – President and CEO Derek Reiners – SVP, CFO and Treasurer Kevin Burdick – VP, Natural Gas Gathering and Processing Sheridan Swords – SVP, Natural Gas Liquids, ONEOK Partners Walt Hulse – EVP of Strategic Planning and Corporate Affairs Wes Christensen – SVP, Operations Phil May – VP, Natural Gas Pipelines Analysts Christine Cho – Barclays Capital Chris Sighinolfi – Jefferies & Company Kristina Kazarian – Deutsche Bank Craig Shere – Tuohy Brothers John Edwards – Credit Suisse Michael Blum – Wells Fargo Securities Becca Followill – US Capital Advisors Eric Genco – Citigroup Matt Niblack – HITE Hedge Operator Good day everyone, and welcome to the Second Quarter 2015 ONEOK and ONEOK Partners Earnings Call. Today’s call is being recorded. And at this time, I would like to turn the conference over to Mr. T.D. Eureste. Please go ahead. T.D. Eureste Thank you and welcome to ONEOK and ONEOK Partners’ second quarter 2015 earnings conference call. A reminder that statements made during this call that might include ONEOK or ONEOK Partners’ expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provisions of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker is Terry Spencer, President and CEO of ONEOK and ONEOK Partners. Terry? Terry Spencer Thank you, T.D. Good morning and many thank you for joining today and for your continued interest in ONEOK and ONEOK Partners. On this conference call is Walt Hulse, Executive Vice President of Strategic Planning and Corporate Affairs; Derek Reiners, our Chief Financial Officer; Wes Christensen, Senior Vice President, Operations; Sheridan Swords, Senior Vice President, Natural Gas Liquids; Kevin Burdick, Vice President, Natural Gas Gathering and Processing; and Phil May, Vice President, Natural Gas Pipelines. As noted in our second quarter earnings results release yesterday afternoon, key financial and operational information discussed during our first quarter earnings call has been updated in a short presentation and is posted on ONEOK’s and ONEOK Partners’ Web site. Please refer to this presentation and to the earnings releases for various explanation and key metrics. With the information that has already been provided, I intend to keep my remarks brief today and focus on a few key areas. We’ll spend the majority of our time answering your questions. To begin, even in this continued weak commodity price environment, we expect that both ONEOK and ONEOK Partners will end the year within our 2015 financial guidance ranges. And as we exit 2015, we expect 2016 to continue to benefit from the completed and soon to be completed capital growth projects in the natural gas liquids, natural gas pipelines and natural gas gathering and processing segments. We are seeing volume growth through the first half of the year as anticipated, particularly regarding natural gas liquids gathered and fractionated and natural gas gathered and processed. We expect these volume increases to continue into 2016. Overall, the Partnerships’ year-to-date performance positions us to achieve our natural gas gathering volume and financial objectives for the year. I will now turn the call over to Derek for a brief discussion of ONEOK Partners’ and ONEOK’s financials. Derek? Derek Reiners Thank you, Terry. Starting on partnership, 2015 EBITDA contribution continues to ramp up as strong volume growth is shaking up as we anticipated. We expect to grow our EBITDA in the second half of 2015 and be within our 2015 financial guidance EBITDA range of $1.51 billion to $1.73 billion. Our EBITDA growth follows the volume growth. Even in this lower commodity price environment, the Partnership’s year-to-date EBITDA of $712 million is only $40 million less than in the same period in 2014, which was a record in environment with much higher commodity prices. Our coverage ratio has improved to a 0.88 times coverage in the second quarter of 2015 and we expect continued improvement in our coverage the balance of the year. The partnership has a solid balance sheet and ample liquidity to support our current capital program including access to our commercial paper program and credit facility. As of June 30, ONEOK Partners had an adjusted debt-to-EBITDA ratio of 4.5 times. As we said, investment grade credit ratings of ONEOK Partners remain very important to us. Through the first half of 2015 our ATM program was a very effective tool for issuing equity and we continue to evaluate the overnight equity markets and other sources of capital. We will continue to take a balanced approach and remain disciplined when issuing debt and equity. Additional equity is needed to continue to support our capital projects. We continue to remain confident in our ability to raise necessary capital to fund our capital projects at ONEOK Partners. At ONEOK our liquidity remains strong with a $150 million in cash and undrawn $300 million credit facility, and a debt-to-EBITDA ratio of 2 times at June 30. We continue to retain access cash at ONEOK as we navigate these uncertain times. Terry, that concludes my remarks. Terry Spencer Thank you, Derek. Now let’s take a closer look at each of our business segments, starting with our natural gas liquids segment. The segment’s 2015 year-to-date results were supported by solid second quarter performance. The segment’s year-to-date operating income exceeds year-to-date 2014 operating income. This becomes a more useful statistic when you consider that first quarter 2014 results rightly benefited from a historically high demand for propane and that in 2015 the segment has experienced lower realized NGL product price differentials and narrower NGL location price differentials. So even though year-over-year the segment was competing with the 2014 propane benefit, operating income so far in 2015 has exceeded first half 2014 totals because of the continued strong growth of fee based revenues and volumes. Our integrated NGL system continues to benefit from providing non-discretionary fee-based services to NGL producers by connecting growing natural gas liquids supply in the Rocky Mountain, Mid-Continent and Permian regions with key market centers. The natural gas liquids gathered volume on the Bakken NGL pipeline reached approximately 100,000 barrels per day in July and is expected to reach approximately 105,000 barrels per day in the fourth quarter 2015. This is an increase of approximately 20,000 barrels per day from what we expected in the first quarter as a result of decreased ethane rejection in the Rocky Mountain region. We will talk more about the reduced ethane rejection in a moment. The average bundle gathering and fractionation rate on the Bakken NGL pipeline is more than $0.30 per gallon. Moving to our fractionated volume. In addition to the increased ethane fractionated due to the decreased ethane rejection, we also saw more than 20,000 barrels per day of incremental interruptible volumes on our system in the second quarter as we were able to utilize our fractionation assets to meet market demand. We expect to continue to see approximately that level of incremental interruptible volume from our system into the fourth quarter. As a reminder, we do not include interruptible volumes in our fractionation volume guidance. And finally, in recent weeks, we have seen Conway to Mont Belvieu ethane price differentials range from $0.02 to $0.03 per gallon and we expect this range to continue for the rest of this year. As you know our natural gas pipelines business is primarily fee-based with long-term firm demand charge contracts. We continue to develop new projects and opportunities to grow our fee-based earnings. Just last week we announced plans to expand our ONEOK WesTex Intrastate Natural Gas Pipeline System in the Texas Panhandle and Permian Basin. The expansion which will complement our previously announced Roadrunner Gas Transmission Pipeline joint venture is already 90% subscribed with 25 years firm demand charge agreements. These projects and the expansion of our Mid-Western Gas Transmission Pipeline System are continued examples of our committeemen to stable long-term fee-based earnings growth. The natural gas gathering and processing segment’s second quarter results were significantly improved over the first quarter. Earnings for this segment are still expected to be significantly weighted towards the second half of the year which is in line with the expected growth of our 2015 natural gas gathered and processed volumes. We have greater confidence in our Williston Basin volume projections with six months of operating performance under our belt and good visibility into the remainder of 2015. The segment is seeing the benefit of rigs concentrated in the most productive areas, new well connections, two compressor stations completed, and the current flared gas inventory. We expect Williston Basin volume in the third quarter to reach approximately 650 million cubic feet per day as we continue to bring on additional field infrastructure. Additionally, our new well connections continue to exceed our expectations as we completed nearly as many in the first half of 2015 as we did in the first half of 2014. We remain on track to fill our plans to approximately 685 million cubic feet per day in the fourth quarter as we complete gathering system and compression projects through the second half of the year. These new compressor stations will not only fill our existing plants but also will provide capacity to ramp up volumes at our Lonesome Creek plant, which is expected to be completed late in the fourth quarter 2015. In the Mid-Continent our volumes increased quarter-over-quarter due to incremental interruptible gathering and processing services we provide to third parties from time to time as demand dictates. In addition, a key producer in the Cana-Woodford as expect has now started the process of completing wells drilled in the first half of the year. Our commercial team continues to make progress with customers on its recontracting efforts and has same positive results in increasing our fee based margin while providing enhanced services to our customers. Additionally, we reduced the level of ethane rejection in the Rocky Mountain region in June 2015 to maintain downstream NGL product quality specifications to ensure continued reliable delivery of high quality NGL products to meet the needs of our downstream markets. We expect the decreased level of ethane rejections to continue. Our producer customers are continuing to find ways to reduce drilling cost, and are doing more with less. Said another way, our producer customers are increasing volume with fewer but more efficient rigs and advanced completion technologies are increasing well production rates to levels the industry has never seen before. Our positive operating performance through the first half of the year, combined with what our producer customers are communicating to us, has given us greater confidence in our 2015 natural gas gathering and processing volumes and momentum into 2016. Much like 2015, our 2016 volume growth is expected to be led by growth in the Williston Basin. In the Williston we connected more than 260 new wells in the second quarter 2015, bringing our year-to-date total to more than 560 new well connections. We still expect to reach our 2015 new well connection goal of more than 700 wells and our 2016 goal of more than 600 new wells. That continues to be an inventory of flared gas in the Williston Basin and we estimate approximately 145 million cubic feet per day is dedicated to the Partnership with the majority of the wells flaring already connected to our system. As I touched on earlier, our producer customers are doing more with less. There’re approximately 40 rigs drilling in the most productive areas at any given time on our acreage dedication in Northeast McKenzie, North Dunn and Southern Williams Counties. Additionally wells in the high producing areas continue to exhibit significant performance improvements; producing two to three times more natural gas than lower producing areas. Additionally, more than 900 wells, which have been drilled but not completed, remain in the basin. The continued drilling flared natural gas inventory, improved well performance and significant backlog of uncompleted wells is expected to continue and help contribute to the Partnership reaching its 2016 natural gas gathered volume expectations. Our strong natural gas liquids and natural gas volume growth in the second quarter support the volume outlook we’ve been communicating and provide our stakeholders additional visibility to support our volume growth outlook for the second half of the year; and most importantly, our financial guidance expectations for 2015 and the momentum into 2016. As always, thank you for your continued support in ONEOK and ONEOK Partners and thank you to our dedicated employees for your hard work and continued commitment to our Company. Operator, we’re ready for the questions. Question-and-Answer Session Operator Thank you [Operator Instructions]. And we will take the first question today from Christine Cho with Barclays. Please go ahead. Christine Cho I just wanted to start with the reduced ethane in the Rockies. When you say to maintain downstream product quality specifications, are you talking about meeting natural gas pipeline specs? Terry Spencer No Christine we’re talking about natural liquids specifications…. Christine Cho So…Yes, more color would be helpful. Terry Spencer Sure, and Sheridan, I’ll let you talk about it. Sheridan Swords The NGLs coming out of the Bakken have a high oxygen content, and as we fractionate that oxygen, it’s been driven into the propane, and the butane and to be able to get that by bringing more ethane on, we can driven it into the EP or we can treat it and we continue to make sure that the propane is on spec for delivery into the end use market. Christine Cho And then I guess a molecule [ph] from the Rockies. How much does that generate? I am assuming it’s not the full $0.30 that we usually look at for Bakken. Terry Spencer It is — we are having, it’s close to that number but there is some offset versus that current ship wrecker pays are demand charges that we have. So this is going to offset, it gives demand charges as well. So it’s not the full $0.30. Christine Cho Okay, but not something for off ’15? Terry Spencer It’s close, yes. Christine Cho Okay. I guess one of your competitors is in the process of connecting two of their NGL pipelines that would bring 50,000 barrels per day of propane from the Marcellus into the Midwest. Do you have any thoughts that you could share with us about what that level of supply could potentially use to the spread between Belvieu, Conway. Is that kind of supply going over along Conway or is that already enough excess capacity between Conway and Belvieu that it could easily go to Gulf Coast without any problems or does it just pretty prevent Conway from ever trading at a premium, again like it did last year. Any color would be helpful? Terry Spencer Christine what I would say is that obviously more volume into the Mid-Continent has nothing but improved spreads. We do think there is the ability to move some propane from Conway down to Mont Belvieu, especially if you displaced out a product. So these are all back spot ones that you may move more propane than butane and more propane than the EP or ethane that you have. But we do think there is capacity to move incrementally more volume between the two. But I think it will normally have a widening effect on the spread and it will have a dampening effect on Conway ever trading over Belvieu, you are correct. Christine Cho Okay. And then I guess last question from me. You guys have done a sizable amount of equity on the ATM year-to-date but like you said you are going to have to do more and because I think the market has somewhat of a wide range out there and what that number is, it kind of puts a bigger overhang on OKS. So that’s EBITDA you guys report is always different than what I calculate and I suspect it’s because of the project credit that’s in there but how far does the credit rating agencies go in giving you that credit, is it year, 18 months, two years, any color on how they have used your balance sheet would be helpful? Derek Reiners Sure Christine, this is Derek. On an unadjusted basis, our debt-to-EBITDA has shown a 5.1 and we reported 4.5 on an adjusted basis, you are correct. The principal difference there is the material projects that we have on our way that we receive some credit for in our covenants so that’s that delta. On a run rate basis, you are probably 1 or 2 basis points lower than that if you just took four quarter — or excuse me second quarter and multiply that by 4. The agencies I think give us some credit for that, I am not exactly sure to what extent, they don’t exactly share all their calculations with us. But they certainly understand that as we’re in construction mode, we will be issuing equity and debt for that matter ahead of the realization of the earnings from those projects. And so I think there is some benefit afforded to us in that regard. Cleary agencies look forward and think about the nature of those projects and the earnings from those projects going forward as they think about, how does our leverage looks going forward. Christine Cho Thank you for the color. Derek Reiners You bet. Terry Spencer You bet. Thanks Christine. Operator And we will now go to Chris Sighinolfi with Jefferies. Chris Sighinolfi Hey good morning Terry. Terry Spencer Hey good morning Chris. Chris Sighinolfi Thanks for the added color this morning also thanks to Walt and T. D. for the slide presentation and the added disclosure, it’s very helpful to us. So I just want to say thanks. Terry Spencer You are quite welcome. Chris Sighinolfi Couple of questions, I guess the follow on with where the screen going originally, the slide 4 where you have the volumetric data since the April update, clearly the Bakken NGL volumes are up materially from April end of July and you expected peak rates for the fourth quarter. You mentioned Terry the effects of reduced ethane rejection and interruptible volumes on 2Q and the guidance. But the wondering sort of those factors 2Q with an upside price for you on those fronts. So what are you seeing in the Bakken and I guess what gives you confidence with the forecast and could we see further upside from the products that you mentioned as we move into the back half? Terry Spencer Well Chris I mean we have increased confidence because our producers are performing and we continue to have lots of discussions to get a better understanding of where they are and what their plans are and they are executing those plans and as we said they are continuing to improve their cost structure and improve their technology and really significantly outperformed even in the midst of slight rig reductions in some cases. So we’ve got good visibility into the quarter and that’s the reason why we feel so confident about the volumes. That plays right into the natural gas liquids segment particularly as we produced more natural gas liquids out of the Rocky’s and we produced more natural gas liquids out of the Mid-Continent that benefits the NGL segment. So it’s about visibility, it’s about continued communication with these producers. Chris Sighinolfi And so on the, I guess the downstream spec element, the Sheridan’s comments. Is there further upside on that element, what you saw in Q2 and thus far in 3Q? Or are we fairly comfortable with their specs look like given base level and production volumes on is different? Sheridan Swords Well, one thing I would say is that in 2Q we discovered that we stated the ethane recovery or decreased ethane rejection in June, so you would have a full three months in the third quarter and full three months in the fourth quarter. So we think the level of ethane, or close to the level ethane that we were extracting today, is enough to bring these products into the spec and we can handle and get into the end use market. Chris Sighinolfi Sticking with that slide, slide number four, for a moment, it seems like the steepest projected ramp in July volumes to year end is on the West Texas system. So I just had a couple questions there. First, what is driving the ramp? Two, it looks also like the blended tariff rate on the system maybe came up a penny from the April update. I’m wondering if that was due to any recontracting if I am over-reading or reading too much and it’s something like there is something else going on. And then three, Terry you had mentioned when you bought that asset the potential to fractionate barrels coming off gathering Permian volumes. So just wondering when we might expect to see the approach of that effort or if you could give us something on it? Terry Spencer The first thing I’d say is July is down a little bit, the 2 15 is down a little bit from the fact that we had some outages on the system that caused the volume to be down. Also the reason the $0.04 we’ve gone from $0.03 to $0.04 just because we have increased the tariff rates on the pipeline closer to market than from what it was. So you’re seeing an increase in rates on the existing volume there. We continue to think that we’ll have ramp up there as we talk to more producers out there and we think there is opportunity for that to grow. As you point out that the West Texas pipeline has the lowest margin on our system, so it doesn’t have the biggest impact. Chris Sighinolfi And then on the fractionation side of it longer-term, just give an update on where we stand. Terry Spencer We continue to talk to producers and processors out in the Permian who are looking for a bundled service, not just transportation to fractionation and delivery into the end use market. So as we stated when we bought this pipeline, we think the ability to bring that bundled service to customers of the West Texas pipeline greatly enhance our ability to bring product to the line. And so we are in negotiations with various people on the line to be able to do that. Chris Sighinolfi Sheridan, anything to talk about? Sheridan Swords No, I didn’t have anything to add, Chris. Chris Sighinolfi I guess one final thing on the asset side, it looks like Stateline de-ethanizer was moved out a little bit. Given the comments around reduced ethane rejection, I’m just wondering what drove that and any and that that movement in time would have on cost or return. Kevin Burdick The de-ethanizer was pushed back is regarding to the details of the design and it was really two drivers. One was as we work with our contractor. There was some long lead time equipment that got in and pushed the dates out a little bit. And then as we recast the dates when we apply for winter construction and looked at the efficiency we have when we run our projects through the winter, that cost us some time to — don’t think it will have a material impact on our ’16 what we’re thinking there. Chris Sighinolfi One final thing for me, just, Derek, the 4.5 times debt to EBITDA leverage metric that you quoted, that is consistent with how we interpret the covenants on the credit facilities, is that right? Kevin Burdick Yes, that’s correct. It is exactly the way that we file with our banks for covenant compliance. Chris Sighinolfi Okay, perfect. Thanks a lot for the added color today, guys, and congrats on a great quarter. Kevin Burdick You bet. Thanks Chris. Operator And we’ll go to Kristina Kazarian with Deutsche Bank. Kristina Kazarian Quick follow-up, first on leverage levels, can you talk — I note you guys talked about this a little bit in two of the previous questions. But can you talk a little bit more about what I should be thinking on in terms of where the rating agencies want you guys to go on like a year-end run rate basis to keep an IG rating, and what that would mean for the use of the ATM or maybe even a block, and how you think about that given where the different currencies are trading right now? Derek Reiners The agencies I think have put out some guidance for us in their most recent updates. I think Moody’s talks about a 4.5 times and S&P talks about 4.25 to be in those ranges. So certainly we think about that as we consider our equity needs during the year. We’ve said many times the ATM has been a good tool for us and certainly would expect to continue to use that in the future. But again, we have to kind of balance the balance sheet needs, the leverage with the issuing equity at a higher yield certainly than we would like to see. And of course as to additional you pay distributions on those units and so that impacts your coverage. So it’s a balance and certainly we have regular communications with the agencies and let them know what our plans are. Kristina Kazarian And then bigger picture, I know we often talk about the desire to move more from POP to fee-based and to kind to get the business and at some in time you said you guys have sustained like the one-time coverage just off fee-based. I know you mentioned, again say in the press release but can we talk about progress that’s been made there and time frame to that actually occurring in your mind? Terry Spencer Yes, I will just make a high level comment. It’s going very well. Producers are engaged with us. We’ve had success. We’ve had some contracts. We are converted more to a fee-based structure than POP. So we are expanding the fee-based component and shrinking the commodity sensitive component that’s gone — it’s gone well. Producers, they want additional services, other things added to their contracts with us, other features and we are working with them on those. So it’s going well. When you think about the regions in which we operate and particularly in the Williston Basin, it’s not like hundreds of contracts we’re having to address, its key producers and just it’s not a whole bunch of contracts, okay? So we expect to have some success as we continue to move forward, have success fairly quickly. Kristina Kazarian And so when we think about that, is it like a ’16, ’17, ’18, how just roughly frame enough maybe? Terry Spencer Yes, it’s going to be more of 2016 benefit to us. Kristina Kazarian Perfect. Thanks guys. That was it from me today. Terry Spencer You bet. Thank you. Operator And we will go to Craig Shere with Tuohy Brothers. Craig Shere Good morning and congratulations. Terry Spencer Thanks Craig. Craig Shere So when you — in the last questioning when you were saying Terry 2016 benefit and some of the conversion to more fee-based from POP processing and contracting, is that to suggest that the vast majority if not all of the distribution could be covered by fee-base by then or is that more a longer term? Terry Spencer Now that’s Craig — that would be a longer term proposition for us, okay. I think it’s a practical goal, I think it makes more sense than perhaps trying to target a percentage of fee and percentage of commodity exposure but definitely it’s a longer term goal. Craig Shere Okay. And Derek expressed the balance between topping ATM and keeping in mind the practical yields these units are trading at in the public market. Even with today’s gains I think we are at stair step of lower price point than what you got on the ATM issuances in the second quarter. Is there a point at which you are just not interested in public issuances and at which without considering major structural changes that the OKE free cash flow and balance sheet strength could be used to bridge funding needs for few quarters? Derek Reiners Yes, Craig this is Derek. I think that’s a good point. Certainly OKE has some additional cash on its balance sheet today and it has certainly got capacity to raise capital there at more attractive yields today. I think it is important to step back and think about the underlying assets of the Partnership and the types of projects that we have, even at these higher yields those projects make sense. And so it’s something we certainly think about very often but and we could consider other types of securities other than just a common unit, we could consider — OKE might consider participation in some form or fashion as well to help that need as well. Craig Shere And Terry as we think about bottlenecks in infrastructure in terms of actually filling out the Bakken Express Pipeline, I know that right now at the $45 oil that’s not what people are thinking about. But thinking overtime, filling up that pipeline at $0.30 plus pricing that’s bundled pricing including all downstream infrastructure. Is the bottleneck there fractionation that would need to be added and how we should think about how much more fractionation is needed to fill up that pipe in terms of the full issue of ethane rejection? Terry Spencer Well Craig it’s a combination of both pipe and fractionation capacity. We are certainly not anywhere near to that point yet but if you think about it very broadly and longer term, if need to get to that kind of next stair step level of production assuming the prices stabilize and rebound, when we think about expanding that whole infrastructure it’s got to be pipes, it’s a combination of lubs, it’s pumps and it’s fractionation capacity you got potentially in the Mid-Continent and Gulf Coast. So you have to think about it broadly, I wouldn’t characterize it as just one particular component. Craig Shere And is there a bookmark you can give in terms of — or book-ins you can give in terms of how billions of dollars of infrastructure we are talking about? Terry Spencer I’ll let Sheridan. Sheridan Swords Well, what I would say, Craig, the other thing to realize is that fracs are not exclusive to one basin. Our system is we can move Y grade around. So would we have to add more fracs if we add more volume out of the Bakken? Possibly if we bring more volume as we’re seeing more volume come out at the Scoop, the Stack and some of those areas, as that comes on that fills up our existing frac capacity as well, so it’s go in there. But right now we think we have enough frac capacity for the volume on the Bakken today as it grows even in a C3 plus rejected volume. We do see a great opportunity out at the Central Oklahoma with the Stack and what’s going on down there in the Scoop that we think — we do think in the future we will be building more fracs. Craig Shere On a separate note, I was a bit surprise the optimization margins weren’t more robust in the quarter, because propane spreads actually got pretty decent even though ethane was pretty anemic still. Can you update us on your ability to capture specific propane differentials even amidst the anemic ethane margins? Sheridan Swords Well, I think the biggest thing you have to look at is when you look at the propane differential through the second quarter — you have to realize if you are going to the LONESTAR facility, which had the highest spread there’s restrictions in getting to that facility. So a lot of what we were able to capture was between Conway and the non-TET or enterprise mark. So that was down cents per gallon from that. We continue to, on the propane side, we continue to convert a lot of our optimization capacity to fee-based. So when we do that that reduces our ability to get a wider spread on margins on what we do ship down there, because we have to ship more and more volume for our third-party people that have, we’ve given them Belvieu access. Craig Shere And just one more, the Bakken gathered NGL volumes are only forecast to rise 5% from July to the fourth quarter. But gathered volumes are guided to rise 14% from 2Q to 4Q. Can you elaborate on that? Sheridan Swords The reason that gathered volumes are continuing to go up, it is definitely a growth out of our Bakken, but we also see growth coming out of the Mid-Continent as we continue to go forward on that. So I think that may be where you are seeing some of that growth happen. Craig Shere I guess — I am sorry, the first number was the NGL volumes and second was the guest gathered volumes all out of Bakken. Sheridan Swords Okay. Kevin Burdick Craig, this is Kevin. On the gathered volumes when you look at the information we provided in the quarter, that is not necessarily a quarterly average that’s saying we will reach that capacity at some point. So, if you just do that math, that’s not saying that there is a, what your number was that’s the average growth, quarter-over-quarter, that just taking look at kind of a peak volume in the third quarter and a peak volume in the fourth quarter. Craig Shere So the numbers are a bit apples and oranges. That helps. Thank you very much. Operator We’ll go to Jeremy Tonet with J.P. Morgan. Unidentified Analyst This is actually Chris on for Jeremy. I guess as noted earlier, I appreciate the color, extra color on the slide deck. When you look at the volume outlook for the second half of 2015 you noted that captured flare gas was one of the key drivers and you also have an inventory of about 145 million cubic feet a day in ONEOK’s dedicated area. And so, we were wondering whether there would be — whether that would be more weighted towards the second half of 2015 or how much of that goes into 2016? Terry Spencer Well, yes, there is a considerable amount in the second half, but it certainly gives you considerable momentum going into 2016. So, it is going to carry you well into 2016 along with the newly completed wells and the backlog of uncompleted wells. So it is all kind of working together. Kevin, you got anything to add to that? Kevin Burdick No, I would just — the one statistic that I think is very interesting to kind of describe some of the improved performance is, if you look at the numbers provided by the state from January to May, oil production when up I think it was around 10,000 barrels a day. But gas production, which was basically flat or maybe a 1% increase, gas production actually went up about 150 million cubic feet a day during that same timeframe. So that demonstrates that as oil states flat with the improved gas to oil ratios, the improved performance gas oil ratios, the improved performance, the gas volumes have continued to go up. Unidentified Analyst Thanks, that’s helpful. I guess moving to West Texas LPG, your JV partner there noted some pretty big expectations in terms of increased pipeline distributions. And so we’re wondering, relative to your plans with that at the time of the acquisition, how are things trending? And with the recent tariff developments and your expectations for I guess returns going forward? Terry Spencer Well, it is going very well. With the tariff increases as well as the volume prospects that we continue to develop, we’ve got high expectations for the pipeline, it’s a great fit with our existing infrastructure, it is of course putting in this premiere basin that we wanted to be in for some time and sets ourselves for continued growth. The performance from a financial perspective is going to improve significantly with these tariff increases and as the volumes continue to be added it’s going to be — it is and it is going to continue to be a major contributor to the segment’s profit. Unidentified Analyst So relative to your planned into time of the acquisition, would you say that’s higher or? Terry Spencer I think the — what our expectations when we had the acquisition we’re progressing right along those expectations. Unidentified Analyst Thanks, it’s helpful. And then I guess lastly from me. On the re-contracting front in terms of your percentage of proceed contracts. For 2016, would you expect any kind of lower returns from those contract negotiations or what kind of give and take do you have with producer customers in that regard. Anything there would be helpful? Terry Spencer Well the strategy is to enhance our returns and obviously these contracts have been affected by the lower commodity price environment and certainly at these price levels and the resulting margins it makes it difficult to realize an acceptable return. So we are not going to sacrifice return and as we continue to work with these producers and provide enhanced services and we have demonstrated that we have been able to put contracts together that make sense and get our returns to an acceptable level. Unidentified Analyst Thanks. Appreciate the color. Terry Spencer You bet. Operator And we will go to John Edwards with Credit Suisse. John Edwards Yes, good morning everybody and congrats on a nice quarter. Just coming back to the financing questions, you have indicated you are open to alternative approaches here. So I take it that you would also include things like subordinating yields, take units, perhaps even cash injections from OKE using OKE equity. Would that be fair? Terry Spencer Yes, that would be fair. We continue to evaluate all of those levers. John Edwards And then I am just curious on the projects that have been suspended Terry, kind of what’s the thoughts behind those perhaps any color on when you think you would be able to bring those back into say execution mode? Terry Spencer No specific dates at this particular point in time but again we continue to assess the current market environment which is very volatile and uncertain. It is — and we continue to assess the environment and when the environment makes sense and when the producers need that capacity certainly we will fire those projects back up, okay. Right now we are continuing to — we are still in a wait and see mode on those suspended projects. John Edwards Okay and then just any thoughts regarding your plans with all the recent increases in M&A activity? Terry Spencer Well, our plans are going to be the same. We are going to stay organically focused to the extent of we participate in M&A from a strategic asset standpoint that is we — when people ask me about M&A I am like okay yes we are interested in M&A particularly as it relates to strategic asset acquisitions like our West Texas pipeline in the Permian. So yes we are going to stay active and focused and look at opportunities. But at the end of that day what happens out there in the M&A arena, we don’t have a whole lot of control over that. We will just keep our heads down and stay focused and continue to drive risk out this business and serve our customers. John Edwards Okay. Great. That’s it from me. Thanks. Terry Spencer Yes. Operator Next is Michael Blum with Wells Fargo. Michael Blum Hi, thanks, so two quick ones. Just one more question on the West Texas LPG pipeline. When you acquired the asset you laid out a plan to spend a significant amount of capital over the next few years and expand the capacity of the line, obviously you have executed on increasing rate already. Has anything changed there or is that still all kind of on plan? Sheridan Swords Hi Michael this is Sheridan. Yes, we have been talking to quite a few producers out there that will backstop expansion. So we are progressing as planned on that and we are very hopeful hear pretty soon that we will be able to come out and announce expansion of the pipeline. So the Permian has still been resilient. We are still seeing growth and we are getting most people call on us about trying to get on this platform, as we still think with the assets that we have we can be extremely competitive versus the marketplace out there. Michael Blum And then just I apologize if I missed this but could you quantify the reduction in ethane rejection you saw this quarter? Sheridan Swords In the Bakken is about 20,000 barrels a day in June. So that’s 20,000 barrels a day in June, so you can put over about 7,000 barrels a day on average for the quarter. Operator We’ll go to Becca Followill with U.S. Capital Advisors. Becca Followill If this already been asked, if it has just tell me to go listen to — look at the transcripts, but on the ethane rejection, why is it occurring now? What has changed in having to add more ethane in to help the spec? Terry Spencer Well, Becca, I think the short answer, and I will let Sheridan follow-up, but I think the short answer is just the volume growth, significant volume growth that we kind of broke over to a point where the NGL production has gotten so big to the point where now this issue emerging is something significant. Sheridan Swords Yes, I would say you are exactly right. It is fundamentally that we’ve had end use people call us and say that the propane is off spec and we need to clean it up. Becca Followill So, it is just you reached a tipping point? Sheridan Swords Yes, that’s right. Becca Followill And then going forward, as you continue to produce volumes and you will have to produce more ethane in order to keep it in balance, is that correct? Sheridan Swords It will be. We are working on a long-term plan that we can clean this up at our fractionators so that we do not have to continue to extract this ethane. But that is going to take some time to construct and get in place. But we are working, our engineers are working on a long-term solution. Terry Spencer And the only thing I will add is that is not done for free. Becca Followill So your shippers will have to pay for that? Terry Spencer Likely so. Operator And next line is Eric Genco with Citi. Eric Genco I just wanted to go back to the — and I guess not to beat a dead horse. The percent of proceeds to fee based. Your fee-based rate ticked up to $0.39 from sort of the mid-30s this quarter. Is that related to your efforts to move towards more fee-based? Terry Spencer I think the short answer is yes. Eric Genco And I guess as I was looking at it last night, is the strategy then to move towards more of a fee-based cut or a hybrid contract structure where maybe if commodity prices are low you get an extra fee payment? Because your equity volumes for NGLs and for residue gas actually ticked up a bit relative to the overall production levels. And I would have thought if that was moving towards fee-based that that would have been down or flat. So, I was just curious to whether this is more of a hybrid move or whether this is a pure conversion. Kevin Burdick Eric, this is Kevin. It will be — it is a combination. I mean there we talk about converting to more of a fee-based margin. There are a variety of ways that we get there. One is, like you said, is just increasing the fees and increasing the POP percentages, that kind of trade-off. There is other ways that accomplish the same thing. So our goal, like Terry has talked previously, is each of our customers is different. They are looking for different services. Those different services may require different strategies in how we go about working with them to get to the right mix of what is that. But in all the scenarios, it does result in a higher fee, but it may not, a fee-based margin, but it may not necessarily correlate to a lower equity volume. Terry Spencer And, Kevin, the only thing I would add to that is that when you think about our business as a whole, we’re keenly focused on bringing new fee-based opportunities and fee-based projects to the table. And in Phil’s business segment, as we mentioned in the remarks, the Roadrunner pipeline and its OWT expansion are important. And on OWT expansion, in particular, is a good example of the additional projects that have spun off as a result of this Roadrunner project in establishing a conduit to those markets in Mexico. So we’ll be very focused and remain very focused on fee-based opportunities and that will help bring that fee-based percentage up as we go forward. Eric Genco So is it fair to say then that that $0.39, at least, probably while commodity prices remain low, is probably fairly sticky at this point? And then perhaps as commodity prices recover maybe that falls back a little bit to where it should have been, but it doesn’t matter because you have retained the upside in these contracts? Terry Spencer No, I don’t think so, Eric. I think that as we continue to renegotiate that fee should go up. So, yes, I don’t think that that rate is going to be driven much by or affected much by a move in commodity prices. Eric Genco And I had a couple other quick ones just to sort of — some of the numbers you gave on the last quarter’s conference call, and I think you repeated them, but I just want to double check. So there is about 900 drilled uncompleted wells in the Bakken right now and I think last quarter you said about 50% is on your acreage, so that is basically the same –? Terry Spencer That is correct, roughly 50%. Eric Genco And I think you said last quarter that there were 50 rigs drilling on your acreage. I was curious; did you give a number for that today? Terry Spencer Yes, we did. Eric Genco Okay, what was that? I’m sorry. I missed that. Terry Spencer We’re in the 40 range right now. Eric Genco 40 range…. Terry Spencer Yes, and again that moves up and down. But all of that has been in line with our expectations. Eric Genco Okay. Terry Spencer The only thing I would add to that is keep in mind that these IP rates is the average initial production rates on these wells just continue skyrocket. And I was just reading some materials the other day from some of our customers or some of our producers rather, and it’s really remarkable the improvement that we are seeing. So even if you see rig reductions we are seeing these increased IP rates that are more than offsetting some of those reductions. Eric Genco I think that’s fair, I think in some of the instances we’ve been looking at — some assumptions it takes about 24 days to drill well and some of these things but we are hearing some things maybe it’s fallen down to almost the 16 range for some people so. I guess we would count as not the end all be all that it used to be. Terry Spencer Yes. Eric Genco I also just wanted to ask real quick. Of the 900 drilling completed wells in the basin what you view is sort of being an equilibrium number for that? I mean there’s always going to be some number of uncompleted wells and I was just curious overall for the basin what do you think is normal? Terry Spencer That’s a tough one to answer. I mean because especially as producers have shifted almost entirely now to kind of the multi-well pads and those stick a rig and at a spot and then drill several wells and that — so you kind of have an artificial working inventory if you will of completed — of uncompleted wells. I think there is some as we have talked with others in North Dakota is that 300, 400 ranges that will kind of always be there as a working inventory as long as you are at this kind of a rig count, you may be in that range. But again that can fluctuate as again as rigs move around and what, where and how they are drilling. Eric Genco Okay. Well, thank you very much. That’s all I had. Terry Spencer Thank you. Operator We will go to Andy Gupta with HITE Hedge. And it appears he does not have a question. So we will go to Matt Niblack with HITE. Please go ahead. Matt Niblack Hi. I just wanted to make sure I understood what you said at the beginning of the call properly that you had ample of liquidity particularly given how credit metrics are calculated by your borrowers that there is no need to issue okay equity at these FX valuations? Terry Spencer Well I don’t know that I have said that. We have been pretty clear that we expect to continue to issue equity as we balance our credit metrics with issuing at this price. Matt Niblack Okay. But you said you’re going at least avoid the disruptive overnight offering given the ATM program? Terry Spencer Well I mean we talk about the overnight markets all the time and we certainly continue to look at that option. As we said many times the ATM program has worked pretty well for us. We were able to get quite a bit done in the second quarter, so to avoid that overnight market issue but I can’t wool that out for you. Matt Niblack Okay. Thank you. Operator And that will conclude our question-and-answer session. I would like to turn it back for any additional or closing remarks. Terry Spencer Thank you. Our quite period for the third quarter starts when we close our books early October and extensive earnings are released after the market closes on November 3rd, followed by our conference call on November 4. Thank you for joining us and have a good day. Operator Thank you very much and that does conclude our conference for today. I would like to thank everyone for your participation and have a great day.

Star Gas Partners’ (SGU) CEO Steven Goldman on Q2 2015 Results – Earnings Call Transcript

Star Gas Partners LP (NYSE: SGU ) Q2 2015 Earnings Conference Call August 04, 2015 11:00 AM ET Executives Steven Goldman – CEO Chris Witty – IR, Darrow Associates Richard Ambury – CFO Analysts Andrew Gadlin – Odeon Capital David Spier – Nitor Capital Michael Prouting – 10K Capital Operator Hello and welcome to the Star Gas Partners, Fiscal 2015 Third Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being record. I would now like to turn the conference over to Steve Goldman Star Gas Partners’ Chief Executive Officer. Please go ahead, sir. Steven Goldman Thank you, Chad. Good morning and thank you for joining us today. With me today is Star Gas Chief Financial Officer, Richard Ambury. After I provide some brief remarks about the quarter and first nine months of fiscal 2015 Rich will review the fiscal third quarter-ended June 30th, 2015 and year-to-date financial results. We will then take your questions. Before we begin Chris Witty of our Investor Relations firm Darrow Associates will read the Safe Harbor Statement. Please go ahead, Chris. Chris Witty Thanks, Steve, and good morning. This conference call may include forward-looking statements that represent the partnership’s expectations and beliefs concerning future events that involve risks and uncertainties and may cause the partnership’s actual performance to be materially different from the performance indicated or implied by such statements. All statements, other than statements of historical facts included in this conference call, are forward-looking statements. Although the partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the partnership’s expectations are disclosed in this conference call and in the partnership’s quarterly reports and its annual report and Form 10-K for the fiscal year ended September 30, 2014. All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this conference call. I’d now like to turn the call back over to Steve Goldman. Steve? Steven Goldman Thanks, Chris. We notice this has been an extraordinary fiscal year thus far as we’ve benefited greatly from falling oil prices and an incredibly cold period this winter unlike anything we have seen in recent memory and we are pleased that we’ve been able to retain much of the benefit of these factors despite an uneven year for weather. Our first quarter and third quarters were certainly an outlook we had planned for what we were counting on in terms of temperatures. Our first quarter you may recall was warmer than normal which challenged us in several ways. It caused equipment sales to be slower than expected and tempered our ramp up of staffing prior to the coldest part of the winter season due to the uncertainty as to how the rest of the winter will proceed. We also faced competitors who are much more aggressive on price to we believe to the lack of weather and related volume. The second quarter was starkly different whether it’s severe temperatures and numerous snowstorms such that we still increased expense related to service and maintenance for both of these during the second quarter and third quarter. I mention this because our third quarter results was somewhat mixed but given the temperatures and other factors impacting it from the quarter before we believe the partnership operated to the best of its ability. In terms of weather the third quarter was cooler during the beginning but that included higher temperatures during May and June. Warm day specifically over 90 degrees helped to drive air conditioning, equipment sales and service so despite the somewhat unusual weather patterns we believe we’ve still been able to deliver our solid results. Our EBITDA and attrition continue to support our belief in that by focusing on the customer and on efficient operations we’re making Star Gas a stronger business every day. One of the areas of improvement that I have spoken about in the past is training and I think it’s important to mention that we are now in the process of creating an internal culture of continuous improvement. We have put in place several new processes to improve the way our employees perform to both better please our customers as well strengthen the bottom line. While we are in the beginning phases of these initiatives our employees have reacted positively to everything we’ve implemented thus far. I mentioned earlier that we’re pleased with our attrition numbers this year but the third quarter’s net attrition was slightly worse than the same period last year and so our sales group has redoubled its efforts to replace these accounts by reaching farther out of our existing footprint for new customers. That said one area of our customer segment that does continue to grow very well has been and is propane and these operations certainly have room to expand even further. In that [way] I’d like to mention we just began operating in Eastern Tennessee this month. We continue to try new things to constantly improve our operating results, notably from a marketing perspective we expanded the use of social media and billboards as two examples to better spread the message about our ability to do more than just service heating equipment. As we all know acquisitions are always an important part of our measure of success, in this regard I’d like to mention that we are in the final negotiations and hopefully we will close soon on another great addition to Star Gas family of businesses and the deal where it’s approximately $20 million. If so when completed we will announce this acquisition. Beside from this acquisition we are also continuing to speak to several other large and small potential owners as usual. Before turning the call over to Rich who will be discussing our financial results I’d like to thank Kim and his team for the tremendous effort that we went through in closing our new credit agreement which allows us to redeem our high interest notes outstanding just to the great deal of time and we’ll strengthen our company financially. With that I’d like to turn the call over to Rich. Richard Ambury Thanks Steven. Good morning everyone. For the third quarter of fiscal 2015 our home heating oil and propane volume decreased by 6% versus last year of 2.6 million gallons to 45 million gallons. Heating degree days were 15% warmer than during the prior year as comparable to fiscal third quarter and 22% warmer than normal. Notes; that temperatures during this non-heating period are not as impactful to annual volume sales as during the heating season. Our heating oil and propane margins increased by over $0.07 year-over-year to approximately $1 per gallon. As a reminder, since the third quarter is a non-heating period with relatively low overall volumes, margins can be impacted quite easily. Total product gross profit was $52 million slightly lower than last year as home heating oil and propane margins were offset by the impact of lower volumes. Star’s net loss declined by $1 million to $8.4 million, largely due to a favorable non-cash change in the fair value of derivative instruments. The adjusted EBITDA loss for the quarter increased by $900,000 to $9.3 million as the impact of higher home heating oil and propane per gallon margins was more than offset by the decline in volume attributable to the warmer weather in a decrease in service and installation profitability. Now let’s review the nine months results. Home heating oil and propane volume rose by 7% as acquisitions primarily [directed] more than offset the impact of net customer attrition, conservations and other factors. In analyzing the results please keep in mind that the first and third quarters of fiscal 2015 were warmer than the first and third quarters of fiscal 2014 while the second quarter of fiscal 2015 was much colder than the second quarter of fiscal 2014. On balance the average temperatures over the nine months period were approximately equal to the average temperatures of the prior year’s comparable period and 5% colder than normal. Volume of other petroleum products rose 27% to 76 million gallons again reflecting significant motor fuel volume provided by Griffith. Total sales declined by 13% to $1.5 billion versus $1.7 billion in the prior year period as the additional sales provided by acquisitions were more than offset by lower selling prices in response to a decline in wholesale product cost of 32% per gallon. Year-to-date product gross profit rose 18% or $64 million to $421 million, due to the growth in sales volume as well as higher home heating oil and propane margins. The decline in home heating oil and propane costs contributed to the per-gallon margin expansion. However as we have mentioned on earlier calls the extreme cold temperatures during the second fiscal quarter of 2015 created additional service requirements. Service and installations gross profit declined by $4 million largely due to the impact of the colder temperatures in storms experience to the second quarter of fiscal 2015. Delivery and branch expenses rose by $23 million or 10%, reflecting the increase in total volume of 10%. These costs increased in the base business on a cents per gallon basis by approximately 3%. As previously mentioned this increase, as well as the higher service expense increased our per gallon margin gross profit requirement. Depreciation and amortization expense rose by $3.5 million, largely due to the Griffith acquisition and interest expense was lower by 19% reflecting lower bank borrowings. Net income increased by $21 million to $83 million due to the impact of higher home heating oil and propane margins, acquisitions and a favorable non-cash change in the fair value of derivative instruments. Adjusted EBITDA increased by $33 million or 26% to a $164 million as the impact of higher home heating oil and propane per gallon margins and acquisition more than offset high operating and service cost largely attributable to cold and temperatures and a numerous snow storms experience during the second quarter of fiscal 2015. Now let’s move over to the balance sheet for a second. We have recently announced that we actually it’s renew five year asset base revolving credit facility that provides the ability to borrow up to $300 million. $450 million during heating season for working capital purposes. The credit facility also provides for a 100 million five year senior secured term loan proceeds from a term loan along with cash on the balance sheet will be used to redeem our 785 senior notes due 2017. The term loan payments schedule is comprised of 10 million per year plus 25% of excess cash flow with the final payment and maturity. We expect to see lower interest expense going forward through this new debt structure. And with that I’d like to turn the call back to Steve. Steven Goldman Thanks, Rich. At this time we would be pleased to address any questions you may have. Chad please open the phone lines for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer Session. [Operator Instructions] Our first question comes for the day from Andrew Gadlin with Odeon Capital. Andrew Gadlin You mentioned earlier in the call that there is an acquisition in the works for approximately 20 million in proceeds. Can you talk a little bit about geography or business mix? Richard Ambury So New York area company located on Long Island, it’s about somewhere around 19,000 customers it’s a business that more or less reflects our average retail heating oil type business in the area so a very strong competitor of ours so we think of it as a very brand, as I’ve mentioned in the past it’s one of these acquisitions that we’ve been speaking to on and off for years to try to get to this point, we are very excited about the opportunity because we believe it’s a very good addition to Start Gas. Andrew Gadlin And if the acquisition closes mid quarter would you guys put out a press release just to let us know that it’s been done? Steven Goldman We’d either file a press release or an 8-K. Andrew Gadlin Got it. Thanks. And then in terms of the term loan that you are taking out can you remind me what the interest rate on that term loan? Steven Goldman While it’s variable and there is a grid but the lowest grid is LIBOR plus 3 in a quarter. Andrew Gadlin Got it. Well 100 basis points floor? Steven Goldman There is no floor. Andrew Gadlin Okay. And in terms of that facility as you think about it priorities for cash-flow in the near-term would you say you want to pay that tax down as quickly as possible or balancing the opportunities and share buybacks and dividend increases etc. Steven Goldman Sure. We want to balance everything out. The way the excess cash flow covenants to repay anything back over the $10 million, it includes acquisition. So there is no hurry to pay back that loan. So it’s at the end of the term, there is a $60 million bullet which includes the $10 million final maturity, so be it. Richard Ambury We don’t believe that doing this offers our strategy from what we’ve been doing for the last several years, which is looking to make the best use of our earnings to better the business and strengthen the investment of those people that have believed in us up to now. Operator Next question comes from James [indiscernible] with Locust Wood Capital. Unidentified Analyst Hi. Just like to congratulate you guys on a strong third quarter and at Locust Wood we’re just wondering how you guys think about your dividend payout ratios? Richard Ambury We evaluate our dividend payout each and every year, it’s usually sometime in April the fiscal year, depending on what kind of year we’re having and what our opportunities for acquisitions or paying back this debt which is lower rate if not it’s very attractive to keep this outstanding and unit repurchases. Unidentified Analyst Rich, this is Steve also from Locust Wood. Great job you guys have done very well [for us] over the years, would you guys think about in the future reporting your results distributable cash flow basis I mean obviously we can figure it out but the type of people who are following your company it might be helpful to them, have you guys given any thought to that? Steven Goldman No we really haven’t give any thoughts to that, it’s just another non-GAAP SEC type term and I’m not so sure we want to really go down that road right now. Operator The next question comes from David Spier with Nitor Capital. David Spier I just wanted to — most of my questions have already answered, I want to clarify on the term loan, you mentioned about 10 million in annual payments you’re referring to the principal? Steven Goldman That is correct. David Spier Okay, so essentially its 10 million principal payments, and then the interest on that is LIBOR plus you said 375 basis points. Steven Goldman Well, there is a grid depending on our availability, yes. David Spier Okay. It makes a lot of sense. So essentially you’d be able to take down that debt which you’re previously paying about I’d say 11 million in interest payments so you can be able to take it down slowly overtime and then be up about 60 million in the final balloon payment. So that’s correct? Steven Goldman So we do have to set aside 25% of excess cash flow to pay that final maturity during the fiscal year. Operator [Operator Instructions] The next question comes from Michael Prouting with 10K Capital. Michael Prouting I apologize in advance of this background noise. I am at an airport this morning. Just by the way congratulations on the debt refinancing. So it sounds like the strategy really is to not pay that down any quicker than you have to and keep the firepower for any large acquisitions that might come along. Steven Goldman Yes, that’s pretty much it, yes. Michael Prouting Okay. That makes total sense. You talked about an acquisition that you are in the final stages of closing right now. Can you just give us a sense of how the acquisition pipeline looks at this point and also in particular any larger deals that might be out there in the horizon? Richard Ambury It looks probably like it’s been looking for the last several years, whom we’re speaking to four or five different people in different parts of our geography right now. We are always looking to get some others going at the same time. We don’t have anything extraordinarily large that’s imminent right now but again we continue to speak to all potential acquisitions down the road and as I mentioned before this took really several years to get this one done. So you really never know when the seller will be ready to go ahead and finalize the transition. So again it doesn’t look any better than it did before but it isn’t any worse and I think our opportunities are out there and we’re happy where we are with that. Michael Prouting Okay. I appreciate the color on that and I would assume also that as far as valuation is concerned that you’re still within your historical parameters in terms of what you’d be willing to pay. Steven Goldman That is correct. Michael Prouting Okay. And just one I guess somewhat random question, I know there has been discussion previously about collecting or getting rid of the limited partners structure. I’m just wondering if that’s something that’s on the front burner or something that’s going to consideration. Steven Goldman It’s shown on our front burner that doesn’t necessarily mean we won’t look at it from time to time. Operator Our next question comes from Gary [Indiscernible] Unidentified Analyst Okay Steve I believe it was you that said just a couple minutes ago concerning the cash flow, the 25% cash flow to pay back on the term loan. You used the phrase set aside I had read I thought that this had to be paid and not set aside. Steven Goldman I think you are right it is to be paid from 25% of the excess cash flow. Unidentified Analyst Okay at the end of the term or can you do it or is that a long way each should five years. Steven Goldman Yes. The way the term loan worked is we pay 10 million a year for each fiscal year and at the end of each fiscal year we basically see what the excess cash flow is as defined which is roughly EBITDA, less interest, less taxes, less fixed assets, less some pension payments as well as any acquisitions that we might make. Unidentified Analyst There is a cap on it is there are not? Steven Goldman Yes. The cap would be $15 million. That is correct. Unidentified Analyst Yes. Okay, alright so it’s not set aside necessarily it is to be paid. Okay. Steven Goldman That is correct. Unidentified Analyst Okay. That’s okay I just want to clarify. That’s all I have. Steven Goldman Okay. Operator Our next question comes from Gene Riley a Private Investor. Unidentified Analyst Hello. I just have a question about the unit repurchase program in the last two years you’ve been having record earnings and record cash flow but you seem to have ground to a halt on the repurchases when does that turnaround? Steven Goldman Again we look at all opportunities whether its acquisitions having cash on the balance sheet to take debt off the table that’s almost is 9% and we look at it all at various prices and analysis. Operator [Operator Instructions] At this time there are no further questions. So I’d like to turn the conference back over to Steve Goldman for any closing remarks. End of Q&A Steven Goldman Thank you for taking the time today and joining us and for your ongoing interest in Star Gas. We look forward to sharing our fourth quarter 2015 results with all of you in December. Operator The conference has now concluded. Thank you for attending today’s presentation. You may disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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