Adams Resources & Energy, Inc. (AMEX:AE) Q4 2023 Earnings Call Transcript March 14, 2024
Adams Resources & Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Adams Resources & Energy Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instruction] Please note, this event is being recorded. I would now like to turn the conference over to John Beisler, Investor Relations. Please go ahead.
John Beisler: Thank you, and good morning, everyone. Welcome to the Adams Resources and Energy fourth quarter and full year 2023 conference call. Joining me on the call this morning are Adams Resources and Energy President and CEO, Kevin Roycraft and the company’s EVP and CFO, Tracy Ohmart. This call is also being webcast and can be accessed through the audio link on the Investor Relations page at adamsresources.com. Today’s call, including the Q&A session will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. I’d also like to remind you that statements made in today’s discussion that are not historical facts, including statements or expectations or future events or future financial performance are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements by their nature are uncertain and outside of the company’s control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued yesterday for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s filings with the Securities and Exchange Commission. Adams Resources and Energy assumes no obligation to publicly update or revise any forward-looking statements. Management will refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on and adjusted net income and earnings per share. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release.
Finally, the earnings press release we issued yesterday is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K submitted to the SEC. Now, I would like to turn the call over to the company’s President and CEO, Kevin Roycraft. Kevin?
Kevin Roycraft: Thank you, John, and good morning, everyone. I will begin today’s call with some details on the quarter, before turning it over to Tracy for a more in-depth dive into the financials. I will then close the prepared remarks by discussing the outlook for the first quarter and full year 2024. Myself, Tracy and our division Presidents, Greg Mills and Wade Harrison will be available for your questions at the conclusion of the prepared remarks. I was encouraged in many areas by the company’s fourth quarter results. Despite the continuation of the macroeconomic headwinds discussed in our last two quarterly calls, the business produced solid results for the fourth quarter. Adjusted cash flow, available cash and liquidity all improved sequentially on a year-over-year basis.
For the quarter, we improved our adjusted cash flow of 44% over the third quarter of 2023 from $4.8 million to $6.8 million and 100% over the prior year quarter. Not included in the fourth quarter adjusted cash flow numbers were nearly $1 million of onetime expenses and $2.6 million in gains from sale of assets, both associated with the closure of our Red River operations during the quarter. Factoring in these onetime events into the company’s adjusted cash flow numbers, we easily produced the strongest quarter we’ve had since the third quarter of 2022. For the full year of 2023, we improved net cash flow from operating activities by $16.5 million over 2022 from $13.8 million to $30.3 million. However, when adjusted for crude oil inventory changes, gain on sale of assets, and taxes, 2023’s adjusted cash flow came in at $23.4 million compared to $29 million in the prior year.
The largest of these adjustments was the inventory change differentials between 2022 and 2023. As I mentioned previously, we continue to see positive momentum in our cash and liquidity positions. Cash and cash equivalents improved 62% over the prior year quarter and 104% sequentially, finishing the year with $33.3 million in cash. Liquidity followed a similar trajectory, improving 44% over the third quarter from $55.9 million to $80.3 million at year’s end. GulfMark Energy’s legacy area volumes, which include South Texas, Michigan, North Dakota, and Louisiana were generally flat in the fourth quarter compared to the third quarter of 2023. Overall, quarterly volumes decreased, primarily due to the closure of our Red River operations in North Texas and Oklahoma.
I was very pleased with our team’s execution of this exit. We fully completed our contract commitments, while working on a very short timeline to exit the area and move equipment. Of 62 tractors and 88 trailers dedicated to the Red River operation, we sold 38 tractors and 68 trailers in the quarter for a net gain on the sale of $2.6 million. The remaining late model equipment will be moved into the GulfMark or Firebird operations, which is expected to reduce these division’s needs for growth and maintenance CapEx in 2024. Turning to the VEX pipeline. GulfMark was able to drive a total of 9,377 barrels per day to the line in the quarter, an increase of 10% over the previous quarter’s 8,548 barrels per day. Although the barrel growth is encouraging, VEX is still behind our volume expectations as our expected third-party shipper on the line continues to find and repair issues on their pipeline system.
While VEX is still a critical asset to our company, providing huge cost savings by reducing truck-miles to reach its full potential, it will need third-party barrels to come online. It is a positive sign that our future shipper is still spending time and money to repair their system. However, I am reluctant to put a timeline on start-up since we have no control on the scope and timing of their repairs. Our most recent acquisitions of Phoenix Oil and Firebird Bulk Carriers finished their first full year with the company. Even with the continuing challenges in the market, the combined businesses produced more than $4 million in positive cash flow. I am especially pleased with the progress we are making towards vertical integration and the intracompany business.
GulfMark has become a top five customer for Firebird. Using Firebird’s trucks allows GulfMark to keep the overflow truck barrels in-house, providing cost savings and allowing safety and operational control over those units. Phoenix also continues to produce crossover business opportunities with service transport. Our over-the-road chemical hauling division, service transport company saw improved cash flow and earnings in the fourth quarter when compared to the third quarter of 2023. However, these increases were not due to improving market conditions, but were largely driven by favorable insurance premium adjustments related to better-than-expected safety performance in prior year periods. These credits are well earned and truly spotlights the work Service Transport is doing to run a safe and cost-effective operation.
In fact, the National Tank Truck Association has just named Service Transport a Grand Award winner for their 2023 North American Safety Contest and a finalist for the Heil Trophy, awarded to the top bulk carrier for safety nationwide, an award STC won back in 2021. From a market perspective, service transports customers are still battling a sluggish chemical shipping environment that is expected to continue through the second quarter of this year. I will touch base on the outlook for Q1 and 2024 later. But now I’ll turn the call over to Tracy for a deeper dive into the financials.
Tracy Ohmart: Thank you, Kevin, and good morning, everyone. Total revenue for the fourth quarter of 2023 was $709.8 million, compared to $747.7 million in the prior year quarter. The decline was primarily driven by a decrease in the market price of crude oil and lower crude oil volumes. The decrease in crude oil price was primarily due to weaknesses in the Chinese economy and continued concerns over economic recession. Now let’s look at the quarter by individual segments. Fourth quarter revenues for our Marketing segment were $671.7 million, compared to $707.7 million in the prior year quarter. The decrease is primarily due to a decrease in the market price of crude oil over the past year and a result of lower crude oil volumes.
Operating income for the quarter for the Marketing segment was $4.1 million compared to a loss of $4.4 million in the fourth quarter of 2022. The increase is due to inventory valuation changes, partially offset by a decrease in the average market price of crude oil, lower crude oil volumes and higher operating expenses in the 2023 period. Our Transportation segment reported $23.3 million of revenue in the fourth quarter, compared to $26.3 million in the prior year quarter. Operating income was $1.6 million versus $1.8 million in the fourth quarter of 2022. The decrease is primarily due to a decrease in volumes in transportation rates during 2023 as a result of the softening in the transportation market. Our logistics and repurposing segment, which consists of Firebird and Phoenix that we acquired in August 2022, added $14.8 million in revenue for the fourth quarter of 2023, compared to $13.7 million for the prior year quarter.
The segment reported a loss of $1.1 million, compared to $148,000 of earnings in the prior year quarter. General and administrative expenses were $4.3 million for the fourth quarter of 2023 and $14.9 million for the year, which is a decrease of $2.8 million compared to the full year of 2022, primarily due to an adjustment of $2.6 million for the reversal of the contingent consideration accrual related to the Firebird and Phoenix acquisition and lower personnel costs and legal fees. Interest expense decreased to $859,000 for the fourth quarter of 2023 versus $918,000 in last year’s fourth quarter. For the total year, interest expense increased by $2.1 million compared to 2022, primarily due to a $1.6 million increase in interest expense as a result of borrowings under the credit agreement, which was put in place on October 27, 2022.
Net loss for the quarter was $874,000 or $0.34 per share, compared to a net loss of $7.3 million or $2.34 per share in the fourth quarter of 2022. For the quarter, cash provided from operating activities was $22.4 million. For the full year, cash provided from operating activities was $30.3 million compared to $13.8 million in the prior year. The increase was a result of a decrease in the price of our crude oil inventory and an 18.5% decrease in the number of barrels held in inventory. Capital expenditures for the quarter totaled $3 million, primarily from the purchase of eight tractors, 13 trailers and other field equipment. Our available cash and cash equivalents as of December 31, 2023, totaled $33.3 million compared to $20.5 million on December 31, 2022.
Total liquidity as of December 31 was $80.3 million versus $55.9 million in the prior quarter. Now I’ll turn the call back over to Kevin for some final comments. Kevin?
Kevin Roycraft: Thank you, Tracy. I will now touch on the outlook for the first quarter and for full year 2024. All business units will continue to work on cost control and operational efficiencies as we expect the headwinds in the market to continue into the second half of the year. We saw the benefit of these efforts with improved results in the back half of 2023 as our cost reduction initiatives took hold. We will continue to build cash and liquidity positions as well as pay down the debt incurred from the KSA share repurchase conducted in the fourth quarter of 2022. GulfMark Energy will continue to battle heavy competition for available barrels, especially in the Eagle Ford basin, where the rig count has decreased from 76 to 55%, a 28% reduction over the past year.
As we wait for drilling activity to increase in the area, GulfMark can still achieve success by improving margins through more efficient operations, cost reductions and customer negotiations. For the VEX pipeline, we will continue to work on finding new barrels to run on this operationally critical line. While third-party barrels from the recent connection with the potential future shipper remain a likely possibility, we are hesitant to put a time line on the start-up due to factors out of our control, as previously mentioned. Because of this, our team will focus on their efforts on the other conversations that are being held with multiple potential shippers on the VEX pipeline. We will look for growth in 2024 from both the Phoenix and Firebird acquisitions.
Driver count has grown at Firebird from 97 drivers at the time of acquisition to 115 drivers today. The growth has come from increased hauling from the addition of new customers as well as internal hauling for GulfMark Energy’s overflow. Firebird will continue to work on improving rates and returns in 2024. Phoenix oil should break ground on the new Dayton, Texas rail transloading and lab facility in the first half of 2024. Completion of this project will improve capacity and efficiency of the company as well as open up the ability to process new products. As I’ve mentioned in previous calls, our chemical Transportation division, Service Transport is well positioned for success when market conditions improve. Service Transport has added new customers and streamlined operations in anticipation of a market rebound.
Driver turnover has remained low, and they are ready to provide additional capacity to the shippers when the time comes. In closing, we believe the company can see improved results over 2023 even if the current market challenges persist, as we expect them to for the first half of the year. Obviously, if market conditions improve, specifically in the areas of domestic chemical manufacturing, housing starts, automobile production and rig count increases, we could see significant year-over-year improvement. As the Adams team waits for market improvements, we will not sit idly. Rather, we will continue to take the necessary steps for the company and our shareholders to be successful. With that, I would like to open the line for questions. Operator?
Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Erik Volfing of Grand Slam. Please go ahead.
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