Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .
The following information should be read in conjunction with our Consolidated Financial Statements and accompanying notes included under Part II, Item 8 of this annual report. Our financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S.
Overview of Business
Adams Resources & Energy, Inc. and its subsidiaries are primarily engaged in crude oil marketing, truck and pipeline transportation of crude oil, and terminalling and storage in various crude oil and natural gas basins in the lower 48 states of the U.S. In addition, we conduct tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with seventeen terminals across the U.S. We also recycle and repurpose off-specification fuels, lubricants, crude oil and other chemicals from producers in the U.S.
We operate and report in four business segments: (i) crude oil marketing, transportation and storage; (ii) tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk; (iii) pipeline transportation, terminalling and storage of crude oil; and (iv) interstate bulk transportation logistics of crude oil, condensate, fuels, oils and other petroleum products and recycling and repurposing of off-specification fuels, lubricants, crude oil and other chemicals. See Note 9 in the Notes to Consolidated Financial Statements for further information regarding our business segments.
Results of Operations
Crude Oil Marketing
Our crude oil marketing segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31,
Change (1)
Change (1)
Revenues
Operating earnings (2)
Depreciation and amortization
Gains on sales of assets
Driver compensation
Insurance
Fuel
(1) Represents the percentage increase (decrease) from the prior year.
(2) Operating earnings included net inventory valuation losses of $0.8 million, net inventory valuation losses of $2.0 million and net inventory liquidation gains of $10.3 million for the years ended December 31, 2023, 2022 and 2021, respectively.
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Volume and price information were as follows for the periods indicated:
Year Ended December 31,
Field level purchase volumes – per day (1)
Crude oil – barrels
Average purchase price
Crude oil – per barrel
(1) Reflects the volume purchased from third parties at the field level of operations.
2023 compared to 2022 . Crude oil marketing revenues decreased by $646.8 million during the year ended December 31, 2023 as compared to 2022, primarily as a result of a decrease in the market price of crude oil, which decreased revenues by approximately $444.4 million, and lower crude oil volumes, which decreased revenues by approximately $202.4 million. The average crude oil price was $92.63 per barrel for 2022, which decreased to $74.96 per barrel for 2023. Revenues from our volumes are mostly based upon the market price in our market areas, primarily in the Gulf Coast. The decrease in the market price of crude oil during 2023 as compared to 2022 was primarily due to weakness in the Chinese economy and concern over economic recession, which caused crude oil prices to fall. During the third quarter of 2023, OPEC oil production cuts and U.S. inventory draws from the Mid-Continent and Gulf Coast resulted in an increase in crude oil prices.
Revenues also decreased due to the termination on October 31, 2023 and non-renewal of our five year purchase contract in North Texas and South Central Oklahoma (the “Red River area”). In October 2018, we acquired a trucking company that owned approximately 113 tractors and 126 trailers operating in the Red River area, and subsequently entered into a new revenue agreement at that time. During the five year period, volumes handled in the Red River area ranged from an average of 25,000 to 28,000 barrels per day. The purchase price for Red River area volumes was based on a contractual price for volumes in North Texas and Oklahoma, which had been slightly lower than the purchase price for legacy volumes. The termination of this contract has resulted in a decrease in the average crude oil volumes for the crude oil marketing segment beginning in November 2023.
Driver compensation remained relatively flat during the year ended December 31, 2023 as compared to 2022, despite a decrease in the overall driver count in 2023. At the end of October 2023, we had approximately 49 drivers dedicated to the Red River area, which were either terminated or redeployed to other areas of our businesses.
Insurance costs decreased by $0.7 million during the year ended December 31, 2023 as compared to 2022, primarily due to a lower overall driver count in 2023 and premium reductions due to our safety performance during the current year, partially offset by an overall increase in insurance premiums. Fuel costs decreased by $2.1 million during the year ended December 31, 2023 as compared to 2022, consistent with a lower driver count and lower fuel prices in 2023, as compared to 2022.
Depreciation and amortization expense increased by $0.3 million during the year ended December 31, 2023 as compared to 2022, primarily due to the timing of purchases and retirements of tractors and other field equipment during 2022 and 2023. In connection with the termination of the Red River contract, we sold 36 tractors and 65 trailers during the fourth quarter of 2023, resulting in gains of approximately $2.4 million, and also transferred tractors and trailers to other areas of our businesses.
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Our crude oil marketing operating earnings for the year ended December 31, 2023 increased by $1.2 million as compared to 2022, primarily as a result of inventory valuation losses of $2.0 million in 2022 compared to valuation losses of $0.8 million in 2023 (as shown in the table below) and lower fuel costs and insurance costs in 2023 as compared to 2022, partially offset by a decrease in the average market price of crude oil and a decrease in crude oil volumes in 2023.
2022 compared to 2021 . Crude oil marketing revenues increased by $1,302.2 million during the year ended December 31, 2022 as compared to 2021, primarily as a result of an increase in the market price of crude oil, which increased revenues by approximately $1,104.2 million, and higher crude oil volumes, which increased revenues by approximately $198.0 million. The average crude oil price was $65.48 for 2021, which increased to $92.63 for 2022. Revenues from our volumes are mostly based upon the market price in our market areas, primarily in the Gulf Coast. The market price of crude oil increased during 2022 as compared to 2021 primarily as a result of a return of global crude oil demand following the pandemic, which combined with a perceived shortage of global crude oil production. In addition, the invasion of Ukraine by Russia contributed to an increase in the market price of crude oil in the first half of 2022. In the second half of 2022, weakness in the Chinese economy and concern over economic recession caused crude oil prices to fall, while still remaining historically high.
Driver compensation increased by $1.9 million during the year ended December 31, 2022 as compared to 2021, primarily as a result of higher volumes transported in 2022 and an increase in driver pay as compared to 2021, partially offset by a lower overall driver count in 2022.
Insurance costs increased by $1.8 million during the year ended December 31, 2022 as compared to 2021, primarily due to an increase in insurance premiums, partially offset by a lower overall driver count in 2022. Fuel costs increased by $4.5 million during the year ended December 31, 2022 as compared to 2021, consistent with higher fuel prices in 2022, as compared to 2021.
Depreciation and amortization expense increased by $1.1 million during the year ended December 31, 2022 as compared to 2021, primarily due to the timing of purchases and retirements of tractors and other field equipment during 2021 and 2022.
Our crude oil marketing operating earnings for the year ended December 31, 2022 decreased by $9.4 million as compared to 2021, primarily as a result of inventory valuation losses of $2.0 million in 2022 as compared to inventory liquidation gains of $10.3 million in 2021 (as shown in the table below), and higher operating expenses in 2022 as compared to 2021, partially offset by an increase in the average market price of crude oil and an increase in crude oil volumes in 2022.
Field Level Operating Earnings (Non-GAAP Financial Measure) . Inventory valuations and forward derivative instrument (mark-to-market) valuations are two significant factors affecting comparative crude oil marketing segment operating earnings or losses. As a purchaser and shipper of crude oil, we hold inventory in storage tanks and third-party pipelines. Generally, during periods of increasing crude oil prices, we recognize inventory liquidation gains while during periods of falling prices, we recognize inventory liquidation and valuation losses.
Crude oil marketing operating earnings can be affected by the valuations of our forward month derivative instruments. These non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. We generally enter into these derivative contracts as part of a strategy to protect crude oil inventory value from market price fluctuations. The valuation of derivative instruments at period end requires the recognition of non-cash “mark-to-market” gains and losses.
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The impact of inventory liquidations and valuations and derivative valuations on our crude oil marketing segment operating earnings is summarized in the following reconciliation of our non-GAAP financial measure and provides management a measure of the business unit’s performance by removing the impact of inventory valuation and liquidation adjustments for the periods indicated (in thousands):
Year Ended December 31,
As reported segment operating earnings
Add (subtract):
Inventory liquidation gains
Inventory valuation losses
Derivative valuation gains
Field level operating earnings (1)
(1) The use of field level operating earnings is unique to us, not a substitute for a GAAP measure and may not be comparable to any similar measures developed by industry participants. We utilize this data to evaluate the profitability of our operations.
Field level operating earnings and field level purchase volumes depict our day-to-day operation of acquiring crude oil at the wellhead, transporting the product and delivering the product to market sales points. Field level operating earnings decreased slightly during the year ended December 31, 2023 as compared to 2022, primarily due to a decrease in the average market price of crude oil and a decrease in crude oil volumes in 2023, partially offset by lower fuel costs and insurance costs in 2023 as compared to 2022.
Field level operating earnings increased during the year ended December 31, 2022 as compared to 2021, primarily due to an increase in the average market price of crude oil and an increase in crude oil volumes in 2022, which increased revenues, partially offset by higher operating costs in 2022.
We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels and price per barrel):
December 31,
Average
Average
Average
Barrels
Price
Barrels
Price
Barrels
Price
Crude oil inventory
Historically, prices received for crude oil have been volatile and unpredictable with price volatility expected to continue. See “Item 1A. Risk Factors. ”
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Transportation
Our transportation segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31,
Change (1)
Change (1)
Revenues
Operating earnings
Depreciation and amortization
Driver commissions
Insurance
Fuel
Maintenance expense
Mileage (000s)
(1) Represents the percentage increase (decrease) from the prior year.
Our revenue rate structure includes a component for fuel costs in which fuel cost fluctuations are largely passed through to the customer over time. Revenues, net of fuel costs, were as follows for the periods indicated (in thousands):
Year Ended December 31,
Total transportation revenue
Diesel fuel cost
Revenues, net of fuel costs (1)
(1) Revenues, net of fuel costs, is a non-GAAP financial measure and is utilized for internal analysis of the results of our transportation segment.
2023 compared to 2022 . Transportation revenues decreased by $14.0 million during the year ended December 31, 2023 as compared to 2022. Transportation revenues, net of fuel costs, decreased by $11.7 million during the year ended December 31, 2023 as compared to 2022. These decreases in transportation revenues were primarily due to a decrease in volumes and decreased transportation rates during 2023 as a result of a softening in the transportation market due to changes in demand, supply chain issues and inflation. Softening of customer demand during 2023 led us to close two terminals, one in Pittsburgh, Pennsylvania and another in Atlanta, Georgia, with drivers being reassigned to nearby terminals, bringing our total to seventeen terminals in ten states by the end of 2023.
Driver commissions decreased by $1.2 million during the year ended December 31, 2023 as compared to 2022, primarily due to a decrease in the overall driver count and lower mileage during 2023, partially offset by an increase in driver pay in July 2023.
Fuel costs decreased by $2.3 million during the year ended December 31, 2023 as compared to 2022, primarily as a result of a decrease in 2023 in the price of fuel, lower miles traveled during 2023 and a lower overall driver count during 2023. Insurance costs decreased $0.9 million during the year ended December 31, 2023 as compared to 2022, primarily due to a lower overall driver count in 2023 and premium reductions due to our safety performance during 2023, partially offset by an overall increase in insurance premiums. Maintenance expense decreased by $0.6 million during the year ended December 31, 2023 as compared to 2022, primarily due to lower repairs and maintenance for tractors and trailers in our fleet, partially offset by escalating prices of parts, repairs and maintenance.
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Depreciation and amortization expense increased by $0.8 million during the year ended December 31, 2023 as compared to 2022, primarily as a result of the timing of purchases and leases of new tractors and trailers in 2022 and 2023. See the following table for details regarding tractor and trailer purchases, sales and leases.
Our transportation operating earnings decreased by $5.8 million during the year ended December 31, 2023 as compared to 2022, primarily due to lower revenues as a result of lower volumes, decreased transportation rates and higher maintenance costs, partially offset by lower fuel costs, driver commissions and insurance costs.
2022 compared to 2021 . Transportation revenues increased by $17.9 million during the year ended December 31, 2022 as compared to 2021. Transportation revenues, net of fuel costs, increased by $13.5 million during the year ended December 31, 2022 as compared to 2021. These increases in transportation revenues were primarily due to increased transportation rates during 2022 through continued negotiations with customers. In addition, as a result of customer demand, we opened four new terminals during the second half of 2021. These terminals, located in Charleston, West Virginia, West Memphis, Arkansas, Joliet, Illinois, and Augusta, Georgia, increased revenues by approximately $8.1 million during 2022. These increases also reflect the effect of a severe winter storm in February 2021 and the resulting power outages affecting Texas, which resulted in a significant decline in transportation services for over a week and a temporary loss of revenues in 2021. In addition, our Louisiana operations were impacted by Hurricane Ida in August 2021, resulting in a loss of days worked by drivers in the area, thus decreasing revenues. The impact of the storm affected our Louisiana locations through mid-September 2021.
Driver commissions increased by $0.2 million during the year ended December 31, 2022 as compared to 2021, primarily due to an increase in driver pay in mid-2022 and an increase in the number of drivers, partially offset by lower mileage during 2022. In addition, driver commissions were impacted by Hurricane Ida in August 2021, which affected our Louisiana operations, resulting in a loss of days worked by drivers in the area, thus decreasing driver commissions. The impact of the storm affected our Louisiana locations through mid-September 2021.
Fuel costs increased by $4.4 million during the year ended December 31, 2022 as compared to 2021, primarily as a result of an increase in the price of fuel during 2022. Insurance costs increased by $0.4 million during the year ended December 31, 2022 as compared to 2021, primarily due to an increase in insurance premiums in 2022. Maintenance expense increased by $1.4 million during the year ended December 31, 2022 as compared to 2021, primarily due to repairs and maintenance for older tractors and trailers in our fleet and escalating prices of parts, repairs and maintenance.
Depreciation and amortization expense decreased by $0.6 million during the year ended December 31, 2022 as compared to 2021, primarily as a result of the timing of purchases and leases of new tractors and trailers in 2021 and 2022.
Our transportation operating earnings increased by $3.8 million during the year ended December 31, 2022 as compared to 2021, primarily due to higher revenues as a result of increased transportation rates and revenues from new terminals, partially offset by higher fuel costs, maintenance costs, driver commissions and insurance costs.
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Equipment additions and retirements for the transportation fleet were as follows for the periods indicated:
Year Ended December 31,
New tractors purchased
11 units
3 units
28 units
New tractors leased
40 units
10 units
Tractors retired
73 units
4 units
79 units
New trailers purchased
20 units
1 unit
67 units
New trailers leased
23 units
13 units
Trailers retired
74 units
85 units
33 units
The sales of retired equipment in our transportation segment produced gains of approximately $1.7 million, $0.8 million and $0.4 million during the years ended December 31, 2023, 2022 and 2021, respectively.
Our customers are primarily in the domestic petrochemical industry. Customer demand is affected by low natural gas prices (a basic feedstock cost for the petrochemical industry) and high export demand for petrochemicals.
Pipeline and Storage
Our pipeline and storage segment revenues, operating losses and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31,
Change (1)
Change (1)
Segment revenues (2)
Less: Intersegment revenues (2)
Revenues
Operating losses
Depreciation and amortization
Insurance
(1) Represents the percentage increase (decrease) from the prior year.
(2) Segment revenues include intersegment revenues from our crude oil marketing segment, which are eliminated due to consolidation in our consolidated statements of operations.
Volume information was as follows for the periods indicated (in barrels per day):
Year Ended December 31,
Pipeline throughput
Terminalling
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2023 compared to 2022 . Pipeline and storage segment revenues decreased by $0.5 million during the year ended December 31, 2023 as compared to 2022. Intersegment revenues, which are revenues earned from GulfMark, an affiliated shipper, decreased by $0.9 million for the year ended December 31, 2023 as compared to 2022, primarily due to lower volumes transported by GulfMark during 2023. All pipeline and storage revenues earned from GulfMark are eliminated in consolidation, with the offset to marketing costs and expenses in our consolidated statements of operations. During the year ended December 31, 2022, all pipeline and storage segment revenues were earned from GulfMark, while during the year ended December 31, 2023, approximately $0.3 million of revenues were earned from third party customers.
We are currently constructing a new pipeline connection between the VEX Pipeline System and the Max Midstream pipeline system, and we expect to place the assets into commercial service during the second half of 2024. In addition, we are exploring new connections with other pipeline systems, for new crude oil supply opportunities both upstream and downstream of the pipeline, to enhance the crude oil supply and take-away capability of the system.
Our pipeline and storage operating losses increased by $0.3 million during the year ended December 31, 2023 as compared to 2022, primarily due to increases in operating salaries and wages and related personnel costs, materials and supplies and outside service costs in 2023, partially offset by an increase in third party revenues in 2023.
2022 compared to 2021 . Pipeline and storage segment revenues decreased by $0.7 million during the year ended December 31, 2022 as compared to 2021. Intersegment revenues, which are revenues earned from GulfMark, an affiliated shipper, decreased by $0.1 million for the year ended December 31, 2022 as compared to 2021, primarily due to lower volumes transported by GulfMark during 2022. All pipeline and storage revenues earned from GulfMark are eliminated in consolidation, with the offset to marketing costs and expenses in our consolidated statements of operations. During the year ended December 31, 2022, all pipeline and storage segment revenues were earned from GulfMark, while during the year ended December 31, 2021, approximately $0.7 million of revenues were earned from third party customers.
Our pipeline and storage operating losses increased by $1.1 million during the year ended December 31, 2022 as compared to 2021, primarily due to the third-party revenue contract ending, which resulted in lower revenues of $0.7 million, and increases in operating salaries and wages and related personnel costs, materials and supplies, outside service costs and insurance costs in 2022.
Logistics and Repurposing
Our logistics and repurposing segment revenues, operating (losses) earnings and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31,
Revenues
Operating (losses) earnings
Depreciation and amortization
Driver commissions
Insurance
Fuel
(1) Represents the period from acquisition, August 12, 2022 through December 31, 2022.
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On August 12, 2022, we acquired all of the equity interests of Firebird and Phoenix. Firebird is an interstate bulk motor carrier of crude oil, condensate, fuels, oils and ͏other petroleum products. At the time of acquisition, Firebird had six terminal locations throughout Texas and owned 123 tractors and 216 trailers largely in the Eagle Ford basin. Phoenix ͏recycles and repurposes off-specification fuels, lubricants, crude oil and other chemicals from ͏producers in the U.S. See Note 6 in the Notes to Consolidated Financial Statements for further information regarding the acquisition.
On May 4, 2023, we acquired approximately 10.6 acres of land in the Gulf Inland Industrial Park, located in Dayton, Texas, for approximately $1.8 million to build a new processing facility for Phoenix with rail spur and siding, product storage, and truck rack. Phoenix intends to build new infrastructure to service its existing customers and to create opportunities for growing the business. Phoenix also plans to relocate its headquarters from Humble, Texas to this new location.
2023 compared to 2022 . Revenues earned from Firebird operations were approximately $28.2 million during the year ended December 31, 2023, while revenues earned from Phoenix operations were approximately $33.1 million during the same period. Revenues earned from Firebird operations were approximately $9.5 million for the period from the August 12, 2022 acquisition date through December 31, 2022, while revenues earned from Phoenix operations were approximately $12.9 million during the same period.
Operating expenses during the year ended December 31, 2023 include driver commissions of $8.9 million, fuel costs of $3.7 million, maintenance expenses of $2.4 million and insurance costs of $2.6 million. Depreciation expense was $5.4 million and amortization expense related to intangible assets was $1.1 million during the current year. Operating losses during the year ended December 31, 2023 were $0.9 million.
General and Administrative Expense
General and administrative expenses decreased by $2.8 million during the year ended December 31, 2023 as compared to 2022, primarily due to an adjustment in 2023 of the $2.6 million contingent consideration accrual related to the Firebird and Phoenix acquisition in 2022 (see Note 6 in the Notes to Consolidated Financial Statements for further information), and lower salaries and wages and related personnel costs and legal fees, partially offset by higher insurance costs, outside service costs, audit fees and banking fees primarily related to outstanding letters of credit. The 2022 period also includes approximately $0.6 million of costs related to the repurchase of our common shares from an affiliate (see Note 10 in the Notes to Consolidated Financial Statements for further information) and approximately $0.5 million of acquisition related costs for the purchase of Firebird and Phoenix.
General and administrative expenses increased by $4.0 million during the year ended December 31, 2022 as compared to 2021, primarily due to higher salaries and wages and related personnel costs, audit fees, legal fees, outside service costs and insurance costs. As described above, 2022 also includes approximately $0.6 million of costs related to the repurchase of our common shares from an affiliate and approximately $0.5 million of acquisition related costs for the purchase of Firebird and Phoenix.
Interest Expense
Interest expense increased by $2.1 million during the year ended December 31, 2023 as compared to 2022, primarily due to an increase in interest expense of $1.6 million as a result of higher borrowings under the revolving portion of the Credit Agreement and the outstanding borrowings under the Term Loan of $21.9 million under our Credit Agreement. Interest expense also increased approximately $1.0 million related to our entry into new finance leases in 2023 (see Note 17 in the Notes to Consolidated Financial Statements for further information). The 2022 period includes the write off of debt issuance costs of $0.4 million related to the Wells Fargo credit agreement that we terminated in October 2022 (see Note 12 in the Notes to Consolidated Financial Statements for further information).
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Interest expense increased by $0.5 million during the year ended December 31, 2022 as compared to 2021, primarily due to the write off of debt issuance costs of $0.4 million related to the Wells Fargo credit agreement that we terminated in October 2022, and an increase of $0.3 million related to the outstanding Term Loan under our Credit Agreement. We entered into the Credit Agreement with Cadence Bank in October 2022 and used the proceeds from the Term Loan to partially fund the repurchase of shares from KSA Industries, Inc. (“KSA”) and certain of its affiliates on October 31, 2022 (see Note 10 in the Notes to Consolidated Financial Statements for further information).
Income Taxes
Provision for (benefit from) income taxes is based upon federal and state tax rates, and variations in amounts are consistent with taxable income (loss) in the respective accounting periods.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating losses (“NOL”) incurred in tax years 2018, 2019 and 2020 to offset 100 percent of taxable income and be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.
The NOL carryback provision in the CARES Act resulted in a cash benefit to us for the fiscal years 2018, 2019 and 2020. We carried back our NOL for the fiscal year 2018 to 2013 and received a cash refund of approximately $2.7 million in June 2020. We carried back our NOL for the fiscal year 2019 to 2014 and received a cash refund of approximately $3.7 million in April 2021. We carried back our NOL for the fiscal year 2020 to 2015 and 2016 and received a cash refund of approximately $6.9 million in June 2022.
We account for interest and penalties related to uncertain tax positions as part of our provision for federal and state income taxes. At December 31, 2023 and 2022, we have not recorded any uncertain tax benefits.
For the years ended December 31, 2023 and 2022, our effective tax rate was approximately 56.4 percent and 35.5 percent, respectively, which is higher than our statutory tax rate primarily due to non-deductible expenses, the mix of earnings in states with higher tax rates and less earnings before income taxes as compared to prior years.
At December 31, 2023 and 2022, we had deferred tax liabilities of approximately $12.9 million and $15.4 million, respectively. We recorded net tax liabilities in 2022 of approximately $6.2 million related to the tax effect of our estimated fair value allocations related to the purchase of Firebird and Phoenix (Note 6 in the Notes to Consolidated Financial Statements for further information).
See Note 14 in the Notes to Consolidated Financial Statements for further information.
Liquidity and Capital Resources
General
Our primary sources of liquidity are (i) our cash balance, (ii) cash flow from operating activities, (iii) borrowings under our Credit Agreement and (iv) funds received from the sale of equity securities. Our primary cash requirements include, but are not limited to, (i) ordinary course of business uses, such as the payment of amounts related to the purchase of crude oil, and other expenses, (ii) discretionary capital spending for investments in our business and (iii) dividends to our shareholders. We believe we will have sufficient liquidity through our current cash balances, availability under our Credit Agreement, expected cash generated from future operations, and the ease of financing tractor and trailer additions through leasing arrangements (should the need arise) to meet our short-term and long-term liquidity needs for the reasonably foreseeable future. Our cash balance and cash flow from operating activities is dependent on the success of future operations. If our cash inflow subsides or turns negative, we will evaluate our investment plan accordingly and remain flexible.
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We maintain cash balances in order to meet the timing of day-to-day cash needs. Cash and cash equivalents (excluding restricted cash) and working capital, the excess of current assets over current liabilities, were as follows at the dates indicated (in thousands):
December 31,
Cash and cash equivalents
Working capital
Our cash balance at December 31, 2023 increased by 62.0 percent from December 31, 2022, as discussed further below.
We have in place a Credit Agreement with Cadence Bank. The Credit Agreement provides for (a) a revolving credit facility that allows for borrowings up to $60.0 million in aggregate principal amount from time to time, and (b) a term loan in aggregate principal amount of $25.0 million (the “Term Loan”). We may also obtain letters of credit under the revolving credit facility up to a maximum amount of $30.0 million, which reduces availability under the revolving credit facility by a like amount. Borrowings under the revolving credit facility may be, at our option, base rate loans (defined by reference to the higher of the prime rate, the federal funds rate or an adjusted term secured overnight financing rate (“SOFR”) for a one month tenor plus one percent) or SOFR loans, in each case plus an applicable margin, the amount of which is determined by reference to our consolidated total leverage ratio, and is between 1 percent and 2 percent for base rate loans and between 2 percent and 3 percent for SOFR loans.
The Term Loan amortizes on a 10-year schedule with quarterly payments beginning December 31, 2022, and matures October 27, 2027. Proceeds of the Term Loan were used, together with additional cash on hand, to fund the repurchase of shares from KSA and certain of its affiliates on October 31, 2022. The Term Loan bears interest at the SOFR loan rate plus the applicable margin for SOFR loans.
We are required to maintain compliance with certain financial covenants under the Credit Agreement, including a consolidated leverage ratio, an asset coverage ratio and a consolidated fixed charge coverage ratio. We were in compliance with these covenants as of December 31, 2023.
On August 2, 2023, we entered into an amendment to the Credit Agreement. The amendment (i) clarifies our ability to exclude crude oil inventory valuation losses (and, to the extent included in our consolidated net income, inventory liquidation gains) from the calculation of Consolidated EBITDA (as defined in the Credit Agreement) for purposes of the related financial covenants, (ii) provides for the exclusion of unusual and non-recurring losses and expenses from the calculation of Consolidated EBITDA, not to exceed ten percent (10%) of Consolidated EBITDA for the period, and (iii) amends the definition of Consolidated Funded Indebtedness to include letters of credit and banker’s acceptances only to the extent such letters of credit or banker’s acceptances have been drawn, for purposes of the Consolidated Total Leverage Ratio calculation (as defined in the Credit Agreement). The Amendment applies to our fiscal period ending June 30, 2023 and thereafter.
At December 31, 2023, we had $21.9 million outstanding under the Credit Agreement, representing the remaining principal balance of the Term Loan, with a weighted average interest rate of 7.69 percent. We also had $13.0 million of letters of credit issued under the Credit Agreement at a fee of 2.25 percent per annum. No amounts were outstanding under the revolving credit facility. See Note 12 in the Notes to Consolidated Financial Statements for further information.
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On December 23, 2020, we entered into an At Market Issuance Sales Agreement (“ATM Agreement”) with B. Riley Securities, Inc., as agent (the “Agent”). Pursuant to the ATM Agreement, we may offer to sell shares of our common stock through or to the Agent for cash from time to time. The total number of shares of common stock to be sold, if any, and the price the shares will be sold at will be determined by us periodically in connection with any such sales, though the total amount sold may not exceed the limitations stated in the applicable registration statement. We filed a registration statement initially registering an aggregate of $20.0 million of shares of common stock for sale under the ATM Agreement. During the year ended December 31, 2023, we received net proceeds of approximately $0.5 million (net of offering costs to the Agent of $27 thousand) from the sale of 14,680 of our common shares at an average price per share of approximately $40.74 under the ATM Agreement. In December 2023, we filed a new registration statement which replaced our prior shelf registration statement and restored the aggregate of $20.0 million of shares of common stock for sale under the ATM Agreement. The registration statement was declared effective on January 5, 2024. The full capacity of the ATM agreement remains unsold.
We utilize cash from operations to make discretionary investments in our four business segments. With the exception of operating and finance lease commitments primarily associated with storage tank terminal arrangements, leased office space, tractors, trailers and other equipment, our future commitments and planned investments can be readily curtailed if operating cash flows decrease. See below for information regarding our operating and finance lease obligations. We have no off-balance sheet arrangements that have or are reasonably expected to have a material current or future effect on our financial position, results of operations or cash flows.
The most significant item affecting future increases or decreases in liquidity is earnings from operations, and these earnings are dependent on the success of future operations. See “Part I, Item 1A. Risk Factors. ”
Cash Flows from Operating, Investing and Financing Activities
Our consolidated cash flows from operating, investing and financing activities were as follows for the periods indicated (in thousands):
Year Ended December 31,
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating activities . Net cash flows provided by operating activities was $30.3 million for the year ended December 31, 2023 as compared to $13.8 million for the year ended December 31, 2022. The increase in net cash flows from operating activities of $16.5 million was primarily due to changes in our working capital accounts, including a decrease in the price of our crude oil inventory, which decreased from $78.39 per barrel at December 31, 2022 to $72.35 per barrel at December 31, 2023, and a decrease of 18.5 percent in the number of barrels held in inventory. Early payments made to suppliers decreased by approximately $9.5 million in 2023, while early payments received from customers decreased by approximately $12.4 million in 2023. Earnings also decreased by $3.3 million in 2023 as compared to 2022.
Net cash flows provided by operating activities was $13.8 million for the year ended December 31, 2022 as compared to $81.0 million for the year ended December 31, 2021. The decrease in net cash flows from operating activities of $67.2 million was primarily due to lower earnings of $8.4 million in 2022 and changes in our working capital accounts. Early payments received from customers decreased by approximately $7.6 million in 2022, and early payments made to suppliers increased by approximately $8.3 million in 2022. In addition, crude oil inventory increased by $8.0 million at December 31, 2022, primarily due to an increase in the price of our crude oil inventory, which increased from $71.86 per barrel at December 31, 2021 to $78.39 per barrel at December 31, 2022, and an increase of 26.6 percent in the number of barrels held in inventory.
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At various times each month, we may make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within our crude oil marketing operations. Crude oil supply prepayments are recouped and advanced from month to month as the suppliers deliver product to us. In addition, in order to secure crude oil supply, we may also “early pay” our suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. These “early payments” reduce cash and accounts payable as of the balance sheet date.
We also require certain customers to make similar early payments or to post cash collateral with us in order to support their purchases from us. Early payments and cash collateral received from customers increases cash and reduces accounts receivable as of the balance sheet date.
Early payments received from customers and prepayments made to suppliers were as follows at the dates indicated (in thousands):
December 31,
Early payments received
Early payments to suppliers
We rely heavily on our ability to obtain open-line trade credit from our suppliers especially with respect to our crude oil marketing operations. The timing of payments and receipts of these early pays received and paid can have a significant impact on our cash balance.
Investing activities . Net cash used in investing activities for the year ended December 31, 2023 decreased by $32.9 million when compared to 2022. This decrease in net cash flows used in investing activities was primarily due to a payment of $33.1 million for the acquisition of Firebird and Phoenix in August 2022 (see Note 6 in the Notes to Consolidated Financial Statements for further information) and an increase of $5.7 million in cash proceeds from sales of assets, partially offset by an increase of $4.4 million in capital spending for property and equipment (see “Capital Spending” below) and a decrease of $1.5 million in insurance and state collateral refunds in 2023.
Net cash used in investing activities for the year ended December 31, 2022 increased by $25.9 million when compared to 2021. This increase in net cash flows used in investing activities was primarily due to a payment of $33.1 million for the acquisition of Firebird and Phoenix in August 2022, partially offset by a decrease of $4.9 million in capital spending for property and equipment (see “Capital Spending” below), an increase of $0.8 million in cash proceeds from sales of assets and an increase of $1.5 million in insurance and state collateral refunds in 2022.
Financing activities . Net cash used in financing activities for the year ended December 31, 2023 decreased by $41.0 million when compared to 2022. The change in net cash flows from financing activities was primarily due to the following cash outflows and inflows:
• borrowings and repayments under revolving credit agreements in place during each year (see Note 12 in the Notes to Consolidated Financial Statements for further information). During 2023, we borrowed and repaid $76.0 million under the revolving credit facility under our Credit Agreement with Cadence Bank, while during 2022, we borrowed and repaid $92.0 million under the credit agreements with Cadence Bank or Wells Fargo in place during 2022. Borrowings were primarily used for working capital purposes.
• borrowing under our Term Loan. During 2022, we borrowed $25.0 million under the Term Loan with Cadence Bank to partially fund the repurchase of the shares from KSA and affiliates (see Note 10 in the Notes to Consolidated Financial Statements for further information). During the years ended December 31, 2023 and 2022, we made principal payments of $2.5 million and $0.6 million, respectively, on the Term Loan.
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• cash payment to repurchase shares. During 2022, we made a cash payment in October 2022 of $69.9 million for the repurchase of an aggregate of 1,942,433 shares of our common stock from KSA and affiliates (see Note 10 in the Notes to Consolidated Financial Statements for further information).
• principal repayments under finance lease obligations. During 2023, we had an increase of $3.8 million in principal repayments made for finance lease obligations (see “Material Cash Requirements” below for information regarding our finance lease obligations).
• net proceeds from the sale of equity. During 2023, we had a decrease of $1.2 million in net proceeds from the sale of common shares under the ATM program as compared to 2022. During the year ended December 31, 2023, we received net proceeds of approximately $0.5 million from the sale of 14,680 of our common shares, while during the year ended December 31, 2022, we received net proceeds of approximately $1.7 million from the sale of 46,524 of our common shares.
• payment of debt issuance costs. During 2022, we made payments of $1.7 million for debt issuance costs related to our entry into the Credit Agreement with Cadence Bank.
• cash payment of dividends. During both of the years ended December 31, 2023 and 2022, we paid aggregate cash dividends of $0.96 per common share, or totals of $2.5 million and $3.8 million, respectively. On October 31, 2022, the number of common shares outstanding decreased by 1.9 million as a result of the repurchase of the shares from KSA and affiliates.
Net cash used in financing activities for the year ended December 31, 2022 increased by $38.3 million when compared to 2021. The change in net cash flows from financing activities was primarily due to the following cash outflows and inflows:
• a cash payment in October 2022 of $69.9 million for the repurchase of an aggregate of 1,942,433 shares of our common stock from KSA and affiliates;
• an increase in 2022 of $0.4 million in principal repayments made for finance lease obligations (see “Material Cash Requirements” below for information regarding our finance lease obligations);
• a decrease in 2022 of $1.1 million in net proceeds from the sale of common shares under the ATM program. During the year ended December 31, 2022, we received net proceeds of approximately $1.7 million from the sale of 46,524 of our common shares, while during the year ended December 31, 2021, we received net proceeds of approximately $2.8 million from the sale of 97,623 of our common shares.
• an increase in 2022 in net borrowings under our credit agreements with Wells Fargo and Cadence Bank. During 2022, we borrowed and repaid $92.0 million under the credit agreements, primarily for working capital purposes. We also borrowed $25.0 million under the Term Loan with Cadence Bank to partially fund the repurchase of the shares from KSA and affiliates, and made a principal repayment of $0.6 million in December 2022 on the Term Loan. During the year ended December 31, 2021, we borrowed $8.0 million under the credit agreement primarily to repay the $10.0 million outstanding payable related to the purchase of the VEX pipeline system in October 2020, and repaid the $8.0 million during 2021.
• a cash outflow in 2022 of $1.7 million for debt issuance costs related to the Credit Agreement with Cadence Bank;
• a cash outflow in 2022 as a result of the payment of the $10.0 million outstanding payable related to the purchase of the VEX Pipeline System in October 2020;
• a decrease in 2022 in cash dividends paid on our common shares. During both of the years ended December 31, 2022 and 2021, we paid aggregate cash dividends of $0.96 per common share, or totals of $3.8 million and $4.1 million, respectively. On October 31, 2022, the number of common shares outstanding decreased by 1.9 million as a result of the repurchase of the shares from KSA and affiliates.
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Capital Spending
We use cash from operations and existing cash balances to make discretionary investments in our businesses. Capital spending was as follows for the periods indicated (in thousands):
Year Ended December 31,
Crude oil marketing (1)
Transportation (2)
Pipeline and storage
Logistics and repurposing (3)
Other (4)
Capital spending
(1) Amounts for the years ended December 31, 2023, 2022 and 2021, do not include approximately $8.0 million, $5.1 million and $2.1 million, respectively, of tractors, trailers and other equipment acquired under finance leases.
(2) Amounts for the years ended December 31, 2023 and 2022, do not include approximately $8.6 million and $2.8 million, respectively, of tractors and trailers acquired under finance leases.
(3) Amount for the year ended December 31, 2023 does not include approximately $1.3 million of tractors acquired under finance leases. Amount for the year ended December 31, 2022 does not include approximately $33.1 million of capital spending related to the acquisition of Firebird and Phoenix.
(4) Amounts relate to the purchase of a company vehicle and office and computer equipment, which are not attributed or allocated to any of our reporting segments.
As a result of the uncertainty relating to the economic environment resulting from the COVID-19 pandemic, we significantly reduced our capital spending in 2023, 2022 and 2021 and, as a result, entered into finance lease agreements for the use of tractors and trailers. See “Material Cash Requirements” below for information regarding our finance lease obligations.
Crude oil marketing . Capital expenditures during 2023 were for the purchase of various field equipment. Capital expenditures during 2022 were for the purchase of 20 tractors, 10 trailers and other field equipment, and during 2021, were for the purchase of 16 tractors, 2 trailers and other field equipment.
Transportation . Capital expenditures during 2023 were for the purchase of eleven tractors, twenty trailers and various field equipment. Capital expenditures during 2022 were for the purchase of three tractors, one trailer and other field equipment, and during 2021, were for the purchase of 28 tractors, 67 trailers and computer software and equipment.
Pipeline and storage . Capital expenditures during 2023 were for the continued construction of a pipeline connection, which is expected to be placed in commercial service during the second half of 2024. Capital expenditures during 2022 were for the purchase of land and easements in connection with a planned pipeline connection, and during 2021, were for the purchase of computer equipment and field equipment.
Logistics and repurposing . Capital expenditures during 2023 were for the purchase of approximately 10.6 acres of land in the Gulf Inland Industrial Park, located in Dayton, Texas, for approximately $1.8 million to build a new processing facility for Phoenix, 15 tractors, four trailers and various field equipment. Capital expenditures for 2022 were for the purchase of field equipment.
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Material Cash Requirements
The following table summarizes our contractual obligations with material cash requirements at December 31, 2023 (in thousands):
Payments due by period
Contractual Obligations
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Credit Agreement (1)
Finance lease obligations (2)
Operating lease obligations (3)
Purchase obligations:
Crude oil marketing — crude oil (4)
Tractors and trailers (5)
Total contractual obligations
(1) Represents scheduled future maturities for amounts due under the Term Loan under our Credit Agreement plus estimated cash payments for interest. Interest payments are based upon the principal amount of the amount outstanding and the applicable interest rate at December 31, 2023. See Note 12 in the Notes to Consolidated Financial Statements for further information about our Credit Agreement.
(2) Amounts represent our principal contractual commitments, including interest, outstanding under finance leases for tractors, trailers, tank storage and throughput arrangements and other equipment.
(3) Amounts represent rental obligations under non-cancelable operating leases and terminal arrangements with terms in excess of one year.
(4) Amount represents commitments to purchase certain quantities of crude oil substantially in January 2024 in connection with our crude oil marketing activities. These commodity purchase obligations are the basis for commodity sales, which generate the cash flow necessary to meet these purchase obligations.
(5) Amount represents commitments to purchase nine new tractors and thirteen new trailers in our transportation business, 28 new tractors in our crude oil marketing business, and two new trailers in our logistics and repurposing segment.
We maintain certain lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis. In addition, we enter into office space and certain lease and terminal access contracts in order to provide tank storage and dock access for our crude oil marketing business. These storage and access contracts require certain minimum monthly payments for the term of the contracts.
Rental expense was as follows for the periods indicated (in thousands):
Year Ended December 31,
Rental expense
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Insurance
Our primary insurance needs are workers’ compensation, automobile and umbrella liability coverage for our trucking fleet and medical insurance for our employees. See Note 18 in the Notes to Consolidated Financial Statements for further information. Insurance costs were as follows for the periods indicated (in thousands):
Year Ended December 31,
Insurance costs
Related Party Transactions
For information regarding our related party transactions, see Note 10 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Recent Accounting Developments
For information regarding recent accounting developments, see Note 2 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Outlook
One of our primary opportunities for 2024 will be to expand our relationships with existing customers by providing additional services to them through our recently acquired new lines of business. We also plan to expand on our other businesses by capitalizing on integration opportunities we can offer our customers. In addition, we will continue to focus on expanding our core businesses while delivering value to our shareholders. We will work to achieve positive results in markets with strong competition and margin pressures throughout all segments of our business. We also plan to continue to focus on cutting costs to combat inflation by negotiating with suppliers and by operating efficiently.
Our major objectives for 2024 are as follows:
• Crude oil marketing – We plan to focus on increasing margins to maximize cash flow and capturing midstream opportunities in an inflationary market. We will continue to take advantage of our recently upgraded fleet dispatch and maintenance software system to help drive more efficiency in our fleet operations and lower our operating costs, which we believe will help drive increased profitability. In addition, we will look for opportunities to increase our trucking fleet to add to our overall ability to gather and distribute crude oil.
• Transportation – We plan to continue to increase truck utilization, upgrade our fleet quality and enhance driver retention and recruitment. We also plan to continue to capitalize on our recent acquisitions and organic expansions to improve quality of revenue through improved efficiencies. We will continue to look for ways to expand our terminal footprint to put us in a position to better compete for new business.
• Pipeline and storage – We will focus on opportunities to increase our pipeline and storage utilization, by identifying opportunities with our existing and new customers to increase volumes. In addition, we will look to capitalize on our new pipeline connection, scheduled to come on-line in the second half of 2024, as well as continuing to look for new connections for the pipeline system both upstream and downstream of the pipeline, to increase the crude oil supply and take-away capability of the system.
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• Logistics and repurposing – We will focus on maintaining the relationships that these entities have developed over their years of operations and look to expand the customer base by offering these new services to our other divisions customers. We believe by integrating this business with certain aspects of our other businesses, we can bring additional overall value to both our customers and to our shareholders. We expect to break ground on the Dayton facility during the second quarter of 2024. When completed, this facility will allow us to operate our rail and trucking business more efficiently, as well as open up opportunities to process a wider variety of products.
• Strategic business development – We will deploy a disciplined investment approach to growth in our four segments and funding new growth opportunities that are adjacent and complimentary to existing operating activities.
Critical Accounting Policies and Estimates
In our financial reporting processes, we employ methods, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our financial statements. These methods, estimates and assumptions also affect the reported amounts of revenues and expenses for each reporting period. Investors should be aware that actual results could differ from these estimates if the underlying assumptions prove to be incorrect. The following sections discuss the use of estimates within our critical accounting policies and estimates.
Goodwill and Intangible Assets
We allocate the purchase price of acquired businesses to their identifiable tangible assets and liabilities, such as accounts receivable, inventory, property, plant and equipment, accounts payable and accrued liabilities. We also allocate a portion of the purchase price to identifiable intangible assets, such as non-compete agreements, trade names and customer relationships. Allocations are based on estimated fair values of assets and liabilities. Deferred taxes are recorded for any differences between the assigned values and tax bases of assets and liabilities. Estimated deferred taxes are based on available information concerning the tax bases of assets acquired and liabilities assumed and loss carryforwards at the acquisition date, although such estimates may change in the future as additional information becomes known. We use all available information to estimate fair values including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows.
Certain estimates and judgments are required in the application of the fair value techniques, including estimates of future cash flows and the selection of a discount rate, as well as the use of “Level 3” measurements as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820, Fair Value Measurements and Disclosure . Any remaining excess of cost over allocated fair values is recorded as goodwill. We typically engage third-party valuation experts to assist in determining the fair values for both the identifiable tangible and intangible assets. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact our results of operations.
At December 31, 2023, our goodwill balance was approximately $6.7 million. At December 31, 2023 and 2022, the carrying values of our intangible assets were $8.0 million and $9.7 million, respectively. See Note 6 and Note 8 in the Notes to Consolidated Financial Statements for further information.
Fair Value Accounting
We enter into certain forward commodity contracts that are required to be recorded at fair value, and these contracts are recorded as either an asset or liability measured at its fair value. Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and we elect, cash flow hedge accounting. We had no contracts designated for hedge accounting during the years ended December 31, 2023, 2022 and 2021.
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We utilize a market approach to valuing our commodity contracts. On a contract by contract, forward month by forward month basis, we obtain observable market data for valuing our contracts that typically have durations of less than 18 months. At December 31, 2023, all of our market value measurements were based on inputs based on observable market data (Level 2 inputs). See discussion under “Fair Value Measurements” in Note 2 and Note 13 in the Notes to Consolidated Financial Statements.
Our fair value contracts give rise to market risk, which represents the potential loss that may result from a change in the market value of a particular commitment. We monitor and manage our exposure to market risk to ensure compliance with our risk management policies. These risk management policies are regularly assessed to ensure their appropriateness given our objectives, strategies and current market conditions.
Liability and Contingency Accruals, including those related to Insurance Liabilities
We establish a liability under the automobile and workers’ compensation insurance policies for expected claims incurred but not reported on a monthly basis. We retain a third-party consulting actuary to establish loss development factors, based on historical claims experience as well as industry experience. We apply those factors to current claims information to derive an estimate of the ultimate claims liability. See Note 18 in the Notes to Consolidated Financial Statements for further information.
From time to time as incidental to our operations, we become involved in various accidents, lawsuits and/or disputes. As an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, worker compensation claims or other items of general liability as are typical for the industry. In addition, we have extensive operations that must comply with a wide variety of tax laws, environmental laws and labor laws, among others. Should an incident occur, we evaluate the claim based on its nature, the facts and circumstances and the applicability of insurance coverage. When our assessment indicates that it is probable that a liability has occurred and the amount of the liability can be reasonably estimated, we make appropriate accruals or disclosure. We base our estimates on all known facts at the time and our assessment of the ultimate outcome, including consultation with external experts and counsel. We revise these estimates as additional information is obtained or resolution is achieved. At December 31, 2023, we do not believe any of our outstanding legal matters would have a material adverse effect on our financial position, results of operations or cash flows.
Revenue Recognition
We account for our revenues under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers . ASC 606’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.
Our revenues are primarily generated from the marketing, transportation, storage and terminalling of crude oil and other related products, the tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk and the recycling and repurposing of off-specification fuels, lubricants, crude oil and other chemicals. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. To identify the performance obligations, we considered all of the products or services promised in the contracts with customers, whether explicitly stated or implied based on customary business practices. Revenue is recognized when, or as, each performance obligation is satisfied under terms of the contract. Payment is typically due in full within 30 days of the invoice date.
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Crude oil marketing segment . Crude oil marketing activities generate revenues from the sale and delivery of crude oil purchased either directly from producers or on the open market. Most of our crude oil purchase and sale contracts qualify and are designated as non-trading activities, and we consider these contracts as normal purchases and sales activity. For normal purchases and sales, our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the product to the customer. Revenue is recognized based on the transaction price and the quantity delivered.
The majority of our crude oil sales contracts have multiple distinct performance obligations as the promise to transfer the individual goods (e.g., barrels of crude oil) is separately identifiable from the other goods promised within the contracts. Our performance obligations are satisfied at a point in time. For normal sales arrangements, revenue is recognized in the month in which control of the physical product is transferred to the customer, generally upon delivery of the product to the customer.
Transportation segment . Transportation activities generate revenue from the truck transportation of liquid chemicals, pressurized gases, asphalt or dry bulk from point A to point B for customers. Each sales order is associated with our master transportation agreements and is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the goods and services are delivered.
Pipeline and storage segment . Pipeline and storage activities generate revenue by transporting crude oil on our pipeline and providing storage and terminalling services for our customers. Our operations generally consist of fee-based activities associated with the transportation of crude oil and providing storage and terminalling services for crude oil. Revenues from pipeline tariffs and fees are associated with the transportation of crude oil at a published tariff. We primarily recognize pipeline tariff and fee revenues over time as services are rendered, based on the volumes transported. As is common in the pipeline transportation industry, our tariffs incorporate a loss allowance factor. We recognize the allowance volumes collected as part of the transaction price and record this non-cash consideration at fair value, measured as of the contract inception date.
Storage fees are typically recognized in revenue ratably over the term of the contract regardless of the actual storage capacity utilized as our performance obligation is to make available storage capacity for a period of time. Terminalling fees are recognized as the crude oil enters or exits the terminal and is received from or delivered to the connecting carrier or third-party terminal, as applicable.
Logistics and repurposing . Logistics activities generate revenue from the truck transportation of crude oil, condensate, fuels, oils and other petroleum products from point A to point B for customers. Each sales order is associated with our master transportation agreements and is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the goods and services are delivered.
Recycling and repurposing activities generate revenue by repurposing off-specification fuels, lubricants, crude oil and other chemicals. These recycling and repurposing activities generate revenues from the sale and delivery of product purchased directly from the customer. Our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the product to the customer. Revenue is recognized based on the transaction price and the quantity delivered.
See Note 3 in the Notes to Consolidated Financial Statements for further information.
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