Earnings Call: Q1 2020

May 13, 2020

Ladies and gentlemen, thank you for standing by, and welcome to Keyera First Quarter 2020 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to turn the conference over to your host today, Lavonne Dedunich, Director of Investor Relations. Please go ahead. Good morning, everyone, and thank you for joining us for Keyera's Q1 conference call for 2020. Our speakers today will be David Smith, Chief Executive Officer Dean Sadoguchi, President and Chief Commercial Officer Steven Kroeker, Senior Vice President and CFO and Brad Lock, Senior Vice President and COO. I would like to remind listeners that some of the comments and answers that we will provide speak to future events. These forward looking statements are given as of today's date and reflect events or outcomes that management currently expects. In addition, we will also refer to some non GAAP financial measures. For additional information on non GAAP measures and forward looking statements, please refer to our public filings available on SEDAR and our website. With that, I will turn it over to David. Thank you, Lavonne, and good morning, everyone. Thank you for joining us today. We hope that you and your families are staying safe and healthy during these challenging times. As we navigate these extraordinary circumstances, we are reminded of the fragility of life and the importance of health, safety and the health, safety and well-being of our families, co workers, employees and contractors, our customers and our stakeholders. It's not just our physical health that's at risk, it's our mental health as well. We are all affected and we need to take care of each other. From a business standpoint, it is difficult to predict the full scope and extent of the consequences of the COVID-nineteen pandemic. At Keyera, we are focusing on those things that are within our control and we have taken prudent steps to address short term challenges and enhance the long term success of the company. Our strong financial position allows us to ensure the stability and continuity of the business during this unprecedented economic situation. We have a strong balance sheet, 2 investment grade credit ratings and over $1,400,000,000 in undrawn capacity on our committed credit facility. To enhance Cara's competitive positioning in our gathering and processing business, we continue to advance our optimization plan in response to industry conditions. To date, we have announced plans to suspend operations at 6 of our gas plants. These have been difficult decisions as these plants have been part of the Keyera family for many years. However, these actions to optimize the portfolio will reduce costs and reduce greenhouse gas emissions, enhancing netbacks for our customers and improving profitability for Keyera. To maintain our financial flexibility, we decided to defer construction of the CAPS pipeline system for approximately 1 year. This decision has reduced our 2020 growth capital program by approximately $250,000,000 In conjunction with our decision to defer caps, we suspended the dividend reinvestment program. And finally, in parallel with our gathering and processing optimization plan and our reduced capital expenditure program, we are reviewing alternatives to further reduce our overall cost structure, including both operating costs and general and administrative expenses. With these actions we have taken and are taking, I am confident that we will navigate through this challenging time and emerge stronger, ready to capture opportunities as the industry recovers. Our strong Q1 financial results are an indication of the strength of our business model. We achieved record adjusted EBITDA of $327,000,000 and record distributable cash flow of $253,000,000 or $1.16 per share. Our net earnings were $86,000,000 or $0.39 per share. I will now turn it over to Brad to discuss our operations. Thank you, David. At Keyera, we remain committed to the highest standard of health safety performance and have taken the appropriate precautions to to to our values and for their diligence in working safely with one another. Overall, our employees continue to work from home where possible and we have measures in place at our facilities to limit the potential spread of COVID-nineteen and contingency plans in place to ensure that can continue to operate safely and reliably. Over the past 2 months, our organization has risen to that challenge that the COVID-nineteen pandemic has presented. We have activated our corporate advisory team and have focused our efforts on 3 areas: pandemic response, business continuity, and critical facility operations. I have seen exceptional work from our people over the past weeks and I want to recognize the efforts of our information technology team, enabling a smooth transition to our staff working remotely, our facility operations and maintenance teams who have helped ensure no operational interruptions that have occurred as a result of the pandemic and our human resources and communications teams who have been on the front line since day 1 supporting our employees and contractors and doing it with the care and compassion that Keyera is known for. These are just a few areas where we have excelled in our response and there are many more that I could mention. In the Q1 of 2020, we continue to progress our capital projects that are nearing completion and will begin to generate cash flow later this year. We have completed Phase 2 of the Wapiti gas plant and expect to commission the plant in the Q4 to align with our customers' needs. In Cushing, Oklahoma, construction continues at our WildHorse crude oil storage and blending terminal and we remain on track to commission this facility in the second half of the year. With high demand for storage capacity, we look forward to bringing this terminal into service. At our Pipestone gas plant in the liquids rich Montney area of Alberta, construction is progressing very well. We now expect the plant to be operational and generating cash flows this fall. As a reminder, this gas plant provides Oventus Pipestone or supports Oventus Pipestone development where they plan on commissioning the facility with existing regional volumes, which will grow as they develop their extensive land position. I will now pass it over to Dean to talk about our business outlooks for 2020. Thanks, Brad. I want to echo Brad's comments about the exceptional work of our teams over the past few weeks. And in particular, I'd like to highlight the work of our CAPS team. In April, we announced with the support of our partners and customers, we would be deferring the construction of CAPS by approximately 1 year. As the COVID-nineteen situation continues to unfold, deferring caps allows us to reduce our 2020 capital program and improve our financial flexibility. This is a testament to the teamwork of all the stakeholders involved, the strong customer relationships and the strong customer support for this project. At the end of April, we received our full AER regulatory approval for the entire CaPS pipe mainline. And with this significant milestone, we are on schedule to start up in the first half of twenty twenty three. As David mentioned, we had a very strong start to the year with record results in several areas. I want to speak a bit about our expectations looking forward for the remainder of the year. This is an unprecedented time and there are uncertainties that we'll continue to navigate our way through. In our gathering processing business, producers have announced significant reductions to the capital programs, which will result in lower volumes through Keyera's gas plants and lower operating margin than originally expected. We're working with our customers where appropriate to develop mutually beneficial solutions and help keep their volumes flowing in the short term, typically in exchange for another form of value. For Liquids Infrastructure business, we expect our results to be relatively resilient as our condensate business is supported by long term take or pay contracts with creditworthy counterparties. And demand for storage assets has increased as these assets provide valuable flexibility for our customers. Our fractionation utilization and revenue may be lower for the remainder of 2020 if drilling activity is significantly reduced or substantial production is shut in. Within our marketing segment, we still expect realized margin for 2020 to range between $270,000,000 $310,000,000 given the strength of our Q1 as well as our effective risk management strategy that protected the value of our inventory as commodity prices fell dramatically during the Q1. With that, I'll turn it over to Stephen to talk about our financial results. Thanks, Dean. Keyera achieved record results in the Q1 of 2020 with adjusted EBITDA of $327,000,000 and distributable cash flow of $253,000,000 or $1.16 per share. Fee for service realized margin for the quarter was slightly ahead of that in the Q1 of 2019 and trailing 12 months fee for service realized margin increased slightly to $676,000,000 For the Q1 of 2020, the Liquids Infrastructure segment generated a record $102,000,000 in operating margin due to increased demand for condensate transportation and storage. Meanwhile, the Gathering and Processing segment generated $64,000,000 in operating margin in the Q1, which was $4,000,000 less than the same quarter last year and $16,000,000 lower than the Q4 of 2019. The lower result in gathering and processing reflects lower industry activity and select fee relief behind various facilities as well as increased operating costs and lower throughput due to unscheduled repair work at the Wapiti plant that totaled 4 weeks. The marketing segment delivered operating margin of $246,000,000 and realized margin of $165,000,000 largely due to higher contributions from isooctane sales and an effective risk management strategy. The hedging strategy is aimed at protecting both inventory value and margin. As there is uncertainty as to when a recovery in energy demand and commodity prices may occur, Keyera remains focused on preserving its financial flexibility and maintaining a strong financial position. This includes the following: a strong balance sheet with net debt to adjusted EBITDA of 2.2 times as of March 31, 2020, including 50% of the subordinated hybrid notes as debt. A conservative payout ratio of 55% for the last 12 months, which is well within our long term target range of between 50% 70% 2 investment grade corporate credit ratings, a $1,500,000,000 line of credit with only $70,000,000 drawn as of March 31, 2020, and minimal long term debt maturities in the next 5 years. With the decision to defer caps 1 year, we have reduced our growth capital for 2020 to a range of between $475,000,000 $525,000,000 dollars down from a range of $700,000,000 to $800,000,000 In April, we also suspended the regular and premium components of the dividend reinvestment plan effective with the May 2020 dividend. We felt this was a prudent step to preserve shareholder value. In 2020, our distributable cash flow per share is expected to benefit from significantly lower cash taxes and maintenance capital. We now expect the current income tax recovery of between $20,000,000 $30,000,000 for the year compared to a $98,000,000 cash tax expense in 2019. And we expect our 2020 maintenance capital to be between $30,000,000 $35,000,000 which is significantly lower than the $105,000,000 incurred in 2019. With that, I'll turn it over to David. Thanks, Stephen. Looking ahead, Keyera remains committed to operational excellence focused on safe, reliable and responsible operations. With our strong financial position, we will continue to take a disciplined approach in the face of this uncertain business environment. The COVID-nineteen crisis is unprecedented and the situation remains challenging and unpredictable. However, we are cautiously optimistic that the worst is behind us. Driving demand appears to have already bottomed out and will be further supported by the gradual relaxation of stay at home policies. Significant volumes of oil supply are being shut in around the world, helping to ease the strain on inventory levels and support prices. In Canada, we've seen a recovery in the condensate pricing. And meanwhile, natural gas prices in Alberta have remained firm throughout. I am confident that Keyera will successfully navigate the current challenges and strengthen our foundation to add shareholder value as the industry recovers. On behalf of Keyera's Board of Directors and management team, I would like to thank again our employees, customers, shareholders and other stakeholders for your continued support. Please stay safe and healthy. Take care of yourself and your loved ones and stay positive. With that, I'll turn it back to the operator. Please go ahead with questions. Your first question comes from Matt Taylor from Tudor, Pickering, Holt. Your line is open. Yes. Thanks for taking my questions here. Starting off on AAF, you made some comments in the MD and A about weak isooctane pricing and product premiums for 2020. And then one of your midstream peers talked about lower utilization expected from their octane enhancement business. So as I'm looking at your expected marketing guidance there, I noticed AES has continued or assumed to continue to operate in your capacity. Can you just speak to what market dynamics you're seeing there to keep utilization high while demand is down? Sure, Matt. It's Dean Sedoguchi. We are continuing to run our facility near capacity. Obviously, we've seen a little bit of a roller coaster ride over the last 6 weeks in ARBOP prices going from minus $2 to plus $12 to $13 So that's been very positive. And obviously, we're seeing driving demand starting to increase as the lockdowns ease across North America and in the world as well. So we've seen this steady demand for our product. The premiums aren't as strong as what we saw last year, But certainly there's demand for the product and we've been pretty open that we actually sell a lot of our products through Gleaner Park. And so the Caribbean market has still been relatively strong for gasoline. And like I say, we're starting to see more demand pick up in North America now too. Thanks for that. Dean, just as a follow-up, can you frame how you hedged the AF business even if there is unexpected downside here for longer? Well, we our hedges are more typically higher in the near months and they sort of fall off a bit more in the later months. So again, we do have a bit of uncertainty as we get into the latter half of this year and into 2021. But again, those fundamentals are improving. So we're going to be looking to hedge in layers to protect our downside for that business and preserve margin. Great. Thanks, Dean. And then one more on the dividend. Leverage and payouts are in good shape here. But as you layer on some downside risk to your GMP business and then start thinking about unhedged marketing in 2021, just I guess two questions. Do you defer any more dividend growth in the near term here to preserve future financial flexibility? And then second, would you be willing to continue deferring CapEx like caps to protect the dividend should these market conditions persist? Matt, it's Dave here. I'll take that one. I think we continue to monitor the situation as we always do when we look at our dividend policy and our capital allocation. We have projects underway now that will all be completed. The material ones will be completed before the end of this year and I think so we have a fair bit of flexibility at this point with respect to the timing and degree of capital investment. And with respect to the dividend, I think it's fair to say we're going to be cautious in the current environment with respect to any future increases. We have a long track record of gradual growth in the dividend per share. But in this environment, I think we're going to be focused on making sure that the dividend is sustainable long term. So I think it's probably prudent for us to take a pause with respect to growth or growth in the dividend per share. But these are things that we monitor quarter to quarter. Great. Thanks for that answer, David. That's all for me. And your next question will come from Patrick Kenny, National Bank Financial. Your line is open. Hey, guys. Just a follow-up on AEF here. You previously pushed back the turnaround from this fall into 2021. I was just curious if there was any thoughts to bring that back to 2020, just given the pullback in gasoline demand? Or is that just not feasible given some of the hedging positions you have in place? Hi, Pat. This is Brad. I think we continue to monitor the performance of AEF, and we're happy with how it's performing right now. I think we're going to continue to look at a 2021 turnaround and are actually going to potentially consider pushing that out into future years if we can manage both the risk and the compliance requirements that go with that. So I don't think we have any desire to pull that forward into 2020 right now. Okay. Thanks, Brad. And then on the G and P side, perhaps maybe a bit more color on the comment around developing solutions with your customers that are mutually beneficial. Just wondering what that means to your processing agreements and near term cash flow outlook. And then also maybe a comment on whether or not the liquidity support being offered to the customers with the EDC loans. I mean, does that not relieve at least some of the pressure on you guys to renegotiate your existing fees? Yes, Pat, it's Dean. First of all, I mean, I think you have to look at our 2 different G and P gathering areas and processing areas. And one is our Central Foothills. And as David mentioned, when you look at the outlook for natural gas, it's probably been as good as it has been in many years. And certainly with the reduction of production, both oil and natural gas and across North America, we also think that NGLs are going to get tighter. So from a pricing perspective, we think in our Central Foothills area, in conjunction with some of the operating cost reduction initiatives that we have underway, we think that that is looking more promising when we look out into the future. When you look at our northern area, which is driven more by condensate economics, you have to remember that several weeks ago, I mean condensate was trading at low single digit prices. And today they're trading $2 $3 off of WTI which is in that $23 $24 U. S. Range. So much different in a 4, 5, 6 week span. So again, long story short, I mean, we worked I mean, this is a tremendous this crisis is very significant. And so we try to work with our customers through these short term what we believe is shorter term challenges. And so we've provided some concessions on a very short term basis and we've asked for value in other ways and that would be confidential that we we're not at liberty to share that. But that's generally our philosophy. We want to work with our customers so that they're there for the long term. Pat, it's Dave here. I'll just add a comment or 2. I think what we're saying here is I think we're feeling a fair bit more positive about the outlook now than we were probably 4 or 5 weeks ago. With respect to your question around liquidity support from the government, I think that will certainly help. It's no secret that some of the companies that are customers of ours in a couple of these areas have balance sheets that are challenged. The other thing that I think is reasonable to expect is that we'll see some consolidation over the course of the next little while among the E and P companies. And specifically, we saw Spartan Delta buying out the assets of Bellatrix. And for us, we think that's a positive step because Spartan Delta starts out with a much stronger financial position than Bellatrix had. And I think to the extent that we see other transactions like that that'll be positive for our business long term. Got it. Thanks for that. And then if I could just finish off on caps, There's a disclaimer in the MD and A on the 10% to 15% return, potentially falling below the low end of the range if things don't recover. Wondering if you could just provide maybe a floor return solely based on the take or pay obligations, which I believe work out to be just over 50% of the initial capacity of the system. And then also just if things don't recover by say the latter half of twenty twenty one, would you not just defer caps again by another year? In other words, do you not only sanction the project if you see activity levels come back, which would in turn support the 10% to 15% return range? Or is that not the way to think about it? So Pat, I mean, we work very closely obviously to defer caps for a year when we announced that a couple of weeks ago. And still tremendous support for the project. And again, our customers believe that competing NGL pipeline system is very, very valuable long term for this basin and this outlook for the outlook for our basin looks like and where our customers are. And from there, we'll be able to make whatever the best decision is for both of us. So I think it's too early to sort of speculate what may or may not happen. But again, we'll work with our customers on that front. Okay. I'll leave it there. Thanks guys. Your next question comes from Linda Evregales from TD Securities. Your line is open. I'm wondering if you can maybe give us some sense of seasonality around your marketing business. Specifically, you recorded an unrealized mark to market gain. Is it reasonable to assume that it will be booked or realized in Q2? The $81,000,000 There is a as Dean pointed out before, in our hedging program, we concentrate on the near months. And then as you go further out with a little bit less liquidity, we don't hesitate we don't hedge as much going further out. So on a margin basis from hedging being used to protect margin, for example, business, that's the profile you would see more near term effects there. And so then it's really just dependent upon on where RBOB and WTI and those kind of variables move in the near term. And then meanwhile, we also hedge our inventory. And so again, a lot of the inventory is hedged on a month to month kind of rolling basis. And so again, you would see a bit more of a near term impact on that depending on which way again WTI moves and other prices. So is it reasonable to say that your confidence in reaffirming guidance is based on what you've already locked in? And given that you hedge your inventory substantially that significant losses are unlikely at this point? Yes, I mean from our point of view and you've seen it in the past on our side, our hedging strategy with respect to inventory has generally proven to be very successfully saw that in 2014, you saw that in 2018, you saw it this past quarter as well in that area. Okay. And I'm wondering the rationale for deferring your plan for the 19th cavern. Was it a function of social distancing, wanting to defer any sort of capital outlay commitments or market conditions? And what factors would be required to resume plans on that? Linda, it's Dean. Given the uncertainty of where we are, I mean, we thought it was prudent to preserve capital at this point. So we decided to defer the 19th cavern. Obviously demand looks relatively strong. We can resume the development of that cavern very easily. I mean it's on our site. We've developed a lot of caverns over the last number of years. So for now, we just deferred it just given the environment that we're in and the uncertainty that we've seen. Okay. Thank you. And just a cleanup question on your cash tax outlook in 2021 and beyond. Is it reasonable to assume that you won't be paying cash taxes for the foreseeable future? Or is it possible that you might enjoy some recovery in the next couple of years similar to this year? We're definitely pleased to see the recovery for this year. We don't generally give guidance on a go forward basis. I think I would just point you again to the disclosure and the fact that we have a continued suite of projects that are coming into service this year, which will again provide pools. So it leaves us in a pretty strong position. Okay. Thank you. I'll jump back in the queue. Your next question comes from Robert Catellier, GBC Capital Markets. Your line is open. Hi, good morning, everyone. Just a couple of follow ups here. I wanted to start with the comment on the dividend. So notwithstanding the fact that you don't want to tempt fate, you're in a pretty good financial position and with the capital spend slowing down, the free cash flow position looks pretty good too. So my question to you is, what do you need to see to resume dividend growth? Is it just a general level of stability and a reduction of the uncertainty in the environment or is there something else you're looking to on the financials? Thanks for the question, Rob. It's Dave here. It's hard to be specific. I mean, every quarter we have a conversation with our Board about the dividend and we take into account a whole bunch of factors as you can appreciate our outlook for cash flow, our outlook for capital requirements, what we think the impact will be on balance sheet and all those factors weigh into it. I think ultimately, we never want to increase the dividend unless we're confident that we can sustain it at that level. And so I just think with the tremendous uncertainty that we're dealing with over the coming months, we're probably going to be inclined to be a little bit more cautious. But it's hard to be specific about what the conditions would be that would cause us to change that stance. I think ultimately it's going to be determined by what we see as the level and the confidence that we have in our cash flows going forward. Okay. So just a level of prudence appropriate for the current environment? Absolutely. Okay. Then following up on just the cost reductions, I'm not thinking exclusively of the optimization plan, but just the G and A and the other OpEx, what's possible in terms of reducing OpEx and what impacts that might have on G and P margins, for example? Rob, I don't think we're quite ready to be able to provide any kind of an indication on that question. We are going through further analysis right now on the strategy and the timing around the G and P optimization effort. I think I've suggested in the past that we would probably be in a position to provide a little bit more color on that with our Q2 release in August. We are in the midst right now of reviewing operating costs more generally across the portfolio, but it's premature to suggest what that might look like. And similarly, with our G and A focus, I think it's a little bit premature to estimate what that might look like. On the G and A side, keeping in mind that we are reducing the size of the portfolio in the gathering and processing world and we are reducing our activity level in terms of capital projects. And so for those two reasons, we expect that the G and A support that's required is going to be reduced as well. But it's as I say, it's a little early to estimate what that looks like. Sure. Okay. I understand. And then just on the gathering and post sourcing business, based on what you know today, what do you think is possible in terms of the depth of the decline in terms of operating margin and volumes? And what are you looking to in terms of green shoots that might make you more confident that volumes and activity is normalizing? Is it still the condensate price? And if so, what levels do you think you need to see for a sustained recovery in volume and drilling activity? Robert, I mean, certainly, we can't provide guidance in terms of our G and P business. And part of it is, if you look at the customers behind our facilities or other facilities, they're reluctant to sort of provide a lot of future guidance of what the plans are. But certainly in the North portfolio, a lot of the economics there are driven off of condensate prices. And natural gas prices certainly help, but a lot of it's driven off of condensate. To be quite honest, when this all rolled out and we the system is not built for a demand shock like we just saw. Taking 25,000,000 barrels of demand offline, it's just not something that has ever happened before. So obviously, it creates a lot of havoc, both physically and financially in the market. So what we were concerned about initially was that 225,000 barrels of condensate demand comes offline very, very quickly. Where does that come from? Does it physically shut in people in the field once storage fills out? And with what we're seeing today, a lot of that supply has been cut off from the U. S. And there has been shut ins in Alberta, in the Montney, but far, far, far less than what we're sort of prepared for. So from a shut in perspective, we think that that risk is much lower because demand for gasoline is building in the Mid Continent. Refining capacity is or utilization has moved up from 65% to 73% and hopefully we'll see that continuing to grow. Condensate prices have firmed up as we've talked about. So it's sort of in that low 20s and U. S. Dollar per barrel. And so with that, we have we know that there's a number of producers that have production that where the wells have already been drilled and they don't want to bring them on until they get a better price environment. So we think as condensate prices continue to improve, we'll see some of that production that's shut in ready to flow. And whether that happens in Q3 or Q4, Q1, we can't determine that at this point. Sorry for the long winded answer. No, it's very good detail. I appreciate the nuance of really it's up to the customers at this point. Okay. Thank you. Your next question comes from Rob Hope from Scotiabank. Your line is open. Hello, everyone. Just to follow-up on that last conversation. So arguably, you probably have the best condensate information in the market just given your existing assets. So when you've seen Condi imports kind of decline in April and what you've seen so far in May, just want to confirm that you think a big the risk of a big condensate shock to the market is behind us, just given that the U. S. Imports have gone down enough? Yes. I mean, we certainly believe the worst is behind us. I mean, the estimates that we've seen is that there's roughly 1,000,000 barrels of diluted bitumen offline right now. And then so if you look at WCS gifts, which are $3 ish at least as of yesterday, I haven't checked this morning. But I think that signals that sort of supply demand has rebalanced and maybe overbalanced. And so as we see refining runs continue to increase in the Midwest, they're very dependent on their feedstock from Canada. So again, so as that demand picks up, we'll see more oil sands come back online, production come online and it's going to require more diluent. So again, we believe that it's going in the right direction, but we're cautiously optimistic. I mean, we don't know if another significant wave of COVID breaks out and everybody has to get locked down for weeks or months. Those are all the uncertainties that we just have to be aware of. All right. Thanks for that. And then actually another follow-up question. Going back to the OpEx at the GMP business, I appreciate the earlier comments, but it was ticking up in Q1 versus Q4 of last year despite lower volumes. So, are there some one time severance charges or one time charges there associated with your rationalization plan and that moving forward, we should see them starting to trend downwards? Rob, it's Brad. I don't think there is anything significant in our in the OpEx component. I think certainly as Wapiti continued to ramp up that would have contributed to some of the incremental operating cost. And certainly we've with some of the other activity that's going on out there, we've tried to manage those costs appropriately. So I don't think there's anything really significant in it, just more northern driven than anything else. Okay. And I guess just on Wapiti, the outage costs, would they be flowing through there or was that mainly a revenue impact? No, they would flow through there as well, as yes, the maintenance costs associated with the 2 outages. Your next question will come from Robert Kwan from RBC Capital Markets. Your line is open. Hi, good morning. If I can start with G and P. So operating margin was down about $17,000,000 versus the 4th quarter. You referenced some of the Wapiti OpEx, but just even higher level, are you able to quantify what the Wapiti outage was both revenue and OpEx? How much was attributable to lower volumes and then how much was attributable to the fee reductions that you put through as of Jan 1? Yes, we didn't. We chose not to go through that much detail. I think if you parse out that $16,000,000 into equal buckets, you're probably in the ballpark in the range for that. And again, not all would be recurring. I do I would highlight that we do put on our website the supplemental data, which shows you the throughput through Wapiti as well. And so again, if you normalize that for no outages, then you can again see continued performance on the Wapiti plant as well. Okay. And just with the fee reductions that came in as of Jan 1, was that delivered to your customers in advance of some of the optimization activities like shutting off the 6 plants, I. E, if you already delivered the lower fees and revenue, but you haven't been able to strip the costs out yet? Yes, that's right. Mean, we've renegotiated or we've negotiated maybe different fee structures where we felt we needed to. And again, typically we're trying to get longer term commitments out of that as well, but each deal is different. And, but certainly independent of that, we are aiming to be uber competitive with our business and part of that is driving costs down. Okay. So are you able to maybe quantify what that lag might look like? Or put differently, just how much OpEx is associated with the 6 plants are going to be taken offline through next year? Yes. Again, Robert, I don't think we're quite ready to be able to provide any kind of indication of that. Okay. Just on finishing on G and P, are you able to talk about what the volumes going through the facilities are kind of right now versus what was going through in Q1? Yes. I think the data is published monthly by the AER. So people can look there. I think we've been reasonably satisfied with volumes, though they continue to they bounce around at times as producers continue to look at pricing. I think we've been reasonably happy with how volumes have kind of stabilized over the last little while. Yes, Robert, maybe just let me jump in just to kind of try and clarify. I think we have been concerned about the possibility of shut in production, particularly 4 or 5 weeks ago when condensate pricing and some of the uncertainty just caused a lot of consternation within the industry. But as things have stabilized and recovered, we really haven't seen any material amount of shut in production, a little bit of gas in the South region similar to what we saw last year in fact, which is probably more seasonal than anything else. But otherwise, we really haven't seen any material shut in production to this point. We're simply being a bit cautious with the tremendous uncertainty that we've seen over the last few weeks. So call it the 7% sequential decline from Q4 Q4 given that obviously we haven't seen any of this data given the lag, but as we start to see it, we'll probably see that decelerate. Is that fair for Q2? Yes, I think that's fair. And I think a significant part of that 7% was the outage at Wapiti. Got it. Okay. I'm just turning to marketing. What would need to happen, or unfold versus your expectations to take you out of the guidance range, whether that's the low end or the high end? Stephen here. I'll take a stab at that one. Again, we've tried to provide guidance on marketing just to make it a bit easier for people. There's just a host of variables that go into it. Some of the variables that are iso octane premiums. And so that would include the RBOB over WTI premium, which you can see on the market. And again, we hedge a lot of that in the near term. So we've been very fortunate that way. And as well, the isowoctane premium above RBOB. And so those two elements are key elements to continue to monitor. Butane as a feedstock, again, we believe it will still be we still believe the market prices today are still versus long term are still attractive, definitely not the low market prices we saw last year, but still reasonable. So again, if you had a big shift in that, that would be an item there. And then I think as Dean was pointing to before, to the extent that you had a continued lockdown and nobody driving, then that would have an effect on gasoline demand, which then impacts those premiums that we saw earlier. You have to remember that marketing is that we benefit from ways to make ways to make our guidance. And but again, you need those different commodities to all be working well. No, I Sorry, go ahead. Yes. I mean, Robert, it's a different question in this type of environment because you've seen massive swings in a lot of volatility obviously in commodity prices. And so it's sometimes tough to say what could happen and that could affect your marketing book. I mean one extreme case would be there's massive shut ins in 25% of the NGL volumes disappear overnight. We think that's highly unlikely, but I guess it's theoretically possible. I mentioned that our RBOB prices were trading negative. Well, if something happened where our RBOB price is to trade negative for extended periods that would hurt. We don't believe that's going to happen and we believe that the front month strength that we're seeing is going to continue in the back end which again that's the trend we've been seeing for the last several weeks. So we believe we're very comfortable with the range that we have based on the hedges we have in place and everything that we see. And but again, there's still some uncertainties. Got it. That's good color. If I can just finish on hedging, and you talked about some of the vol. But first, were there any realized marks in the Q1 that really related to future periods or anything that was rolling in the inventory or even just closing positions and rolling them? And then the second being, it looks like from the disclosures that the book is net short TI. I guess is that the case? And was there anything that you've been able to do when we've seen some of the craziness in the contract rolls? I'll try and interpret, I think, what you're asking in that first question there. So on the hedging side there, again, you saw there was a modest impairment of inventory that was more than offset by the hedging side. And again, not a bad match, but more than offset. And so it did its job there. And so then that does that lower inventory cost does set up for margin on the go forward basis on the physical side as well. So again, the hedging did what we wanted to do. And remind me again what your second question was? It looks like in the hedge book that you're running in hedging book. Yes. Yes. And so again, we try and protect the margin and the inventory. And so a lot of times butane well, most of the time butane and condensate trade on a WTI basis. And so we use WTI as the hedging tool because most of the time it is actually priced off of WTI. And secondly, on the margin side of the business for the isooctane business, you're trying to we're trying to make sure we hedge that complete margin right from butane feedstock all the way up to as far as we can go on the iso octane sale, which is RBOB. And so in between is the WTI component. And so that's why we're selling WTI as well. Right. But just in terms of some of the volatility, is that something you can actually take advantage of like when we see when we saw it yet go negative? Is that an opportunity for you? Well, we are fortunate that we see lots of not lots, we have a skill set internally that does find opportunities in these kind of environments where we do have volatility. And so we expect as we go forward, we'll continue to see pockets of opportunities. I'm not sure where you're getting into with your question, but I guess what I would point out is that we're not traders. We're generally sellers. We'll always be short when it comes to the hedge book because we're generally sellers of WTI and sellers of the RBOB spread and sellers of the NGL commodities to protect our inventory. And certainly there's always somebody that says, should we take this position off when you've got a big unrealized gain? But that's not the approach we take. We're the hedges are in place to protect the value of our future production and our inventory. Thank you. Your next question will come from Pran Neve Satish from Wells Fargo. Your line is open. Hi, thank you. Just one question for me. I was just wondering if you comment a bit on your contracting on your crude storage assets and whether there's any available capacity there to take advantage of contango in the market? Our baseline terminal is fully contracted, contracts ranging up to 10 years in length. I guess some of those would be 2 years off of that. So take 8 years I guess now. And then our Wildhorse terminal out of the 4,500,000 barrels of storage, 3,500,000 barrels of that is contracted to 3rd parties. But it's not operational? It's not operational yet, no. Yes. Not until later this year. Where we have seen an opportunity is on the condensate side. So we Keyera operates the largest volume of or the largest capacity volume of condensate storage with our underground caverns at Fort Saskatchewan and we have seen opportunities to contract more of that capacity in the recent with the recent volatility that we've seen. Got it. Thank you. Your next question will come from Andrew Kuszky from Credit Suisse. Thank you. Good morning. Needless to say, it was extremely volatile for the year to date in a number of commodity markets. And in that kind of context, how did your risk management hold up, in particular in the marketing market? Like clearly the results are impressive, but did all your risk management systems behave as you anticipated them behavior? Were there tweaks during the quarter? No, I would say that it behaved the way we wanted it to behave. We were quite happy with how our hedging worked both on inventory objectives as well as margin in the near term. And then Andrew, I would add that as Stephen mentioned earlier, it's times like these where the efficacy of our hedging program is really demonstrated. We've had tremendous volatility, but this is what our risk management practice is intended to protect against. And I think when you see the realized and unrealized gains that we've seen, it's a reflection of the fact that our that the system works. As you know and as we've said many times, we have a risk management committee that meets weekly that includes several of the people around this table. And we pay close attention to it and we try and be disciplined. And I think, the results of that were borne out in our Q1 results. So then on a go forward basis for the remainder of the year, does anything change from a risk management basis? Because when we look at your marketing margins, you're basically halfway to the top end of your guidance, really just after 1 quarter of results. So do you lay off risk? Or does the guidance not change just because the outlook you have on the environment is just more cautious? I think it's more the latter. I think what we've been trying to convey here is a certain degree of caution and prudence. But with the hedges that we have in place and with the fundamentals that we see in the business now, I would suggest that we're pretty confident certainly in the lower end of the range. And I think as things unfold, we could very easily be capturing opportunities over the next three quarters that would take us to the higher end of the range or beyond. I think our history would demonstrate that our team, it's sometimes difficult to predict, but when we're in uncertain times, our team is really good at finding opportunities to add margin through acquiring whether it's condensate or propane or butane or isooctane, taking advantage of the facilities that we have and the relationships that we have to add margin to the portfolio. So I think with respect to marketing and with respect to the gathering and processing comments that you've heard this morning, we're being cautious, I think, because there's still a lot of question marks about how we get through this, the current crisis. But at the same time, I think as we sit here today, the fundamentals are stabilizing and I think we're cautiously optimistic. That's helpful. And one final one for me and just on the context on storage. How much product storage do you have really for your own purposes beyond operational requirements on a day to day basis in caverns, tanks and really railcars? We really don't disclose that. I would say the majority of our storage is contracted out to 3rd parties. But we do have some that we use for internal purposes. But again, we don't disclose that. Okay. Thank you. Your next question will come from Chris Hillett of Barclays. Your line is open. Hi, good morning. Most of my questions have been asked already, but just one follow-up here on Wapiti Phase 2 actually, if you don't mind. Some of the comments in the MD and A mentioned that you're going to go ahead and commission Phase 2 at the end of this year sort of as originally planned, though you now don't expect to need the capacity necessarily. So I guess just curious strategically kind of what's behind that decision? Are you just contractually obligated to commission the facility by the end of this year? Is there more to it than that? And then second, when do you think you might actually need that capacity? So I think the good news is at Wapiti, we're basically mechanically complete and we've mechanically completed that facility on schedule and it's ready to go. With the outbreak of pandemic, we chose to move everybody off-site. There was no immediate demand for that capacity. So we chose to protect the integrity of the operation out there and move any non required people off-site, which included all the commissioning staff that went with that. As we look over the rest of this year, we don't see a demand for that facility. But certainly from a reliability and redundancy perspective, there is value to having Train 2 available for use. And that's really the motivation to get it back up and running or get it commissioned in the back half of this year. And then we are able to respond to any market scenarios that might be available to provide additional services to customers in the area beyond what our current contractual obligations are. Okay. That's very helpful then. That was it for me. Thank you very much. Your next question comes from Ben Pham from BMO. Your line is open. Okay. Thanks. Good morning. I wanted to go back to some of the commentary on your outlook and volumes and whatnot. And I'm wondering what the public disclosures on the Canadian OSNs shut ins, are you guys able to do detailed or have you been able to do a detailed bottom up analysis to stress test your cash flows and be able to figure out impact on your condensate volumes and gas processing volumes? And then with that range in production, you can figure out the range of outcomes for this year. Is that pretty visible to you guys as you do that? Or is that as clear as mud right now? Yes. We have done that exercise, Ben, where we've modeled in different scenarios. I mean, we do have the benefit of a lot of public data plus what moves on our system. We see the nominations every month what comes in and out of it. So we have pretty good data. But again, there are some uncertainties and part of that is where the oil sands supply is sold and most of that's mid continent. And we sort of see that as an advantage today. The mid continent refiners there have complex refineries and they can make more gasoline and that's the highest value product right now. Distillates are weak and so is jet. So again, we see as the lockdowns ease, we certainly see demand picking up for continued demand picking up for gasoline. And again, that's going to draw more supply from Canada. And but we've modeled out 3 different scenarios and just to see what it looks like in our business. Okay. That's great to hear. And can you remind me when you decided to turn off your DRIP with the caps deferral, are you self funded then regardless of bringing CapEx up next year or do you have to bring back the DRIP program as you ramp up caps? Yes, Stephen here. The primary reason for turning off the DRIP is obviously the share price level and just the amount of dilution it was causing in that respect there. And as well the deferral caps gave us some flexibility as well on financing. I think again because of next spring and hopefully move forward with caps, we'll just evaluate our balance sheet and our operating cash flows and the outlook and make the prudent choice then as to how to fund that project. And at this time, I will turn the call over to the presenters. Great. Thank you everyone for joining in on our Q1 conference call. That completes it. As David said, please continue to stay healthy and positive during this interesting time. Thank you. This concludes today's conference call. You may now disconnect.