Ladies and gentlemen, thank you for standing by, welcome to the Tidewater Midstream and Infrastructure Limited third quarter results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. Please be advised that today's conference is being recorded. I will now like to hand the call over to your speaker today, Joel Vorra, CFO. Thank you. Please go ahead.
Thanks, Cheryl. On the call with me today, as usual, is Joel MacLeod, Tidewater's President and CEO. Before I pass it over to Joel, as usual, to review the quarterly highlights, just want to remind everyone that some comments made today may be forward-looking in nature and based on Tidewater's expectations, estimates, judgments, and projections. Forward-looking statements we express today may differ as a result of risks and uncertainties. Further, some information refers to non-GAAP measures. To know more about forward-looking statements and non-GAAP measures, please refer to our various financial reports, which are available at tidewatermidstream.com or on SEDAR. With that, I'll pass it over to Joel MacLeod for a review of the third quarter highlights.
Good morning, everyone, and thanks for joining our Q3 2019 conference call. Q3 was an okay result, an in-line quarter where we delivered CAD 25 million of adjusted EBITDA and a significant improvement versus the CAD 17 million of adjusted EBITDA 12 months prior in Q3 2018. We'll provide a rundown of the main components of our Q3, but also want the market and our valued shareholders to know that we are laser-focused on de-leveraging and are also eager to deliver on over 100% EBITDA growth from our Q3 2019 results into 2020. We are confident in our abilities to get back to 3 to 3.5 times debt to EBITDA into the end of 2020 and also achieve our targeted level of 2.5 to 3 times debt to EBITDA in the next 18-24 months.
Tidewater successfully commissioned our 100 million cubic feet a day sour deep-cut processing complex, our Pipestone Plant, on time and on budget, and began processing customer gas in September 2019. The Pipestone Gas Plant is currently processing over 60 million cubic feet a day of natural gas and throughput continues to increase. Full capacity has been impacted due to construction delays on downstream third-party infrastructure, which are expected to be in place in January. We do not anticipate a material impact to our Q4 or Q1 results as a result of downstream third-party infrastructure delays. We continue to see significant activity at Pipestone, and it continues to be one of the most active areas in Western Canada, with over 120 wells being drilled since January 1st, and results continue to impress.
Throughput on the Pioneer Pipeline continued to increase through the third quarter of 2019, with volumes reaching approximately 130 million cubic feet a day in the first week of November 2019 under the 15-year take-or-pay commitment with TransAlta. Tidewater and TransAlta continue to work together on additional volume commitments on the pipeline. TransAlta has and continues to be an incredible partner, and we wish to thank the entire TransAlta team for their support. On the ESG front, we believe we are becoming a leader within the oil and gas sector. As we build and operate the Pioneer Pipeline, which will be the largest pipeline in Alberta to distribute clean natural gas to TransAlta's legacy coal-fed Sundance and Keephills generating stations, reducing carbon emissions by over 30%. Further, the Prince George Refinery is one of the only assets in Western Canada that can utilize renewables.
canola oil, biodiesel, and ethanol are utilized at the facility to help reduce our carbon footprint, along with several other green initiatives. We also want the market to be aware that we are becoming a leader on the health, safety, and regulatory front, as we did have over 2.5 million man-hours on our three capital projects, over 8.4 million kilometers driven, over 20,000 field level hazard assessments with an industry-leading TRIF score of 0.2. On October 4th, we announced the acquisition of the Prince George Refinery, where support from both customers and midstream peers has been stronger than anticipated. Our team worked some long weekends and evenings to close the acquisition early, where the asset continues to outperform.
We are currently focused on harvesting the related cash flow and de-leveraging, but are likely to proceed with some small capital projects in the sub CAD 1 million range with pay-outs of sub 24 months. Significant upside exists at Prince George, but our current focus is on de-leveraging for the next 3 to 9 months and delivering the outperformance in our quarterly results. Tidewater has transformed our business over the past 24 months with the successful sanctioning, completion, and commissioning of the Pipestone Gas Plant, Pipestone Storage Facility, and Pioneer Pipeline, and the acquisition of PGR.
Tidewater continues to build an integrated and connected midstream infrastructure network from wellhead to end customer in order to increase value for its customers and ourselves. Over the past two years, Tidewater has added over 10 new take-or-pay contracts, ranging in term from five to 15 years and including over five new investment-grade counterparties, which now account for a significant portion of the corporation's cash flows. Tidewater continues to work to offer premium service to its customers through multiple egress options at its facilities, including its Alliance, TC Energy, and storage connections at Pipestone, and its Pioneer, TC Energy, and storage connections at Brazeau. Exposure to premium markets through access to its rail infrastructure and refined products markets.
Continue to make huge strides in improving the strength of our customers and contracts, where approximately 75% of our EBITDA is from take-or-pay or long-term agreements, and approximately 50% of our EBITDA is from investment-grade counterparties and is a key factor for being able to finance the entire Prince George acquisition with low-cost debt. We wish to thank our credit syndicate for all their support in a tough oil and gas environment. The completion of the Pipestone Plant, Pipestone Storage Facility , Pioneer Pipeline, and the acquisition of PGR, Tidewater is positioned to generate significant free cash flow in multiple commodity price environments. Tidewater's asset mix allows us to generate cash flow in varying commodity price environments to allow our customers to capitalize on high and low commodity prices.
Tidewater's focus over the next 6 to 12 months is to harvest our related cash flow from our large capital projects and the Prince George Refinery acquisition. Tidewater plans to deploy limited growth capital in 2020 and focus on optimization and small capital projects with 2 to 3-year payouts. Tidewater has decided to delay the expansion at Pipestone, our Pipestone Plant Two, until further notice and focus on de-leveraging over the next 6 to 12 months. We are highly unlikely to consider any acquisitions in the next 3 to 6 months, as we need to focus on de-leveraging. To reiterate, we remain highly confident in our ability to execute on our plan, where EBITDA is expected to grow over 100% in the coming 3 to 6 months.
Also want to be crystal clear that our near-term focus is de-leveraging and getting back to three to three and a half times debt to EBITDA by the end of 2020. With that, I'll pass it back to Mr. Vorra, and he can walk you through some of the details around the financial side of our Q3. Thank you.
Thanks, Joel. I'll just spend a little bit of time reviewing the key financial highlights for the third quarter. Revenue, we came in at CAD 147 million, representing a 5% decrease from the prior quarter and an 84% increase from the same period in the prior year, mainly as a result of the new capital projects coming online and the crude infrastructure business. Important to note to include our hedging business in that number. When adjusting revenue for hedges, it would represent a 4.5% increase over the prior quarter and a 100% increase over the same period in the prior year. Gross operating margin was approximately CAD 11.8 million or 8%. Again, when adjusting for hedges, the margin was approximately CAD 27 million or 17%, representing a 2% increase over the prior quarter and a 36% increase from the same period in the prior year.
Adjusted EBITDA, as Joel mentioned, came in in line with our expectations at CAD 25.5 million, a 17% increase from the prior quarter and a 47% increase from the same period in the prior year. The increase to EBITDA is mainly a result of contributions from the Pipestone Gas Plant in the quarter and the Pioneer Pipeline during the quarter, as well as increased contributions from gas storage. As Joel mentioned, EBITDA is expected to continue to increase with Pioneer volumes consistent through the fourth quarter and Pipestone volumes continuing to ramp up during the fourth quarter, as well as contribution from the Prince George Refinery, which we closed ahead of schedule.
We continued to maintain a conservative payout ratio in an effort to deleverage, maintain the payout ratio of 28% or CAD 12 million in distributable cash flow, which is also expected to continue to increase as our completed projects ramp up. We have contribution from the Prince George Refinery, which will significantly help our goal to 3 to 3.5x leverage by the end of 2020. With that, I think those are the key financial metrics. With that, we can open it up to questions.
To ask a question, please press *1 on your telephone keypad. The first question comes from Rob Hope of Scotiabank. Please go ahead. Your line is open.
Good morning or good afternoon, everyone. Maybe to start off on the comments you had on delevering and focusing on smaller projects, can you give us a sense of what you think your aggregate capital spend in 2020 will be, both on the growth and maintenance side?
A good question, Rob. I think on the maintenance side, we'd be in that. I think we previously guided CAD 10 million-CAD 15 million with the addition of some of the new projects and the Prince George Refinery, we'd be in that CAD 20 million-ish maintenance capital range. Then as far as growth capital, I would say minimal. We'd be significantly less obviously than in the previous 18-24 months. You could ballpark in the. We do have some projects, including the Pipestone battery that's been announced, so you could ballpark in the CAD 20 million-ish range. I think we'll continue to give updates as some of these smaller projects come to fruition.
All right. Thanks for that. Then as a follow-up, when you're thinking about the Pipestone Gas Plant expansion, so you're deferring it now, but is there a way you can slow play the development such that you can stagger it in your capital plan to hit post your de-levering plan, if you will?
Yeah, I think, Rob, for now, we're clear it's on hold, that can change quickly. We've still got a lot of customer support, lots of options to finance should we want to head down that path. It's been clear from shareholders in the market for now, let's focus on de-leveraging and harvesting the cash flow from the recent acquisition and our three large capital projects. I don't think you're going to see us spend, highly unlikely, CAD 5 million-CAD 10 million on Pipestone Phase II expansion in 2020. I think it'll be more of a go, no-go.
Right now it's a no-go decision, but that can come back to life quickly, especially if we get a large investment-grade producer and/or our shareholders give us feedback. I think we demonstrate that de-leveraging, I think we'll be in a better position to kick it back off and get it moving again. Want to be clear, for now it is on hold and our focus is on de-leveraging.
All right, just one final question from me. Can you just give us an outline of how you're looking at your gas storage? We've seen AECO been quite volatile with a nice upward slope in the move recently. Could we see an uptick in gas margins in Q4, or is it on the contract side more ratable through the year?
I think it's a good question, Rob. The summer months with the significant volatility in AECO is usually the biggest contributor to gas storage. With prices moving up, some of those volumes are contracted, so it would be a little more ratable. I'd say overall, to answer your question, usually the summer months are the juicier months, but I think, yeah, there is probably the potential for gas storage to exceed what we would have thought in the winter with prices where they are, but it likely wouldn't be as high a margins as we would see in the summer months when you have AECO bouncing between CAD 0 and CAD 1 on any given day.
All right. Thank you.
Your next question comes from Patrick Kenny of National Bank Financial. Please go ahead, your line is open.
Hey, guys. Just on Pipestone Phase I, maybe just a little bit more color on the third-party infrastructure delay there, and what level of confidence you have that this delay is operational in nature, and that you'll have this connection in place by January as opposed to some sort of landowner or regulatory issue that could persist perhaps into mid-2020 or beyond.
Good question, Pat. I think it's helpful even for us to respond to that. It's not a landowner issue. It's nothing that is going to persist. The third-party infrastructure provider is a key partner for us and a very large entity that's been on this for two years. Our sense is main driver's been weather. With the ground freezing, we may exceed that January date, for now we'd want to message we don't see a material impact to our Q4 or Q1. We are trucking out the liquids today. It's related to our liquids and the related pipe connection. Worst case is a January date. Best case is probably end of December, again, don't expect a material impact to our Q4 or Q1. I think that's enough color. Joel, is there anything you want to add there?
No, I think that's good.
Okay, that's great. Over on to PGR. Can you guys confirm what you're seeing on your end for the PG 2-1-1 crack spread over the first 12, 13 days of ownership? Also what that translates into from a Tidewater LCFS adjusted crack spread perspective relative to your CAD 44 a barrel guidance into 2020.
Yep. I think we'll provide ranges given we're 13 days in. Offtake's going well and the refinery's running very well. Obviously, there's days when it spikes even potentially above that CAD 60, but I think I'd rather give you a range of CAD 50-CAD 60 a barrel crack spreads on our 85% of diesel and gasoline production. Very happy with what we've seen and currently seeing the asset outperform, but don't want to get ahead of ourselves and even want to ensure that we do have a cushion. We don't expect an unplanned outage, but for us, we want to make sure we also have some cushion there should we see an unplanned outage. We've seen near record throughput here over the last couple of months.
I'd say, I know we're not going to be direct with a perfect answer, but if we said ranging between CAD 50-CAD 60 crack spread, Pat, that's where it would be today. Yes, there has been days when it's ticked up above that, but we'd like to be conservative at this point in time.
Sorry, Joel, is that translating it into a Tidewater adjusted crack spread, or is that the expectation for the benchmark 2-1-1?
I think we can say yes to both, Pat.
Okay. Sounds good. Also just any thoughts on the B.C. premier looking to implement some form of regulation for gasoline prices in the province? I know some of the recent articles seem to be focused on the Lower Mainland. Do you see any risk to your margins up in Northern B.C.?
We see minimal risk, especially in regards to gasoline. You'll see that Prince George trades at a significant discount to Vancouver, in that even CAD 20-CAD 30 a barrel range. Most of the concern from what we've seen in our staff at Prince George, we have had to provide, and they have prior to us acquiring the refinery, significant data to the B.C. government. To your point, it's more focused on Vancouver. In Vancouver, the prices are very high. Some of that's related to the cost of infrastructure and real estate as well. Today, we don't expect any impact, and today our offtake, want to be clear, is related to the Prince George orbit. Today, we would see less than 1%-2% of our volume move to Vancouver. For us, minimal risk, minimal exposure.
At the same time, we do see upside if we can start to feed some of our gasoline and even diesel. Today, I believe, is trading a little bit above at Vancouver versus Prince George. Want to be clear, that would be some upside that we see in trying to move some of our gasoline and/or diesel into that Vancouver market, which hasn't happened historically.
Yeah. I was going to say, on the flip side, I guess, given the eight-week turnaround at the Burnaby Refinery next quarter, is there an opportunity to capitalize on potentially lower or, sorry, higher Lower Mainland prices? How does that work with the Husky offtake agreement that you have?
Yeah. Husky has the offtake for 90% of the supply on the gasoline and diesel side. We do have the ability to bring in other products and sell them into the Vancouver market. We do plan to consider that, and it's low capital. We have the infrastructure, 1 million barrels of storage, rail, and truck facilities. At the same time, we're not forecasting any upside, but are definitely getting ready. At the same time, Parkland does it historically, and our dealings with them is they do an incredible job. Our sense is they're building inventory and preparing. We don't want to forecast any upside, but we definitely want to be ready, and we've started to both rail in and rail out product just so we're ready for any opportunities. There's no capital cost for us to do so.
I think there's potential for some upside, and we want to be in a position to capitalize it if there is. We're doing so as we speak, but don't want to bank on it.
All right. Thanks, Joel. I'll jump back in the queue.
Your next question comes from Robert Catellier of CIBC Capital Markets. Please go ahead. Your line is open.
Good afternoon. I just wanted to follow up a little bit on Pipestone to that decision to delay the FID. That is the case of the company making a capital allocation decision as opposed to somebody else picking up the project. Is that correct?
Correct, Rob. We still and continue to speak to customers and continue to see a lot of activity and interest in the project, both on the financing front and customer support. For now, a message has been received from shareholders in the market. Let's focus on deleveraging here over the next couple of quarters or have a material strengthening in our customers at Pipestone and into Pipestone Phase II would be helpful as well. Risk tolerance from our shareholders, the market is saying we need to focus on deleveraging for the time being. At the same time, we can move fairly quickly. We have done a lot of engineering. We obviously have a plant that runs there today. We can move quickly should there be a need or a desire to move forward, but want to be clear.
For now, the next three to six months, our focus is deleveraging.
Okay. I'm curious as to how the NGL pipeline connection, or lack thereof at this point, is impacting operations. Are you seeing higher OpEx because you're trucking the liquids, or are customers delivering hot gas onto the Alliance Pipeline, or how is that impacting your margins there?
Yep. We're trucking all liquids out, both C3 plus and condensate. At the same time, with the differential between light sweet and condensate, we have been able to help certain producers that have a density closer to oil or above 800 density. I wouldn't say we're generating incremental EBITDA, but know that that differential between light sweet and condensate has helped mitigate some of the pain. Producers have been very reasonable. They are even incurring the majority of the cost or a portion of in cases. Overall, we would expect our Q4 and the related Pipestone EBITDA to be, I don't know, within 10%-15% of our forecast. We're not going to be 30%, 40%, 50% under what we would have anticipated. Some of our other assets are currently outperforming.
When we look at Q4 and even into Q1, at worst case, our sense is a January 15th date for the pipeline to be in place. We want to plan for that. With the cold weather here, there's a chance we'll have all the pipe connections in place by the end of the year. We want the market to be aware of it, and happy to answer any other questions.
Got it. You touched on something there, just producer relationships and I'm just curious with the Bellatrix situation, you gave your bad debts exposure there, which was minimal. What kind of throughput are you exposed to with Bellatrix in particular, and what sort of pressure are you seeing from producers with respect to fees?
With Bellatrix, we made an effort to move away from them at Brazeau and brought in Westbrook, who's been a great customer. They have not been flowing at Brazeau River for over 18 months here. They do flow a small amount of volume, sub 5 million a day, into our Alder Flats facility. They would be sub even 0.5% of our EBITDA and our exposure from our previous press release maximum would be in that CAD 100,000 range. It's closer to zero. We don't see material exposure there today. To your second question on other producers or processing fee pricing pressure. Over the past 30 days, we haven't seen any. It's more how do we get CAD 2.50 gas and even CAD 2.80 gas. Today, I think CAD 2.40 online. We have not seen any pressure on processing fees, even at Pipestone.
Have not seen any pressure on processing fees. Want to be prepared for that. In general, gas processing through the Deep Basin, throughput today is high, but into spring and summer, don't want the market to think we're going to see massive growth on gas processing cash flows through the Deep Basin into 2020 and 2021. Nice to have a few strong months here, and it may continue for a couple more months, but want to be clear that we do expect to see a flat to declining gas processing environment through the Deep Basin, not at Pipestone. Today don't see any pressure on fees and don't necessarily expect any pressure on fees.
Okay, awesome. Thank you.
Thanks, Rob.
Your next question comes from Robert Robinson of R.H.R. Capital. Please go ahead. Your line is open.
Hi, can you just give us a little color on the refined product market in your area? You've got some of the highest margins anywhere in North America. I'm just wondering what keeps it so high. Is there a large transportation cost issue to move it into that market from your competitors?
Great question. Today there's only two refineries in British Columbia. The Burnaby Refinery, which is a 55,000 barrel a day refinery, and then our Prince George Refinery, a 12,000 barrel a day refinery. Today, the BC market is short roughly 150,000 barrels a day, and we would be one of only two refineries in the area. The market is short, and we control the largest piece of infrastructure north of Vancouver and outside of Edmonton in the area. It is a captive market, and we're also seeing some of the largest capital projects in all of Canada, in British Columbia. The Site C Dam project is roughly a CAD 10 billion project. It's underway. We're starting to see, and we see demand pull from there today.
Even LNG Canada and Coastal GasLink, we don't want to guarantee that that activity is going to continue, but we are starting to see demand pull there, and that's a CAD 40 billion to CAD 50 billion potential project. Trans Mountain as well. We're hopeful Trans Mountain moves forward. We're not banking on it. It's another large capital project in our backyard, and we would control one of the largest infrastructure hubs for refined products with our 1 million barrels of storage and rail and trucks. It's a captive market. Edmonton would be the main source of competing supply. To your question, there is a transportation cost to move Edmonton refined product into Prince George. At the same time, there isn't competing infrastructure in that Prince George area north of us or even south of us until you kind of get into that Vancouver area.
Nice to have the largest piece of infrastructure and control that Prince George area where we are seeing demand increasing. We're not forecasting with our base CAD 75 million of EBITDA on the asset, but want to be upfront that there is some very large projects that are starting to increase demand in our backyard there at Prince George.
Okay. Can you give us some update on your tolling arrangements that you were planning on putting in place or trying to put in place?
Our tolling arrangements, I would say we still need some more time. No guarantees that we're going to be able to toll Prince George on a set processing fee. Say, for example, it could be CAD 44 a barrel on a five or a 10-year agreement. I would say we need some more time there. The feedback, though, from the producer community and existing customers has been how do we get more capacity at Prince George. Even in the past three weeks with the Keystone outage, the apportionment, producers have seen even 40% apportionment where the spot market moves CAD 6 and CAD 7 a barrel. The Prince George Refinery, there's no apportionment there. We can take volumes in by truck or volumes run on the Western Pipeline System.
Great to continue to have interest and discussions with producers, but we're not quite at a position where we have real tolling arrangements, and it's probably going to take another three, six, nine months before we have some true feedback on if we think we can get X or Y% of our fees and potentially to a fixed tolling agreement on a long term. We need a little more time.
Thank you, Joel.
Thank you.
Your next question is from Robert Kwan of RBC Capital Markets. Please go ahead. Your line is open.
Great. Good morning. If I can come back to Pipestone Two. You made a comment that sort of confirmed that it was a conscious decision on your part to reduce CapEx and focus on the de-levering. There's also some comments around things can move quickly around contracting, and that could allow you to move forward. I'm wondering, what do you need to see? Put differently, do you have the contracting level today that you would need to go forward, but you want to see that high-graded before you actually go forward?
You've got it, Robert. I'd say we've got a similar support to where we FID Pipestone Phase I, which would be with minimal investment-grade counterparties, with 60%-70% of the volumes. With risk tolerance in the market and even our leverage profile, the message from our shareholders in the market is, at this point in time, we'd prefer you sit tight. If you were able to secure a large investment-grade customer, it would be a decision that we'd likely have support to move forward with. We want to be clear that for now, the next three to six months, the project is on hold and may be on hold forever.
I get a sense we likely do move ahead with the project, but it's definitely not in the next three to six months and maybe not even into the next 12 or 24 months, and there's a risk we never move forward with Pipestone Phase II.
Got it. If you decide to move forward, how do you think about that decision with respect to the 3 to 3.5 times target leverage exit 2020? With leverage, is the 2.5 to 3 times still the long-term target?
Yes. I would say if we move forward, our goal would be to maintain those targets. Still be in the 3 to 3.5 times into the end of 2020. Longer term, we would like to be and are even at a point where we're close to committing. Our board doesn't want us quite yet to commit to 2.5 to 3 times, but that's where we want to head and that's our target.
Okay. Let's say Pipestone Two does go forward. Does that default you to equity or are there asset rationalization opportunities? How would you be looking at funding that CapEx?
Yeah, equity is not an option. Want to be crystal clear. Raising equity is not an option. We’d rather pass or delay. What options would we have? We’ve talked about continue to see a lot of interest in selling down a working interest in Pipestone Phase I at a premium, and then offer that partner the opportunity to participate in Pipestone Phase II. Nice to continue to see interest there. Could we monetize other assets or non-core assets? Absolutely. Price is the question as far as what we could receive for various non-core assets. We always have other assets that we do not want to be selling our crown jewels, but continue to see expressions of interest in some of our stronger contracted assets.
Okay. If I can just finish, you mentioned it's highly unlikely you'll look at M&A in the next 3-6 months. What do you need to see to kind of start looking at M&A again?
We need to see our leverage, I think have a quarter or two, see the market believe in our de-leveraging. If we do see outperformance from our assets to see accelerated de-leveraging and see some support in the market, I think we'd start to look at opportunities again. For now, acquisitions are essentially shut down or on hold here for the next three to six months and want to be clear on our focus.
Right. Similar to Pipestone Two, if you did M&A, you would still be living within that three to three and a half exit 2020 leverage metric?
Yes. We have to stay within that band here into the end of 2020.
Okay. That's great. Thank you.
Thank you.
Your next question comes from Elias Foscolos of Industrial Alliance. Please go ahead. Your line is open.
Good morning.
Good morning. Hey, Elias.
Hi. I wanted to focus on EBITDA for the quarter and some sort of operational understanding. The EBITDA that you reported was definitely boosted by a realized gain on derivative contracts. A couple questions related to that. Do you see more of that coming? That's question one, and question two, when I look at operational margin, I see a decrease sequentially quarter-over-quarter in gathering and processing and a widening and a loss in sort of the other category. I'm interested in some color on, in particularly the gathering and processing, because I wouldn't have expected that to have deteriorated.
Yeah, good questions, Elias. I think to answer your first question, the realized gain on hedging, I wouldn't consider that necessarily a one-time contributor to the EBITDA, given those are contracts that we locked in even as early as Q4 last year in 2018. A lot of those would be related to crude oil differentials in the crude oil business. When you have volatility in that business, we have locked in that margin, and it will impact the revenue and the operating expense line items above the operating income line on the income statement, and the related offset shows up.
In that hedging number, which is the 15.2 million number. I would say with less volatility, that hedging number is smaller, the revenue is higher. We've locked in those margins as early as 12 months ago. Not as big of a contributor to EBITDA as you might think. For that number to go down, our revenue number goes up. To answer your other question, the gathering and processing piece, I wouldn't say there's a significant decline quarter-over-quarter. There's a bit of a decline in margin. That being said, with gas storage in Q2, the margins there are significant when we have volatility in AECO. I'd say overall, we should be within the 5%-10% of the gas processing piece.
Overall in the summer, though, gas processing itself usually comes off a little bit, and then we see a bit of a return in the winter months. I wouldn't say looking at the business as a whole, that we've had a significant decline in the gas processing piece. Yeah, the summer, it's tough months for producers when prices are sub CAD 1.
Elias Foscolos, Joel MacLeod here. To your question, Q4. If you look at Q2 and Q3 differentials where I don't have in front of me, but minus 12, minus 13, minus 14, you will see those hedging gains. Into Q4, with differentials moving out, you're likely to see less gains unrealized and realized, and you'll see more net operating income into Q4. It's a function of us locking in those contracts for a period of 12 to 24 months. When differentials move in, yeah, we realize gains on those related hedges. When differentials move back out, like you'll see into Q4, those gains will reduce, and you'll see the cash flow show up more in operating income. On the gas storage side, Joel Vorra can speak to it better than I can, but there was volatility.
We saw negative days, zero days, and a lot of that natural gas storage cash flow shows up below the line in those hedging gains and losses. Again, it's a hedge, and those are contracted with large investment-grade counterparties. Joel, anything else you want to add?
Good summary.
I really shouldn't think of the margin exclusive of those realized gains. I really should think of them together, or the investing community should think of them as somewhat interrelated or quite a bit interrelated.
Right. You've got to include the realized gain as either a reduction to your operating expense or an increase to the revenue, given they offset each other almost one-to-one. Those margins are locked in. The reason we don't present it that way is it changes the presentation under IFRS of the statements, and I think would create even more confusion. That's something we'll evaluate going forward. We wouldn't expect large Over the last 12 months, there's been so much volatility that that number has been large. On a run rate basis, it's not a one-to-one contributor to EBITDA. Yes, to answer your question, you have to include those hedging numbers in the operating margin.
Got it. That's kind of it. Maybe one other follow-up a bit off Robert's question, it has to do with the acquisitions and how that's off the table for the next three to six months. The question I would ask is, how much would a stronger share price Let's ignore the de-leveraging. Let's just say, share price is substantially stronger. How much would that potentially change your outlook?
It'd be significant to us if our cost to capital can improve. Today, equity is off the table. If we were back in that CAD 2-plus range, I think we can start looking at other opportunities. I think as most are aware, there's probably more opportunities than ever. For today, we just completed what we feel is probably the best acquisition I've been involved in in my entire career. Now we need to demonstrate to the market the performance and bring our leverage down and our risk profile down. Good question, Elias.
Great. That's it for me. Thanks very much.
Thank you.
There are no further questions at this time. I will turn the call over to Joel MacLeod for closing remarks.
Thank you, everyone. A big thanks to our employees, customers, and our valued shareholders to what has been a very challenging oil and gas environment. Thanks, everyone.
This concludes today's conference call. Thank Thank you for your participation. You may now disconnect.