Earnings Call: Q2 2019

Aug 13, 2019

Earnings release

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Midstream and Infrastructure Limited Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Joel Vara, you may begin your conference. Thank you, Chris. Hello, everybody. On the call with me today, as usual, is Joel McLeod, Tidewater's President and CEO. Before passing the call over to Joel for a review of the quarterly highlights, I'd like to remind everyone that comments made today may be forward looking in nature based on current expectations, estimates or judgments and projections. Forward looking statements we may express or imply today are subject to risks and uncertainties, which can cause actual results to differ from expectations. Further, some of the information provided refers to non GAAP measures. To know more about forward looking statements and non GAAP measures, please refer to our various reports, which are available at tidewatermidstream.com or on SEDAR. With that, I'll pass it to Joel McLeod for a review of the quarterly highlights. Thanks, Joel. Good morning, everyone. Thanks for joining our Q2 2019 conference call. We appreciate all the support from our shareholders, stakeholders and staff as Tidewater sits near all time lows and I personally have more conviction than ever to increase my shareholdings in Tidewater when conditions permit. Our second quarter feels like a typical Q2, which is not overly exciting, but in line with consensus and similar to Q1 at approximately $22,000,000 of EBITDA in both Q1 and Q2 2019. Our focus remains on our 2 large capital projects where Pioneer Pipeline to TransAlta came online at the end of May, approximately 4 months ahead of schedule and our Pipestone Sour Deep Cut Plant is currently being commissioned and is scheduled to be online in the next 30 days or so. We remain confident in our ability to deliver over 50% EBITDA cash flow growth in the next 3 to 5 months with our 2 large capital projects being online in the next 30 days and our TransAlta pipeline take or pay kicking in, in November. Our team has done an incredible job in transforming our contracts and customer base through the addition of over 10 new take or pay contracts ranging from 5 to 15 years and including adding over 5 investment grade counterparties. Extending our 2 largest customers at Pipestone from 5 year taker pace to 10 year taker pace is a huge accomplishment by the team and should give shareholders confidence and long term contracted cash flows in one of the most active areas in Western Canada. The transformation of Tidewater's customers and contracts has been recognized by numerous infrastructure funds and private equity pools of capital. Our balance sheet remains a key focus as we work to reduce leverage and focus on bringing leverage back down towards 3x debt to EBITDA with our 2 large projects coming online. Also want to reiterate that we remain committed to not raising equity at current levels. We have more customer support than ever and the focus over the next 60 to 90 days is our funding plan for Pipestone Phase 2 and the related potential formal investment decision to proceed with Pipestone Phase 2. We continue to have several options to fund the next $200,000,000 to $400,000,000 of capital where our preference is not to issue equity at these levels and not to take on more leverage. On our Pipestone Montney deep cut sour plant, a quick update. Our operations and engineering team has done an incredible job where our commissioning is in full gear and we expect to be online in approximately 30 days. The project remains on time and on budget. Pipestone remains one of the most active areas in Western Canada, if not the most active, with over 80 wells spud in 2019 alone and the area continues to be short processing capacity. We continue to be inbounded by producers looking for processing capacity at our Pipestone plant where we feel we can offer the highest liquids yields netbacks in the area and also offers connectivity to gas storage. Unfortunately, we are fully contracted for Pipestone Phase 1, which is a great problem for Tidewater and our shareholders to have. Again, we want to thank our customers in kelp, Pipestone, Advantage, Novista, our 2 investment grade customers and a few others who wish to remain nameless for the time being. Your support means a lot to us. Our Pioneer pipeline to TransAlta came online in May approximately 4 months ahead of schedule and continues to test record throughput levels. We don't expect full EBITDA cash flow until November when our take or pay kicks in. We are actively working with our partner in TransAlta to expand the pipeline above 130,000,000 cubic feet a day where the pipeline does have capacity in excess of 400,000,000 cubic feet a day with incremental capital compression. A big thank you to our partner in TransAlta who has been an incredible partner and we look forward to growing our partnership with them in the future. Our gas storage business continues to see record throughput and contracting. Our gas storage team continues to do a spectacular job and we have recently extended contracts to as far out as 8 years with investment grade counterparties. We see significant growth in our gas storage business and it acts as a natural hedge in a tough natural gas environment as we are seeing today. As we discussed on previous calls, our execute our plan where EBITDA cash flow is expected to increase by greater than 50% in the next 3 to 5 months as our 2 large projects come online and related take or pay contracts kick in. With that, I'll pass it back to Mr. Vohra and he can walk you through some of the details around the financial side of our Q2. Thanks, Joel. Hi, everyone. I'll walk through some of the results and then we can open it up for questions. Overall, revenue for the quarter, up again mostly related to the increased crude oil business pipeline and rail shipments on crude oil OpEx and revenue up about $30,000,000 So continue to explore new markets, test new markets and grow that business for opportunities in the future. So that's the main driver behind the increase in revenue and OpEx. Operating margin about $25,000,000 for the quarter, adjusting for realized gains on commodity hedges that'd be similar to Q1. And to echo Joel McLeod's comments, a quarter sort of in line with our expectations similar to Q1 with gas prices coming off. We do see a little bit of pressure on the processing business, which is largely made up for in the gas storage business and did have record throughputs in gas storage and probably a record quarter for gas storage, largely offsetting what we see as far as pressure on April prices. EBITDA around $22,000,000 which I think was close to consensus probably in line with our expectations. A few pieces made up again for the decline in AECO gas prices, but also that volatility in commodity prices. We're able to capitalize in some areas given pipeline rail connections, gas storage and multiple end markets. So sometimes that volatility is a bit of a benefit. Payout ratio, maintain a payout ratio for the 6 months around 25%, 29% for the quarter, around $11,500,000 a little bit down, partly related to increased finance costs related to capital. That big piece is behind us now when we look at capital and the balance sheet and net debt around $65,000,000 of net cash spend for the quarter, which is starting to come down. Q1 would have been our most capital intensive quarter by far in the history of the company. Q2 started to come off and now with Pipestone Gas Storage, the Pioneer Pipeline and the Pipestone Gas Plant, all essentially either commissioned or nearing commissioning that capital intensive period is sort of behind us. So great to see that we've been able to execute on the projects and we'll start to realize that cash flow here in large part in Q4. Also subsequent to the end of the quarter, closed the Pipestone Gas Storage deal where those assets have now moved into a limited partnership. We've been funded by our joint venture equity partner, $25,000,000 You'll see that short term contribution liability sitting on the balance sheet that will go away. We've now been funded the non recourse $30,000,000 non recourse debt in the limited partnership related to gas storage. So that came in subsequent to the quarter. And then also, I think most are aware, closing of the convertible debenture of $75,000,000 which again further helps liquidity and balance sheet and helps round out the capital projects. So I think with that, nice to see the most capital intensive piece in the history of the company sort of behind us and looking forward to those cash flows coming online. I think with that, we'll open it up to questions. Your first question will come from the line of Rob Hope of Scotiabank. Please go ahead. Your line is open. Hello, everyone. First question, just want to touch on the Pipestone gas plant Phase II. Just as you're looking at your cost of equity and cost of capital, what financing alternatives are you looking for? Is it a private equity partner or could we see customers given an option to participate like we did in Pipestone Phase 1? Hi, Rob. Joel here. I think today all options are on the table. We want to find, I believe the most attractive option for our shareholders. It's great to have the interest we do with various private equity groups and continue to spend time. I'm not going to directly answer your question, but I think we're evaluating various options and real happy with the amount of interest we've seen even extending the Pipestone Energy contract from 5 to 10 years with our recent acquisition was very helpful in cost of capital and options. So we continue to through options and are excited to attempt to move the project forward. And then maybe a follow-up question just on Pipestone as well. If we go back to Pipestone Phase 1, you did sanction that with quite a bit of white space in the plant. Could we see you do something similar to that with Pipestone Phase 2? I'm just trying to get a sense that is it customer interest that's the gating factor or is it kind of your source of the capital? Yes, I would say today it's more towards the financing plan that we're happy with. We've got multiple options in front of us. Customer support would be, I'd say similar to Phase 1 when we FID'd where we were in that 60% customer support and maybe a little higher when we see WTI move as much as we have and then even some of our customers hitting all time lows, we just want to reiterate that there's no guarantees that we will continue to have the customer support that we do. But right now, we've seen more customer support than we've ever seen. Pipestone Phase 1 has more interest in volume than we can handle and want to move while we have that customer support. Thank you. I'll hop back in queue. Your next question will come from the line of Patrick Kenny of National Bank Financial. Please go ahead. Your line is open. Hi, guys. Just maybe at a high level here, a lot of moving parts and various projects in various stages. Wondering if we can get a quick update on what percentage of say Q4 run rate EBITDA would be under take or pay agreements and also what the weighted average contract life looks like exiting the year? Yes, good question, Pat. Obviously, with the Pioneer pipeline coming on and the Pipestone gas plant as well as storage, all three of those projects have significantly increased our weighted average contract life and take or pay. We'd be probably in the 60% to 70% -ish range of take or pay type contracts and weighted average as a company. I'd have to think, but I know Pipestone gas plant weighted average is about 8 to 9 years. The Pipestone storage facility is 6 years and then obviously the TransAlta pipeline piece is 15 years. So definitely has changed the base business and excited for those contracts to come online in the Q4. They would be definitely our longest and strongest contracts and even gas storage having essentially all of the customers being investment grade is big for us. And just to confirm, you're still comfortable with the $125,000,000 to $135,000,000 of adjusted EBITDA for 2020, obviously, prior accounting for the Pipestone, East Battery and Liquids Infrastructure Investments? Yes. Okay. Having the projects behind us, I think, is a key factor there, yes. Great. And then at BRC, currently flowing, don't know, around $80,000,000 a day, I believe, versus TransAlta looking to pull $130,000,000 a day through Pioneer by November. I assume what doesn't come from BRC will be tied in from NGTL. But at some point, do you expect most of the volume to be pulled through BRC? Or maybe put differently is TransAlta incentivized in any way to contract with producers and go through BRC or are they indifferent from taking it off NGTL? Yes, I think it's a good question. I think to the extent that we can draw producers to BRC having gas storage, 2 end pipelines, a frac there, 3 NGL pipeline connections is big. So and TransAlta has been involved in producer discussions and potential to bring additional producers to BRC. That being said, we do have a pile of options at BRC to fill that pipeline. 1 would be pulling off NGTL, gas storage is another big piece and then producers coming through BRC. So I'd say that all of the above are in motion. Great. And then you have some fractionation contracts also coming off of BRC in March of next year, I believe. Can you remind us what portion of the frac capacity this represents and maybe when you expect to have this portion recommitted and for what tenure? Yes. I think it's a good question. I think off the top of my head, maybe I won't give you a percentage of exactly what comes due in Q1 2020. I know we do have some longer term 3 year contracts there. Generally, though, we see those contracts sort of in the Q4 of the year get renewed and generally on the NGL type season similar to a gas storage season where you're in that April to April time frame. So I'd say into the Q4, we'd start to look at extending those contracts. But we do have some are 12 months, but we do have some longer term commitments up to 3 years there. And I'd say maybe half, but don't hold me to that. Okay. And last one for me guys. Joel, maybe you can walk us through your outlook on the leverage frontier, where you expect to exit the year from a net debt and debt to EBITDA ratio perspective? And then how you see your leverage trending through 2020 relative to that 3 times target? Yes. I think now that we've got the big projects behind us, we'll start to see that leverage stabilize. Obviously, looking at the next phase of growth, but right now barring any massive capital projects and I wouldn't say that we aren't going to move forward with new capital projects or the new program. But barring that, we would be generating significant free cash flow, bringing leverage levels down through 2020. And to echo Joe MacLeod's comments, targeting that 3 times debt to EBITDA range, obviously, with cash flow coming on with the new projects, we'll significantly deleverage there, where we've spent a significant amount of capital, obviously, without the cash flow coming online quite yet. So the target would be moving down closer to that 3.5x, 3x. That being said, we are evaluating the next phase of growth. But I guess to answer your question, Patrick, in that 3 to 3.5 times would be the target go forward. Okay, great. That's it for me guys. Thanks. Thanks, Matt. Your next question will come from the line of Robert Katellier of CIBC Capital Markets. Please go ahead. Your line is open. Hi. I'd like to echo some of Pat's question is, if you can get the take or pay any average contract life breakdown into your investor presentation that would be helpful. And I'd also like to have on a similar basis the investment grade counterparty breakdown, if you have that on the again on the same basis, the run rate with the new assets you've added here. No problem, Rob. And then the one thing I noticed, you made reference to plans for the crude oil midstream business and the contract on capacity on third party pipelines. I was wondering if you could walk through the strategy there a little bit and whether that's expected to consume any balance sheet capacity and how you would manage the commodity price risk on the marketing business. And I think you're 50% to 100 percent hedged, but any plans to take up that hedge if you have bigger commitments on pipes? Yes. Rit and Rob, our plans would be to dip our toe when we started to have to. I don't want any of our shareholders or the very we've done a really good job there and generated some significant EBITDA and we back to back with refiners as buyers and then producers we know on the supply side. But at this point, I don't think we necessarily want to get into the details. I think the main message would be they're immaterial or close to being immaterial, but we are considering adding and we would back to back those with buyers, with refiners and parties that we continue to grow our business with. We see them more as a tolling type of opportunity where we can offer egress for producers and lock in some margin and cash flow. Okay. So effectively what you're basically doing already just a little bit larger? Potentially, yes. With Enbridge mainline and I would say, I know we're going to participate there, but we review all open seasons and have been involved in a few and continue to evaluate. When you see Brent to TI today at 3, an example would be we've got a Brent TI hedge at $9 very small volume, but just want to give perspective that we continue to evaluate opportunities and have I think our team has done an incredible job in leveraging off our knowledge and our relationships to generate tolling EBITDA off our crude oil infrastructure. Okay. And then last question for me is on the potential for Pipestone Phase 2. Have you given any more thought to scoping that, particularly what you might do with the they might treat the sour gas? So on Pipestone Phase 2 current plan is to go to 8% H2S. That is not a guarantee, but we are looking to have a little more flexibility than what we have with Pipestone Phase 1. Pipestone Phase 1 as we've seen was a bit of a race for us and as a result of executing on that we've got more interest than we can handle. But today, our plan is to move towards 8% H2S. And would that be acid gas injection or sulfur? So you'll see public data will show we're currently drilling our second AGI well. If our second AGI well is exceeds our expectation, there is an opportunity that Phase 2 would be AGI, but for now we're planning for sulfur recovery. Okay. Thank you. Your next question will come from Robert Kwan of RBC Capital Markets. Please go ahead. Your line is open. Good morning. If I can just kind of go back to the financing side of things and all the different things you're looking at, obviously, the total cost is probably going to be the governing factor. But if you kind of had your way, how do you think about joint ventures, whether that's taking a partner into a new project or selling down an existing asset versus just an outright sale of an asset to raise funds? Good question, Rob, and it's something we've been working through for 6 months. Ideally, we keep our story as straightforward and as simple as possible. But when our plan is not to raise equity at current levels and not add debt, I think you get a sense of that joint venture private equity capital is where we're going to head. We could sell down a working interest in Pipestone Phase 1 at a premium or we could look to roll Pipestone into a joint venture. So I would say we're evaluating those options. Complexity is something that we don't necessarily lean towards, but if our cost of capital is 7% to 9%, it's something we feel we need to evaluate and Pipestone Phase 2 is an opportunity we don't want to pass on given we continue to be inbounded by competitors, private equity groups on being involved in Pipestone as it's to us the most active area and the wells continue to get better and better in the area. Got it. And how do you think about you mentioned earlier customer options. How do you go into thinking about that given there's no certainty that the option gets exercised and then you're stuck with the capital? So on as far as customer exercises, so with our Pipestone Energy Agreement, they can no longer they no longer have the option to exercise. So our preference would be to no longer have producers that have the option to have an ownership. I mean, I guess depending on the customer and I don't want to be negative to kelp or others, but when private equity capital would rather deploy more rather than large capital and even us we'd rather own and operate 100% assets as we grow Tidewater to a point in 3, 5, 10 years where we've become an attractive acquisition target, our preference would be own and operate 100% versus having 80% or definitely a non op situation is definitely not what we want to be into, but we'd like to own and operate 100% where possible. Got it. Does the significant share price weakness that we've seen, does that change or cause you to rethink the capital allocation strategy? And if so, what are some of the different things you're thinking about? Not really. We've been sideways on our share price for 4 years and then moving down just to reiterate our comments that we won't be issuing equity at these levels. I mean, if we were up at $2 then I think, yes, absolutely, it would definitely probably lean to considering equity. But right now, it just reiterates our message and great to have multiple strong large infrastructure funds that want to be involved in what we're doing, especially up in that Pipestone area. Maybe I'll just finish and it's a little bit along the same lines. Joel, you made the comment at the outset of the call that you've got more conviction than ever to assets to raise capital to effectively invest in what you see as undervalued assets via share repurchases? I would say we're evaluating all options, Rob, with our leverage and then our 2 projects coming online. I think step 1 is just focus getting our cash flow growing, but we are having those discussions. We had our board meeting yesterday as far as share repurchases and at a point we feel it would make sense. It's just step 1 is getting our cash flow online, monetizing non core assets, again, is something we're discussing with our board and would consider. We just don't want to set the expectation that we can sell non core assets at a massive premium or being accretive to Tidewater where we're at today. But do want to be clear, yes, definitely evaluating disposition of non core assets and would love to be buying more stock either personally or and are starting to look through even Tidewater considering that. But don't want to pound the table and say we are with X percent certainty going to be stepping in with an NCIB, but it's something we have to consider with our share price where it's at today. Great. Thank you very much. Thanks, Rob. Your next question comes from Elias Foscolos of Industrial Alliance. Your line is open. Good morning. Regarding Pipestone Phase 2, you have mentioned you plan on sanctioning or making a decision towards year end. Have you publicly mentioned the potential size of that expansion? Yes, I think there's a range, Elias. It obviously depends on the day, commodity price, producer sentiment. It would be in today 100,000,000 to 120,000,000 cubic feet a day. That can change as we see WTI move up on days like today. It could be greater than that, but today that's the range we would be considering today. Okay. And moving on to the Pioneer line, it had some flow in Q2. I'm going to say roughly running at about 35%, 40% capacity. Proportionally speaking, before it gets up to its 130 later in the year, would this be producing less EBITDA than its proportional throughput, maybe due to some contractual nature? In other words, can we see a step up from 1 volume and 2 some sort of pricing or was this running at kind of the rate that proportionally you would expect? Yes. On for commissioning and startup, I would say we've probably even exceeded our expectations. And I believe we've been very clear that the take or pay doesn't kick in until November of 2019. But also on TransAlta side, they've been great, but they've tested both Sundance and Keybills. And that's what the first five or so months here are to do is test operationally what we can and can't do. I'd say everything is in line and we're excited to step into November, December and what we can do. But overall, I'd say going as planned. Okay. Moving to the Pipestone East Battery, I know you inherited something that's existing and also you plan to put some more capital into it. Is it going to be generating any cash flow in the interim period? Or will we see really all of it coming in, as you said, 12 to 18 months? Yes. You'd see most, Elias, in 12 to 18 months. There's a little bit, but I wouldn't say it's material enough for us to change any projections or guidance. There is a little bit that comes on in the short term, but the majority would be once that facility is complete. Great. That's it for me. Thanks a lot and I'll turn the call back. Thanks, Elias. Your next question comes from Curtis Jensen of Robotti and Company. Your line is open. Hey, good afternoon or good morning, fellas. Non operations question for Joel McLeod. Joel, I think as part of the convert offering, there was mention that you were going to your intention was to increase your ownership with the use of a loan where you were going to pledge your existing shares as collateral. Is that accurate? Yes, correct, Curtis. And legal counsel is advising me not to get into the weeds, but I can assure you I have more conviction than ever and want to continue to add to my position. It will be a function too when conditions permit and there's a lot of moving pieces right now as far as what's material and what's not material information. Is there well, you can not answer it. I mean, is there a mechanism in there that is essentially a margin call mechanism that if the stock keeps going down, your collateral would be called away? There is, but the amount that I've pledged in margin, there's more than significant room for me to step in and happy to do so. I think I'm just trying to position myself where I can make one of the larger purchases that I have over the past 4 years and really believe in what we're doing and want to show our shareholders that we believe in what we're doing. All right. And then maybe for Joe Vora, just one quick one on I don't know if there is is there a bridge between sort of your adjusted EBITDA and distributable cash? It seems like the gap was a little wider this quarter. And I don't know if it was related to working capital or I know you have sort of a written description of what each is, but I don't if you could quantify it somehow or now or in the future? Yes, Curtis, the main pieces would be increased financing costs related to just draws on the facility commensurate with that capital program. So that would be one piece. I think there was when you add together maintenance capital and some decommissioning pieces, we're in line with guidance, but we were a little light in Q1. We had $16,000,000 or so in distributable cash flow, a little more of that came in Q2 and the other piece would be one time FX rate moving with some we hedge all FX exposure. But when you have Canadian U. S. Dollar moves right around period end, that can have an impact too. So that would be one other impact. But I'd say overall, when we're guiding to around a 25% payout ratio, that's still what we'd expect for the year. All right. Thanks. Thanks a lot, guys. Thank you, Chris. There are no further questions at this time. I will now return the call to Mr. McLeod. Well, thanks everyone. We really appreciate time, support, shareholders, staff, stakeholders, credit syndicate. Everyone have a good day and thanks again.