Earnings Call: Q4 2018

Mar 14, 2019

Good afternoon. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Midstream and Infrastructure Ltd. 4th 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. Mr. Joel Vora, you may begin your conference. Thanks, Lindsay. Hi, everybody. Joel McLeod is here with me today before passing the call over to Joel to review the quarter and the year. I'll just remind everyone that comments today may be forward looking and based on Tidewater's current expectations, estimates and judgments, forward looking statements we express or imply are subject to risk and uncertainties and actual results may differ from expectations. Further, some of the information provided is non GAAP. For more info on the forward looking statements and non GAAP measures, you can refer to our MD and A. As always, with that, I think I'll pass it over to Joel for a review of the quarter and 2018 year. Thanks, Joel. Good morning, everyone. Thanks for making time today to join us on our call. After 2 fairly weak quarters in Q2 and Q3, an absolute huge accomplishment in Q4 by our entire team to deliver a strong quarter in a very tough Canadian energy environment. We worked extremely hard in Q4 to attract volumes and great to deliver a record quarter for Tidewater in our 4 year history, with main drivers being our crude oil infrastructure business and gas storage business. In what has been an extremely challenging Canadian oil and gas environment, we have signed over 5 new investment grade counterparties and significantly strengthened our customers and contracts. We have gone from being a one asset company with Bellatrix being our largest customer 4 years ago to now having approximately 10 investment grade counterparties and a 15 year take or pay with TransAlta on $180,000,000 project and a Pipestone Montney $210,000,000 project backstopped by a 10 year take or pay with Kelp. Major accomplishment by our team in strengthening our customers and contracts, and we have more support from customers than we have ever had and want to continue to utilize this momentum. Want to be clear that Bellatrix is currently less than 1% of our EBITDA as there seems to be some confusion in the market on our concentration risk around Bellatrix. We strongly feel our 2 large capital projects are 2 of the top contracted energy infrastructure projects in Western Canada and our TransAlta pipeline and our Pipestone Montney sour deep cut plant. And this continues to be reiterated through interest from various large private equity firms and industry peers around being involved in these large scale contracted infrastructure projects. We are confident in our ability to deliver over 50% EBITDA growth into the end of 2019, which is only 6 to 8 months away with these 2 large capital projects, and let's jump into a brief update around our 2 capital projects. First, our Pipestone Montney deep cut sour plant construction continues to go extremely well with pipelines welded and lowered in. We're ahead of schedule on the pipeline front. Plant continues to go well. We drilled what looks to potentially be the longest acid gas injection well in Canadian history and remain confident we will be on time and on budget. We have signed 2 new customers over the past few months, including 1 large investment grade producer and the plant is fully contracted. We are starting to receive significant interest around Pipestone Phase 2 and a liquids hub and are working through a funding plan over the next couple of months, which would not currently plan to include equity. Contract term on future expansions is also looking better than anticipated with the potential for 10 year taker pays being possible where previously we would not have thought we could get the strength of contracts. And it's a huge step for us in attempting to lower our cost of capital moving forward. Again, I want to thank our customers in Calton Pipestone and a few others who wish to remain nameless for all their support as it means a lot to us. Next project, our other main project being our TransAlta project. Construction is going well. Weather permitting, we plan to be on budget and potentially ahead of schedule. Team is doing an incredible job on that front. TransAlta has been an absolute pleasure to work with as a partner and we want to thank Don and Brett and the entire TransAlta team for their support and they have announced that they will be our 50 percent partner on the pipeline, which we're excited about and excited to deliver them as much natural gas as we can over the next 15 plus years. The initial contract being 130,000,000 cubic feet a day, we are eager to work through expansion plans and attempt to bring 400 plus 1,000,000 a day through the 20 inches pipeline where expansions generate very attractive returns. It's going to take us time and not guaranteeing that we're going to get up even $300,000,000 or $400,000,000 a day, but we're real excited about the opportunity over the next 10 plus years to fill to attempt to fill the pipeline. Crude oil infrastructure business continues to be a significant growth engine for us. We do not expect this to stop with continued egress challenges out of the Western Canadian Sedimentary Basin. We look forward to our crude oil pipeline. We look to grow the crude oil pipeline and tankage storage infrastructure piece as well on a larger scale over the next 2 to 5 years, and we'll be focusing on longer term contracts and strong counterparties on the crude oil infrastructure side. We will have moved volumes to approximately 10 new markets here by the end of Q1 and the majority of these are to multibillion dollar entities who are looking for long term certainty over supply. Private equity and Industry Partners remain a key option for us for larger infrastructure build outs on the funding side if we choose to go down that path. And we do wish to thank producers and refiners for all their support as we push hard to improve market access for Canadian crude oil. Our gas storage business continues to see significant growth and acts as a natural hedge in a tough natural gas environment. We continue to set new volume records and now have approximately 5 investment grade counterparties. So great job by our entire BD Gas Storage team and continue to see that as a major growth engine here into the next 2 to 5 years. Some great news at our Brazeau River facility where we had a significant win and fully contracting our fractionation facility for the first time in our history that NGL season commences here in April and we signed up 2 new large investment grade producers. I think that the most important piece of the puzzle that we just want to emphasize to the market and to our shareholders over the past 6 months has been our balance sheet. So balance sheet, balance sheet, every key discussion, our plan, it's a focus. Our credit syndicate has been incredible and remains very supportive. As we peak on our net debt levels, we have accelerated capital and are moving a little quicker than we anticipated on TransAlta, which is a great problem to have, same with the Pipestone pipeline portion of the plant. So just overall, want to be clear that this is a timing issue when you look at our net debt Q4, Q1. We've got lots of options. Our credit syndicates have been supportive. Private equity continues to be very interested in being involved and even on pieces like the cogen or maybe even a potential small interest in some of our assets if we choose to go down that path. We are very confident in our ability to fund our existing capital projects and plan to give certainty on our funding plan for our next stage of growth of $200,000,000 to $500,000,000 by the Q4. The current funding plan for capital into 2020 would be highly unlikely to include equity and want to be clear on that front where our share price is today. I think you've heard us reiterate the interest around private equity, other options and just want to continue to do so. And to wrap up my portion, just again, with customer support being at all time highs, remain highly confident in our ability to deliver over 50% EBITDA growth into the end of 2019, and we wish to thank all our shareholders, our customers and staff for what was an extremely demanding Q4. With that, I'll pass it back over to Mr. Bora and he can walk you through some of the details around the financial side of our Q4. Thanks, Joel. Hi, everyone. I'll walk through some of the key metrics quarter over quarter and year over year. Joel touched on it. Q4 was a big quarter, a growth quarter for us, a lot going on, significant volatility in the market. We saw how the business reacts in the face of that volatility. And I think it's a testament to how not only our risk management team and policy, but also the natural hedges that our assets create among the business. So revenue was up quarter over quarter about 14%, $80,000,000 in Q3, dollars 90,000,000 in Q4. Some of that would be marketing type related, but also fee per service up about 45 plus percent year over year from $220,000,000 in 2017 to $320,000,000 in 2018. The big piece of that would be the increase in the marketing side of the business, but also adding things like the Ram River Gas Plant and long term fee for service contracts there. And then also in Q4, the introduction of the crude infrastructure business would have been an adder to that top line. Operating margin quarter over quarter was down a little bit, which is expected. When you see this volatility, we've got an active hedging program. And when you see the massive NGL and crude oil volatility in the 4th quarter, some of that margin on the top line operating margin piece gets reduced and then the derivative side on the financial hedges gets increased and you'll see that in other income on the income statement. Year over year, 30% operating margin in 2017, 26% in 2018, which is consistent with the increase in the marketing business, which is expected and I think we've talked about that before. Adjusted EBITDA would be the big one, record quarter for adjusted EBITDA in Q4, 20% increase from Q3, 25 percent increase year over year. So consistent with what our goal is in that 20% year over year EBITDA increase. So very happy on that front and we'll continue to work to grow that metric. And as the pieces come together as far as infrastructure and naturally hedging our operations through some volatile times, I think we'll continue to see that number increase. Debt would be a big one I think that everybody is watching as we round out our capital program in 2019. Capital was accelerated into Q4, part of that being TransAlta pipeline going very well, Pipestone plant going well. So like Joel said, some of that is a timing issue, but has got us close to the top end of our covenants. But again, just a timing issue. And when we look at funding in the Q1 around TransAlta truing up to their 50%, the cogen piece at our Pipestone plant, We remain fully funded through free cash flow and our credit facility to round out that capital program into Q2, Q3 and have those projects come online in the Q4. And then again, to reiterate what Joel said, significant interest from not only customers, but also partners. So really a testament, I guess, to the operations team and the engineering team through from our base business operations to the large capital projects that are now nearing completion into the second and third quarter and look forward to having some of that cash flow online at the end of the year. With that, I think we'll open it up to questions. Our first question comes from the line of Rob Hope from Scotiabank. Your line is now open. Hello, everyone. First question is just on your crude oil infrastructure business. With the volatility we've seen in differentials as well as the amount of rail volumes kind of dropping off in 2019. Has that changed the timing or outlook for how much margin that business could do in 2019? Rob, I'd say not at this point. We are able to hedge and lock in even through 2020. Our margins, customer interest continues to be at highs. And even as we look at Q4 and Q1 differentials, we think there's opportunity to add to that business. We are, I want to be clear, also focused on the pipeline side where we've got 3 pipe connected batteries. Atchison is a site where we can build out tankage. So we're real excited about the crude side of the business, confident in that $10 ish million of base EBITDA over the next 12 months. And I think there is some upside there. But we don't want to get ahead of ourselves with government intervention and some of the other pieces that we've seen, just want to be careful. But the $10,000,000 is solid locked in and then I think it's a question of do we get to $15,000,000 to $20,000,000 and too early to say at this point in time. And then in your prepared remarks, I think you highlighted $200,000,000 to $500,000,000 if I heard correctly of potential future growth opportunities that have not yet been secured. Can you just give us some additional color and break those down? Yes. I mean it's a little premature, but Pipestone Phase 2 again not in the bag, but the team's done a great job there. We've got more support than we've ever had on that front. That would be a $200 ish million project. A liquids hub at Pipestone is also something we're considering that could be a $100 ish million project. And then if we were to build tankage out at Atchison, it could start around $50,000,000 but it would likely turn into 100 plus $1,000,000 projects. I'd say we definitely don't have a lack of projects from even gas storage expansion at $100,000,000 to $200,000,000 up at Pipestone with some great counterparties that the team has been able to bring to the table to even maybe building some pipeline. Some of that's a little competitive, so we want to not go through all our opportunities. But I think our message to our shareholders is we do not have a lack of projects. The economics look strong. The function for us, as everyone knows, is more cost to capital and balance sheet. And I think we're getting to a point where we're going to have enough options. Raising equity down at these levels are is almost a guaranteed no, and nice to have 2, 3 or 4 other options. All good questions, Rob. All right. I'll hop back in the queue. Thank you. Our next question comes from the line of Robert Catellier with CIBC World Markets. Your line is now open. Hey, maybe you can start by telling us where you are on the take or pay levels across the business, pro form a having Pioneer and Pipestone in service? Yes, good question. I think once those pieces come online, again, we're anticipating $40 ish million of incremental EBITDA between the two projects, all backstopped by take or pay, which would be a 50% increase to historical 12 month EBITDA. So that's all take or pay. Rob, we'd be greater than 70 ish percent, I'd say, take or pay, and then you can ratchet that up when you add in reserve dedications, some of the evergreen fee for service contracts that we have that continually renew. So I'd say your base number would be 70% once those projects come online. Okay, that's helpful. And then what has to happen to make the condensate hub a reality? Is there a particular level of contracting you're looking for? Or is it really a question of whether or not you expand Pipestone to Phase 2? I think it's a couple of factors. Customer support continues to go up. So I think we're getting close on that. That's obviously the key piece and then funding as well. Know there's concern in the market and with our debt levels, raising equity. So I think we have to have a funding plan in place. Do we need Pipestone Phase 2? I would say not necessarily, Robin. We could phase out that liquids hub as well. So we're hopeful in the next 2 to 3 months, we can get that over the goal line, have a funding plan laid out, have the customer support and move it forward. Okay. You mentioned private equity a couple of times in your funding comments, but I mean as much as it's not issuing equity, is there not an element of dilution in there? The funding way I guess depending what you do, right? Yes. I would agree, Rob. It's tough to sell down from a cogen to a small working interest in one of our contracted assets. But 2, if parties are willing to pay a significant premium to do so and that will enable us funding the next project at a 6 to 7x EBITDA build and they're willing to pay north of 10x. And we're evaluating. I don't want to say I know we don't know exactly today what we're going to do, but nice to have options in the Canadian energy sector right now. There's a lot of groups on the producer side that don't have options. So we're just evaluating our options. And then into Q4, we'll come forward with the current plan and things can move around, but nice for us to have 4 or 5 different options that we're evaluating. Okay. So your point, it's it will take the most option, at least dilutive option at the time, I guess, depending on what your options are then. Final question then, you mentioned about strengthening customer contracts in the crude oil infrastructure business. What impact does the government's policy of mandatory curtailments on Alberta and also the acquisition of railcars have on that outlook? I think it just presents uncertainty, Rob, more than anything. For us, it's going to continue to be an issue, egress out of Western Canada. We're set up nicely, with infrastructure, railcars likely move towards pipelines, tankage and storage, but we're cautious. So we have even looked at export terminals where I would say at this point they're on hold just given all the uncertainty in Tidewater us, we cannot make $100 plus 1,000,000 commitments on a bit of a guess on where the government's going to land on intervention moving forward. It's definitely an issue. We've got great customers and counterparties that we've dealt with a ton over the past 10 years. They're eager to work with us. To open up 10 markets after only 6 months is something we're extremely proud of and we continue to see demand for crude and we can be a big part of that both on the pipe, tankage and also on the rail side. Okay. Thanks for taking my questions and the presentation. Thank you. Our next question comes from the line of Kenny with National Bank Financial. Your line is now open. Yes, good morning guys. You mentioned in the release new volumes at Ram River. I just wanted to confirm if you were talking about volume growth through 2018 or just new volumes since acquiring plant in late 2017? And if the former, if you can give us a bit more color on what's driving the growth there? And then maybe longer term, curious to get your thoughts around Kuma as a customer and potentially ramping up production there if Pierre Day does sanction their LNG plant at some point here? Yes. Hey, Pat. Ram River, the guys did a great job when we acquired that plant in December 2017. The plant was around $120,000,000 a day. Today, we'd be another 20%, 30% higher than that. That was through incremental adds through 2018. So no significant adds in Q4, but through 2018, definitely volumes came on from some large investment grade producers in the area. I'd say what's driving the growth, it's a big plant down there and the sour processing, I think is something that's becoming a little more scarce in the area. So the ability for Ram River to take volumes, no problem. It's got a ton of capacity. It can take a pile of sour volumes. I think that'd be a piece of it. And then also working with producers in a tough environment to get creative on fees and that sort of thing. We're definitely happy with the increase at the Ram facility for sure. So yes, through 2018, it was a lot of hard work from the commercial team to bring those volumes on. And then sorry, what was your other question, Pat? Just upside related to longer term upside related to Okuma and Pierade. Yes, I think the acquisition by Pierde would we view that as a positive. They've got some pretty big plans in the area. So we're definitely rooting for them. They've been a great counterparty for us. As you know, they were involved when we acquired the plant. So they've been a great capital. So definitely, I think there's if they're able to execute on their plans, there's hopefully a whole bunch of upside for the RAM plant. So we're definitely rooting for them and happy to have them as a customer. And maybe just a few things to add there quick. Sulfur price, Pat, has been helpful too over the past 12 months. It's actually, I don't know, I'd say even meaningful to netbacks. RAM is one of the largest plants and sulfur plants out there and we've been great at opening up some new markets. We're moving unit trains to sulfur and have been for 6 months or so there. And then on Ikema Perde, I want to see Tim what he does best, which is drilling Foothills wells. And they've drilled a few. It's a little early. I don't want to speak on their behalf, but we're real excited to see what they can do now that they've raised their $20,000,000 as well. So we're big supporters trying to help them wherever we can. All right. That's great color. Thanks guys. And then Joel, as formulate your funding plan here over the coming quarters, you mentioned some interest in some of your assets from private equity. And just curious how you feel about potentially a strong bid coming in for an asset like the Pioneer pipeline after it's commissioned, of course. If the stock is still trading at 6x, 7x by then and let's say you can sell your 50% interest in the pipeline for somewhere north of 10x. Is that something that you have to consider or is it just not for sale because of other strategic reasons? Todd, I mean, we can never say it's not for sale. So we always would consider a bid. But knowing our plans expansion wise and the economics of those expansion plans at 3x to 5x EBITDA multiples, we are focused on that front and finding a way over the next 5 to 10 years to move $400,000,000 a day of gas for that pipeline. So I would say it would be highly unlikely we would divest of our entire interest in that pipeline. TransAlta has been a great partner, but never say never. And as we've seen on the U. S. Side, there's been multiples paid of north of even 15 times on pipelines. But I'd say today that is highly unlikely. We're focused on growing the gas throughput through that pipeline and maybe even expanding that infrastructure over the next 5 to 10 years. Okay. That's great. Just a quick follow-up on the Pioneer. Given TransAlta's recent announcement to extend the mothballing of Sundance 35 right through 2021 basically. Does that somewhat limit the potential upside in throughput over and above the initial $130,000,000 a day or do you still see the need to add some compression to the pipe well before 2022? It feels like there is more demand than we can meet And I think they're continuing to look at ways to get even more than 400,000,000 cubic feet a day of gas into that complex, Pat. So know the mothballing news was not a surprise to us. We're focused on trying to get more gas, they're more excited than they've ever been in the project and they've been an incredible partner and want to thank the entire TransAlta team. All right. That's perfect. Thanks, guys. Our next question comes from the line of Robert Kwan with RBC Capital Markets. Your line is now open. Hey, good morning. Maybe I'll just start where we ended off here on the Pioneer pipeline and you commented that it feels like there's more demand than for what Pioneer can offer. Just wondering under the contract, TransAlta has talked about trying to secure a second connection. Is there preferential rights to pull the gas off Pioneer before pulling it off of an alternative system? I think I'll answer that, Robert. I think and one of our guys can correct me if I'm wrong, but I think we've got preferential or priority on 130. And then above and beyond that, it's open to either counterparty to source volumes. The take or pay is increased commensurate with any expansion. So I think it would come down to economics. But given the pipe is in the ground, I would think that the best option would be through our existing pipeline. But there is the base 130 and then there's some optionality above that for either counterparty to source and tie in volumes. And just want to reiterate that in a great partner, we are going out of our way to focus our efforts with them versus Capital Power or others and just want to continue to reiterate that. Okay. Just in terms of EBITDA, there's the comment here of exiting 2019 greater than 50% higher. I'm just wondering, you've also given more specific guidance around 'nineteen EBITDA previously of $100,000,000 $105,000,000 in 2020 at $125,000,000 to $135,000,000 I'm just wondering if you're still comfortable with those numbers kind of coming out of the quarter, whether that's just what's going on in the base business or even what you're seeing around throughput frac spreads NGL prices and the like? Yes. I would say, Rob, I mean, it's a little early. We're only into Q3, but happy to reiterate that guidance that you've mentioned, $125,000,000 to $130,000,000 into 2020 exiting 2019 is something we're confident in. I think the question is a bit on the upside piece, which we're not quite ready. And I think the uncertainty we've seen with government intervention and other pieces, just don't want to get ahead of ourselves. But nice to deliver a strong Q4, Q1 is feeling good. And as our two projects come online and we're confident we're highly confident they are into the end of the year, getting more and more confidence. And a lot of that cash flow, I think, as everyone knows, is contract. And it's not us trying to determine a margin on an NGL barrel or a crude barrel. It's contracted tolling EBITDA, which is huge for our shareholders. Got it. And that EBITDA those EBITDA ranges are pre IFRS 16, is that correct? Mr. Voro? Yes, that's right, Rob. Okay. Perfect. If I can just finish one last question here. Just in Q4, you had significant realized hedge gains. Just wondering was all or substantially all of that related to hedging volumes that you actually sold in Q4? Or was some of that monetization of hedges in advance of say Q1 or Q2 flow? The majority of that would have been Q4 volumes and that'd be a mix of some of the crude pieces. As you know, when you get into crude, obviously, a lot higher value than NGL. So some of that would be crude, some of that would be existing NGLs. But yes, the majority of that would be Q4 related. Okay. That's great. Thank you. Thanks, Rob. Our next question comes from the line of Elias Foscolos with Industrial Alliance Securities. Your line is now open. Good morning. I'll start with a question on the crude by rail. You've given us some numbers directionally $10,000,000 annualized for 2019. I was just wondering how did Q4 shape up directionally? Was it above that sort of on an annualized basis, If you can give us some idea or below? Yes. Elias, it's Joel here. Q4 would probably be a touch ahead of that. Even when we work with producers and refiners, we don't try and maximize our margin to the last $0.50 It's a long term game, and we're seeing that through Q1 and through 2019 2020, where they're coming to us first. We're doing some moves that I never dreamed we would have into some refineries that we've never even been able to access over the past 10 years. So roughly Q4 would, I don't know, say 10 ish percent margin wise, probably ahead of what we would plan through 2019, but we've locked in the 2019 cash flow very confident in that $10,000,000 And there could be some upside there, but just a little too early to say, especially with government intervention piece. There's just a little too much uncertainty out there. Great. Thanks for that color. A bit of a follow-up on Robert's last question. And he sort of related to the realized gain in Q4. So I'll sort of start with that. I think the growth you guys have clearly given us that number, call it, dollars 10,000,000 EBITDA annualized per quarter on the projects that are under construction right now. But when I look at Q4 going into Q1, I'm not interested in specific numbers, just directionally. We should be seeing an increase at Brazo River. We should be seeing sort of widening frac spreads, although I don't know if that's going to impact you too much. Probably an impact positive impact off Ram River and yet kind of a negative impact off the realized gains. Would that kind of put us as sort of as a trajectory going sort of stable for where we are on the base, maybe slightly downward and then of course as projects come on sort of take off, just something along that line if possible? Yes. I think directionally, what we've seen in Q4 is similar to what we can expect in a Q1 and a Q2 directionally, just seeing how the business reacts in different environments. Once those projects come on, that's when we're going to see the increase. And Joel touched on it a couple of times. There's a lot of uncertainty and volatility. Some of that volatility we benefit from. So I don't want to say that there's no chance for upside or even 5% on either end, 5% or 10% on either end. There's always that possibility, but I'd say directionally Q1, Q2 expect to see kind of what you've seen. And then when those projects come online is when we get to that guidance when we're talking 50% or our exit 2019 run rates. And Elias, it's Troy here. If you try to want to stress test it, I think flat is the message Q1, Q2. But I think on the downside, if you said worst case, what could it look like? It's probably 5% moved down roughly, just trying to set expectations. I mean, there always can be event bankruptcies or if gas went to $0.25 We don't see any of that. But I'm just trying to give you some guidance as to where we see things over the next couple of quarters. And then into Q3, Q4, I expect to see a very large increase in cash flow and EBITDA. Yes. So what we're really saying into Q4 into Q1 kind of expect the same overall, but operations are going to pick up and make the difference up. And then of course, as we get into Q3, Q4, that's been said 4 times over this call. So that's pretty clear to me. Great. And just want to be clear too, some of those when we look at the direction we're focusing on, a lot of that is hedging based business. The marketing piece, I think we should be clear too is marketing off the back of our assets. It's not spec trading. It's not spec trading. Right. It wouldn't be It wouldn't be speculative trading. So that's just realize a lot of those marketing pieces are more locked in than what you might think given it's off the back of our pipe infrastructure, rail infrastructure, storage. Farms. Right, right. So it is base business related and not as one time as it might. Look, although the volatility and the movement in differential, yes, definitely did have an impact on it. Yes. No, that's great color. Thank you very much. Thank you. And there are no further questions in queue at this time. I'll hand the call back over to Joel McLeod for closing comments. Well, thank you, everyone. Thanks for making time today. We look forward to working hard through 'nineteen and delivering our 50% plus EBITDA growth into the end of the year. But thanks again to everyone, our customers, shareholders, staff, again a big thank you.