Earnings Call: Q3 2018

Nov 14, 2018

Earnings release

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Midstream and Infrastructure Third 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. I would now like to turn the call over to Mr. Joel Vora. Please go ahead. Hi, everybody. Joel Vora here. Thanks for joining the call. Joel McLeod is on the call with me as well, Tidewater's President and CEO. Before passing the call over to Mr. MacLeod for a review of the quarterly highlights, I'd like to remind you that some of the comments today are forward looking in nature and are based on Tidewater's expectations, estimates, 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. For more information on non GAAP measures and forward looking information, please refer to the company's various financial reports and disclosures, which are available at tidewatermidstream.com or on SEDAR. With that, Joel, I'll pass it to you for an overview. Thanks, and thanks, everyone, for making time today. Also a big thank you to our shareholders, customers and staff through what was a tough quarter and what continues to be a challenging Canadian energy market. Our Q3 results were disappointing and were impacted by various factors with the main two being AECO gas prices and reduced producer throughput. However, on the positive side, our gas storage assets had one of their strongest quarters to date and continue to act as a hedge in a low gas price environment, and we continue to work to expand those facilities. And further to that, we do have some we have seen some positive news here in the past few weeks with natural gas prices hitting 8 to 10 month highs over the last couple of weeks and throughput at our facilities has seen a related increase. Regulatory approval of our 2 large capital projects being our Pipestone Sour Deep Cut Montney facility and our TransAlta coal to gas conversion pipeline are also significant milestones for us that we have achieved here in the past couple of months. And we are full steam ahead to bring both of these projects online on schedule in mid to late 2019, and the team is worked in hard to do so. On the other front, our new business unit, our crude oil infrastructure piece, producer and refiner support with our rapidly growing crude oil infrastructure business has been significant, and we continue to open up new markets for Canadian crude oil and work towards longer term contracts. These projects could include storage, tankage, pipe connected terminals like we have today at Valhalla, Brazil and Edmonton in addition to rail and or other terminals even potentially on Tidewater. Private equity partners would remain a key option for Tidewater for larger infrastructure build out, and we appreciate all the support we've had from our shareholders and from private equity partners as we do continue to look at some opportunities. We also want to thank producers and refiners for all the support as we push hard to try and improve market access for Canadian crude oil and all related liquids, including ethane, propane, butane and even condensate with the differentials we're seeing through almost every component of Canadian liquids. Maybe just a quick update on our 2 big projects. If we start with our Pipestone Montney deep cut sour plant, I think everyone on the call is likely aware we have received regulatory approval on the plant and also the pipelines, and we're full steam ahead and getting ready to drive piles on-site and have been clearing, and that is going extremely well. We've been lucky here with the weather and continue to move ahead. The plant is fully contracted and well results in the area continue to impress. We'd hate to say that the Pipestone area and the related liquids are immune to the differentials that we've seen on both condensate and light sweet crude, but we're working very hard with producers to optimize their liquids, their streams as the plant comes online and ensure we maximize their netbacks and great to have a ton of producer support in the area and even from some parties that aren't involved in the plant on even a potential liquids hub up in the Pipestone area. We continue to expect the plant to come online at mid-twenty 19 and want to continue to reiterate that. And again, want to thank our customers in Kells and Blackbird for all their support. And with Pipestone's merger acquisition of the Blackbird team and entity also look forward to working with the Pipestone Oil team and Paul and Bob in particular have been great supporters of Tidewater and we greatly appreciate all their support. If we jump into our TransAlta pipeline project, a quick update and want to thank the TransAlta team as well for all their support. Don, Brad, their entire team has been incredible to work with and great to get a regulatory approval here, roughly 30 days ahead of schedule and be full steam ahead on the construction part of the project and excited to see that project come online on time as planned. We did see a cost increase. We want our shareholders and market to know there that we're taking that very seriously. A portion of that is related to steel prices, to pipeline activity and also our ability to flow above $130,000,000 a day. But we did see a cost increase there and just want the market to understand and our shareholders that we're taking that very seriously. We're confident in our ability to execute, but we have seen an increase up to $180,000,000 on the project. We do feel that project is a great project for Albertans Canadians in a coal to gas conversion and very pleased to get a regulatory approval 30 days ahead of schedule and be ready to start construction here any day now. I believe we're clearing here in the next couple of weeks, which is very exciting for the team. So just to close out, we do look forward to delivering a solid quarter in Q4. We did have a tough Q2 and Q3. Nice to be halfway into Q4, see throughput coming up, seeing our crude business grow, seeing volumes at our plants increase. So nice to be stepping into a solid Q4 and excited to get the results out with time. We do feel that 2019 is going to be a transformational year for Tidewater with our 2 large projects coming online. And right now, Q1 is feeling quite strong. So nice to get through 2 tough quarters and step into some stronger results and show the market what we can do and want to reiterate that we're fully funded to execute on our capital program and confident in our ability to deliver over the next 12 months. And with that, I'll pass it back to Mr. Vora, and he'll walk you through some of that financial details. Thanks, Joel. Good summary. I'll walk through some of the key financial metrics that I think the market watches. 1st, revenue up approximately 15% quarter over quarter, mainly related to commodity NGL prices in the first piece of the quarter, not a massive impact on margins, saw an approximate 10% decrease in the processing volumes, which and processing revenue, which Joel alluded to. Again, reiterate quarter a little under expectations, but we are seeing with increased prices, also increased throughput volumes coming through the plants here into Q4. G and A relatively even quarter over quarter. I want to point out the stock based compensation piece, which may be a little bit higher than what some research analysts would have forecast. Just wanted clear that that's a mark to market non cash item. So as our share price moves up and down, those RSUs are mark to market to our share price. So if our share price moves up, that noncash item increases. I just want to be clear that, that's an impact to the net income but is noncash. On to adjusted EBITDA, approximately a 10% impact that I think we've talked about, we alluded to and alluded to some increased volumes here into Q4. Distributable cash flow quarter over quarter from $11,500,000 to approximately $12,900,000 mainly driven by the difference in maintenance capital. We had the BRC turnaround there in Q2 and a little bit lower maintenance capital here in Q3. Payout ratio remains, what I would call conservative, around 25%, given we're funding 2 large capital projects. But deploying free cash flow into those capital projects is part of our corporate plans and maintain that corporate maintain that payout ratio around 25%. As far as capital, I think we gave some updates on current spend in the MD and what is left to spend on those projects in through 2018, 2019. Those numbers obviously are going to depend on the TransAlta option to exercise in that 50% option. And then the 2 of the anchor tenants in the Pipestone plant and not only timing, but if those exercises happen. So just want to be clear that there's some variability there based on when or if the options are exercised. And then looking into 2019, exercised and then looking into 2019, looking at net debt to adjusted EBITDA in and around, again, depending if options are exercised, maxing out around a 4 to a maximum 4.5 times and then coming down pretty quickly when that cash flow comes on into the second half of twenty nineteen down to that 3 to 3.5 times where I think we're comfortable living. But I think with that, I will open it up to questions. Your first question today comes from the line of Robert Kwan of RBC Capital Markets. Your line is open. Good morning. Maybe just to start around the disclosure around the extraction and fractionation side of things. And just wondering, is this do you see this as being isolated to the Q4? Do you see this persisting into 2019? Yes. It's a good question, Robert. I think we're working through it. I would I'd hate to tell you something and then something changed. I'd say today, we don't have any major material concerns. Just wanted to mention some of those pieces, given that gas storage and the straddle piece are the best performing pieces of the business in low price environments and just wanted to be clear that there was some unplanned maintenance upstream of those facilities. But as of right now, don't see a material impact to 2019 and even Q4. I think we'll wait and see here, but don't have a concern at this time. Okay. Assuming that resolves itself and it sounds like volumes are starting to come back, can you just talk about how you were looking at that $80,000,000 run rate kind of as an exit out of this year? Yes. I think what we saw and if I am I correcting your question that sort of what needs to happen to hit that run rate? Is that your question, Robert? Well, are you still comfortable that exiting the year that roughly is a baseline for 2019 as you get into plus plus pluses, if that's still a good number? Yes. I think when we look at the base fee for service processing business, which would be the lion's share of our cash flow, and then you look at how volume through the straddle plant storage continues to perform very well, yes, I think we're comfortable. Okay. Okay. Sorry, go ahead. Robert, sorry, it's Joel. And I apologize. We're sitting in different locations right now, everyone on the call. So it's not as smooth as it should be. I would just reiterate, we are very confident in our ability to exit $18,000,000 at $80,000,000 with the pieces that are coming together. Okay. So then as we think about 2019 or kind of exit 2019, you've got that base $80,000,000 you've given us the $10,000,000 for the crude oil side of things. Pipestone's at $30,000,000 to $35,000,000 at the back half of 'nineteen commissioning and then you've got the Alberta pipe, which is another $10,000,000 exiting twenty nineteen. Are those kind of the major pieces as we think about bridging the business here? Yes. And just realizing the $120,000,000 number we provided previously, we assumed TransAlta's exercise, so that's a gross $20,000,000 of EBITDA project, and we've assumed their exercise, which was would result in about half of that $10,000,000 of EBITDA. So when we've talked about that $120,000,000 number and now we've added $10,000,000 we are feeling comfortable about a $1,000,000 $30,000,000 adjusted EBITDA number exiting 2019. Got it. So just to be clear, with that $130,000,000 and then with the net debt numbers Joel that you gave earlier that 4, 4.5 max down to 3, 3.5 that assumes the TransAlta exercise. Does that assume the Pipestone exercise? Or that's 100% still? There's ranges there, Robert, but no, generally would not assume a Pipestone excess. So that'd be 100% of the capital spend. That's great. Okay. Thank you very much. Your next question comes from the line of Amber Brown from National Bank. Your line is open. Good morning, guys. I just have a quick question about TransAlta and their 50% option. So if they exercise it and will you guys be looking to redeploy that cash into organic growth? And if so, what near term opportunities are you looking at? Or would you just be using the proceeds to reduce your debt level? That's a great question. We've got a lot of projects that we're gearing up to be ready to step into. But given our balance sheet and where it's at, I think step 1 is pay down some debt, but we want to be ready. And I think we are going to be ready once the exercise happens, and we believe it is into Q1. We definitely have more than one project that we're getting ready to pull the trigger on and economics, EBITDA build multiples are coming down on some of those projects. So I think it will be a function of timing, a function of where our covenants at, where we're at, but want our shareholders in the market to be aware we've got lots of opportunities and are real excited about the next 12 months, 24 months, especially on the crude side, but even on a Pipestone Phase 2. Component of the business, we're not there yet, but nice to have and see the commercial support that we've seen on multiple projects. Awesome. Thank you. And you mentioned in your MD and A that you guys are currently evaluating our condensate liquids hub at Pipestone. Would this be included in your Phase 2? Yes, it would be a component of a Phase 2. We're not there yet, but nice to have support for that. And especially when condensate diffs have moved down and light sweet differentials have been crushed to the widest margin that I've seen in my career. We can definitely add some value up in Pipestone with our gas plant having a lighter stream of condensate there, and we want to work with producers to optimize their streams and ensure they have the highest possible netbacks. Great. Thank you for that color. And then my last question is on the crude oil infrastructure side. So I guess it's early days from the court decision on Keystone. But are you guys starting to or do you expect to have decisions with customers on extending the length of your crude by rail contracts beyond 12 months? And would you guys consider building any crude rail storages of your own in order to get it more into blending and the marketing side of the business? Yes. I would say yes to all of the above. The crude market is moving so much, so I would hate to guarantee anything to the market and we've only been at it here for 2 months. But nice to be dealing with a lot of counterparties that we did in our previous business in Predator Midstream, same refiner groups, a few new ones. And then also on the producer side, the support from the producers has been unbelievable. So nice to be opening up some new markets. We do want to have pipeline options in addition to rail. And yes, absolutely, we'd love to build some storage and help producers through these volatile times where we've seen on our gas storage assets. Storage has been huge for our customers, and we feel tankage would be as well and even to see refiners having an interest in owning tankage and deploying capital into Canada is something that the entire Canadian energy space needs. We need some help and nice to be having some of those conversations today. And there are no further questions in queue at this time. I turn the call back to the presenters. Thanks, guys. I think it's Joel Voorhe here. Just again, want to thank everybody, especially our shareholders and through to our customers in a tough environment, reiterate what Joel said. Thanks for the support. Thank you, everyone. And this concludes today's conference call. You may now disconnect.