Earnings Call: Q2 2018

Aug 9, 2018

Earnings release

Good morning or afternoon. My name is Michelle 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. 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 turn the call over to Joel Zora, CFO. Please go ahead. Thanks, Michelle. Good morning, everybody. On the call with me today is Joel McLeod, Tidewater's President and CEO. Before passing the call over to Joel to review the quarter, I just want to remind everybody that some of the comments made today are forward looking based on expectations, estimates, judgments, forward looking statements are subject to risk and uncertainties and actual results may differ from expectations. Also, we'll refer to non GAAP measures. To know more about the non GAAP measures and forward looking statements refer to Tidewater's MD and A disclosed on SEDAR. With that, I think I'll pass over to Joel McLeod for an overview of the Q2. Thanks, Joel, and thanks everyone for making time. Good morning. I think to start, a big thank you to our team, our team members, our shareholders and most importantly our customers throughout what was a tough quarter for us. We also want to emphasize the significant achievement for the Tidewater team with us completing our first large turnaround at the Brezo River Complex without a lost safety time incident and being on time and on budget. So big thanks to the team for execution on that front. Our Brazo turnaround is scheduled every 4 years and as a result we did experience reduced throughput at our largest plant in addition to decreased throughput across the company mainly due to the lower gas price environment. Our gas storage assets and our extraction plants performed very well where we only saw an approximate 5% impact to EBITDA, which we tried to guide towards the market. We expect Q3 to be in and around Q2 and we're starting to see some very positive news flows, record customer support into Q4 and Q1. We remain confident in achieving our $80,000,000 of adjusted EBITDA for 2018 and also remain confident in achieving our $120,000,000 of annualized run rate EBITDA once our 2 large projects come online in mid to late 2019. We continue to feel our 2 large capital projects are 2 of the top energy infrastructure projects in Western Canada and this continues to be validated by 3rd party interest in these projects. Our team continues to do an incredible job where both projects remain on time and on budget. If we start with the TransAlta pipeline project, it continues to go very well and we do expect to submit our full regulatory package by the end of the month. And again, we're currently even a little ahead of schedule and on budget. Gas continuing to be weak through 2021 and power prices in Alberta being strong. We continue to push hard to even flow more than $130,000,000 a day through the pipeline. Project again is going extremely well, significant support from producers as they continue to look for egress option and TransAlta, the entire TransAlta team has been an absolute pleasure to work with. So big thanks to the TransAlta team. Our other large capital project is our Pipestone Montney sour deep cut plant and recent news here in the past 48 hours, which we included in our press release, huge accomplishment to have kelp agree to extend their 5 year take or pay to a 10 year take or pay and also increase their volume commitment from 25,000,000 to 30,000,000 a day. A big thank you to the entire CELT team, Dave, Carol, Sadiq, just an absolute pleasure to work with and then also to the Black Bird team and Garth and his entire team and our 2 anchor tenants at the Pipestone plant. Also recent news, which was mentioned in our press release this morning was a 4th customer was signed with 7.5 year take or pay and real excited to get them involved in the plant as well. Activity and well results, probably most of you on the call are aware, but those of you that aren't continue to see big, big results around the Pipestone Montney play, big liquids yields and real excited about the play. It's still early stages and the results continue to impress and it is becoming if it isn't already the premier condensate resource play in North America. We have more interest in our plant than we have capacity and we do plan to fully contract the facility into the end of the year. Kind of the last point here at Ram River, our team again has done a great job there. Throughput is up. We signed another 5 year take or pay for an approximate incremental $18,000,000 a day, which comes online into Q4 and that East Duvernay play kind of down through Ram River, through the Sylvan Lake, Gilbey area and we're even seeing East Duvernay wells being drilled closer to Brazo River and up into being around our Powder River plant. But real exciting to see more activity than we've seen probably in our history around our assets and our proposed plant at Pipestone and overall, the customer support has been huge for us. With that, I think I'll pass it back over to Mr. Vora. Thanks, Joel. Good summary. I'll walk through some of the financial highlights for the quarter as Joel alluded to, a bit of a tough quarter with gas prices where they are, but I think looking at the base business and some of the natural hedges and how the infrastructure and some of the assets we have react in different price environments, We were able to hold within 5% of Tidewater's record EBITDA in Q1 and maintain $19,000,000 in adjusted EBITDA, which is a 26% increase over the same period Q2 last year. So I think overall happy with the quarter. But as Joel said, I think a little bit of a tough quarter first non EBITDA growth quarter and I think expect sort of the same thing through the end of the summer into Q3, but feeling good about Q4 and Q1 and into 2019. And Joel talked about some of the projects that will come online in 2019 that will further add to cash flow. The fee for service business remains strong, was supported by increased gas storage fees in a low commodity price environment, existing take or pay contracts as well as some increased volumes at the Ram River Gas Plant. So operating margin, operating income remained strong, EBITDA margin around 28% versus 24% in the Q1 of 2018 and 26% for the same period Q2 twenty seventeen, primarily again driven by margins on the fee for service piece of the business and a little bit of a higher margin in Q2 for that larger contribution from gas storage. Again, stable operating margin of $22,000,000 or 32 percent versus $23,000,000 in the first quarter. Revenue was $69,000,000 in the 2nd quarter versus $56,000,000 in the same quarter in 2017 or a 23% increase consistent with that EBITDA increase year over year and consistent with our goal of increasing adjusted EBITDA per share and even cash flow per share of 20% year over year. Again, maintain conservative payout ratio under 30% with the projects that we're looking at. I want to be mindful of funding some of the projects we're looking at and pay close attention to our free cash flow, distributable cash flow, dollars 11,600,000 for this quarter in the Q2. And I think maintaining that conservative payout ratio is important, especially given some of the large projects that we have and funding those projects with existing capacity on the credit facility and free cash flow that we're generating over the next 12 to 24 months. Maintenance capital remains in that $12,000,000 to $13,000,000 range for full year 2018, a significant portion of that is we're through a significant portion of that now with the BRC turnaround behind us. And as Joel said, a big thanks to the operations team and engineering teams who pulled that off on budget and on schedule over a 2 week 16 day period. Net debt around 2 $50,000,000 obviously the main driver of that and the main driver of capital in the quarter are those 2 large projects that we continue to move forward on, secured long lead items on both projects and that would be the main driver of capital spend in the quarter. And again remain fully funded with free cash flow and existing credit facility to complete those projects. So I think overall financially from a financial highlight point of view, happy with the quarter. I think good to see the business perform in a volatile commodity price environment. And like Joel said, a little bit of a tough quarter, but within 5% of our record adjusted EBITDA from Q1 and excited about the base business into the end of the year in 2019. With that, I think we'll open it up to questions from anybody on the call. Your first question comes from Patrick Kenny from National Bank Financial. Your line is open. Hey, good morning guys. First off, just curious on the TransAlta pipeline, what gives you confidence in your assertion that they'll ultimately pick up their option to fund half the pipe? And I mean is that just from recent conversations you've had with the company or are there certain financial incentives that will be in the final agreement that cause you to believe they'll exercise it? Yes. Pat, our team meets weekly. They've been just an absolute pleasure to work with and continue. We don't want to guarantee an exercise, but that's where we feel it's headed and great to have them on board. And I think they're also very happy with what they've seen on execution, time, budget. I think our team is definitely outperforming on that project. We meet with them on a regular basis at least twice a week and that gives us a lot of confidence. Fair enough. Then over to BRC, so after the turnaround in June, of course, there's a bit of a lag in the data that we can see from the AER. So just wondering if you can update us on what current throughput levels look like at BRC and maybe worth a refresh as well on what percent of capacity is underpinned by take or pays and for how long? Joel, do you want to handle that one or do you want me to handle that? Yes, I'm happy to handle it and I think you'll see the public data with the anchor tenant in Bellatrix transitioning out of the plant. The throughput today is, I'd say, 20% to 30% lower than what it has been in the past. We expect to fill those volumes moving into the Q4 and into 20 19, especially as we backstop the TransAlta pipeline, significant producer support at Brazil. But yes, you'll see in after the public date or after the turnaround in public data 20 ish to 25% down volumes at the BRC through the summer, which is part of the reason why we expect the Q3 to be similar to what we see in the Q2. And as far as take or pays at the BRC, that's a plant that is pretty much 100%, 90% to 95% take or pay at the BRC. So when we see volume fluctuations there, it's not a significant impact on EBITDA. And then I think we've alluded to it in the past. We've got the storage assets at the BRC, which are a great hedge to volume fluctuations and commodity prices. Just to add to that, we don't want to get ahead of ourselves, but activity that we're seeing in the Cardium around the Ellerslie as well and then even the East Duvernay is moving in and we can point to public data and give the market a sense of where some of the activity is. I don't think that's going to be huge or overly impactful into Q4, Q1, but over the next few years, I think it will be. And we also are working on a few large pieces to get TransAlta more gas into our pipeline and those could actually also feed Brazil with more gas. I think we just need a little more time to work through a few of those opportunities, but that TransAlta pipeline is huge in assuring Brazo sustainability and even potential expansions in the years to come at the Brazo facility. And sorry, remind me again, the 90% to 95% take or pay, that's right through 2019? Yes, we'd be through 2019 and even a little bit beyond those the contracts that are on aren't all for the same term, but yes, we'd be into 2019 and some of those would go a little further than that. Got it. Okay, great. And then lastly, guys, just now that we're into August already and correct me if I'm wrong, but I believe your non compete with secure expires this month. If so, so, wanted to get your thoughts on pursuing crude oil midstream opportunities, especially, of course, now that crude by rail volumes are on the way back up. Wondering if there's any low hanging fruit out there for you either at Atchison or elsewhere? That's a good question, pal. We've tried to focus on our core business with natural gas NGLs and the secure team has been phenomenal to all of us. So I think we got to wait until the non compete expires here in the next little bit. And absolutely, our customers, if they want us to look at crude, I think we would probably have to update the market too and ensure our shareholders are on-site and our Board is on-site with us heading down the crude side, but we know it very well. I think we just need a little more time before we can give you a definitive response. Your next question comes from Robert Hope from Scotiabank. Your line is open. And kelp increasing their commitments. I was just wondering, can you give a sense of in the region of Pipestone, are you seeing a scarcity capacity in the region that are helping you advance these conversations? And then I guess longer term, do you have the ability to expand the plant? Hi, Rob. So absolutely today, there is a definite shortage for sour processing on the north side of the river. So definitely that is impacting, I think commodity prices, liquids, condensate being around CAD90 a barrel is also driving a lot of that activity, but also the well results when you look at Kalt, Advantage, New Vista, Blackbird, the results, even CNRLs drilling in there now. And as you pull public data, big results in more liquids than most of the entities expected and every one of the wells that we've seen has sour gas content. So shortage in capacity in Kana Keyera, Keyera's partnership there with in Canada, the north of us, their message and you guys would know this better than I, is roughly 2 years post when we'll be up and running. So we've got a real window and with our commodity prices being high, guys want to flow and generate cash flow, especially when those initial rates are as large as they are. So I think I answered your question. Capacity is definitely short on the sour processing side where we're at Pipestone, and that is driving interest. And I think commodity price and well results the other key piece on the ability to expand for now. We have to focus on Phase 1, and we are laser focused on that piece. And then we will consider an expansion down the road. But right now, our focus is on Phase 1. That's helpful. And then moving over to your storage operations, can you give an updated thinking on the potential to meaningfully update some of your storage operations in the province? Yes. So storage operations and Joel probably knows them better a little better than I do, so he can jump in. So up at Pipestone Dimsdale there, we are injecting roughly 50 ish million a day up there. And then down at Brazo, we're injecting approximately 20 $5,000,000 to $30,000,000 a day right now. We are doing a small expansion down at Brazil, no material to add another $10 ish million a day, but that would kind of give you a sense of where we're at today. We continue to work through a Phase 2 and expansion of our Pipestone Dimsdale storage project and hope to get the market an update on that front here in the next couple of months. But Joel, anything you want to add there? No. I think today the assets are working well and continue to work to expand that piece up north near Pipestone. I think the one message we'd want to give and it's not real per se right now, but even the LNG piece for the first time we've had some interest related to the storage facility as a result of LNG, which is interesting and even to have the Brookfield team taking over the Enbridge assets into BC. No guarantees that anything will happen, but nice to have some parties we know to try and explore other opportunities where hopefully we can work together and have some win wins. I appreciate the color. Your next question comes from Robert Catellier from CIBC Capital Markets. Your line is open. Hi, guys. Just wanted to get a little more context on your outlook. Reiterating the outlook here, but is it safe to say that the composition of full year EBITDA might be a little bit different? And maybe another maybe a way to address the question is how much frac or storage EBITDA is contemplated in that 2018 outlook? Yes, I think that's a great question, Rob. Yes, I think you're right. The composition is a little different. The piece with storage revenue, though it really is fee for service, it's not all that different than a take or pay, where we're not taking commodity exposure, but the movements in the storage spreads do have an impact on the fee. But once we lock in those contracts, that is essentially fee for service. So is there a move from straight take or pay processing into storage fee revenue? I think the answer there is yes. It will be heavier weighted in these summer months to some storage fee revenue versus gas processing. And then on the NGL side, yes, I think the same goes there where we see frac spreads today where they are at north of $0.90 a gallon. I think with gas prices where they are, yes, it is a bigger contributor in the summer months when gas prices are low. So I think it's a fair comment. Yes, we would have a little bit higher weighting to the NGL side and to where you look at where NGL prices are today. I think we would expect that. But want to be clear too that the storage piece is not all that different from processing fee revenue. But yes, your comment holds where it would be a higher weighting in Q2, Q3. Okay. And then when we look at the new customer that signed an LOI at Pipestone, I have two questions there. Is the fact that it's an LOI just a matter of working through the business process to get it completed into a definitive agreement or is there something else there? And then could you characterize the type of customer? Yes. No problem, Rob. So think in Tidewater's history, we've only ever announced 2 non binding LOIs. First one being TransAlta, which we did execute on the existing definitive agreement. So we have a very high degree of confidence that this 4th customer at Pipestone will turn into a definitive agreement. We're into the gas handling agreement as we speak. All is going very well and they're very happy. So confident we're going to get there. There's no reason to think that we're not and we've been in discussions with them for 6 plus months and maybe even a year. To characterize the customer, midsize producer, above $500,000,000 market cap. And for now, I think I just want to leave it at that without getting their consent to disclose other details. But a great partner and a name that everyone will know well and ecstatic to have them involved in the plant. Yes. That's the characterization I was looking for. And then finally, the BC Oil and Gas Commission has new rules on our measures agreement in the Blueberry River First Nations territory. And I'm wondering if that has any discernible impact on your business development plans at all? Not right at this moment. Pipestone is obviously on the Alberta side of the border, but But if you look at the well results in Inga, Fireweed, that blueberry, But if you look at the well results in Inga, Fireweed, that Blueberry area, we are watching it closely and the results are big, big liquids. We own a non op position in the Cypress plant, which would sit just to the South West of there. So, yes, I think it will impact plans, but we're probably, I don't know, 18 to 24 months out before we have to deal with that head on. And what I've seen our team do even on the TransAlta project has been unbelievable on the First Nations front and we continue to go out of our way to work closely and I think our team does a great job there. Okay. Thanks guys. Your next question comes from Robert Kwan RBC Capital Markets. Your line is open. Good morning. Can you just refresh your thoughts on funding the capital plan, particularly if the options are either not exercised for Pipe Zone or the TransAlta pipe or not taken up right away? And especially in that latter category, how fast are you just about running leverage up until the options are exercised? Great question, Rob. It's top of mind. We meet weekly. We have to be laser focused on our 2 capital projects and on our balance sheet, and I can assure our shareholders we are. We do have room and we will likely be giving an update where our credit facility here in the coming months where our credit syndicate has been a huge supporter of ours and do want to thank them for that. Right now, it is highly likely that TransAlta exercises. If they did not, we continue to be inbounded by private equity regularly and they would pay even a premium to be involved in the project. So we've got lots of options. We prefer not. We prefer to own that asset as much of it as we can. And Joel maybe jump in if there's anything I'm missing there. We do feel we can fund both projects 100%. If we have to. It is going to be tight and our expectation is that TransAlta exercises today and that will give us some breathing room to look at other projects into 2019. But know that it's top of mind and we're watching it and right now, we have room and we're real happy with how well the team is executing. I would echo those comments as well Joel. I think and you alluded to potentially an update on the credit piece. And I think we've been upfront in the past to live at a 4 plus times debt to EBITDA is not something going forward that we're comfortable, but through a build out of the project and prior to cash flow coming on, especially when we have 10, 15 year take or pays backstopping these projects. I think we're comfortable through the build up, but not to live long term in that space, but through the credit facility and then some of the options through the option exercises that the tenants have and then the inbounds from private equity. I think we've got a plan A, B and C and I think we're feeling good about our options that are on the table and to have those 10 year, 15 year contracts are huge for us. Got it. Can you just maybe elaborate though on the statement around wanting to own as much of it as possible, but it certainly either being or being very confident in the option exercise and if not having the private equity option. If you didn't have the option exercise that obviously would give you the ability to own a lot more the project, but would you move towards the private equity option fairly quickly? I think we can. I think knowing the amount of interest in the private equity groups that we know well even through the sale of our last business 4 years ago, we could. I think we just want to assess our opportunities. And right now, Rob, we feel Q4 and Q1 could be some of our strongest results to date. We just need a few more months and great to have options. I think for now though, we'll leave it at that, but I'm hopeful and we will get an update out to the market here in the next 30, 60, 90 days and give a sense. But we absolutely love to own as much of that TransAlta pipeline as we can. It's a great project. There is a high likelihood that we will flow more than $130,000,000 a day of gas on that line, which can take well over $300,000,000 a day of gas. And I think it's going to be a transformational asset for Western Canada for years to come. Got it. Just moving to gas storage at Brazo, you've got the project to increase injection capacity. I just wanted to clarify, is that different from the joint venture you just entered into? The dollar amounts are about the same. Yes, it would be different. Those are 2 different projects. Good question. And can you just talk about then what the joint venture entails? Is it brand new? You didn't vend in any existing assets, did you? No, it was that was again consolidating the area. There were 3 additional existing storage pools in the area. It wasn't all that material to us to be honest, Rob, but it does increase storage at Brazo. And I think storage, especially with the TransAlta piece, is going to give us a ton of flexibility there. So it is in addition to the 3 existing storage reservoirs that we already had. That was a piece that we were looking at over the last 12 months to 24 months and we've now essentially consolidated 100% of what is around Brazo. So we do have a partner in that project and there's potential for it to have some size. But right now, it's fairly small and immaterial to us and just adds to the existing storage base at Brezo. Got it. And if I can just finish with one small cleanup question just around cash flow and specifically capitalized interest. So you booked $4,000,000 in Q2. Was that isolated just to the quarter? Or did you book the entire year to date amount and run it through the quarter? Given the capital that's been spent on these 2 large projects, we did take 6 months of that interest. So we've spent north of $100,000,000 this year on those capital projects and that interest would be reflective of the $100,000,000 plus that we spent on capital through 2018. Got it. So a bunch of the business. It encompasses both quarters. Okay, perfect. Thank you. I have no further questions in queue. I turn the call back over to the presenters for closing remarks. Thanks, Michelle. I think I'll pass it to Joel in a minute, but I think again just want to reiterate our thanks for customers and shareholders and all the stakeholders. Obviously, the share price isn't quite where we'd like it, but appreciate all the support that we've had from everybody. And just want to reiterate that we're laser focused on the next 12 months, 24 months and beyond, and they're going to work hard to continue to grow the base business and execute on the projects that are in front of us. But Joel, with that, I'll pass it to you. No, I think that's good, Joel. Just I think also a big thanks to our staff. We reiterate that we feel our team is one of the hardest working teams in Western Canada. We continue to see that through the summer. I can assure our shareholders in the market that we're grinding through and working extremely hard to deliver. And I think the customer support the customers see that. And again, just a big thanks to our staff and also all the support from shareholders. Thanks, everyone, for making time today. We appreciate it. Thank you everyone. This will conclude today's conference call. You may now disconnect.