Earnings Call: Q1 2018

May 14, 2018

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 First 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 Thank you. Joel Vora, Chief Financial Officer, you may begin your conference. Thank you. On the call with me today, everyone hello, everyone, is Joel McLeod, Tidewater's President and CEO. Before passing the call on to Joel to review the quarterly highlights, just want to remind everyone that some comments made today are forward looking in nature and based on current expectations and estimates. Forward looking statements we express or imply today are subject to risk and uncertainties, which can cause actual results to differ from expectations. For more information on forward looking statements or non GAAP measures that we're speaking about today, It's available in our financial reports, which are available at tidewatermidstream.com and also on SEDAR. I'll pass the call over now to Joel McLeod to review the quarter and quarterly highlights. Thanks, Joel, and thanks everyone for making time today. Also to start, a big thank you to our customers and producers who helped us deliver our 11th consecutive quarterly growth on the EBITDA side. We hit our $80,000,000 run rate EBITDA number, our $20,000,000 quarter, something our team is very proud of. We saw a 17% increase over Q4 EBITDA into Q1 and that just continues to emphasize our push and focus on 20% EBITDA per share growth annualized here into the next couple of years. We remain confident as our 2 big projects come online. We'll get into our 2 big projects in the TransAlta project and the Pipestone Sour Deep Cut plant. But we do see ourselves getting to that $120,000,000 run rate EBITDA number into 2019 as those two projects come online. That said, this morning, AECO prices in that $0.20 an Mcf range. We do expect see some weakness in our throughput here into Q2 and Q3. The majority, if not all, would be offset by our gas storage and our extraction operations. And we continue to reiterate $80,000,000 of EBITDA for calendar 2018, but we are seeing a difficult time for dry gas producers. The foundation of Tidewater is in the liquids rich areas and to see condensate prices at CAD90 a barrel. It's very positive for Tidewater, it's very positive for our pipe stone project, but we want to be very upfront that it could be a tough Q2, Q3 for some of our drier gas producers. Most of our producers are liquids rich and continue to see a pile of liquids at our facilities. Maybe to jump into a few of our core areas just quickly to give a brief update, Ram. So down that Ram River, I know some see that as a declining assets. We would say the opposite. Our team has done a great job of signing a 5 year take or pay with a large very large investment grade entity and those volumes are flowing today. The activity we see even in the past few weeks within the Duvernay, the Ellerslie within 5 or 6 kilometers and then also the Cardium down around Ram. We're working hard to continue to bring more volumes into RAM. With Brazo, our largest facility today, we are stepping into a turnaround here into the end of May and that happens every 4 years. So we have messaged a slight volume impact due to the turnaround. The plant does not go down in entirety, but we do expect to see some reduced throughputs in the May June. Cardium activity with oil being at 3.5 years around Brazil near high. So we still see a lot of activity around Brazo, especially as oil prices are high. And we do get a significant amount of solution gas and gas through our plant. We get a significant amount of liquids as a result of the oil activity that we're seeing, and the team is working extremely hard to sign up some customers into the end of the year. Also, the Duvernay play, you'll hear about the East Duvernay shale basin. We continue to see even some vertical strat wells being drilled, but also some horizontals to the East of Brazil and it's an interesting development here over the next 2, 3 years and that plays still in its early stages. The TransAlta project that's tied to Brazil is a huge long term project for the BRC. It will continue to help have volumes flow through Brazo to have a direct connected end market and gas storage that's tied to both Brazo and the TransAlta project, we feel is continue to be extremely excited about that project. It's going very well backstopped by a 15 year take or pay from TransAlta. Our storage assets, unfortunately for producers, when gas is low, it's tough for Western Canada, but our storage assets do do very well in a low gas price environment. Today, we have a record amount of storage capacity in roughly $50,000,000 to $55,000,000 a day at Dimstell Pipestone and then $25,000,000 to $30,000,000 a day at Brazeau. And we did recently announced roughly a quarter ago our 6 year agreement with a large financial institution and continue to see significant interest from large investment grade entities on contracting storage as the value of gas storage continues to go up. And even as the market discusses a potential FID of LNG off the West Coast to Canada, that's driving some new large parties to have some discussions with us. So the gas storage side of the business is doing very well. Thanks. With that, we can jump into just a quick update on our 2 big projects. Our team is laser focused on our 2 big projects, being the Pipestone Sour Deep Cut Plant and the TransAlta Pipeline. Just a quick update on the Pipestone sourdoughcut plant and happy to answer any questions. Condensate prices being at 3.5 year highs, CAD90 a barrel today has a huge impact to that play that Montney around Pipestone is a condensate play. It is not a natural gas and the play and the economics are driven off of condensate price. Great to see the activity, the well results we're seeing. We have discussed in the past that we have signed our 3 customers and confident we will be 85% plus contract for the year, a lot of interest around the facility and potential to even start to look at Phase 2 until the end of the year. A big thank you to Blackbird and Cal, both have been just an absolute pleasure to work with on the project and remain our 2 anchors for the project and happy to go out of our way to continue to help them with their netbacks in any way we can. Our other large project there, the TransAlta project, we talked a little bit about it there and happy to answer any questions, going extremely well, even a little better than anticipated there on time and even a potential to be a little ahead of schedule, definitely on budget. That project only gets stronger in a low gas price environment. So our base take or pay being a 15 year take or pay $130,000,000 a day on days like today when AECO is $0.20 so we would TransAlta we would be pushing to flow as much volume as possible. I think it's just important to have the market and our shareholders be aware of the upside on a project like that when we continue to see a tough gas price environment as it's very positive for a power related project. And also a thank you to Brett Gellner and the whole TransAlta team. They've been an absolute pleasure to work with as well. With that though, I think we'll pass it over to Mr. Vohra and he can run you through the financial piece of the business. Thanks, Joel. Joel touched on the adjusted EBITDA side of things that in line with what we had expected for Q1 and annualized run rate for 2018 and our 20,000,000 dollars adjusted EBITDA operating margins in that 28 ish percent and EBITDA margin around 23% to 24%. So again, driven by the liquid side of the business and also the gas processing side of the business, we've seen that margin around 28% to 30% over the last 12 or so months and into the quarter. Maintenance capital for the quarter, Joel talked a little bit about the turnaround coming up at the BRC. We anticipate that $12,000,000 to $13,000,000 in annualized maintenance capital this year, including the BRC turnaround. So we'll see a bit more maintenance capital in the second quarter when the plant is going through turnaround. Anticipate around a 25%, 26% to 30% payout ratio through 2018. So a bit of a lower payout ratio this quarter, but just given the fact that, that turnaround is coming in Q2 at the BRC. So distributable cash flow of about $14,500,000 There were some transaction costs included in that number related to the acquisition, the Ram River Gas Plant acquisition that was completed late in Q4 and some transition into the Q1. When we move into net debt to the end of the quarter, net debt of about 177,000,000 dollars capital of $43,000,000 in the quarter, roughly $35,000,000 of that spent on the Pipestone plant and approximately $5,000,000 committed to the TransAlta project where we have now locked up the pipe for that project. So going forward, anticipate around $50,000,000 or so, give or take, capital spend on those two projects quarter over quarter and continue to move those projects ahead. All in all, Joe talked a bit about Q2, Q3 and volume impact. Storage business and straddle business, including the strength in liquids, is helping to fill that gap. We could see some impact on volumes, but the straddle and liquids business and storage business is doing extremely well. Happy to answer any questions from analysts or others on the financial information, but overall, happy with the quarter and happy how the assets are set up going forward in 2018. Your first question comes from Robert Hope of Scotiabank. Your line is open. Good afternoon, everyone. Just the first question is just on the volume outlook through Q2 and Q3. I know there's a couple of things going on there, but how much have you how much producer volumes have you seen shut in so far? And how many days do you think the BRC will be down for? Good question, Rob. The BRC is depending on what train you look at, it's a 3 to 4 week turnaround. The plant itself doesn't fully go down. When we talk about EBITDA impact from volumes, potentially a 5% to 10% impact, although looking where storage is and where our liquids business is, likely that we're able to fill that impact. When we look at the amount of volumes that have been shut off and when you look at where AECO has been over the last 30 days or so, and especially in the last couple of weeks, I haven't seen producer volumes move down quite this fast overall and not just in our assets. So given we have reserve dedication and take or pays backstopping a lot of that, the impact to EBITDA, we're talking in the 5% to 10% range. But as far as giving you a number, there's definitely volumes being shut in. And I think when we pull public data, you can see the impact and it changes daily depending on the price, and we've seen massive volatility. All right. That's helpful. And then just as a follow-up, in terms of the storage business, I guess, in the near term, are you concerned regarding the ability for NGTL to access storage and potentially being a headwind to the business? And I guess the second part of the question would be, would the inability of TCPL to access storage potentially push off a sanctioning of a larger storage project at Grand Prairie? Today, we are not restricted on any of our assets on injections, and we have large reservoirs both at BRC and up near Grand Prairie where we can take everything we can get today into those reservoirs. Today, TCPL restrictions do not impact us the way they would in Eastgate. So it's definitely not a concern for us today. All right. Appreciate the color. Thank you. Your next question comes from Patrick Kenny of National Bank Financial. Your line is open. Hey, guys. Just on the $100,000,000 a day of volume flowing through your NGL extraction plants, Maybe you can comment on how sticky that throughput might be in the face of sub-one dollars AECO pricing this summer? Right. Given those good questions, Pat and Joel can probably elaborate too. But today, those plants that'd be our Vale Loop plant for Saskatchewan and Paddle River, those plants are flowing essentially at the capacity on those main lines, and those would be the ACRA and TCPL systems. So today, we haven't seen those volumes really fluctuate at all. And even last year and through the summer, the prior year summer, those volumes have not been impacted at all. So we wouldn't expect the straddle volumes on those plants to be impacted at all. I would guess they'd be maybe running at that $90,000,000 to $100,000,000 all summer long, just given TCPL is still running 0% IT. So the firm volumes generally are running on that system and able to run through those plants. But Joel can maybe elaborate. We haven't seen any impact to those since we've owned those plants. Yes. Pat, good question. Those plants and if you look historically in public day, you'll see they're dead flat. There will be the odd blip. Maybe we've seen, I don't know, say we've got 95 percent run time when I know our 1 ethane buyer at Edmonton goes down, sometimes we've got to swing volumes or move volumes around, but they are probably some of our highest run time, flattest throughput volumes that you'll see and we do not anticipate seeing any of those volumes going away here in the next 2, 3 years even. And even outside of that, I don't have any we haven't seen any reason to question those volumes into the foreseeable future. All right. That's great. Thanks for that. And then as a related question, but more medium term, at Pipestone, assuming oil prices and liquids pricing remains up there, any incremental infrastructure opportunities that you see coming out of that plant once it's up and running, say, fractionation or NGL storage opportunities? I think we've got to be focused on Phase 1, even the regulatory side. I know our project team would probably shoot us if we tried to bolt on a new piece of business up there today, but the customer interest is definitely at an all time high. And absolutely, we're going to have to look at from storage to frac to even a Phase 2 and expansion, definitely connecting into our storage facility. But for now and into 2019, we got to focus on what's in front of us, which is a very large project on its own. It's going very well, but are very careful not to change scope or add new pieces until we get a little closer to being wrapped up on Phase 1. And clearly, lots on the goal right now on the organic front. Of course, lots of assets up for sale too right now. So just wondering if you can comment, Joel, on your appetite for strategic M and A at this point and how you guys might think about financing any potential transaction that might fit with Tidewater here? Yes. I mean, obviously, our balance sheet is about where we want it and unlikely to raise equity at these levels. So we're probably not going to be as aggressive as we have been in the past. But absolutely, if we continue to look at opportunities and on the private equity front, there's more interest than ever to partner, etcetera. So I think we've got lots of options in front of us. Nothing, though, that I'm aware of that's highly likely that we're to be successful on, but absolutely we need to be aware, especially of assets that may be available in our backyard and nice to have multiple options to finance other than just raising equity or adding leverage. As today, we're happy with where our balance sheet is at. Don't really want to take on any more leverage today. We've got to focus on our 2 big projects. And then on the equity side, highly likely to look at highly unlikely to look at an equity finance. Got it. That's great guys. I'll jump back in the queue. Your next question comes from Robert Catellier of CIBC. Your line is open. Hey, good morning, everyone. I wondered if you could just update us on the permitting process at Pipestone and when you need to have the project permitted to meet your end service dates? So I'll take that one on. And obviously there's public data out there. The project is going very well. It is a sour plant. So we are going to have statements of concern and landowners to work through. I think our team has done a great job over the past two and a half years initially on a storage project, which we're able to get full approval. And now on the project, we've seen nothing but positive feedback from the regulatory from offsetting land owners and continues to move ahead. Tough to give a definitive date, Rob, but definitely into the end of the year, we have ordered our long leads and more full steam ahead and have no reason today to believe that we're going to have a bump on the regulatory side. So by the end of the year, hopefully sooner, but by the end of the year definitely And I think I can circle with our regulatory group to get back to you, if you like. That's good color there. I was just also wondering though on the storage, looks like there's some new projects here with under a jointly owned subsidiary. I wonder if you could give us some more color on that in particular, what the ultimate capacity might be? And also the connectivity of those assets? Yes. Robert, that acquisition in the quarter was a small one, an additional 3 pools around Brazeau. It was part of a receivership process. Those pools are directly underneath Brazo. So today, the cash flow is not material and even the purchase price wasn't material, but it's another add on to our storage assets at Brazil that are connected to the plant and to TCPL where there's definitely future development opportunities there and increases our capacity. So today, it's always tough on storage to give a definitive answer on what the capacity is, given that it's cushion gas dependent and compression dependent, but those would be similar to the 3 pools that we acquired previously and even a little bit smaller, but you'd be in that 30 to 40 Bcf range in those pools. So there's potential to bring them up closer to how our other assets are operating. But again, it's cushioned gas dependent. So today, it's not a big piece, but does give us ability to expand our storage business going forward. Okay. And then finally, some industry participants have hit some constraints on the rail side over the winter. I'm wondering if you can discuss what impacts, if any, that it's had on your business or was it business as usual? Yes. I think and again, Joel can jump in here. I think we weren't it didn't have a major impact on us, but yes, there were issues with service around CN and in and around the Edmonton area. It sounds to me, unless Joel has something different, that it's getting better. There wasn't a massive impact to our bottom line, but our guys in the marketing group were working through some issues at times around service, but it sounds to me like it's improved through the end of the winter there. But anything else to add, Joel? I don't think it had a huge impact to us. No. And with our rail expertise, obviously, some of you may not be aware, our previous entity was that was our core focus was rail and crude by rail. We are not in crude by rail in Tidewater, but we do move propane. So with that experience, we ensured when we built our Atchison rail facility that we had flexibility, we had more rail spots than we needed and we felt minimal impact. So I think our team did a great job and but at the same time, I would hate to say we're better than our peers, given we only move 3 to 10 cars a day out of Atchison. So in no way are we moving 50 or 100 cars a day like we were in our previous entity. But I think we plan accordingly and it feels like things are getting a little better, Rob. I'm not down in the detail like we used to be, but happy to get some feedback. It sounds like CN and CPE are doing a little better and we need it. Canadian Energy, we need some support. It feels like everyone's against us right now and it'd be nice to see the railways pick up some slack and I believe they are and everyone continue to work together. That's helpful color guys. That's it for me. Your next question comes from Robert Kwan of RBC Capital Markets. Your line is open. Great. Good morning. I'm just wondering if you've got general thoughts on the Alliance open season or expansion open season and just what you might be hearing from customers And last tying it back to kind of your business, are you having discussions with potential customers for either new contracts or projects that might be contingent on the Alliance expansion moving forward? Good, great question. I'll start and Joel is down a little more in the weeds on daily spot prices and Don Chicago pricing versus AECO more than I am. But I can tell you and want to be careful as Pembina and Enbridge have been good partners. They've been great to us. But just the sentiment we've heard is it's maybe not going as well as even we anticipated. We're a very small shipper on alliance today. They've done a great job. And even we were considering putting a small, very small, nonmaterial amount even to have some egress we found our producers are very supportive of, but it sounds like it's probably going to be a little tougher than was anticipated. I hope they get it done. We need egress. Western Canada needs egress. But my sense is just the cost and Rob, I'm sure you know the cost better than I, but when I heard it north of $1.50 I believe and Joel probably knows the number better than I, it's a big number for producers to commit to. And I think producers too are more hopeful now that that LNG is going to be announced and product can move less, but even ourselves, we would never plan our business around that and everything else associated with that, you're still 5, 6, 7 years out. But happy to have an offline discussion and Joel jump in there if I missed anything. No, I'd echo the same. Again, yes, we want to be careful about talking about a process that's going on right now and even seeing prices don Chicago moving in and out of the money almost depending on when you're looking at. So I'd echo the same. It's not easy. There's no perfect solution. But yes, with more LNG talk and some other options, it sounds like that there could be a little bit more positive sentiment, but by no means is it going to be perfect or easy to get done. But again, don't want to go too far in talking about an ongoing process. Got it. Maybe if then we don't talk about something as specific, whether it's Alliance, whether it's LNG Canada or even bringing back mothball capacity on the mainline, recognizing that most of these initiatives are kind of multiyear things, are there though like can you comment on the types of discussions you might be having with your customers? Are there some things that are more than just up on the drawing board that you're talking with customers about that would be contingent though on an FID on any of those three types of things? I think any added egress is positive for Tidewater, probably. So you ignore assets where we do have pipelines that sit on the Alberta, BC border. I think the ability to move volumes from BC into Alberta today probably makes sense. But long term, if LNG was announced, the ability to move volumes from Alberta West is something we've been thinking about since inception. And our storage facility there at Grand Prairie is position A. It's in a spot where we can pull volumes from BC into Alberta and long term we could push volumes from Alberta to BC. So I think, yes, there's discussions, they're ongoing. Are they material? Is anything likely to happen tomorrow? No, but we have great assets and we continue to be inbound ended, especially as we develop and increase the capacity of our assets. And if I can maybe just finish on the BRC, just understanding the turnaround. So you've got your annual maintenance number out there and a bunch of it's going to be in Q2. I'm just wondering, is there any material revenue or OpEx impact as well associated with the turnaround? Or is it primarily going to flow through the capital line? There will be as far as the maintenance capital side of things, there's it's mostly CapEx. Is there the revenue impact, there wouldn't be any OpEx impact, the revenue impact would be around the downtime of the different trains of the plant, but nothing material that's going to throw a big wrench in things. I think the bigger question is what do volumes look like through the summer and how much do the straddle plants and storage make up for that. So I think more so around the turnaround. I wouldn't expect a big OpEx or revenue impact related to the turnaround. It's more so producers through the summer. Got it. And then just the comment around the payout being in the 25%, I think you mentioned to the 30% range. Was that the Q2? Or was that the annual that you were guiding to? That'd be annualized. So you'd have a little bit lower of a free cash flow or distributable cash flow in the second quarter just given that close to 50% of our annual maintenance capital will be in the second quarter. So I've tried to be transparent about that, that annualized, we're on track to where we've guided. It's the Q2 BRC turnaround, though, that's going to have a bit of an impact to that number. There are no further questions at this time. I will now return the call to our presenters. With that, I think just a quick few closing remarks. A big thank you to our shareholders and our staff. We really appreciate the support in what is a tough energy environment. So just a big thank you there and I think the producer support that we've seen again, thank you to the producers, but we have not seen producer support like we've seen to date. A function of that is the egress options we're trying to bring forward to producers being storage and other direct connections and want to continue to work with TransCanada Alliance and others and just appreciate the support there, the strong liquids pricing. That was a foundation of when we formed Tidewater was NGLs. So overall, the base business is going extremely well and look forward to getting towards that $120,000,000 of EBITDA here as our 2 big projects come online. But with that, thank you and thanks for everyone for making time today. This concludes today's conference call. You may now disconnect.