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Good afternoon ladies and gentlemen, and welcome to the Secure Energy Q1 2023 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, April 27, 2023.
I would now like to turn the conference over to Alison Prokop. Please go ahead.
Thank you. Welcome to Secure's conference call for the first quarter of 2023. Joining me on the call today is Rene Amirault, our Chief Executive Officer; Allen Gransch, our President; and Chad Magus, our Chief Financial Officer.
During the call today, we will make forward-looking statements related to future performance, and we will refer to certain financial measures and ratios that do not have any standardized meaning prescribed by GAAP and may not be comparable to similar financial measures or ratios disclosed by other companies. The forward-looking statements reflect the current views of Secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by Secure. Since forward-looking information address future events and conditions, by their very nature, they involve inherent assumptions, risks and uncertainties, and actual results could differ materially from those anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents available on SEDAR as they identify risk factors applicable to Secure, factors which may cause actual results to differ materially from any forward-looking statements, and identify and define our non-GAAP measures.
Today, we will review our financial and operational results for the first quarter of 2023, followed by our outlook for the remainder of the year. I will now turn the call over to Rene for his opening remarks.
Thank you, Alison, and good afternoon, everyone. The momentum that supported our business throughout 2022 carried on through the first quarter of 2023, resulting in higher volumes at our waste processing facilities and increased demand for all business units due to strong industry fundamentals. As a result, we recorded adjusted EBITDA of $151 million, a 20% increase over the first quarter of last year. We continued to maintain our strong adjusted EBITDA margin of 36% as the positive impact from cost saving synergies related to the Tervita merger and higher revenues leading to improved fixed cost absorption more than offset the impact of inflation.
In the fourth quarter of 2022, we presented our updated capital allocation priorities, which reflect the increased breadth and size of the corporation, our commitment to maintaining a strong balance sheet, unlocking additional shareholder value through increasing returns to shareholders, and growing our business through our capital investment program. In the first quarter of 2023, we were pleased to deliver on these priorities with the return of $100 million of capital to shareholders throughout our $0.10 quarterly dividend and share repurchases under our normal course issuer bid. Since the inception of the NCIB, we have repurchased 4.5% of our outstanding common shares.
We announced today an increase to our capital growth plan for 2023 to approximately $100 million, up from previous guidance of $50 million, as we entered into a new 12-year take-or-pay agreement with a senior E&P producer for water disposal in the Montney region of Alberta. We are excited to work in partnership with our customer to commission new infrastructure associated with this contract this year, providing Secure with long-term take-or-pay volumes and providing our customers with cost effective, reliable solutions for growing volumes. Allen will speak more on this development, along with the construction progress of our crude oil gathering pipeline and terminaling infrastructure in the Clearwater region during the operational update.
In our first quarter financial reporting, we've revised our segment reporting to reflect changes following the completion of the Tervita post-merger integration and providing stakeholders with improved visibility and transparency for valuing the business. Operating segments with similar operating characteristics and economic prospects have been aggregated to form 3 segments.
The environmental waste management infrastructure segment is comprised of waste processing, recovery, recycling and disposal operations offered through our network of waste processing facilities, water pipelines, industrial landfills, waste transfer and metal recycling facilities. The energy infrastructure segment is comprised of crude oil gathering, optimization, terminaling and storage solutions offered through our network of crude oil gathering pipelines, terminals and storage facilities. And the oilfield services segment is comprised of drilling fluids, equipment rentals and onsite project management.
The new reporting structure provides a more direct connection between the corporation's operations, the services we provide to customers, the ongoing strategic direction of Secure. Recast financial information for 2021 and 2022 by quarter has been included in the MD&A to reflect these new segments.
We are very excited to share our fourth annual comprehensive report on sustainability with you next week. Our ESG priorities in 2022 were focused on emission reduction, water conservation and building an inclusive and welcoming culture. We are proud of the progress we've made in these 3 areas, highlighted by an 8% reduction in Scope 1 and 2 emission intensity, an 8% reduction in freshwater consumption and the introduction of company-wide diversity, equity and inclusion training. The sustainability report provides an update on these and other ESG achievements and sets out new goals and initiatives we have taken to further improve our ESG performance. I'd like to thank our remarkable employees who lead our ESG journey, have enabled the transformation of elements of our ESG strategy from plans to realities in our business.
In March, we were pleased to appoint Wendy Hanrahan to the Board of Directors. Wendy is a former TC Energy executive VP who brings to our board a deep knowledge of the North American energy infrastructure sector, an expertise in strategy, information technology, finance, human resources and other corporate services. Wendy will be a key addition to Secure as it enters its next phase of growth and development as a leader in environmental and related energy infrastructure.
We were disappointed with the decision received from the Competition Tribunal on March 3 with respect to the Commissioner of Competition's challenge of Secure's merger with Tervita. While the Tribunal agreed with Secure that not all of the 41 facilities the Commissioner was seeking to have Secure dispose should be sold, it issued an order requiring Secure to divest 29 of the 103 facilities acquired in connection with the merger. We have filed a notice of appeal to the Federal Court of Appeal and believe we have strong grounds in doing so. The next step in the appeal process is the filing of our factum, expected to occur next week, which will contain our detailed argument. The appeal hearing has been tentatively scheduled for the week of June 19, and we believe a decision could be received by the fourth quarter of 2023.
While the appeal of the Competition Tribunal decision is not anticipated for some time, the partial stay received with respect to divesture order allows us to operate status quo. If the Tribunal decision is final after any and all appeals are exhausted, we will be prepared to conduct a process to maximize sale proceeds from acquired divestures, which we can then use to strengthen the business through the repayment of debt, growth and additional shareholder returns.
Chad will now go through the financial highlights from the first quarter of 2023.
Thanks, Rene, and good afternoon to everyone on the call. During the quarter, we generated revenue of $416 million, an increase of 16% from Q1 2022, resulting from higher volumes at our waste processing facilities, pricing increases established last year to keep pace with inflation, and increased demand for services due to robust industry fundamentals.
We recorded net income of $55 million or $0.18 per share, an increase of 50% on a per share basis from the first quarter of 2022. In addition to the factors impacting revenue, the first quarter of 2023 saw the full run rate of our $75 million target synergies realized in relation to the Tervita merger.
Our adjusted EBITDA margin remained very strong at 36%. Inflation continues to have some impact on our costs, but we have been mostly able to offset this through operational efficiencies and managing cost increases.
We generated impressive discretionary free cash flow of $122 million in the quarter, which we allocated to growth and shareholder returns. Our total debt-to-EBITDA ratio remains at 1.9x. With the recurring nature of our cash flows, we are very comfortable with our principal debt balance of $971 million at March 31. We are continuing to target a principal debt balance of between $850 million and $950 million to exit 2023.
Our capital structure currently consists of no near term maturities with the first fixed note maturing in 2025. We retain a considerable liquidity position with $363 million of availability on our credit facilities also maturing in 2025.
In January, we paid our first increased quarterly dividend of $0.10 per common share, resulting in a dividend payout ratio on a trailing 12-month basis of 34%. At our closing share price yesterday, the annual dividend provides an attractive yield of 6.1% on our common shares.
We were also very active on our normal course issuer bid during the quarter. Over the 3-month period, we repurchased and canceled 9.6 million common shares at a weighted average price per share of $7.24 for a total of $69 million. Subsequent to quarter end, we have repurchased an additional 4 million common shares, representing a total 4.4% of the standing common shares repurchased so far this year.
Our healthy balance sheet, along with our significant reliable cash flow, have provided the platform that allowed us to begin executing on our commitment to deliver increased shareholder returns both through our increased dividend and share repurchases, while also maintaining a strong financial position.
I will now pass the call over to Allen to provide our operational highlights.
Thanks, Chad. Good afternoon, everyone. Strong industry fundamentals continue to drive increased volumes across our infrastructure network. With our environmental waste management infrastructure segment, waste volumes received and processed increased by 3% over Q1 of 2022 to over 67,000 barrels per day to increase overall production levels. We recovered 383,000 barrels of oil from waste through this processing, avoiding 7,674 tons of CO2 emissions as a result. Our waste processing facilities also process and disposed on an average nearly 142,000 barrels of produced water each day, an increase of 9% over the prior year quarter, consistent with expectations of same-store sale produced water volumes trend higher over time.
During the quarter, Secure safely contained 1.2 million tonnes of contaminated soil on behalf of our customers across 17 industrial landfills. We expect to see increased remediation work during the year as the liability management programs in British Columbia, Alberta, Saskatchewan seek to speed up the rate at which inactive wells and facilities are abandoned and reclaimed. These programs are expected to result in incremental volumes at our industrial landfills and waste facilities, our metal recycling facilities and higher demand for environmental remediation.
At our metal recycling facilities, ferrous volumes were up 7% as demand increased for scrap steel at mills. We made process improvements at several of our scrap yards to optimize workflow, successfully reducing the amount of handling required and improving inventory turnover. New equipment, including the purchase of new railcars in the second quarter, will increase our handling capacity and drive further optimization at these facilities.
Our Energy Infrastructure segment also had a strong quarter operationally. Our oil terminaling and pipeline volumes averaged 93,000 barrels a day, an increase of 8% from the first quarter of 2022, driven by commercial agreements and recurring crude oil volumes from our oil gathering pipeline. Stable commodity pricing, along with changing oil quality differentials, increased opportunities for blend and price optimization at our 22 crude oil terminals.
Our Oilfield Services segment had a robust quarter operationally with higher demand for products and services associated with higher drilling and completion activity.
Turning now to our capital program. We continue to focus our capital -- our growth capital on opportunities that provide reliable volumes and recurring cash flows generally through customer partnerships with long-term contracts and take-or-pay or minimum volume commitments. As Rene mentioned, we have increased our growth capital plan for 2023 from $50 million to approximately $100 million following the completion of a new commercial agreement. In March, we entered into a 12-year commercial agreement with a senior E&P producer customer for water disposal in the Montney region of Alberta. This agreement provides Secure with take-or-pay commitments on nearly 90% of the facility's capacity and the customer with guaranteed access to cost efficient water disposal. The new water gathering pipeline disposal well and facility enhancements are expected to be completed in the fourth quarter of 2023.
We also continue to progress construction on the previously announced Clearwater oil pipeline and terminaling infrastructure backstopped by 3 commercial agreements. The significant growth in the Clearwater area, which has seen oil production grow from 0 to over 100,000 barrels a day over the last 5 years, has required additional infrastructure to support higher production volumes. In total, we incurred $36 million of growth capital in the first quarter of 2023 related primarily to these 2 projects.
We also incurred $10 million of sustaining capital related to landfill cell expansions, well facility maintenance, asset integrity programs and asset purchases for our metal recycling operations. We continue to expect to incur approximately $60 million of sustaining capital and $25 million of capital related to landfill expansions in 2023. The additional landfill expansions are in anticipation of increased abandonment spend obligations driven from government regulations. We also expect to incur approximately $20 million to settle asset retirement obligations.
Finally, we divested non-core assets for total proceeds of $22 million as we continue to optimize our portfolio. The dispositions included our integrated fluid solutions business line, previously reported within our Oilfield Services segment, and our underutilized rail assets.
I will now turn it back to Rene to address our outlook for the remainder of 2023.
Thanks, Allen.
As we look ahead, Secure is very well positioned to deliver on our strategic priorities of providing best-in-class customer service and growing the volumes we handle across the business. For the remainder of 2023, the corporation expects to see continued momentum across all business lines as stronger energy, environmental and industrial markets continue to drive higher volumes, activity levels and overall demand for Secure's infrastructure. Our extensive network of environmental and energy infrastructure in place today can handle higher processing, recovery and disposal volumes without significant incremental investment.
The addition of new customer-backed infrastructure results in incremental recurring cash flows for Secure through take-or-pay obligations and production area dedications that also provide a guaranteed greater return on our investments.
The energy sector continues to evaluate the supply and demand outlook as it faces macroeconomic factors such as inflationary pressures, the possibility of a near-term recession, overall demand globally and the geopolitical risk premium. However, the current price environment continues to drive robust producer cash flows and increased energy industry activity in our operating regions. New government regulations will increase environmental cleanups and reclamation in all our business units.
Given this backdrop, we remain confident in executing our previously announced capital allocation priority to return more capital to shareholders in the $100 million growth capital program. We are excited to see progress with the digital transformation of our business, which results in both great cost savings and improved customer experience.
To support the safe transportation, handling and disposal of waste, Secure has invested in building a digital e-ticketing platform for waste transportation and disposal documents in Alberta. Built along industry partners, this will help Alberta's energy industry comply with regulations, keep people safe, help preserve the environment, optimize costs and reduce emissions. The platform has been launched internally, and we are anticipating an external launch later in 2023. We are also creating a tool which utilizes artificial intelligence to calculate facility wait times and providing customers with recommendations on Secure's disposal locations. In future releases of the e-ticketing solution, our customers will have access to these valuable tools to reduce idle time, distance driven and emissions. These digital initiatives will make working with Secure easier for our customers and support responsible waste management activities, which will help our industry move forward together.
With tomorrow's Annual General Meeting of Shareholders, 2 of the corporation's longstanding directors, Kevin Nugent and Jay Thornton, will not be standing for re-election, making the end of their term on the Board of Directors. Mr. Nugent joined Secure's Board in 2007 and has been instrumental in establishing best-in-class governance practices and providing sound counsel over the last 15 years. Mr. Thornton was appointed to Secure's Board in connection with the Tervita merger on July 2, 2021, and provided strategic leadership through the merger and integration and has continued to provide valuable counsel to the Board and management. Prior to his appointment to Secure's Board, Mr. Thornton had been a Director of Tervita since 2016.
Both individuals are accomplished business leaders who have brought immeasurable wealth of industry experience and insight to Secure's Board. I want to thank Kevin and Jay for their valuable contributions as directors and wish them both the best in their retirement. I also want to thank all Secure employees for their hard work, dedication and drive that makes this company what it is. And lastly, a thank you to our customers and stakeholders for their continued support and partnership.
That concludes our prepared remarks. We would now be happy to take your questions.
[Operator Instructions] First question comes from Patrick Kenny at National Bank Financial.
Just on the new disclosure, appreciate the operational data. But just wondering if you could help us extract the direct commodity exposure as well within each of the new segments. So for example, 65% of EBITDA being environmental waste management, how much of that is metal recycling? Or within the 25% energy infrastructure segment, how much is crude oil marketing?
Yes. So I mean, what we're going to be able to do I think on a go-forward basis is try to give you different metrics and volumes. And I'm not sure we're going to be able to disclose how much we would get for a barrel of recovered oil versus some of the other metrics. But what we will do is try to give you some meaningful metrics that we could share to our investors and just show the various trend lines as to what's happening in terms of the volumes and what's repeatable volumes that we see coming in day to day. So we give you at least a trend line on the volume aspect of it. I'm not sure what else we're going to be able to disclose because there are so many factors that go into some of those different categories. But we're going to try to at least give you something that you can trend line on a go-forward basis.
I think here, Patrick, we wanted to align our operations really to the activities that we're performing. And I think if you look at that environmental waste management infrastructure segment, it's 70% of our operations. And what do we do there? We're processing waste. We're recovering a barrel of oil or we're recycling metals or we're disposing of contaminated landfill soil. And so we wanted to make sure that these business operations were all contained in one operating segment. And specifically, that same thought process was around our energy infrastructure in terms of what do we have in terms of volume on an oil pipeline? How much do we put through in our terminals to our storage, and really what we do from an optimization standpoint with all the volumes that we receive in our facilities.
And then we broke out our Oilfield Services segment so we could clearly see what is truly impacted by a highly cyclical nature of the business, the drilling activity. And really what we're trying to achieve here is taking a look at Secure valuing it as the sum of parts. So taking a look at our energy sector and comparing it to the proper peer group. Taking a look at environmental waste management and comparing that to the proper peer group, and same with oilfield services. Because clearly, I think the market needs to understand that fundamental, because the stock, as we feel right now, is undervalued because there's just -- they don't seem to understand how these businesses perform because you've got that reoccurring stability in the cash flows in these segments. And this was our way of showcasing that in a more structured way.
Yes. I appreciate that color. And I guess your comment around the stock being undervalued is a good segue into my next question here. Just trading at a free cash flow yield well above 20%, and hence, your buyback activity appears to be a no-brainer. But just perhaps you could comment on the returns you expect to generate from this incremental $50 million of growth capital that was just announced. And maybe your thoughts on how you think about balancing returns from growth projects versus simply bolting on higher quality cash flows under long-term take-or-pay, even if it means having to accept a slightly lower return.
Yes, good question. I think let's maybe talk about capital allocation first. I mean, we announced we were going to come out with a dividend that's currently a 6% yield, which we feel is sustainable for the foreseeable future. Since inception, we've purchased 4.5% of our stock back. We think that's a great investment. As I said, we think the stock's undervalued. We believe our current debt position is at the right -- in the right level. And you balance that out with growth capital opportunities. And as I've said over the past few months, we work on projects that are stocked with take-or-pay long-term contracts. And the contracts take time to get signed and developed. And once you do have them signed, we said we would announce that we got a signed contract as fact. And so the first of that was the Nipisi Clearwater Pipeline, which is an area that needs more infrastructure, and that's specific to that Energy Infrastructure segment.
When we look at these opportunities that are fully backstopped for 10-plus years, that's that 4.5x payback on that asset for a 10-year period. And currently, just as an update on Clearwater, that's on budget. That's on time. That will come on stream year in Q3. And then we announced the Montney water pipeline disposal. That's in a similar kind of payback metrics. That's a 12-year 90% take-or-pay agreement with an existing customer that we're partners with. And they're senior high-quality E&P. And these opportunities, it just improves the asset values that we have in our network. So I would say, to your question, when you think about capital allocation, we're balancing it. Obviously, we've got a lot of free cash flow in this business, and we've been aggressive on the buyback. But these contracts we've been working on for a long period of time, and they're good quality set return projects that we got to go out and execute. So that Montney project, that'll come online in kind of back half, like call it Q4 of this year.
Okay. That's great. A 4.5-year payback does sound quite attractive. So I guess from a BD perspective, it sounds like a rosy outlook for both the Montney and Clearwater. Maybe you could just provide a little bit more color on what your unsecured backlog might look like in terms of customer demand for more water disposal services or incremental gathering pipeline connectivity.
Yes. I would say the majority of our hopper is tying into existing infrastructure, call it brownfield expansion. We have a few of those opportunities we're working on right now, again, that would be tied to long-term contracts. And we've always talked about our capital program being that $50 million to $100 million annually. And so we kind of hit that mark here for 2023 timing of contracts signed. Maybe get a little bit more of these projects developing late in the year for more of a 2024 capital program. So there are some in the hopper that would kind of be very consistent with what you're seeing in 2023.
Okay. Perfect. I'll leave it there.
Thank you.
Thanks, Patrick.
Thank you. The next question comes from Cole Pereira at Stifel.
Just a follow-up on Pat's question on the segments. So if you had a scenario where you had a crude oil waste processing facility. So obviously, the processing revenue and the skim barrels would be reported in EWM. But would -- just to clarify, any blending or marketing would be reported in infrastructure. Is that accurate?
Yes. Just think of it in terms of the -- there's a lot of clean barrels that come into pure terminals and some of those combined facilities. So really, everything we've tried to put in that Energy Infrastructure division is -- it's not really getting processed. It's basically clean oil that needs to get to market and optimized, and sometimes it gets stored. So that's all in that energy infrastructure segment.
Okay. Perfect. And then thinking about the infrastructure segment as well. So I mean, if we think about your pipelines and storage units, I mean that's kind of, call it, $150 million of CapEx total spend, and the segment kind of did $150 million of EBITDA. So I mean, safe to say then the majority of that segment would be kind of that marketing blending, et cetera, type of EBITDA. Is that fair?
You kind of lost me on the $150 million of like -- are you saying net -- like net book value or assets, or what are you --
Sorry. Just talking about the total spend for your 2 pipelines and, call it, the Kerrobert storage from a few years ago.
Yes. I think we've segmented the assets out in the MD&A. So maybe go back to the MD&A to just try to get a little better handle on that. Chad?
Yes. Cole's, it's in the financial statements in the -- segmented in bono. In addition to that, there is the terminaling infrastructure. That would be in addition to that $150 million.
Okay. Got it. And just quickly on the services side. EBITDA was down a little bit sequentially. Meanwhile, activity across the WCSB was up by being -- obviously, you sold the business. So what were some of the drivers there?
Think of that more as you get some of that lumpy projects in there. So it's -- in that division, you've kind of got your, we'll call it -- some of it would be more cyclical, i.e., drilling fluids, solids control, but you also have the lumpy projects. So I don't think you -- don't try to do a correlation pure to drilling rigs. It's more of a case of we've got revenue in there that's maybe non-reoccurring, and projects is a good example how it can be lumpy.
Okay. Got it. That's all for me. I'll turn it back.
Thanks, Cole.
[Operator Instructions] Next question comes from John Gibson at BMO Capital Markets.
I guess I'll follow on Cole's question, asking about the other segment. Energy Infrastructure and EWM saw a decent jump in adjusted EBITDA from Q4. Just wondering, is there some seasonality built in there, or what exactly drove those increases?
This business really, John, is getting -- I mean you're always going to have your Q2 road bans and that type of thing. But the great thing about, A, our customers and, B, the infrastructure that we have in those 2 divisions is it's getting less cyclical -- or not cyclical, seasonal. And so think of Q4 going into Q1, things in terms of first couple of weeks of January, you have some cold temperatures. You can have a quick breakup.
But when you look at -- when you think about the overall EBITDA for everything combined in the last 3 quarters, it's been pretty -- it's been in that $150 million EBITDA range. So I think what's driving that is more your same-store sales. So that's what Allen alluded to in the call there that you look at some of our -- the waste processing, the produced water volumes, our terminal volumes, they're all up definitely year-over-year and even up from Q4.
Got it. Second for me. Are all the proposed Tribunal assets in the EWM segment, or are some of them sprinkled in any of the others?
Yes. Yes, they're all EWM, yes.
Yes. And then -- go ahead.
Yes. There'd be a few terminals in the Energy Infrastructure segment as well.
Yes. Got it. And then last for me. I'm not sure how much you can really talk about it publicly, but wondering if you could give a sense of the level of interest you've had from potential buyers of the Tribunal assets. I understand priority number one is to win the appeal, but pending you don't, just wondering if you could share any interest you've had for them so far.
Well, go ahead, Al.
Yes. I mean we've definitely had interest in. I think from a market perspective, they understand these are great quality assets, and they have interest. But our message to them is, look, we put out our notice of appeal in March, and we think there's strong grounds from laws of air and laws of fact -- there is a fact that we can appeal on. And we're now working through kind of a detailed summary. I basically consider the notice of appeal as an outline, and now we've put in all the substance in a form that the Competition Bureau will see. They'll have a chance to respond. And during this entire process, we have a stake. So we're not obligated to advance any sort of sale process whatsoever. It's business as usual. You keep running the assets. We hope to have a trial here mid-June. And then as we've said, we anticipate, you don't really know, but a decision in Q4. So while there has been interest for sure in these assets, a lot of interest, it's just we've said, hey, let us get through the appeal process first as we think we've got strong grounds for appeal.
Got it. Really appreciate the color. I'll turn it back.
Thank you. There are no further questions at this time. You may proceed.
00 a.m. Mountain Time to be held via conference call. You can find the login details on our website. We look forward to providing you with updates on Secure's performance at the end of July after the completion of our second quarter. Thanks again. Bye now.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.