Tidewater Midstream and Infrastructure Ltd

TSX:TWM

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Midstream and Infrastructure Ltd. Q1 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 9, 2024.

I would now like to turn the conference over to Mr. Michael Gracher, Manager of Investor Relations. Please go ahead, sir.

[Michael Gracher, executive]

Thank you, operator, and welcome, everyone, to Tidewater Midstream's First Quarter 2024 Results Conference Call. I'm Michael Gracher, Manager of Investor Relations. And joining me today are Jeremy Baines, CEO; and Aaron Ames, Tidewater Midstream's Interim CFO. Also with us and available during the question-and-answer session is Shawn Heaney, EVP, Planning and Strategy.

Before we begin, please note that matters discussed on this call include forward-looking statements under applicable securities laws with respect to Tidewater Midstream and Infrastructure Ltd., including, but not limited to, statements regarding investments and acquisitions by the company; commercial arrangements of the company; the business strategies and operational activities of the company; the markets and industries in which the company operates; cost and expense management; the company's leverage and plans for debt and leverage reduction; refinancing of the company's indebtedness; the value of the company's assets and the future growth objectives, targets and financial and operating performance of the company and its businesses.

Such statements are based on factors and assumptions that management believes are reasonable at the time they were made and information currently available.

Forward-looking statements we may express or imply today are subject to risks and uncertainties, which can cause actual results to differ from expectations. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see Tidewater Midstream financial reports, which are available at www.tidewatermidstream.com and on SEDAR+.

And with that, I will now pass the call over to Jeremy to go over the highlights of the quarter.

[Jeremy Baines, executive]

Thanks, Michael, and thanks to everyone for joining us today. I want to say we are proud of another quarter where we operated safely. I'm proud of the team and our focus on safe and reliable operations. This is a key priority for the company.

On the renewables front, the HDRD Complex is operating very well at design capacity of 3,000 barrels per day. As I had mentioned, at year-end, our team worked through the normal ramp-up challenges, and our facility has been performing very well. We expect it to perform at design capacity going forward, and accordingly, we expect HDRD to exceed a full year utilization rate of 85%.

During Q1, we performed on average at 71% of design capacity and expect to be approximately 95% of design capacity for the rest of this year.

Overall, the quarter started with PGR crack spreads around $80, which strengthened in February and March to around $90, ending at an overall average of $88 for the quarter, a bit below the same period last year, which averaged around $90. We are currently seeing typical moderation in crack prices as we progress through Q2 before we move into the high-demand summer driving season.

Last year's Q2 results were impacted by the scheduled PGR turnaround. Well, this year, we expect to be operating at capacity and improving on year-over-year volumes.

For the first time, we have the opportunity to begin marketing our very own renewable diesel product in our own backyard in British Columbia. Our marketing initiatives are progressing well. Due to our renewable diesel produced at HDRD, we have a competitive advantage in our ability to provide customers with a blended renewable diesel product, and we are seeing the benefits with the new logistics customer.

Hot off the press, midstream just completed the scheduled turnaround at BRC. And as I said already, I want to congratulate the team for a successful execution of another turnaround, which was completed safely, on time and on budget with no lost time incidents.

As I stated before, natural gas will play a critical role in the transition towards cleaner, more sustainable energy generation. Presently, gas prices are at historically low levels, which we view as unsustainable in the long term.

With LNG Canada expected to come online in mid-2025, we expect prices will begin to trend upwards throughout 2025, which will enhance the attractiveness of investments and drive demand for natural gas processing at our facilities.

Operationally, we made significant progress in streamlining our cost structure with a continued focus on safety, maximizing asset performance and driving free cash flow generation. We are taking a focused approach to the investments we make in our people and capital with an eye on delivering long-term free cash flow, maximizing return on net assets while minimizing risk and deleveraging. We have already implemented operational changes totaling $6 million on a run rate basis and similarly, SG&A reductions of a further $5 million in 2024 and $7 million on a run rate basis go forward.

On the refinancing front, for both the senior financing at renewables and the convertibles at midstream, we are down the path on both of these and expect to provide an update on our refinancing soon.

I'd like to turn our expectations for the year. Assuming PGR crack spreads averaged in the $80 to $90 per barrel range and BC-LCFS credits are priced between $450 and $500 per credit, Tidewater expects 2024 consolidated adjusted EBITDA to be in the range of $150 million to $170 million.

Tidewater's full year consolidated maintenance capital program is expected to be approximately $35 million to $40 million.

With the BRC turnaround completed safely on time and on budget, our maintenance capital program was weighted to the first half of the year and operations at BRC have ramped back up to normal run rate operations.

To round it out, we also have made significant progress on the front-end engineering and design of the proposed 6,500 barrel a day sustainable aviation fuel project. This includes integrating lessons learned from the HDRD Complex into the SAF project's design basis.

During the first quarter of 2024, the corporation received emissions credits for achieving its first milestone under an executed incentive agreement. These credits were sold under our previously announced purchase agreement. The corporation continues to progress commercial arrangements and is evaluating potential offtake agreements for the SAF project.

The SAF project remains subject to a final investment decision, which is expected in 2025.

Looking forward, we are excited about the opportunities we see in front of us. Our PGR and HDRD facilities are performing well, and expect it to continue to run at design capacity for the remainder of 2024.

With the BRC turnaround completed, safely, on time, on budget and back to run rate operations, our midstream business is well positioned to capitalize on the key role natural gas will play in providing clean and reliable energy.

I will now turn the call over to Aaron to go through the financial results.

[Aaron Ames, executive]

Thank you, Jeremy. During Q1 2024, consolidated adjusted EBITDA was $39.8 million, of which $25.3 million was contributed by Tidewater Renewables. During the same quarter last year, consolidated adjusted EBITDA was $48.9 million, of which $12.6 million was from Tidewater Renewables. The quarter-over-quarter decrease was primarily driven by the sale of Pipestone and Dimsdale.

On January 9, 2024, Tidewater monetized its AltaGas common shares for net proceeds of $341.6 million. These proceeds were used to further reduce credit facility debt and working capital.

At quarter end March 31, 2024, Tidewater Midstream's senior credit facility was elevated by approximately $26 million due to timing of accounts receivable settlements due to the Easter long weekend.

As of May 3, the balance drawn on the facility was approximately $85 million.

I'll now ask the operator to open the call up for questions.

[Operator]

[Operator Instructions] We have our first question coming from the line of Rob Hope from Scotiabank.

[Robert Hope, analyst]

Maybe first on the 2024 guidance. It looks like Tidewater Renewables is largely proceeding as expected. So can you talk about the other items that could be a little bit of a headwind for 2024 guidance, specifically, what you're thinking about the midstream business as well as the refinery?

[Jeremy Baines, executive]

Yes. Thanks for the question, Rob. Obviously, we're very happy with how the HDRD facility, basically since the last week of February, has performed very well. And now that we've gotten the commissioning completed and into normal operations, things are progressing well there.

On the guidance around midstream, obviously with the sale of Pipestone, that was a significant asset and things have changed on that front. And we have a turnaround that's taken place in Q2 at BRC. So we see the midstream business, obviously, in a turnaround year, it won't be as good as other years, but continue to perform pretty well.

There are a few things we're working on around utilization, particularly some opportunities for additional straddle gas at BRC as well. We are working -- we did have a couple of items that were catch-ups from prior years in the results of Q1 that were quite small. But otherwise, we continue to track well there.

And on the PGR, I think you asked about PGR as well. On that front, things are running well. We're getting good volumes out after the turnaround last year with fresh catalyst and really subject to where crack spreads ultimately end. So things continue to progress well. We're operating well and go from there.

[Robert Hope, analyst]

And then maybe just in terms of the converts and kind of the refinancing in front of you. As you take a look at kind of where your capital is right now and kind of where you wanted to be at the end of the year, is there a path forward on the refinancing that looks more attractive or less attractive at this point?

[Aaron Ames, executive]

So we're down the path, as we mentioned, on the various alternatives. And we're progressing very nicely on those alternatives, and we will update the market on those shortly.

[Operator]

[Operator Instructions] We have our next question coming from the line of Robert Kwan from RBC Capital Markets.

[Robert Kwan, analyst]

Just on the BRC downtime, are you able to quantify what the impact is to EBITDA between lost margin on the downtime as well as any expense turnaround cost?

[Jeremy Baines, executive]

Yes. So we've given guidance on the CapEx costs historically. We're somewhere coming in around, I think -- I don't know if we've broken it out, at about $50 million. So it's a big part of our capital program. Downtime, we've been down for, sort of, call it, 2.5 weeks, almost 3 weeks. So take that almost 1/12 of the year's production. So that obviously has an impact. So that's really kind of the view we can provide.

[Robert Kwan, analyst]

And there was nothing in terms of any expense turnaround costs?

[Jeremy Baines, executive]

No, we capitalize all of our cost during turnaround. I would say, and we'd direct you towards the disclosure, we did pare back the turnaround from what was originally planned. So there was significant dollars that were saved. And we also have undertaken some activities at the facility that are going to enhance our profitability go forward. We gave guidance on that, Aaron, about $6 million a year of improved run rate performance with the work we've done.

[Robert Kwan, analyst]

Got it. If I can just make sure I'm understanding what's in and out of guidance here. So the $150 million to $170 million, and just off the Renewables call, and I'm probably putting a little bit of words in your mouth on the range. But I think we talked about it probably being -- annualizing to $100 million, maybe it's more of the ramp up. So like $100 million to $120 million, that kind of implies $50 million on a deconsolidated basis, plus or minus for midstream. Is the roughly $10 million of combined SG&A and then the BRC savings in that, call it, roughly $50 million deconsolidated, i.e. would have been $40 million if you didn't do this stuff?

[Jeremy Baines, executive]

I mean there is part years of those savings in there. Obviously, we're not going to get a full year of the activities we've undertaken largely in Q2, as well as there are some onetime costs associated with capturing those savings. So -- but that has been included in, yes.

[Aaron Ames, executive]

Yes, and just...

[Robert Kwan, analyst]

Sorry, go ahead.

[Aaron Ames, executive]

Sorry, I missed your comments. Sorry.

[Robert Kwan, analyst]

No, no. I don't think you were going to, you can go first.

[Aaron Ames, executive]

Yes. So yes, it's like $60 to $70 million on the midstream side, somewhere in that range.

[Robert Kwan, analyst]

Okay. And then just the last question. Just as you think about your corporate structure, are there any -- is there anything that's being evaluated in terms of the ownership position in Renewables, where that is, where you want it to be or just -- at some point, does it make sense to combine the entities?

[Jeremy Baines, executive]

Yes. I mean, look, we're always looking to optimize costs, and we do have a services agreement between the 2 companies and some of the savings we have exercised on are streamlining those things. As far as our ownership interest and those types of questions really, we can't comment on that. That's really up to the 2 Boards of Directors and the shareholders of Renewables, if anything were to happen on that front.

[Operator]

Our next question comes from the line of Robert Catellier from CIBC Capital Markets.

[Robert Catellier, analyst]

Yes. And just curious a little bit here on what's happening at BRC, what's causing composition to change there? Is there -- is that facility being upstreamed?

[Jeremy Baines, executive]

So where are you referencing composition changing? Sorry, Rob.

[Robert Catellier, analyst]

So I read that in the MD&A.

[Jeremy Baines, executive]

No, I don't think that's what we have put in the MD&A.

[Robert Catellier, analyst]

Okay, maybe...

[Jeremy Baines, executive]

Okay, sorry, I know what it is. It's trucked-in volumes and what's been coming into the facility. So there's some optimization we're doing around those, that would be what you're referring to. But overall, the facility continues to -- as it's ramping up here post turnaround, we'll continue to operate as it has. We are working on -- there is some straddle volumes that we're working on getting into the facility that we haven't captured in the first quarter. So obviously, that will help with liquids that we can recover and process and make money on as well as what we do bring in through the trucked crack.

[Robert Catellier, analyst]

Right. And then...

[Aaron Ames, executive]

And I guess the only other point I would also make is on a go forward basis, when there's certain assets which we talked about in -- at year-end that were idle just because of timing and pricing for natural gas. So as those things come back on, big opportunities in the future. But right now, they're in idle state given the low price of natural gas. So...

[Robert Catellier, analyst]

Right. I was going to ask about that next, particularly the Atchison plant. What's the situation there and the view towards getting that into commercial operation again. And if there's no -- if there isn't visibility to that, do you foresee any significant decommissioning expenditures required in the near term?

[Aaron Ames, executive]

Yes. So we're in discussions around Atchison facility and can we get it at -- economic and cash flowing to operate. Overall, we we're working on solutions to optimize that site but net decommissioning related to any of that will not be an issue.

[Operator]

And there seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Gracher for final closing comments.

[Michael Gracher, executive]

Thanks, everyone, for joining the call. The team is available to address any outstanding items with our contact information at the bottom of this morning's press release.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.