Tidewater Midstream and Infrastructure Ltd

TSX:TWM

Earnings Call Transcript

[Operator]

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Midstream and Infrastructure third quarter results conference call. [Operator Instructions] I would now like to turn the call over to Mr. Joel Vorra. Please go ahead.

[Joel Kyle Vorra, Chief Financial Officer]

Hi, everybody. Joel Vorra here. Thanks for joining the call. Joel MacLeod is on the call with me as well, Tidewater's President and CEO. Before passing the call over to Mr. MacLeod for a review of the quarterly highlights, I'd like to remind you that some of the comments today are forward-looking in nature and are based on Tidewater's expectations, estimates, judgments and projections. Forward-looking statements we may express or imply today are subject to risks and uncertainties, which can cause actual results to differ from expectations. For more information on non-GAAP measures and forward-looking information, please refer to the company's various financial reports and disclosures, which are available at tidewatermidstream.com or on SEDAR. With that, Joel I'll pass it to you for an overview.

[Joel A. MacLeod, Chairman, President & CEO]

Thanks, and thanks, everyone, for making time today. Also a big thank you to our shareholders, customers and staff through what was a tough quarter and what continues to be a challenging Canadian energy market. Our third quarter results were disappointing and were impacted by various factors with the main 2 being AECO gas prices and reduced producer throughput.However, on the positive side, our gas storage assets had one of their strongest quarters to date and continue to act as a hedge in a low gas price environment, and we continue to work to expand those facilities.And further to that, we do have some -- we have seen some positive news here in the past few weeks with natural gas prices hitting 8- to 10-month highs over the last couple of weeks and throughput at our facilities has seen a related increase. Regulatory approval of our 2 large capital projects, being our Pipestone Sour deep-cut Montney facility and our TransAlta coal-to-gas conversion pipeline, are also significant milestones for us that we have achieved here in the past couple months. And we are full steam ahead to bring both of these projects online, on schedule in mid- to late '19, and the team is working hard to do so.On the other front, our new business unit, our crude oil infrastructure piece, producer and refiner support, with our rapidly growing crude oil infrastructure business, has been significant, and we continue to open up new markets for Canadian crude oil and work towards longer-term contracts. These projects could include storage, tankage, pipe-connected terminals like we have today at Valhalla Brazeau and Edmonton, in addition to rail and/or other terminals even potentially on Tidewater. Private equity partners would remain a key option for Tidewater for larger infrastructure build-out, and we appreciate all the support we have from our shareholders and from private equity partners as we do continue to look out some opportunities.We also want to thank producers and refiners for all the support as we push hard to try and improve market access for Canadian crude oil and all related liquids, including ethane, propane, butane and even condensate with the differentials we're seeing to almost every component of Canadian liquids.Maybe just a quick update on our 2 big projects. If we start with our Pipestone Montney deep-cut Sour plant, I think everyone on the call is likely aware we have received regulatory approval on the plant and also, the pipelines, and we're full steam ahead and getting ready to drive piles on site and have been clearing. And that is going extremely well. We've been lucky here with the weather and continue to move ahead. The plant is fully contracted, and while results in the area continue to impress, we'd hate to say that the Pipestone area and related liquids are immune to the differentials that we've seen on both condensate and light sweet crude, but we're working very hard with producers to optimize their liquids, their streams as the plant comes online and ensure we maximize our netbacks and great to have a ton of producer support in the area and even from some parties that aren't involved in the plant on even a potential liquids hub up in the Pipestone area.We continue to expect the plant to come online in mid-'19 and want to continue to reiterate that. And again, I want to thank our customers in Kelt and Blackbird for all their support and with Pipestone's merger/acquisition of the Blackbird team, [ Tim and Nancy ], also look forward to working with the Pipestone oil team and Paul and Bob, in particular, have been great supporters of Tidewater, and we greatly appreciate all their support. If we jump into our TransAlta pipeline project, a quick update, and want to thank the TransAlta team as well for all their support. Dawn, Brett, their entire team has been incredible to work with and great to get a regulatory approval here roughly 30 days ahead of schedule and be full steam ahead on the construction part of the project and excited to see that project come online on time as planned. We did see a cost increase. We want our shareholders and market to know there that we're taking that very seriously. A portion of that is related to steel prices, the pipeline activity and also our ability to flow above 130 million a day, but we did see a cost increase there and just want the market to understand and our shareholders that we're taking that very seriously. We're confident in our ability to execute, but we have seen an increase up to $180 million on the project.We do feel that project is a great project for Albertans, Canadians and a coal-to-gas conversion and very pleased to get a regulatory approval 30 days ahead of schedule and be ready to start construction here any day now. I believe we're clearing here in the next couple of weeks, which is very exciting for the team.So just to close out. We do look forward to delivering a solid quarter in Q4. We did have a tough Q2 and Q3, nice to be halfway into Q4, see throughput coming up, seeing our crude business grow, seeing volumes at our plants increase. So nice to be stepping into a solid Q4 and excited to get the results so with time. We do feel that '19 is going to be a transformational year for Tidewater with our 2 large projects coming online, and right now, Q1 is feeling quite strong. So nice to get through 2 tough quarters and step into some stronger results and show the market what we can do and want to reiterate that we're fully funded to execute on our capital program and confident in our ability to deliver over the next 12 months.With that, I'll pass it back to Mr. Vorra, he'll walk you through some of the financial details.

[Joel Kyle Vorra, Chief Financial Officer]

Thanks, Joel. Good summary. I'll walk through some of the key financial metrics that I think the market watches. First, revenue up approximately 15% quarter-over-quarter, mainly related to commodity NGL prices in the first piece of the quarter. Not a massive impact on margins, saw an approximate 10% decrease in the processing volumes, which -- and processing revenue, which Joel alluded to. Again, reiterate quarter a little under expectations, but we are seeing with increased prices also increased throughput volumes coming through the plants here into Q4. G&A relatively even quarter-over-quarter. I want to point out the stock-based compensation piece, which may be a little bit higher than what some research analysts would have forecast. Just wanted to clear that, that's a mark-to-market noncash item. So as our share price moves up and down, those RSUs are marked-to-market to our share price. So if our share price moves up, that noncash item increases, and just want to be clear that that's an impact to the net income, but it's noncash. On to adjusted EBITDA, approximately a 10% impact that I think we've talked about, we alluded to, and alluded to some increased volumes in here into Q4. Distributable cash flow quarter-over-quarter from $11.5 million to approximately $12.9 million, mainly driven by the difference in maintenance capital. We had the BRC turnaround there in Q2 and a little bit lower maintenance capital here in Q3. Payout ratio remains, what I would call, conservative around 25% given we're funding 2 large capital projects. Deploying free cash flow into those capital projects is part of our corporate plans to maintain that corporate -- maintain that payout ratio around 25%.As far as capital, I think, we gave some updates on current spend in the MD&A and what is left to spend on those projects into 2018, 2019. Those numbers obviously are going to depend on the TransAlta option to exercise in their 50% option and then 2 of the anchor tenants in the Pipestone plant and not only timing, but if those exercises happen, so just want to be clear that there's some variability there based on when or if the options are exercised and then looking into 2019, looking at net debt to adjusted EBITDA in and around, again, depending if options are exercised, maxing out around a 4 to a maximum 4.5x and then coming down pretty quickly when that cash flow comes on into the second half of 2019 down to that 3x to 3.5x where I think we're comfortable living. But I think, with that, I will open it up to questions.

[Operator]

[Operator Instructions] Your first question today comes from the line of Robert Kwan of RBC Capital Markets.

[Robert Michael Kwan, Analyst]

Maybe just to start around the disclosure around the extraction and fractionation side of things. And just wondering, is this -- do you see this as being isolated to the fourth quarter? Do you see this persisting in 2019?

[Joel Kyle Vorra, Chief Financial Officer]

Yes. It's a good question, Robert. I think we're working through it. I'd hate to tell you something and then something change. I'd say today, we don't have any major material concerns. Just wanted to mention some of those pieces given that gas storage and the straddle piece are the best-performing pieces of the business in low-price environments. And just wanted to be clear that there was some unplanned maintenance upstream in those facilities. But as of right now, don't see a material impact to 2019 and even Q4. I think, we'll wait and see here, but don't have a concern at this time.

[Robert Michael Kwan, Analyst]

Okay. Assuming that resolves itself, and it sounds like volumes are starting to come back, can you just talk about how you're looking at that $80 million run rate kind of as an exit out of this year?

[Joel Kyle Vorra, Chief Financial Officer]

Yes. I think what we saw, and if -- am I correcting your question that, sort of, what needs to happen to hit that run rate? Is that your question, Robert?

[Robert Michael Kwan, Analyst]

Well, are you still comfortable that exiting the year that roughly is a baseline for 2019 as you get into plus plus, if that's still a good number?

[Joel Kyle Vorra, Chief Financial Officer]

Yes. I think when we look at the base fee-for-service processing business, which would be the lion share of our cash flow, and then you look at how volumes through the straddle plant storage continues to perform very well, yes, I think we're comfortable.

[Joel A. MacLeod, Chairman, President & CEO]

Robert, sorry, it's Joel. And I apologize, we're sitting in different locations right now with everyone on the call. So it's not as smooth as it should be. I would just reiterate, we are very confident in our ability to exit '18 at $80 million with the pieces that are coming together.

[Robert Michael Kwan, Analyst]

Okay. So then as we think about '19 or kind of exit '19, you got that base $80 million, you've given us $10 million for the crude oil side of things. Pipestone is at $30 million to $35 million with the back half of '19 commissioning and then you got the Alberta pipe, which is another $10 million exiting '19. Are those kind of major pieces as we think about bridging the business here?

[Joel A. MacLeod, Chairman, President & CEO]

Yes. And just realizing the $120 million number we provided previously, we assumed TransAlta's exercise, so that's a gross $20 million of EBITDA project, and we've assumed their exercise, which would result in about half of that $10 million of EBITDA. So when we've talked about that $120 million number, and now we've added $10 million, we are feeling comfortable about a $130 million adjusted EBITDA number exiting 2019.

[Robert Michael Kwan, Analyst]

Got it. So just to be clear, with that $130 million and with the net debt numbers, Joel, that you gave earlier, that 4, 4.5x max down to 3, 3.5, that assumes the TransAlta exercise. Does that assume the Pipestone exercise? Or that's 100% still?

[Joel Kyle Vorra, Chief Financial Officer]

There's ranges there Robert, but no, generally would not assume a Pipestone exercise. That would be 100% of the capital spend.

[Operator]

[Operator Instructions] Your next question comes from the line of Amber Brown from National Bank.

[Amber Brown, Associate]

I just have a quick question about TransAlta and their 50% option. So if they exercise it and will you guys be looking to redeploy that cash into organic growth? And if so, what near-term opportunities are you looking at? Or would you just be using the proceeds to reduce your debt level?

[Joel A. MacLeod, Chairman, President & CEO]

It's a great question, Amber. We've got a lot of projects that we're gearing up to be ready to step into. But given our balance sheet and where it's at, I think step one is pay down some debt, but we want to be ready, and I think we are going to be ready once the exercise happens, and we believe it is into Q1. We're definitely have more than one project that we're getting ready to pull the trigger on, and economics, EBITDA build multiples are coming down on some of those projects. So I think it will be a function of timing, a function of where our covenants at, where we're at, but want our shareholders and market to be aware we've got lots of opportunities and are really excited about the next 12, 24 months, especially on the crude side, but even on a Pipestone Phase 2 component of the business, we're not there yet, but nice to have and see the commercial support that we've seen on multiple projects.

[Amber Brown, Associate]

Awesome. And you mentioned in your MD&A that you guys are currently evaluating a condensate liquids hub at Pipestone. Would this be included in your Phase 2?

[Joel A. MacLeod, Chairman, President & CEO]

Yes, it would be a component of a Phase 2. We're not there yet, but nice to have support for that and especially when condensate dips have moved down and light sweet differentials have been crushed to the lightest margin that I have seen in my career. We can definitely add some value up in Pipestone with our gas plant having a lighter stream of condensate there, and we want to work with producers to optimize our streams and ensure they have the highest possible netbacks.

[Amber Brown, Associate]

Great. And then my last question is on the crude oil infrastructure side. So I guess it's early days from the court decision on Keystone, but are you guys starting to or do you expect to have decisions with customers on extending the length of your crude by rail contracts beyond 12 months? And would you guys consider building any crude oil storages of your own in order to get it more into blending and the marketing side of the business?

[Joel A. MacLeod, Chairman, President & CEO]

Yes, I would say yes to all of the above. The crude market is moving so much, so I would hate to guarantee anything to the market, and we've only been at it here for 2 months, but nice to be dealing with a lot of counterparties that we did in our previous business in Predator Midstream, same refiner groups, a few new ones and then also, on the producer side, the support from the producers has been unbelievable. So nice to be opening up some new markets. We do want to have pipeline options in addition to rail, and yes, absolutely, we'd love to build some storage and help producers through these volatile times where we've seen on our gas storage assets. Storage has been huge for our customers, and we feel tankage would be as well and even to see refiners having an interest in owning tankage and deploying capital into Canada is something that the entire Canadian energy space needs. We need some help and nice to be having some of those conversations today.

[Operator]

[Operator Instructions] And there are no further questions in queue at this time. I turn the call back to the presenters.

[Joel Kyle Vorra, Chief Financial Officer]

Thank you, guys. I think -- it's Joel Vorra here. Just again want to thank everybody, especially our shareholders and through to our customers, in a tough environment reiterate what Joel said. Thanks for the support.

[Joel A. MacLeod, Chairman, President & CEO]

Thank you, everyone.

[Operator]

And this concludes today's conference call. You may now disconnect.