Q3 2019 Earnings Call
Welcome to the quarterly earnings conference call at this time, all participants are in a listen only mode.
Question and answer session you May present star one on your phone if you would like to ask a question. Today's conference is being recorded yes. Any objections you may disconnect. At this time now I'd like to turn the meeting over to Mr. Rich Candor executive Chairman of Candor Morgan. Thank you you may begin hirji rooting them before we begin.
As you I'd like to remind you that todays earnings release, Okay, Im aren't Tamil and this call.
Forward looking in financial outlook statement, you within the meaning of the private Securities Litigation Reform Act like everybody five Securities Exchange Act like deemed or for applicable Canadian ventral and territorial securities laws as well a certain non-GAAP financial measures before making any investment decisions. We strongly encourage you to re.
Our full disclosures on forward looking and financial statements and use of non-GAAP financial measure set forth at the end of K lives MKM else earnings releases and to review our latest filings with the FCC and Canadian provincial and territorial Securities commissions.
List of important material assumptions expectations and risk factors that may cause actual results to differ materially from those anticipate and described in such forward looking at the natural outlooks segments.
Opening statements on these calls before turning it over to Kim.
The acts in the rest of the team I always try to share with you our vision for the future and our financial strategy on the for natural fraud. I believe we continue to execute on our plans and our decision to sell our 70% interest in Kinder Morgan, Canada, and our 100% interest in the U.S. portion of the Cogent pipeline.
Is indicative of that execution as you know, we're receiving a 13 times multiple of EBITDA on our cogent asset, which is well above the multiple which came as trading as a whole on the New York stock exchange.
No we're able to use the proceeds from these sales and Steve will talk more about this later in a matter consistent with what we have previously indicated the maintained a strong balance sheet expand our core assets pay a healthy and growing dividend and opportunistically buyback our stock. All these uses we believe benefit our shareholders.
I should add that we received expressions of interest and other assets at similar or higher multiples of EBITDA and let me say, there's absolutely no certainty as to whether these expressions of interest will result in transactions that said, we will evaluate such interest as a matter of good governance and capital discipline.
All this just indication is substantial difference between the valuation of individual assets and that of the company as a whole when expressed as a multiple of EBITDA.
Turning to our vision for the future on last quarter's call I described our positive outlook on the future of natural gas, which is very important to us as we move about 40% all the natural gas and American through our pipelines and incidentally that positive outlook was reinforced in the September report.
The U.S. energy information administration, which projects that natural gas consumption will increase by 40% between now and 2050, even in a case, where renewable energy rises dramatically.
Today, though I'd like to talk about the environmental impact of this growing natural gas utilization.
First the causative side of the story.
As reported that from 2007 to 2017 total seal to emissions and U.S. have dropped about 14%.
Even more impressive seo to emissions from the electric power sector have dropped approximately 26% during the same period of time not without notwithstanding an increase in the absolute amount of electricity generated.
As most of you know this is largely the result of new natural gas fired power plants, replacing older and dirty coal plants since natural gas admits approximately half as much CEO to compare to coal when burn for power.
This is a huge accomplishment and demonstrate that the answer to minimizing our impact on the environment isn't simply banning fossil fuels, but utilizing them responsibly the tremendous growth in natural gas production. In America has also led to a shipment as LNG to developing countries around the world.
To be used in large part to replace coal fired electricity generation with cleaner natural gas. These positive developments are pretty consistently accepted across the political landscape, but the naysayers on natural gas emphasize that its production and transportation admit too much methane into the atmosphere.
There's some disagreement over the extent of these emissions, but it's clear that they are low and continue to drop due primarily to industry led initiatives, let me share with you some numbers.
US methane emissions from natural gas systems declined more than 14% between 1990 and 2017, despite a 53% increase in natural gas production over the same period us methane emissions as a whole across all industry also decreased by 16% over.
For that period.
You might be interested to know that methane emissions from in Terry fermentation, you may want to Google that the suffices to say that it has to do with the digestive tract of farm animals.
And maneuver management and other key phrase combined actually rose by 18% during that same time period.
If you took those two categories out of the equation total us methane emissions were actually down 27% during that timeframe now that said our industry still needs to continue to address this issue and we are km Ais a founding member of one future voluntary industry initiative committed to achieving that.
Okay, and leakage rate of 1% or less along the entire natural gas supply chain, but 2025.
Back to our members rate is now well below that 1% target more specific to us the group's target for emissions and the transportation and storage segment is 0.31% km is already substantially outperformed that go with emissions from that segment.
0.04% in 2017, improving to 0.02% in 2018 in summary, our viewers at the methane emissions issue is solvable, we'll continue to improve at the end of the environmental positives of natural gas.
Outweigh the negatives and now I'll turn it over to Steve Okay. Thanks, Rich I'm going to start with CMI, then turn it over to our President Kim Dang give you an update on our segment performance our CFO , David Michaels will take you through the numbers and Dax Sanders, we'll update you on came out that will take your questions. The summary on on Kammeyer, this or adhering to the principles that we've laid out.
Obviously for you we have a strong balance sheet haven't met our approximately 4.5 times debt to EBITDA target and with ratings upgrades now from all three ratings agencies, we are maintaining our capital discipline through our return criteria a good track record of execution by our and by self funding our investments we are returning value.
To shareholders as evidenced by the 25% year over year dividend increase and we continue to find attractive growth and or divestiture opportunities again strong balance sheet and capital discipline, returning value to shareholders and finding additional opportunities. Those are the principles. We operate back during the quarter, we announced that Cam.
Well it reached an agreement Pembina pipeline Corporation, where pembina would require acquire all of the common equity of camel, including came out of 70% interest and the Cam I would sell the U.S. portion of the Cochin pipeline dependent or for $1.546 billion us the closing of the transactions, our cross condition and closing remark.
It is on track for late Q4, this year or first quarter 2020, consistent with the principles I. Just stated came I expects to use its proceeds to reduce debt to maintain our net debt to adjusted EBITDA ratio of approximately 4.5 times and use remaining proceeds to invest in attractive projects and or two opportune.
Mystically repurchase Cam I shares and we said as we said when we announced the transaction initially the proceeds will be used to reduce net debt before being put to these investments or.
Repurchases other milestones for the quarter, we placed the first unit of our Elba Island liquefaction facility in service on September 30.
We were delayed here, obviously and that has been a drag on our financial performance as you'll hear from Kim and David but you don't want as in service along with the balance of plant.
And that we are now, earning 70% of the project revenues and when you count also other facilities that we own at the 100% level to km I share specifically, it's about 80% of the total project revenues, both both the joint venture as well as the facilities that we own 100%.
The remaining nine units are on the island and we are expected to place three more in service. This year three more in service this year with the remaining six coming online next year.
The first half a year.
We also placed Gulf Coast Expresser Gtx and service in September . This project was a few days early it's full we need and other one the market needs another one and.
And that brings me to our two Bcf a day Permian Highway pipeline project.
That project is progressing well, we have about 85% of the right of way acquired.
And currently expect that we're going to timely acquire the easements, we need we've also made good progress on the.
Permitting front. However, we are still obtaining some of the regulatory authorizations that we need and that has progressed a little more slowly than what we put in our plan what our plan project plan contemplated.
That means in order to do efficient construction will kick off the construction a little bit later and that means that instead of a fourth quarter 2020 and service. We currently anticipate early 2021.
Both of our Permian gas pipeline projects are fully subscribed under long term contracts that generate attractive returns and both projects bring us additional opportunities in our downstream pipelines as on a combined basis. They bring four Bcf a day incrementally to a system that moves about five Bcf a day to day.
Those projects, bringing opportunities for downstream expansion in fact.
Two LNG facilities, Texas Gulf Coast power, industrial and pet Chem demand and I in fact, our backlog includes about $325 million to expand and improve conductivity, along our Texas intrastate pipeline network in order to enable us to place the incremental volumes that will will be hitting our system and are now hitting our system.
Yes. We are currently we are still working with customers on a third two Bcf a day pipeline called Permian past. This is a work in progress it's not in the backlog at this point and since we reported on this on the second quarter call. The commercial activity has slowed but it continues it slowed as a result of some producer.
Retrenchment.
In their Permian activities, we believe the pipeline as needed, but it may not be needed quite as soon as we were expecting three months ago with a total of three new two Bcf a day projects coming online over the 2019 to 21 period.
Both of ours as well as a third party pipeline.
The Permian pass pipeline may not be needed in 2022.
In the meantime, we're continuing to work with customers and potential partners I believe the long term dine that debt dynamics of needed gas takeaway capacity out of the Permian basin and our extensive pipeline network in Texas put us in a good position.
These Permian projects demonstrate as taking advantage of a very positive situation for our business, there's large supply growth in Texas and large demand growth in Texas, We can bridge, the two and connect to our Premier, Texas Intrastate pipeline network on the Gulf Coast and stay entirely within the state of Texas.
We have more commercial flexibility as we pointed out at the conference 70% of natural gas demand growth between now and 2020 to 2030 is projected to be in Louisiana, and Texas and our systems are well positioned to benefit from that.
As we said last quarter, we believe we have fercs five old one GE process largely behind us with the settlements we did on TGP and LNG and several other of our systems. The outcomes were hard to predict when we were putting our budget together for 2019. So we did not project them in the 2019 budgets.
However, as we said when we announced or when we came out in January if we got these things done it would be a positive to the long term value of our networks as it would help us resolve.
Great risk.
We feel even more strongly about or I feel even more strongly about that statement sitting here today.
The last two Kinder Morgan pipelines with pending fiber one GE filings are on tomorrow Spark meeting agenda. Both of those systems are currently underrate Moratoria, which the commission has been honoring.
Again, notwithstanding the headwind to 2019, we are delighted to have the fiber one she risk largely behind us.
Finally on our backlog the backlog fell quarter to quarter and now stands at $4.1 billion. That's primarily because we placed Elba unit, one and TCX two of our largest projects in the backlog in service at the ended the quarter. We remain we will remain disciplined here we seek returns.
That are well above our cost of capital in order to deploy capital. We believe based on our historical experience and on the size of our network and the market dynamics at play, particularly in natural gas that we will continue to provide the opportunity to invest in two to 3 billion a year in attractive return expansion projects, but.
But but importantly, if we don't find that much and new opportunities. We are not going to force. It we have other opportunities to deliver value to our shareholders and we expect to maintain our discipline, we will maintain our discipline with that I'll turn it over to Kim Okay. Thanks, Dave.
I sound like a broken record, but natural gas had another outstanding quarter ends up 8% per quarter.
Natural gas demand the share secretary occurring increased by approximately core Bcf a day over 28.
In parallel then Mckay falling year address cracker driving volume increase on our pipe.
Transport volumes in our transmission pipe transmission pipe for probably refer to our large diameter pipe.
Hi, approximately 4.15 Bcf Berger our 13%.
Eric marks the seventh quarter in around which volume exceeded the comparable prior period by 10% or more.
Good work on our stuff.
Where the volume Faired.
PMC volumes were up just under 1.2 Bcf or they're.
Primarily due to increased Permian volume and California store entry Carol I PGP volumes were up 700 are very good expansion project.
And our Morgan, Louisiana volumes.
In summary, 680 million cubic meter dragged into the LNG export.
Overall for Kinder Morgan delivery for LNG exports were approximately two and a half Bcf per day, that's an increase of AMR twobcf over the third quarter of 28.
Yes, I'd volumes were up 585 million cubic feet, a day due to increased DJ production and coal to gas lifting.
Gtx started growing volumes in August went into service preparing to September so averaged about 325 million cubic feet today over the quarter.
Just reactor currently call following our two Bcf per day.
And then went volumes were up approximately 250 million cubic feet. It vary due to increased DJ and powder River basin production.
On our on the gathering asset volumes were up 12% or 350 million cubic feet or dang, primarily driven by higher volume in the Haynesville and the April part.
Overall natural gas well had volume other key basins, we are continuing to concrete Permian natural gas well had volume increased 20%.
Third quarter.
Versus the third quarter of 2018, Haynesville increased 22% Bakken increased 20% and Eagleford increased 3%.
Our product segment were also up nicely in the quarter here, we thought increase.
On our nice increases than our refined product partner.
Primarily on SFP team did a higher average tariff and lower current curve.
Clunker refined product volumes were up I, just under 1% across our pipe versus the high numbers, which were down approximately 1.3%.
Our crude and condensate business essentially flat.
Contributions from our.
Our Bakken asset.
What were offset by reduced contributions from KMCC as the as then the case all year and create volumes on campaign.
Were more than offset by lower rate.
Overall crude and condensate volumes were up about 4% in the quarter.
Terminal business was down about 1% on the quarter.
Liquids business account for about 80% or that segment.
Nice increases coming from expansion project the largest work from our baseline terminal expansion project in Edmonton.
However, these increases were more than offset by the increase lease expense that our Edmonton South terminal, which became a third party applications has the trans mountain sale and a variety.
Smaller items.
Arm.
We added about 400000 barrel for tankers.
Versus the third quarter 2018, our baseline Procter project in Canada was the largest Ferguson.
Total reasonable capacity is now over 89 million barrel.
I'd also point out that we've taken Staten Island out forever and removed barrel from all periods in our volume higher right.
Gasoline and distillate volumes, which don't have a material impact on our business given our contracts dark structure.
But do you have from and pride and good underlying fundamentals of our partner were up nicely in Houston, and the New York Harper.
Our bulk business, where got monitoring and bulk not volumes were down approximately 6% due to lower coal impact kind of volume.
Finally, RCM segment were down in the quarter, primarily due to lower commodity prices, but also due to lower crude and NGL volumes and higher power prices.
Our net realized crude off price was down $8 from 50 per barrel approximately NGL prices were down approximately $15 per barrel.
Net crude oil production was down approximately 7% primarily due to lower production across all of our field. However.
Hey, timing on the sale for the crude produced during the period you in the numbers and at Sacroc. We did have some feels like maintenance, which impacts the performance [laughter]. We adjusted for these items production was down approximately 4.5%.
We expect free cash flow from the segment that DCF plastic financing capex to be approximately 350 million for 29 team, which is approximately $30 million better than our pocket this improvement versus but it is primarily due to lower capital expenditure.
Primarily because we elected not to proceed with phase three at tall cotton as it did not meet our return requirement.
With that I'll turn it over to Dave Michael Alright, Thanks Kim.
They were declaring a dividend of 25 cents per share the same as last quarter and inline with our budget to declare $1 per share for the full year 2019.
Which is a 25% increase over that 80 cents per share that we declare for 2018.
Came eyes adjusted earnings per share in DCF per share both grew from last year's third quarter.
We generated DCF per share a 50 cents, which is two times or approximately $570 million in excess of the declared dividend.
In addition to the quarterly performance our press release provides an update to our 2019 outlook. We're now expecting to end the year with adjusted EBITDA about 3% below DC below our budget and DCF slightly below our budget.
Two discrete items that contributed to the variance were one the delay we experienced in placing our Elba Island facility in service and the 5.1 T. settlements.
The Elba delay while disappointing is largely behind US now now that we're recognizing the majority of the revenues.
For that project, just as Steve mentioned in the fiber one GE resolution while it wasn't in our budget was a positive outcome for Kinder Morgan.
So moving onto our quarterly results as you can see we are using our updated format for earnings. So we hope you find this to be an improved presentation of our financials.
I'll start with our GAAP performance, then I'll move on to our non-GAAP performance revenues were down 9% from the third quarter of 2018, but the decline in cost of sales more than offset that lower revenue amount.
Meaning gross margin actually improved from the prior period.
Some of that gross margin benefit came from non cash losses that we experienced in the third quarter of 2018, which we treat a certain items and exclude from our non-GAAP metrics.
Excluding certain items gross margin was in line period over period.
Net income available to common stockholders was down $187 million or 27% due largely to a gain on the sale of our Trans mountain pipeline, which we took during the third quarter 2018 and is also treated as a certain items.
In our materials, we call net income available to common shareholders adjusted for certain items adjusted earnings our adjusted earnings were up $39 million or 8% compared to the third quarter 2018, and adjusted earnings per share was 22 cents for the quarter up one cents or 5% from.
The prior period.
And that includes the additional shares that resulted from the conversion of our preferred equity securities to common shares in October of last year.
Moving onto our DCF performance natural gas was up $85 million or 8% for the quarter.
Greater performance versus last year across multiple asset, Texas Intrastates benefited from the Gtx commissioning and in service LNG was up driven by Permian supply growth, which more than offset the unfavorable impact that experienced from the five LNG rate case impacts.
TGP had increased contributions from multiple expansion projects placed in service coach and had increased contributions from higher volume and rate Kinder Morgan, Louisiana pipeline was up due to.
Being pass expansion.
Okay.
For our products terminals and see a two segments Kim touched on the main drivers behind our financial performance there.
Kinder Morgan, Canada was down $32 million as a result of the sale of Trans Mountain pipeline last year.
DNA expense was higher by $14 million due to higher noncash pension expenses as well as lower overhead capitalized to the product to our projects and those are partially offset mdna by lower DNA, resulting from our Trans mountain sale.
So that explains the main changes in adjusted EBITDA, which was $23 million or 1% below Q3 2018.
Moving below EBITDA interest expense was $21 million lower driven by our lower debt balance sustaining capital was $21 million lower versus Q3 2018, mainly due to the timing of pipeline integrity work, we budgeted to spend more in sustaining capital for the year. This year full year versus last year, and we're still forecast.
To do that though we are trending to come in favorable to our budget for the full year.
Preferred stock dividends were down $39 million as a result of the conversion of our mandatory convertible securities.
Last year.
Other items, our unfavorable $22 million driven by a larger cash contribution to our pension plan. This year versus last so total DCF of 1.140 billion is up $47 million or 4%.
To summarize the main drivers greater contributions from our natural gas and product segments lower preferred stock dividends.
Lower interest expense in sustaining capital.
Partially offset by lower contributions from our CFO to segment driven by lower commodity prices.
The sale Trans mountain pipeline at a higher.
Cash pension contribution.
DCF per share 50 cents.
Was up one center, 2% from last year same drivers as DCF, but that includes the impact from the incremental shares issued as a result of a preferred stock conversion.
For the full year versus our budget EBITDA dimension is expected to be 3% below on the back the drivers of that variance include lower oil and NGL prices as well as lower volumes impacting our CFO to segment. The Elba delay in the five LNG settlements, partially offset by greater contributions from LNG.
The resulting from strong Permian supply growth.
Full year DCF is expected to be slightly below budget due to the same items impacting EBITDA as well as the benefit of favorable interest expense and an add back of noncash pension expenses.
Moving onto the balance sheet, we ended the quarter at 4.7 times debt to EBITDA slightly higher than the 4.5 times at the beginning of the year 2019.
And we forecast in the year at with leverage of 4.6 time, which is the same year end level, we announced last quarter.
Adjusted net debt ended the quarter at 35.2 billion up about $380 million from last quarter and an increase of 1.073 billion from year end 2018.
To reconcile the change in the quarter, we generated DCF of 1.14 billion.
We spent about 700 million on growth capital and contributions to our joint ventures.
We paid out 570 million of dividends and we had a working capital use of approximately $250 million, mainly interest expense payments in the quarter. So that gets you to close to the $380 million increase in debt for the quarter for the full year.
We generated DCF of 3.639 billion, we spent 2.2 billion on growth capital and joint venture contributions.
Eight up dividends of 1.59 billion.
We paid taxes on the Trans mountain sale of 340 million and we had a working capital use of about $550 million largely interest interest payments also being the largest used and that gets you to the main pieces of the 1.073 billion increase in adjusted net debt for the year.
Now I'll turn it back to Steve, Okay, and we're going to update you on km mill.
Progress on the transaction as well as the financial results stacks. Thanks, Steve before a few brief comments on the numbers I'll update you on where we stand on the pending so it came out the pembina consistent with previous comments, we still expect the deal will close either late in the current quarter or in the first quarter of next year. At this point, we have received early termination of the U.S. huh.
Scott Rodino review period, which is a condition to close the remaining conditions to close include K ml shareholder and related cord approvals and other regulatory approvals, including approval by the Canadian competition Bureau, which we expect will be the longest lead item.
With respect to shareholder approval, the common and preferred shareholder meetings are scheduled for December 10th.
As a reminder, while there will be a vote or the preferred shareholders on our proposal to exchange K ml preferred for Pembina preferred as part of the transaction closing of the transaction itself is not dependent upon that vote or any approval of the preferred for shareholders.
With respect to approval by the Canadian competition Bureau, we are proactively engage with terminal and the competition Bureau to respond to request for information in order to facilitate girls review.
Now moving toward the results today. The came on board declared a dividend from the third quarter 0.16 to five per stricken voting share 65 cents annualize, which is consistent with previous guidance earnings per restricted voting share from continuing operations for the third quarter or eight cents and that is derived from approximately 16.6 million of income from continuing operations, which is.
The same as net income income from continuing operations is down approximately 5.6 million versus the same quarter in 2018 looking at the largest drivers of that variance revenue increased across most of camels assets and was led by the contribution from the baseline tank and terminal assets being fully online and an increase in cogen from Cogen due to.
The indexing of rates in the timing of incremental volumes in 2019. However, the increase in revenue was more than offset by higher DNA, mostly associated with the cost of selling came out and lower interest income due to the non recurrence of income on the Trans Mountain sale proceeds received in 2018, there were several other smaller moving pieces, including slightly higher.
Hello, Nm, and DNA and lower income tax expense total DCF from continuing operations for the quarter is 47.8 million, which is up approximately 8.8 million from the comparable period in 2018 beyond the items I've already mentioned cash taxes were favorable by 9.8 million that 9.8 million is driven by a refund risk.
We've been a third quarter of 14.7, representing the overpayment of cash taxes for 2018 netted against 5 million of installments made for 2019 looking forward as we said in the release, we expect our results for the year to be consistent with our budget of approximately 213 million EBITDA and approximately 109 million in DCF finally, as we said in our real.
Please visit the transaction and the lead up to it following the announcement of our normal course issuer bid buyback, we would not utilized any of that program at this point and with that ill turn it back Steve Okay. We're ready to answer your questions on both entities and as we've been doing here recently, we're going to ask that you limit your questions per person.
Into one question with a follow up but if you got additional unanswered questions get back into queue, and we will get back to you.
All right Britney if you'd open it up.
We will now begin our question and answer session. If you would like to ask your question. Please press Star then one from your phone on mute your line in record your name clearly one property.
Like to withdraw your question. Please press star team and our first question comes from Colton Bean.
Taken hold and company. Your line is now open.
Good afternoon.
Good afternoon. So just given the backlog that you all have in place today is there a scenario where operating cash flow is sufficient to fund both the dividend and the capital program in 2020 I.
I guess as a follow on when would you expect to make decisions regarding proceeds from coaching and PBL shares.
Okay. So we.
We havent started our 20.
20 budget process, yet we were taking that up here.
Right quick.
But we so we won't know the final answer that question I mean, this year with the dividend at the level that it was.
We had what we call a self funding gap of was projected to be about $100 million, which means we've almost entirely funded.
Our.
Our capital program in our JV contributions of around 2.7 $2.8 billion and the dividend out of the cash that we generate obviously with Devon going up next year.
That could be a little tighter, but until we know exactly what we've got in the capital plan for next year. We don't have a specific answer I think it's it's it's safe to say, we will be largely self funding our capex along with paying the increased dividend next year.
On the timing so.
Well have the.
The kocian well when the kocian proceeds come admission one of US should have probably mentioned as we said when we announce the transaction. The kocian proceeds by themselves would take our projected net debt to EBITDA to 4.4 times versus the 4.6 that we.
Talked about earlier, we'd expect that again as I said, we would hold that on the balance sheet. If you will and wait for the right opportunity and when it comes to the right opportunity.
We'll be looking at capital projects that we have.
Very attractive turns at returns at well above our cost of capital.
Or at share repurchases share repurchases, we will do opportunistically and not programmatically and so.
We're not talking about specific prices at which we would transact or anything like that but we'll have.
The proceeds available when it comes to the Pembina shares in particular of course, we would expect to convert those to cash at some point, we represent the proceeds represent less than 5% of.
Pembinas.
Trading outstanding stock. So we think that we can convert those shares into cash in a very non disruptive.
Way and we don't have to be in a hurry to do so.
And then we'll to deploy the capital in a share repurchases as I said opportunistically.
Got it that's helpful. And then just a quick follow on so understanding that the weather impacts from field maintenance in the quarter for the all our business should we expect any impact to base decline rates from the reductions in the capital program.
I think that at current we believe that at current prices. If you think about the smaller fields goldsmith.
A cast and tall cotton.
We would probably we're going to be managing those for free cash flow not expecting to invest considerable capital in them that can change if oil prices change.
But for right now that would be our plan on those and we will focus our attention on.
On Sacroc and Yates.
And that's where most of the oil is anyway, having most of the production.
Is in any case.
And so I would expect to see declines and the smaller field and then we'll see what projects are available to us at the return thresholds that we have set in the two larger field.
Our next question comes from she newer Gershuni from you. Yes. Your line is now open.
Hi, good afternoon, everyone.
Good afternoon.
Hi, Steve you would previously guided to 2.32 to 3 billion dollars' worth of Capex is kind of your the run rate number that you've sort of been talking about and I realize you're not through your capital program at this point or the devaluation of the capital program for 2020 at this point, but I was wondering if you can talk about what drew.
Drivers would bring you to the lower end versus the upper end.
As you contemplate the backlog you mentioned discipline earlier.
The slowing of commercial discussions around the third Permian pipeline potentially bring capex for the lower end of just wondering if you can give us sort of a little bit of color of what how.
Oh things will move around between.
The upper and lower bound of your your Capex number you previously Kevin Yes in the short answer your question Permian passes that yeah that would bring it toward the lower end until it ultimately get sanctioned so if you think about where where these projects are likely to come from clearly we've got some and terminals refined products, but the lions share of the project opportunities as we look down the road.
Things that arent into backlog right now are in the natural gas sector and they relate to additional permitting take away capacity as well as feeding LNG facilities in the second wave of LNG and as I said, mostly concentrated on that.
In.
Texas and Louisiana.
And so it's the timing of those project sanctions are sanctioning bodies that will drive our capital our backlog and our capital budgets in the years ahead.
Great and any quick clarification, you just mentioned that on a pro forma basis. It. This is sort of colins question before the on a pro forma basis for the CMO coaching sale.
That you would technically in the year at 4.4 times versus 4.6 did not include the sale of the Pembina shares is not just on the cash that's coming in and the 4.4 within theory be lower if you sold those shares as well too yeah. That's just on the kocian cash proceeds and it does.
Assume an end of the year close which is not a certainty as we've said we may be able to close as soon as the end of.
This quarter.
Or early 2020, but if you make that if you make that assumption of a close in this year and the use of the and the.
The receipt of the 1.5 or 6 billion of US coaching proceeds alone, that's where you get that number.
And our next question comes from Jeremy Tonet from JP Morgan. Your line is now open.
Hi, good afternoon.
Just wanted to pick up on the Q2 side that was a bit below our estimates there was just wondering how much capex is it take take to keep the production flat there.
For the 4.5% decline rate should we expect that to continue any thoughts you could provide there.
Yes so.
We don't.
We don't invest in our CEO to business based on what investment level would be required to keep production flat or to grow production in aggregate way. We invested capital is if the capital that we're investing in the oil that we expect to free up and sell as a result of it if that produces a return that clears our return.
Turn criteria, then we invest and so you know we've had times when sacroc spin up year over year, we've had time certainly when it's been down.
But we continue to find things to do at Sacroc. It's just that we don't invest Swiss specifically to maintain production as I said earlier I mean, I think you can expect that without capital investment in the smaller fields, you would tend to see a decline there and as I've said, we're going to maintain.
Capital discipline, there and we will continue to look for the opportunities that make sense at Sacroc and days.
Got it and then going over to the M&A opportunities you, saying it seems like there was indications of interest in some of your asset that North of 13 times was just wondering if you could provide anymore color. There is this kind of when the FERC regulated assets like citrus is on GMP or kind of what's more the thought process. There if you can monetize that something.
Better than what you trade that is there anything holding you back from doing that.
Well.
Jeremy we're not going to comment on specific.
Expressions of interest that we bad I made that point simply to again drive home as I think the coaching transaction does also that.
There's interest in individual assets at multiples of EBITDA, well above where came as a whole is trade.
And our next question comes from Spiro Dounis from Credit Suisse. Your line is now open.
Hi, good afternoon.
Maybe just following up on the M&A question won't ask you to maybe point out specific assets, but just maybe help us think about where the interest is coming from obviously, we've seen interest from private equity in the space, but now also some strategic deals are getting done. So just curious if you think about the who the potential buyers would be can you describe them and is there any room or interest for you to maybe sell a poor.
I should have an asset while retaining some of the operational control that.
We would certainly entertain showing a portion of that asset and maintaining operational control. That's a good fit with what I believe the Steven the team are doing to continue to position today in my is really good operators.
In every respect from safety to efficiency.
And so thats certainly something wintertime, we're not going to comment further.
Arm to grow the interest is coming from but I think all of you know that there is a lot of money out there.
Looking for a home and midstream area of energy section.
Yes.
Understood.
And then just on Permian pass appreciate the color around the customer side, just just curious if you're seeing JV partners start to show up or express any levels of interest early on in just a quick tag along I'm Permian Highway and sorry, if I missed it but is there an incremental cost associated with a delay and is that can be spread across the partners equally.
Yeah I'll take the last one first yeah modestly I would say and yes, it's a it's borne by the project.
All of its investors.
Permian pass Theres definitely interest from people.
Shippers as well as partners.
Or prospective partners I would I was trying to get across there is that particularly.
It's no secret as you saw how people came out and laid out their capital plans into producing sector following or as part of second quarter earnings.
The growth is still there, it's maybe not growing on the same slow and so that naturally implies I think.
Still a need both still a need for the pipeline project, but perhaps a a later in service state Anna later F. I'd.
Our next question comes from keep Stanley from Wolfe Research. Your line is now okay.
Hi, good afternoon.
Just curious just updated views on on acquisitions as part of the growth strategy. Just you can have a lot more financial flexibility next year, a equity currencies, maybe a little better on relative terms, just just updated thoughts there.
It's a it's really no update in the sense that we are always looking to see what makes sense, what makes sense, particularly in our sector.
And but those things are very hard to project very hard to predict and call your shots on but we continue to leave the offense on the field.
Okay, and sorry, just one follow up on that on the asset sale side as well.
How how would you assess asset sales from here, it's a little different this time around with leverage are ready at your target.
Maybe not a clear uses of sales proceeds besides buybacks. So just how would you assess asset sales given where you are financially now I mean, I think you'd look at we would look at at the same way we look at any any other sales proceeds. The first use of those proceeds would be to make sure that we maintain leverage target that weve achieved and so.
That's first and then from there.
It's a again.
Probably initially sits on the balance sheet, and then opportunistically share repurchases or to fund our capital program. It's the same kinda order of operations that we've talked about Ah on Cam L. proceeds on other proceeds.
And our next question comes from Tristan Richardson from Suntrust. Your line is now open.
Good afternoon. Appreciate all your comments on the stringent project approval criteria and returning cash to shareholders that when you look at 2020, marking the end of your multiyear outlook period.
Do you plan on outlining a multiyear plan similar in in a similar way or do you think about this kind of on an annual basis now.
I think well first of all like if you're asking specifically about the dividend that's a board decision.
And we will be evaluating that as we've said for a I think.
The right long term assumption is to assume a dividend that grows in line or more in line with the growth in the underlying business.
But I wouldn't expect a a multiyear program.
I think we've been very clear when we gave the three year plan and we've achieved all those objectives.
Probably.
And after we.
Payout the dollar to quarter texture during the year. The Gord will look at what the opportunities are for the future, but I think Steve is absolutely right. We'll look at this year to here and not shut out a multiyear plan, but the principles will be multiyear which has a strong balance sheet.
We estimate at attractive returning projects are returning value to shareholders through share repurchases or dividends those principles will and having a well covered dividend those principles Walker exactly right.
Very helpful. Thank you and then just one quick follow up on on P.H.P.
Talked about being most of the way there on regulatory and and right away permitting et cetera.
The sort of the largest pinch points or the the areas of the regulatory process that brought.
Ross the delays.
Do you see does this sort of.
In the rearview mirror now in this last stretch such that.
Gave you that comfort to talk about the early 2021 date.
Yeah. So a good point, we've made a lot of progress lately in getting permits as well as getting our right of way Dawn and where we've had two to proceed to eminent domain, it's something we avoid using but as well as the second quarter Court decision that we got that cleared the way for the project to proceed in large part.
Art.
We still have some more work to do we don't see anything in that work that we have to do on the permitting front that is in any way insurmountable. In fact, we think we've already done that work it needs to be processed now and a in ruled upon but Oh, we made a plant we made our plans assuming that that.
Process would conclude and this was our projection not an agencies projection, but we assume things would would conclude earlier and it's taking a little longer but I think being thoroughly reviewed thoroughly down.
And as a reminder, if he would like to ask a question. Please press Star then one our next question comes from <unk> pardon from Bank of America Securities. Your line is now open.
Good afternoon, Thanks for taking my question.
First one on me.
Just in terms of thinking about your credit ratings and the leverage target given that you have a clear line of sight here into the asset sale proceeds and.
Growing free cash flow do you see.
Any potential to lawyer leverage target and maybe in free hi, Triple B rating and maybe have a higher eyes accretion.
And how your conversations have been with rating agencies industry Guard.
And then I've a follow up.
Okay.
Well I'll start and then asked David or Anthony to fill or Kim to fill in but I think we feel good being a triple b flat.
And getting the upgrade from from Triple B minus we do evaluate whether it makes sense to too.
Prove on that target.
And and Ah data valuation has so far shown that we really get very very little cost of capital benefit and in fact, the extra de leveraging that we would do a wood horse stall opportunities to create value shareholder value to an extent that we don't think is want.
David.
Well just said that in terms of our I wouldn't add anything more to that part of your your answer to what Steve just.
Provided but I would say on in terms of recent rating agency conversations that we've had we just got upgraded by all three just within the last year. They went through a thorough analysis on upgrading us it's very difficult to get upgraded so they take a very cautious approach.
So I think we're in real good standing with them with our current leverage target and our current leverage.
Gotcha.
Rich a in your introductory comments you talked about the environmental positives.
Your business, especially on the natural gas side, but one of your yeah. I think what's missing was your CEO to business and the related you are although a smaller scale versus the old or business. Given that you were trapping carbon dioxide underground and the process do you think your operation.
While the five for U.S.G. eligibility and any incremental.
Incentives and.
We have seen one of your competitors in the business talk about Atlanta. So just wanted to get some of your thoughts there.
Yeah.
So.
You're right, we we capture Seo too and we put it in the ground and that stays there and we get valuable oil out as a consequence of that that has been primarily geologically sourced seo to really exclusively geologically source Seo too there are opportunities to potentially capture.
Manmade Seo too and there are some tax credits to help support that activity. So far in any sizable way we have not found it to be economic and have not found the sources of available.
Seo too from say large ethanol plants for example to be have sufficient.
To be numerous enough of a high enough quantity for us to take full advantage to take advantage that opportunity, but if you think about the long term anything that at some point Seo to sequestration capacity is going to be valuable in the because of the carbon tax or something else certainly it's something that we know how to do.
And our next question comes from Kristina Chow from Barclays. Your line is that okay.
Hi, good morning, everyone.
So I wanted to start on.
I guess follow up on capital.
Okay. So when we think about what you could potentially do stock buybacks should we assume that leverage theme that you're targeting four and a half time. So you know like for next year and it looks like maybe your Capex shakes out like you are not that falls below that that we should think that you would likely.
Buyback stock and what are the puts and takes to lie you would maybe mining peak leverageable are higher than that you know do you think higher with potential M&A opportunity.
We don't anticipate in increasing leverage in order to repurchase shares.
When that's when it's above our target okay. So we expect to maintain our target.
As we as we use our share repurchase program.
And.
As I said before we the share repurchases would come Opportunistically and you know as a set on the km Cam L. proceeds we'd likely initially let those it'll be on the balance sheet and then we'll look for the right opportunities to use it but we're not telegraphing specific metrics or pricing now that we're looking for.
Okay and would you potentially.
Take your leverage higher if you've targeted M&A opportunity in the meeting agencies were okay with it.
[laughter] if the rating agencies were okay with it yeah. That's a that's an ETF, but you know I think the way it and this is purely theoretical okay, but the way that would work is if you saw yourself, having a very clear path back.
To these metrics at a rapid one and one that you could confidently execute on and I think it would only be in those circumstances. So let me just say that obviously it took us a good amount of time and a lot of work to get where we are now and.
We would certainly that's a fundamental part of our philosophy is to maintain strong balance sheet and we can speculate all you want about what might happen in M&A, but let me just say that borders very committed to maintaining a strong balance sheet and that will certainly.
The a really big factor in any decision, we make and amplify what Steve said you know again as we've said so many times over the last three years. If there are four things we can do at the money and all of them benefit our shareholders.
I think we've shown by increasing the dividend, we're returning real value to the shareholders.
If you take a dollar to quarter dividend or the stock price. It's a setting the bar 20 is oil of return. If you look one year out Oh, we have the ability to Steve says substantially fund our own capital projects.
Have the ability to maintain a strong balance sheet and we have the ability at some point opportunistically to buy back shares so.
I can assure you that aboard is going to make decisions that are the best interest in the shareholders here.
We have a large amount of insider ownership and onboard so we're certainly going look up or what's best for our shareholders.
And there are no further questions at this time, okay. Thank you very much of a good evening [noise].
Thank you for your participation in today's conference all participants may disconnect.
Yes.