Q3 2019 Earnings Call
At this time I would like to welcome everyone to the Keegan Corporation third quarter 2019 results conference call.
All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session.
If he would like to ask the question. During this time simply press Star then the number one on your telephone keypad.
We'd like to withdraw your question. Please press the pound Keith Thank you.
This live on C. do Nick you May begin your conference.
Thank you Simon and good morning, It's my pleasure to welcome you all to curious third quarter conference call for 29 team joining me today, It's David Smith, our president and CEO , even Craker senior Vice President and CFO , Brad Lock Senior Vice President and COO, and Dean Setoguchi Senior Vice President and.
Chief commercial officer.
As we released our financial results yesterday, the focus of our call. This morning will be on our business strategy operations business development opportunities and financing.
After our prepared remarks, well open the call to questions.
We'd like to remind listeners that some other comments and answers that we will provide two they speak for future events.
These forward looking statements are given as of today's date and reflect events score outcomes that management currently expects.
In addition, we're also going to refer to some non-GAAP financial measures.
For additional information on non-GAAP measures and forward looking statements.
For two cares public filings available on SEDAR and on our website with that I'll turn it over to David.
Thank you live on and good morning, everyone.
Geared delivered impressive financial results again in the third quarter of 2019 with each key financial metric well above our results from the same period last year.
These results reflect the value of our integrated business and new capital projects completed over the last 12 months.
Adjusted EBITDA increased 68% to a record $269 million for the quarter.
I'll distributable cash flow per share increased 39% to 85 cents per share and net earnings per share increased by more than four times to 71 cents per share.
We are on track to deliver another year of record financial performance as our midstream services remain in high demand and our capital program is on schedule and on budget.
Care currently has a significant capital program underway that extends secured grows out to 2022.
As you progress our growth program, we expect to invest between 800 and $900 million in 2019 and between 700 and $800 million in 2020, excluding acquisitions.
A significant portion of the investment in 2020 relates to the pipestone gas plant and the caps liquid pipeline system.
With a strong balance sheet and payout ratio of 67% year to date.
Dear expects to fund its current growth capital programs without issuing common equity aside from the existing drip program.
Chira has a history of disciplined capital allocation and investment decision, making we invest in projects that generate strong rates of return on our invested capital while maintaining a healthy balance sheet.
We remain committed to the strategy as we continue to grow responsibly and generate long term value for shareholders.
I'll now turn it over to Brad to discuss our operations.
Thank you David <unk>.
During the third quarter, our facilities operated well and we continue to advance our capital program safely.
We completed several capital projects, including the Simon acid gas injection system in July 2nd water disposal, well, what a whopping gas plant in August followed by the Simon at gas plant expansion and the North walk the pipeline system in September .
With the North walk the pipeline system operating a second producer is now delivering significant volumes to the walking to gas plant.
We completed turnarounds at Arbor, Cynthia ever seen this gas plants in the quarter and at October we began a six week planned maintenance outage Judy.
This maintenance work is progressing exactly as planned and we expect to be fully operational by mid November .
As a reminder, this maintenance has allowed us to defer our next fall turnaround of the up until 2021.
In October we shutdown one of our Fractionators at the care best facility for some unplanned maintenance.
Our operations and commercial teams worked closely together to ensure that there was no impact to our customers. The repairs are progressing well and we expect to be fully operational again by mid November .
We do not expect this outage to have a material impact on our fourth quarter results.
Even with all of our activity to date here is on track to deliver yet another year of strong safety performance.
To date, we've invested over 700 million in capital projects, completing four gas plant turnarounds and conducted repairs at both Kfs Andy.
Without a significant recordable safety incident.
Akira, we recognize that providing a safe and healthy work environment is an integral part of being a responsible employer operator and the good corporate citizen.
I'll now pass it over to Dean to talk about our business development opportunities.
Thanks, Brad.
As David mentioned Euro has a significant capital program underway that extends are secured growth into 2022.
A significant portion of this investment focus is on extending or infrastructure in the northwestern Alberta.
To support developments in the liquids rich Montney and Duvernay.
Well pretty phase one was commissioned in the second quarter. This year, providing 150 million cubic feet per day sour gas processing capacity.
25000 barrels per day of condensate handling capacity.
In the third quarter, we've completed the Simon that gas plant expansion and the north Wapiti pipeline system.
We also advanced the second phase of the walk the gas plant and Pipestone gas plant.
Once the Pipestone gas plant is completed in early 2021, [laughter] care will be one of the largest processing and condensate handling companies in this region.
And the first half for 2022, we plan to connector gas plants as well as other third party facilities to cap.
Our NGL and condensate pipeline system.
Caps enhances the integration of our business like conducting gathering processing assets in northwestern Alberta tour liquids infrastructure assets and Fort Saskatchewan.
We're stronger integration, we can provide services more competitively to attract additional volumes to our gas plants fractionators storage caverns and condensate system.
Our cap team has been diligently focused on land acquisitions and environmental consultations.
As a result, we're on track to submit our regulatory application before the ended the year.
We're committed to continuous improvement of our business to competitively positioned cure for both an extended low commodity price environment and a recovery.
As a result, we are reviewing various alternatives, so optimizer gathering processing operations.
Which may include consolidating throughput volumes at certain facilities.
Our goal is to improve the utilization and profitability these facilities, leading to lower per unit operating costs.
Higher netbacks were producers and higher margins for cure.
With that I'll turn it over to Stephen to talk about our financial position strategy.
Thanks Deane.
For the first time on a trailing 12 month basis, Chira generated realized margin over $1 billion.
This realized margin reflects continued strong growth in our fee for service realized margin, which grew 18% in the third quarter of 2019 compared to the third quarter of 2018.
In addition, our marketing business continues to be strong contributor to our cash flow generating record realized margin this past quarter.
Partly as a result of the strong market fundamentals underpinning the isooctane business.
Because we expect these attractive conditions for isooctane to continue we are increasing our 2019 marketing guidance to between 320 and 350 million for realized margin compared to our previous estimate of 280 $320 million.
Our new guidance reflects our belief the f. will be fully operational by mid November .
As 2020 approaches we expect to see it continued ramp up of volumes and associated cash flows from our infrastructure investments in the condensate rich Montney area.
In addition, distributable cash flow in 2020 will benefit from lower maintenance capital and lower cash taxes.
In 2020, we're expecting maintenance capital between 35, and 45 million, which is less than half of 2019 expected maintenance capital.
This decrease is due to less activity in 2020, as we have only two smaller gas plant turnarounds planned.
We now expect to encourage zero current income tax expenses for 2020, as approximately 1 billion of announced capital projects, primarily from the gathering and processing segment are available for use in 2019.
For 2020 in 2021, a further $775 million of announced capital projects in the gathering and processing segment are expected to be available for use.
As of September areas, we have now invested 1.5 billion of our 2.9 billion current capital program.
And we continue to expect to deliver a return on invested capital of 10% to 15% in 2022 and 2024 for the original capital program and caps respectively.
Here continues to be well positioned to fund the remaining portion of this current capital program without issuing common equity apart from the drip and premium drip program.
This is partly because our net debt to EBITDA covenant ratio was only 2.1 times at the end of September and partly because our 2020 cash flow available for reinvestment is expected to reflect the benefit of zero cash taxes and lower maintenance capital.
With that I'll turn over to David for closing remarks.
Thanks Steven.
Even with the challenges our industry is currently facing we are optimistic about the future of oil and gas development in Western Canada.
The world needs Canadian oil and gas to responsibly need growing demand and transition to cleaner sources of energy.
Canada is one of the most responsible energy producing countries in the world with significant resources that are amongst the most economically attractive developments in North America.
With care, a strong values and integrated network of midstream assets, we are well positioned to be an important part of this evolution.
I am proud to lead a team that wants to be part of this important change and is dedicated to serving our customers maintaining the highest standards of operational excellence caring for people in the planet and creating long term value for our shareholders.
Behalf of care as board of directors in management team I would like to thank our employees customers shareholders and other stakeholders for their continued support.
With that I'll turn it back to the operator. Please go ahead with questions.
Thank you at this time, ladies and gentlemen, I'd like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to can Paul's accuen a roster.
Your first question comes from the line of Matt Taylor with Tudor Pickering, Holt and company. Your line is open.
Yes, Thanks for taking my questions here, you mentioned volume loss from a customer.
Next year hitting on margin by about 10 million Bucks or so is that enough to shut down the plant effected and consolidate those volumes to to offset some of that impact just curious to know the size of opportunities you're seeing from opex savings by shutting down more plants.
How about the spreads so I think I mean without specific.
Customer that itself doesn't drive a a shutdown of our facility. If there is sufficient volumes to make the the facility of Brasow continue to run I think what we're trying to do is create an overall strategy to say how do we do you have the right amount of processing capacity available for the business that's out there today.
That provides operating cost savings to our producer customers and enhance the revenues for key era. So that work is still underway, but all of these every.
Every plant is kind of under review from that context.
Keep right can you provide some context of.
Got it type quantity of Opex savings, you're seeing or is it still too early.
I would suggest it's up it's certainly too early to tell.
I think you know again, our goal is really to to try to create a more efficient processing network reflective of the volumes that we see over the next little while but also position ourselves for the future. When we anticipate that drilling activity will resume and barge will come back. So there's a balance there that we're trying to achieve.
Great and then moving over to marketing it looks like you guys restoring below cost butane to be consumed in 2020 do you do you are there enough space there to store the feedstock to use and stronger and stronger summer demand months, effectively making marketing margins better for longer.
Hey, Matt is seeing Setoguchi.
Yes, the great thing about our assets is that we have a lot of storage capacity at our Kfs site. So while our facilities down we're we're storing all that butane and into our caverns into one of recovering. So we have a lot of space to accommodate that and yes, we will be using that butane feedstock and.
2020.
Yes, so effectively after even after the contract resets in March.
Yes, we'll have some some of residual inventory that will last beyond March for sure.
And one last one if I may just can you provide more more color on what what happened there with the frac, there and what needs to happen to bring it back online for butane contract discussions there in Q1, I know you mentioned customers were impacted but with the financial impact the Kara.
So so we just how that we had an operating challenge with with one of our fractionation trains that we had to take down.
By utilizing our network of infrastructure and our.
Our commercial teams, we were able to really mitigate the impact to all of our customers and the of the financial impact two key era will be minimal and 2019.
So again, it's one of the great things about our assets values that we have to two fractionators on site. So.
The other fractionators running full out and very well and so we're continuing to fractionator to NGL mix and again. They then the NGL mix that is coming into.
Fourth this catch one that's beyond or one frac capacity, we're putting into storage and we'll we'll fracking a litter date when it's back on.
Great. That's helpful. Thanks, guys.
Your next question comes from the line of Rob Hope with Scotiabank. Your line is open.
Good morning, everyone.
The first question, it's just it would seem to the market's concerned about Kara acquiring some high multiple assets that could be in the market or are in the market.
Generally speaking I am without I guess talking specifically about opportunities how would you look at M&A and correct me if I'm wrong historically, you've really focused on assets with discounted valuations could you go up the valuation spectrum.
Hi, Rob as Steve said, thanks for that question.
You know it's.
We've had feedback, particularly in the last couple of years from investors' concern vet.
You know that we might make an inappropriate investment I guess I would point to all the investments we havent made.
I think as evidence of the discipline that we continue to exercise when we look at things.
I think that we're very cognizant of.
Of making sure that we keep a strong balance sheet and we're very cognizant of making sure that the investments we make make sense from both the strategic point of view and and a return on capital point of view.
We're always looking at.
Organic growth opportunities and M&A opportunities.
And we always look at it through that disciplined lands.
Im not sure there's much more I can say.
Right. Thank you.
And then how are we thinking about funding you seem very comfortably below the three times leverage that you've targeted in the past absent new projects or M&A. When could you look to shut off the drip or could you even sell some noncore, but high value assets that could accelerate some de leveraged.
Yes, Hi, Rob Steven here.
Again, as David pointed out we do value, having a strong balance sheet. The credit rating is also a credit ratings are also very important to us as well and again as you know triple B made by both DBRS and S&P and so again as we look at our capital program or opportunities that may come in front of.
Yes, we just want to continue to.
To make sure that we are financing things appropriately and at this current stage of the capital program.
2.9 billion dollar capital program and almost all just little bit over half spend we do view the drip as a as a cost efficient tool due to put the right amount of equity into that capital program that said, we are cogs in that the market would like to to see that a drip program turned off or in general amongst peers.
And so when we when we do see we're in a in a position where we're free cash flow is the is is sufficient to handle our capital program.
Happy to.
To consider turning that off and again I think the important thing is it into the day, we want to continue to grow shareholder value and and so again, we're always resident about making commitments.
Ahead of time.
But that being said, we understand a desire to live within cash flow in that respect.
Terms of the leverage to the it's important to note that that 2.1 that we show in the balance sheet that reflects the benefit of the hybrid debt deal that we did in June as you know thats a subordinated.
Piece of debt and so that comes into the ratios and and.
Obviously makes that lower for covenant test purposes, et cetera that focus on senior debt.
I'd just remind.
Yourself and others that credit rating point of view, they do look at total debt as a whole as well and so we're just costly just continuing to to manage the balance sheet appropriately and get that REIT equity treatment as well, which is one of the reasons we looked at the hybrid.
For an appropriate.
Financing tool.
I appreciate the color. Thank you.
Your next question comes from the line of Linda Ezergailis with TD Securities. Your line is open.
Thank you.
I'm wondering if you could maybe help us understand a little bit better how you're approaching a assessing these old alternatives when in terms of facility in volumes consolidation at what point do.
Do you expect you'll be in a position to make a decision and will it be evolving over time or do you think it'll be one big adjustment and can you comment on how commercially flexible you are my assumption would be that you are or would you require some sort of amendments your commercial.
Agreements with your customers to affect all the changes that you are considering.
Hi, Linda this abroad, so I.
I think.
The changes that we're looking at our think are going to be.
Strategically placed over the course of I would suggest the next nine to 12 months most likely.
And they've actually started is.
As recently as Q4.
We have we've looked at a at consolidating our gilbey gas plant into rimbey and have effectively been able to do that here in the fourth quarter. So so that work is still underway and there's still activities happening to make this happened effectively but we actually see a scenario where were you will be will be the volumes from gilbey, we'll all be effectively consolidated into rim.
Now what that does is we have to rework some of the agreements with the producers that are going through gilbey today and make sure that their agreements cover going to remedy, but if they see value in in what we're trying to achieve there there are they're all.
Positive about what we're trying to accomplish so we would see small activities like dot continuing to evolve over the next a little while.
Dan Linda it's a dean.
We really like the situation and if use gilbey as an example, because the situation where we believe that we can offer.
Better value so better Netbacks were producer out of this and Carol will benefit as well they'll take a little bit of time to realize those benefits over the next year.
But certainly long term, we think it's valuable the other thing is is that if you look at Remy. It's one of our most efficient facilities and it's the start of our NGL value chain because over the liquids from that facility and we have we have a fuel frac. There are all pipeline connected into our mten at Fort Saskatchewan assets. So again Thats just a great example of low.
The benefits of this consolidation.
Program that we're looking at.
That's helpful context, maybe just I'm.
Looking a little bit more bigger picture at your opportunities.
Can you comment beyond acquisitions as to where you're seeing most opportunities.
In in the energy value chain, and specifically with the closure of the film Philadelphia Energy solutions refinery in late June has the business case improved.
To potentially expand.
Or are there other factors that's still make you pause on that front.
Overall, we still see.
There are opportunities associated with their caps pipeline.
So again that could lead to more frac in storage investment in the future as we bring more liquids into fourth this gets win.
We were looking at the possibilities of of.
Maybe gathering and connecting to a pipeline in DC and collecting some of the volumes and and DC in into captain into into fourth this Kathryn.
You know with respect specifically to F.
We.
The idea of a lift when is is intriguing and again, it's something that is a project that week. We continue to consider whether reasons is is if you look at OCC teens going forward.
The gasoline blends are moving to a more environmentally friendly product, which is higher octane and lower RVP and thats advantage that are isooctane has over alkyl it and so what we have as a premium product that nobody else mix and and again with the brownfield site that we have we can add capacity more.
Cost effectively been than anybody else.
Okay, and when do you think you might be in a position to make a decision on 28, yes.
So I think that as we've said before part of the challenges ours that we would want to make sure that we had enough of a.
Of contractual underpinning with a third party to make sure that we're not taking.
Works.
Expose yourself to more basis risk that we'd want to and that even though it's very profitable business.
Okay. That's helpful and maybe as we just kind of look at other opportunistic.
Infrastructure in Western Canada related to addressing some of the bottlenecks and issues. There have you assessed the merits of potentially getting involved in it.
Is that something that them not actively being looked at at this point.
Linda we look at a lot of different projects in the deal are you is something that we've we've absolutely looked at.
I think it's one of those investments where if you believe that another pipeline will never get built again, it makes a ton of sense.
Do you believe that you're going to get capacity pipeline capacity in Alberta, then it's a much more difficult investment.
Decision.
Specially to get them to underpin it.
Because it's going to take you two to three years to actually.
Engineered and build it and then you need another 10 or 15 year window to get to return on your investment.
So it's it's a tough investment to.
The to move forward and I'm, not saying that it won't happen, but we've we've looked at it and that's sort of what we concluded.
Thank you I'll jump back into queue.
It's the lender as Dave here I might just add that I think you what you're hearing from Dean is a bit of a theme that we have a lot of opportunities in front of us that work that we're evaluating but I think particularly in the current environment of uncertainty in our industry. We're we're we're not going to do anything on spec we need to make sure that we've got the.
The kinds of underpinnings from customers that make those investments make sense.
Thank you.
Your next question comes from the line of Patrick Kenny with National Bank Financial Your line is open.
Hi, Good morning, guys looks like what Buddy phase one made a strong contribution out of the gate. Just wondering if we can get an update on drilling activity in volume growth that you're seeing around Wap 30, as it relates to phase two coming on mid next year.
Do you see phase two filling up as quickly as you had initially expected or do we need to see a bit more of a sustained recovery nickel prices before.
For the phase two can be expected to achieve the the low end of year, 10% to 15% hurdle rate.
Hey patents as Dean.
Good question.
Generally we're very confident that we'll we'll get in the range in the 20.2 timeframe as Vince.
Steven outlined earlier.
To wrap up is is a bit slower than what we originally anticipated and part of it is because one of our customers. The composition of the gas that they're they're producing from their pads is more liquids heavy.
We're seeing less gas at or gas plant.
Then than we originally expected at this point in time.
Having said that we believe that the the production will.
Will normalize and you know the composition of the gas will be.
More like to type curves that we would expect so that's part of the reason for the slower ramp up and then I think producers are just a little bit little bit more cautious in terms of how fast you wrap up but again, we we certainly feel line of sight too.
Getting within that 10% to 15% return on capital range in 2022.
Okay, great. Thanks for that.
And then on Bellatrix.
Thanks for confirming the letter of credit you had in place there but.
Just curious how should we thinking about the sustainability of the take or pay cash flows you have there as.
Volumes naturally decline at the plant.
Do you see any risk at all that your take or pay contracts may not hold up in the courts or I guess Conversely.
If and when there's a change of control do you expect you'll have to reset your fees to current market rates.
Hi, Patrick a yet Steven here known as a good questions and.
Obviously, we would like to continue to see the.
Our producer customers continue to be healthy and strong but to bellatrix was a situation that.
That has come up as well as you mentioned, we do have the L.C. in place to to protect bad debts.
Again, our current view is right now from from our understanding talking with bellatrix that they want to continue to work with us.
In a healthy manner at the at the Alder flats plant, which is their main planned with them. We do have some operations at other.
Volumes that other plants, but they are more.
So let's materially more minimal and again there is any kind of situation I think there's always risk of take or pays a potentially being removed, but the underlying desire to process volumes.
Often is still there and so lot of timed. It involves just renegotiation of current things I think this world.
We may we may look at for some of those smaller volumes, but again, our current feedback to date is that.
They want to continue working with us.
At Alder flats, and it's been it's been a good relationship between us as a which again is a testament to the value of putting.
You know effort into customer relationships and so it's been good to see.
Yeah, I mean, I would reiterate we do have a very good relationship with the with Bell Intrexon, we're working with them I think the other positive factors that.
With the compression of the of the equal Nymex.
You know basis spreads.
Being a lot tighter I just in other words April prices firming up that's certainly helps.
In terms of bellatrix his position as well so.
You know, we certainly feel pretty good about arrangement right now.
Okay. Thanks for that and then on the other side of the customer spectrum any thoughts on Encana moving to the U.S., mainly as it relates to.
The returns you expect to generate from your Pipestone plant.
Should we expect antennas throughput at the plan to come in at the lower end of expectations.
And now it's a matter of you'll back filling capacity with other producers in the area or is it still very much business as usual up there.
No Patrick we we are still getting the same sort of communication from in Canada that there are there plans haven't changed and specifically in the in the Pipestone.
That's it pipestone gas gathering facility.
Processing adjustability.
The other thing I'd mentioned is that that's a very attractive plants and part of it is because of the amount of liquids, we can handle there.
And.
There are other producers in that area that are looking for capacity as well so.
If for some reason encana were not able to.
Deliver the volume profile that the that they have laid out to us certainly other producers in areas that are looking for that capacity as well.
Okay. Thanks again.
But there guys.
Your next question comes from the line of Ben Pham with BMO. Your line is open.
Okay. Thanks, Good morning, I'm, just wanted to continue to gas volume conversation and sound sounds like qualities.
Selling out maybe a little bit.
Slower than expected, but I mean, it's it's you sell should see some some growth there and I'm wondering if you switched to maybe central Alberta first second and when you. When you can't think of the past cycles of we gas you guys done a pretty good job of working with customers reducing costs passing over and you've seen.
We counterparties can taken up by stronger Counterparties. So I guess when easy you stickier customers today and you look at next year I mean do you think this cycle.
We will be different than the last couple of that you've been through on do you have to look at.
The renegotiations or.
Steve Bankruptcies I mean it this is a cycle do you think for me but different.
Well then we.
I'm sure you fully gas markets very closely and.
You know what how do we feel very more optimistic at least the vote.
About equal gas prices, moving forward and and the basis loads that we've seen over the last 24 months hopefully that's improving going forward because that's really hurt our producers in central laboratory or southern capture area.
And.
So I think thats promising and but at the same time, we're not counting on.
Higher prices, we have to continue to position ourselves. So that we are as competitive as we possibly can be.
And yes, sometimes we've had two.
Renegotiate summer contracts in some areas usually to extend a term. So we just something out of it at the same time.
But.
Recently, even as recently as November one one of our producer customers.
Got back on over 50 million a day of gas through our system and that would be to the Brad West Pembina, nor day sort of.
Filling these so we're already seeing.
A bit of response, but we're we're cautiously optimistic about what that looks like going forward at least in 2020 longer term. We certainly are positioned for a rebound just like we saw in 2014.
Okay, Yeah bands Greg.
Ben It's Dave here I might add I think you know this this cycle. It is different in the in house sustained the the decline in drilling activity has been I mean, we're now into the 60 or.
Have you know very low commodity prices and I think.
I would look at at our track record over that five year period, and say, we've you know our volumes of hung in quite well considering the environment that were and then I think we've done we've continued to look at how we can be more efficient reduce costs enhance netbacks for our customers.
But with the sustained.
Lower drilling activity, we just think it's our responsibility to continue to look at those opportunities and that's really what's kind of brought us to this point.
The advantage of course that we have in this area as we have very.
Very efficient network, that's that's connected together.
With that with spare capacity that allows producers when will you know when we do see a recovery. It allows producers to bring their gas on quickly without a lot of capital.
Okay. That's that's great to hear.
And then maybe the next question's for Stephen.
The debt to EBITDA of 2.1 times.
Touching that really strong position I think a few quarters ago. You mentioned you you didn't want to be about three times.
So so my question is do you do you just take the 2.1 at.
Just I guess face value and you don't make adjustments to the hybrid and the marketing and you compare to the three.
In terms of how you think what the financing outlook.
Yes.
Good question, there Ben I think from our point of view whenever we talk about debt.
Ranges et cetera, it's meant to be more of a long term sustainable view.
Given the portfolio that that that's in place in you know to the extent it you put more more assets in that or fee for service and take or pay that obviously gives you the flexibility to the change your views.
My earlier comment about the 2.1 was just too just help investors.
And research asked to realize that just because you're at 2.1 on a on a ratio like that where subordinated debt brings that senior debt ratio down considerably.
Just remember there's various stakeholders, there's there's our own internal view about always having flexibility on our balance sheet to take advantage of opportunities there our credit rating agencies, who will allow them look at and bring more total debt kind of situation and so we try and factor all those kinds of different factors and when we when we look at an appropriate.
Range in terms of debt there, Okay, and then that's going to that hope that helps you don't know that sets and that's that's that's got done this Ralph one and on just a follow up on the marketing.
I know you up the guidance this year and what looks like it looks like your run rate is pricing upside next next year I'm a wait to see some color not I just I just saw something I think you're saying you know market nice octane I think because more than 50% of your cash flows in marketing.
I'm just why is that is I like your last five year average, that's driving that calculation or is that.
Is there something else that.
Yeah, Yeah, Yeah, you know I would say if you looked at our marketing over the last few years, we've had a a a you know very strong contribution from that whole butane to isooctane value chain again, we get to buy butane at market and so if the market is a is lower as we saw in.
2019 than we get to benefit which provides that diversification.
On the other side when.
Commodity prices, a little bit lower in affecting drilling we do actually see the diversification on the other side in terms of our isooctane value chain.
I would say in a I would say in the past even a more normalized levels.
Isooctane is the is the majority of the contribution so it would be it'd be fair to say that that would be higher as we went into 2019 is a fair is a fair observation.
Yes, that's just the double check that that's that's more of that data do you think more like a 209 run rate and when you have outside yet. So yes. If you look at the if you look at that base rate that we.
Put out there in terms of that 180 to 220.
Hey, it's probably a fair assumption that you know, it's close to the majority being from the isooctane business in and again when we look at the marketing business, we view it as a.
Our our whole goal is to we enjoy the cash flow from that but we also try and take very conscious steps of mitigating any risk with that and so whenever we have inventory in place we hedge it.
We're making our margin on the way through on on the NGL products on the isooctane value chain, when we see opportunities to lock in the margin than we.
Along that whole value chain, we try and lock it in and so our whole will really is to de risk that that marketing casual while receiving the benefits of that whole system.
That's very helpful. Thank you.
Your next question comes from the line of Robert Catellier with RBC capital. Your line is open.
Hey, good morning, everybody I'd like to start with the the never shut down I think the plan there is to decommission.
Can you give us some type of.
Post in terms of how much.
My cost and how long will kick in.
And whether that's in the the capital budget.
So Nevis Nevis deconstruction and am clean up will be a multiyear program. So it's going to take a period of Ah you know the process as you have to get approval from the regulator on what your deconstruction plan and then you need to implement that plan. So we're basically setting up the facility today to prepare for future D.
Construction it'll be a very targeted a low level of investment kind of over a longer period of time to get it to that final resting state. So in the end on a total capital basis, it's not really that material than the overall scheme of things.
As you look to consolidate somebody other plants do you see any opportunity for.
Others to be decommissioned or will they turn them in the compressor stations or what's the plan.
I think getting the and certainly in the in the West Central region, the interconnect of nature and the gathering system that feed into them really probably sets them up more along the line of air compressor station type scenario as opposed to a complete.
Shutdown scenario Nevis was unique in that it was standalone and didnt have connected facilities to it so when there wasn't enough gas to keep it viable you're really have no choice, but to to shut it in I think we have more flexibility in our other facilities in terms of how we can structure their operations and make them sustainable in the long term.
Okay, and just turning to the marketing specifically the butane market price was recently have shot up.
But if you look at.
You know inventory levels are very high.
North America so.
So if you could run a little bit of color what your expectations are.
For the end market in 2020.
And how much of your current requirements are hedged are already in inventory.
Robert It's Dean.
You know.
Certainly we will disclose or just how much we have an inventory, but we are inventorying all the butane supply that we're purchasing now that's not being consumed that F. While it's well it's down so again, we'll have that inventory that we'll be using throughout.
2020 is our feedstock well certainly help other balances.
Prices are are hired to a bit higher today than where they were throughout the rest of 22019.
But there's certainly still very constructive to.
That isooctane business and where they ultimately land when we head into our re contracting season, which starts in April 1st of next year.
That's an undetermined, but it's certainly within an attractive range.
Okay on the on the other side of a corner of course is the isooctane. So do you.
Although those prices look stronger or some some premium so do you think.
The risk between butane and I just walked in a relatively balanced or how do you.
I see the.
The outlook from here.
We feel you know as I said earlier, we feel pretty good about of the demand for arcane and particularly our isooctane again, it's a it's the high.
Hi, octane count and low RVP that really makes it attractive and a and again, that's the direction of where fuels are going so.
We feel pretty good about the but we're talking balances and demand is and our ability to satisfy that at a at of that are pretty good premium.
Okay, you've answered my other question, so I'll leave it there.
Ladies and gentlemen, again, if he would like to ask a question. Please press Star then number one on your telephone keypad.
Next question comes from the line of Robert Kwan with RBC capital markets. Your line is open.
Good morning.
Maybe starting on the GNP business I'm just wondering.
Ken the work that can be done to streamline things into.
Sure and other plants can that be done within the existing plant connections or if that's not the case how much capital do you do you think might be needed to interconnect and expand that you need.
Robert the surprise, so I think thats part of the valuation that's going on right now there's certainly a lot of connections that exist right now that would allow us to move volumes around but you know in order to make the most significant impact in terms of enhanced operating costs for dr. reductions improve producer Netbacks and then.
Prove returns for Kiera, there may be some capital investment and and pipelines an additional connections compression those types of things to get those wall volume's landing in the right spot.
But all at all they fit very well within our program and each individual opportunity will be justified on its own merits. So.
Got it and there was a statement kind of as you were describing this earlier in the call around your expectation for higher margins for the company. Just wondering is that on an absolute basis or is it higher margins at specific plans.
Well I think there's again, it's a it'll be unique to.
To each to each individual opportunity that we pursue ultimately.
Our goal is to not only to create efficiencies that reduce our cost to our producers that allow them to be more efficient and then potentially drill more wells behind our plants, but we also have to keep in mind that our goal is to enhance shareholder value. So ultimately, making sure that that things were doing a benefit the shareholders of key era and Adam.
Which could be improved netbacks on a per unit basis is probably what we're trying to focus on is where we're going to be looking.
Okay, and then from a care perspective, though in terms of higher margins are you talking about dollar margins or percentage margins.
Or both.
I would suggest I mean, what we're trying to get is is improved margins on a on a per unit volume perspective is what we're trying to achieve opt for both ourselves and our producer customers.
Okay.
Yes, Robert Robert It's Dave here I'll, just I'll just chime in I think.
I think the way it's too it's probably too early to provide an east any any guidance, but certainly from our expectation ideally what we'd like to do is trying to more or less maintain the volumes at a at a lower per unit cost, which would benefit the producer in terms of higher net back but also benefit us in terms of the per unit margin.
That we're running at those plants.
But it's a bit difficult to generalize because as Brad said, each each situation is going to be a little different.
Got it.
Just a.
One of its kind of Jean Pierre just value chain, but with Frac space being tied and getting tighter just wondering if you can talk about the ability or the discussions you're having to prioritize producer volumes that are going through your gas plants.
And how that might help retain those volumes.
A question.
Robert can you maybe rephrase. The question, we're not we're not sure we understand what what you're asking you I'm just wondering I just with with the Frac space being tight and if you think about PRASM river producer trying to pull volume or pulling volumes away from your plant are you having discussions with producers about prioritizing volumes that are going through.
Our gas plant as you head into the next NGL year to go through Kfs versus processing people, who want to do alkar.
Well I think a.
Our business, we try to look at it from both sides. So.
You know, where we can offer in integrated suite of services to a customer that allows them to process to our plants and move liquids through our infrastructure and provide us marketing opportunity.
Certainly a.
Our desire that we have that being said, we currently got a lot of volumes into our liquids infrastructure business that come from places outside of our plant. So I don't think we what we prefer the full value chain opportunity, where we can provide that full suite of services. We're we're open to a variety of models in terms of where those long.
James would hit our our value chain.
Yes, I would add Robert I would add I think your premise is correct that you know I mean, our ability to be able to provide the full value chain of services gives us an advantage at the gathering and processing facilities and I think certainly a the customers that we dig the gathering and processing customers that we have at our plants.
You know can expect that that will take care of their NGL volumes on our priority basis.
As you know we invested in the key link pipeline.
Three or four years ago, which allows us to more efficiently gather the liquids from those plants in that west Central Alberta area. We do have a couple of third party plants, a connected to that system, but it certainly gives a it gives the key are operated plants in that area and advantage.
And maybe just finishing with the U.S. side, and the Oklahoma liquids terminal and wild horse, but just on Oklahoma.
It sounds like in the Mdna that performance is pretty good I just wondering if you.
A few more details performance versus plan and then as you think about Wildhorse cement any change in your investment thesis or expectations, given the Oklahoma liquids terminal.
Performance.
And just what you've seen more recently with the startup us on the new pipes in the area.
Hi, Robert as Dean so with respect to royalty is.
Performed better than our expected expectations. This year, so very strongly and we have a pretty pretty good outlook for 2020 as well.
With respect to Wild horse, we still believe that that's going to be very.
Very good business and generate strong returns and our interviews haven't changed so.
It won't be up and running till late next year. So we won't have much impact on or on a results in 2020, but certainly going forward beyond that we feel pretty good about it.
Did you see the oil T performance as being transitory or or do you see that kind of carrying forward and and as you bring wildhorse and maybe makes wildhorse better.
We think it's going to be a.
A strong business I mean, you know theres a lot of things that happen.
You know from year to year that that could affect results, but generally we think that it's going to be a strong business going forward and we.
We think that also applies to the wild horse as well.
But great. Thank you know again, we were just a little bit cautious of we have a very very strong outlook for wild horse, but we we have to get it up and running and improve we can make money. There. So we have to get up running first.
Got it thanks.
There are no further questions at this time I turn the call back over to our presenters.
Thank you everyone for listening to our conference call back friends that kind of conclusion, if you're in Calgary Saint Lawrence I guess minus 14 hearing if you're in Toronto enjoy the Sunshine. Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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