Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to care first quarter 2020 results conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there would be a question and answer session.
Good question during this time.
If you press Star then one on your telephone keypad you require any further assistance. Please press star Zero I would now like to turn the conference over to your host today the fun did unique.
Director of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us for Curis first quarter conference call for 2020, our speakers today will be David Smith, Chief Executive Officer, being Setoguchi, President and Chief Commercial Officer, Steven Quaker Senior Vice President and CFO and Blacklock senior.
<unk>, President and CEO Oh.
I would like to remind listeners that some of the comments and answers that we will provide speech to future events.
Forward looking statements are given as of today's date and reflect events or outcomes that management. Currently expects. In addition, we will also refer to some non-GAAP financial measures for additional information on non-GAAP measures and forward looking statements. Please refer to our public filings available on SEDAR and.
Website with that I will turn it over to David.
Thank you live on and good morning, everyone.
Thank you for joining us today.
We hope that you and your families are staying safe and healthy during these challenging times as we navigate these extraordinary circumstances, we are reminded of the fragility of life and the importance of health safety and health safety and well being of our families co workers employees and contractors or customers at our stakeholders.
It's not just our physical health such that risk, it's our mental health as well, we're all affected and we need to take care of each other.
From a business standpoint, it is difficult to predict the full scope and extended the consequences of the cobot 19 pandemic Akira we're focusing on those things that are within our control and we have taken prudent steps to address short term challenges and enhance the long term success of the company.
Our strong financial position allows us to ensure the stability and continuity of the business. During this unprecedented economic situation.
We have a strong balance sheet to investment grade credit ratings and over $1.4 billion, an undrawn capacity on our committed credit facility.
[noise] to enhance cares competitive positioning in our gathering and processing business. We continue to advance our optimization plan in response to industry conditions.
To date, we've announced plans to suspend operations at six of our gas plants.
These have been difficult decisions as these plants have been part of the cure a family for many years.
However, these actions to optimize the portfolio will reduce costs and reduce greenhouse gas emissions enhancing netbacks for our customers and improving profitability for kiera.
To maintain our financial flexibility, we decided to defer construction of the caps pipeline system for approximately one year.
This decision has reduced our 2020 growth capital program by approximately $250 million.
In conjunction with our decision to defer caps, we suspended the dividend reinvestment program.
And finally in parallel with our gathering and processing optimization plan and our reduced capital expenditure program.
We are reviewing alternatives to further reduce our overall cost structure, including both operating costs in general and administrative expenses.
With these actions we have taken and are taking I.
I am confident that we will navigate through this challenging time and emerged stronger ready to capture opportunities as the industry recovers.
Our strong first quarter financial results are an indication of the strength of our business model, we achieved record adjusted EBITDA of $327 million and record distributable cash flow of $253 million.
Or one dollar and 16 cents per share.
Our net earnings were $86 million or 39 cents per share.
I will now I'll turn it over to Brad to discuss our operations.
Thank you David.
Kiera, we remain committed to the highest standard of health safety performance and have taken the appropriate precautions to support the wellbeing of our employees and contractors as they continue to operate or facilities reliably.
I would like to thank these front line employees for their commitment to our values and for their diligence in working safely with one another.
Overall, our employees continue to work from home, where possible and we have measures in place at our facilities to limit the potential spread of cobot 19, and contingency plans in place to ensure that we can continue to operate safely and reliably.
Over the past two months organization has risen to that challenge, but the Coke 19 pandemic has presented.
We have activated our corporate advisory team and a focused our efforts on three areas pandemic response business continuity and critical facility operations I have seen exceptional work from our people over the past weeks and I want to recognize the efforts of our information technology team, enabling a smooth transition to our stop working remotely.
Our this facility operations and maintenance teams, who have helped ensure no operational interruptions that have occurred as a result in the pandemic.
And our human resources and communications teams, who had been in the front line since day, one supporting our employees and contractors and doing it with the care and compassion. The cure is known for.
These are just a few areas where he we have excelled in our response and there are many more than I could mention.
In the first quarter of 2020, we continued to progress our capital projects that are nearing completion, and we'll begin to generate cash flow later this year.
We have completed phase two of the Wafi gas plant and expect to commission the plant in the fourth quarter, two aligned with our customers needs.
In Cushing, Oklahoma construction continues at a wild horse crude oil storage and blending terminal and we remain on track Commission this facility and the second half of the year.
With high demand for storage capacity, we look forward to bringing this terminal into service.
At our Pipestone gas plant in the liquids rich Montney area of Alberta construction is progressing very well, we now expect the plant to be operational and generating cash flows. This fall.
As a reminder, this gas plant provides old vintage pipestone developer supports over into this pipestone development, where they plan on commissioning the facility with existing regional volumes, which will grow as they develop their extensive land position.
I will now pass it over to Dean to talk about our business outlooks for 2020.
Thanks, Brett.
What I Echo Brad's comments about exceptional work of our teams over the past few weeks and in particular I'd like to highlight the work of recaps team.
In April we announced this with the support of or partners and customers.
We would be deferring the construction of caps by approximately one year.
That's a coping 19 situation continues to unfold differing caps allows us to reduce our 2020 capital program and improve our financial flexibility.
This is a testament to the team were both stakeholders involved the strong customer relationships and a strong customer support for this project.
At the end of April received our full aer regulatory approval for the entire caps pipe mainline.
And with a significant milestone we're on schedule will start up in the first half from 2023.
As David mentioned, we had a very strong start to the year with record results in several areas.
I want to speak a bit too about our expectations looking forward for the remainder of the year.
This is an unprecedented time.
And there are uncertainties that will continue to navigate our way through.
There are gathering processing business producers have announced significant reductions to the capital programs, which will result in lower volumes through cures gas plants and lower operating margin than originally expected.
We're working with their customers where appropriate.
To develop mutually beneficial solutions to help keep their volumes flowing in the short term typically in exchange for another form of value.
Or liquids infrastructure business, we expected results to be relatively resilient.
As their corn seed business is supported by long term take or pay contracts with creditworthy counterparties.
And demand for storage assets has increased as these assets provide valuable flexibility for customers.
Our fractionation utilization in revenue, maybe lower for the remainder of 2020 drilling activity is significantly reduced or substantial production is shut in.
Within or marketing segment, we still expect realized margin for 2020.
To range between 270 and 310 million.
Given the strength of a first quarter as Walter effective risk management strategy that protected the value of our inventory as commodity prices fell dramatically during the first quarter.
With that I'll turn it over to Stephen to talk about our financial results.
Thanks Deane.
Cure achieve record results in the first quarter of 2020 with adjusted EBITDA of 327 million and distributable cash flow of 253 million or $1.16 per share.
Fee for service realized margin for the quarter was slightly ahead of that in the first quarter 2019, and trailing 12 months fee for service realized margin increased slightly to 676 million.
The first quarter of 2020, the liquids infrastructure segment generated a record 102 million in operating margin due to increased demand for condensate transportation and storage.
Meanwhile, the gathering and processing segment generated 64 million in operating margin in the first quarter, which was 4 million less than the same quarter last year, and 16 million lower than the fourth quarter of 2019.
The lower resulting gathering and processing reflects lower industry activity and select fee relief behind various facilities.
As well as increased operating costs and lower throughput due to unscheduled repair work at the Wap and you plant that totaled four weeks.
The marketing segment delivered operating margin of 246 million and realized margin of 165 million.
Largely due to higher contributions from isooctane sales and then effective risk management strategy.
The hedging strategy is aimed at protecting both inventory value and margin.
As there is uncertainty as to when a recovery and energy demand and commodity prices may occur care remains focused on preserving its financial flexibility and maintaining a strong financial position.
This includes the following.
Strong balance sheet with net debt to adjusted EBITDA of 2.2 times as of March 31st 2020, including 50% of the subordinated hybrid notes as debt.
A conservative payout ratio of 55% for the last 12 months, which is well within our long term target range of between 50% and 70%.
To investment grade corporate credit ratings a.
The 1.5 billion line of credit with only 70 million drawn as of March 30, Onest 2020, and minimal long term debt maturities in the next five years.
With the decision to defer caps, one year, we've reduced our growth capital for 2020 to a range of between 475 million and 525 million.
Down from a range of 700 million to 800 million.
In April we also suspended the regular and premium components of the dividend reinvestment plan effective with the May 2020 dividend.
We felt this was a prudent steps to preserve shareholder value.
In 2020, our distributable cash flow per share is expected to benefit from significantly lower cash taxes and maintenance capital.
We now expect to current income tax recovery of between 20 million and 30 million for the year compared to a 98 million dollar cash tax expense in 2019.
And we expect our 2020 maintenance capital to be between 30 million and 35 million, which is significantly lower than the 105 million incurred in 2019.
With that I'll turn it over to David.
Thanks Steven.
Looking ahead Kara remains committed to operational excellence focused on safe reliable and responsible operations with our finance with our strong financial position. We will continue to take a disciplined approach in the face of this uncertain business environment.
The covert 19 crisis is unprecedented and the situation remains challenging and unpredictable.
However, we are cautiously optimistic that the worst is behind us driving demand appears to have already bottomed out and will be further supported by the gradual relaxation of stay at home policies.
Significant volumes of oil supply are being shut in around the world, helping to ease the strain on inventory levels and support prices.
In Canada, we've seen a recovery in the condensate pricing.
And Meanwhile, natural gas prices in Alberta have remained firm throughout.
I am confident that care will successfully navigate the current challenges and strengthen our foundation to add shareholder value as the industry recovers.
On behalf of cares board of directors and management team I would like to thank again, our employees customers shareholders and other stakeholders for your continued support.
Please stay safe and healthy take care of yourself and your loved ones and stay positive.
With that I'll turn it back to the operator. Please go ahead with questions.
Okay. At this time, if anybody would like to ask a question. Please press star one on your telephone keypad that is star one on your telephone keypad. Your first question comes from Matt Taylor from Tudor Pickering Holt Your line is open.
Yes, thanks for taking my questions here starting off on F. You made some comments in the M&A, but weve seen pricing and product premiums for 2020, and then when you Mitch you peers talk to boats.
Lower utilization expected from Oh.
Okay and enhance business so as I'm looking at your that's good marketing guidance. There noticed a continued or see continued to operate in your capacity can you just speak to.
What market dynamics, you're seeing there to keep utilization high well while demand at them.
Sure Matt its steam Setoguchi.
We are continue runner Maria facility near capacity.
Obviously, we've seen a little bit of roller coaster ride over the last six weeks and in our Bob prices going from minus two to plus 12, 13, well well the $13.
So that's been very positive and.
Obviously, we're seeing driving demand starting to increase as the.
As the locked down these across North America and in the world as well.
So.
We've we've.
During the steady demand for our product the premiums aren't as strong as is what we saw last year, but I'm certainly this demand for the product and and.
We've we've been pretty open that we actually sell a lot of our our product through Galena Park and so.
The the Caribbean market is still been relatively strong for for gasoline and legacy we're starting to see more demand pickup in in North America now too.
Thanks, Dean just through the full okay can you frame, how youve hedged if business, even if there is no unexpected downside here for longer.
Well, we are hedges are.
More typically higher in the near month and this is sort of.
Sort of fall off a bit more in the later months.
So again, we do have a bit of uncertainty as we get into the latter half of this year and into 2021, but again those fundamentals are improving so we're going to be looking too.
To hedging and layers.
Due to protect our or downside for that business and preserve margin.
Great. Thanks, and then then one more on the dividend leverage and payouts are in good shape here and then as you layer on some downside risk to your GMP business and then see not start thinking about unhedged marketing in 2021, just I guess two questions do you defer any any more dividend growth in the near term here to.
Preserve future financial flexibility and then.
And then second would you be linked to continue deferring capex light caps to protect the dividends should the should these market conditions persist.
Hi, Matt its Dave here I'll take that one.
I think we continue to monitor the situation.
As we always do when we look at our our dividend policy and a and our capital allocation.
We have projects underway now that will.
All be completed well the material ones will be completed before the end of this year and I think so we have a fair bit of flexibility at this point with respect to this timing and degree of capital capital investment and with respect to the dividend I think it's it's fair to say, we're going to be cautious and the current environment with respect to any future increases.
We have a long track record of.
Of.
Gradual growth in the dividend per share, but in this environment I think we're going to be focused on making sure that the dividend is sustainable long term.
So I think.
I think it's it's probably prudent for us to take a pause with respect to.
With respect to growth areas to growth in the in the dividend per share.
But these are these are things that we monitor quarter to quarter.
Great. Thanks for the answer David that's all for me.
Your next question will come from Patrick Kenny National Bank Financial your line is open.
Hey, guys just a follow up on a fear you previously pushed back the turnaround from this fall into 2021 I was just curious if there's any thoughts to bring that back to 2020 just.
Given the pullback in gasoline demand.
Or is that just not feasible given some of the hedging positions you haven't please.
I thought this Brad I think.
Yeah, we can do to continue to monitor the the the performance of a tough and we're happy with how it's performing right now.
I think we're going to continue to look at a 2021 turn around and are actually going to potentially consider.
Pushing that out into future years, if we can manage both the risk in the compliance requirements or go with that so I don't think we have any any desire to.
To pull that forward into 2020 right now.
Okay. Thanks, Brad and then on the GNP side.
Perhaps maybe a bit more color on the comment around developing solutions with your customers that are mutually beneficial just wondering what that means.
To your processing agreements and near term cash flow look.
And then also maybe comment on.
Whether or not the liquidity support being offered.
To the customers with CDC loans, I mean does that not relief at least some of the pressure on you guys to renegotiate your existing fees.
Yes, it's a it's dean.
First of all I mean, I think you have to look at our two different GMP gathering areas and processing areas and one is our central Fort Hills and.
Just as David mentioned when you look at the.
You know they all look for natural gas.
It's probably been as good as it has been in many years and certainly with the the reduction of of production both oil natural gas in across North America.
We also think that Ngls are going to get tighter though.
From a pricing perspective, we think in our central foothills area in conjunction with some of the the operating cost reduction initiatives that we have underway. We think that that is looking more more promising when we look out into the future.
When you look at our northern area, which is driven more by condensate economics, you have to remember that.
Several weeks ago, I mean condensate with trading at low single digits.
Crisis.
And today the trading you know two $3 off a Wi Fi, which is 23 $24 doubled.
Yes.
Range so much different.
One and a 456 weeks then so.
You know again long story short to mean, we works I mean this is a tremendous [laughter]. This this crisis is very significant and so we try to work with our customers through these short term what we believe is shorter term challenges and and so we've we provided some concessions on a very short term basis and we've asked for Val.
All you and other ways and.
That would be confidential that we were not at liberty to share that but that's generally our philosophy, we want to work with our customers. So that there are other there for long term.
Pat is Dave here I'll, I'll, just add a comment or too I think.
What we're saying here is I think we're feeling a fair bit more positive about about the outlook now than we were probably four or five weeks ago.
With respect to your question around liquidity support from the government I think that will certainly help.
It's no secret that some of the company's that our customers of ours and a couple of these areas.
Our have have balance sheets that are that are challenged.
The other thing that I think is is.
Reasonable to expect is that we'll see some consolidation over the course of the next little while.
Among the MP companies.
Specifically, we saw Spartan delta buying out the assets at Bellatrix and for US, We think Thats a positive step because Spartan deathless starts out with a much stronger financial position and then bellatrix had and I think to the extent that we see other transactions like that that's that that will be positive for our business long term.
Got it thanks for that.
And then if I could just finish off on caps.
There is a disclaimer in the M&A on the 10% to 15% return.
Actually falling below the low end of the range if things don't recover.
Wondering if you could just provide maybe a floor return.
Solely based on the take or pay obligations, which I believe work out to be just over 50% of the initial capacity of the system.
Then also just things don't recover by say the latter half of 2021 would you not just defer caps again by another year in other words.
Not only sanctioned the project if you see activity levels come back, which would in turn supports the 10% to 15% return range or said another way to think about it.
Yes.
So so Pat I mean, we worked very closely obviously too to divert deferred caps for year.
When we announced that a couple of weeks ago and still tremendous support for the for the project and again you know our customers believe that a competing NGL pipeline system is very very valuable long term for this basin in this industry and so.
When we get a euro to just we'll have to see where where the.
With the outlook for the end for our basin looks like and and where customers are and from there will be able to make whatever the best decision is for for both of us.
So I think it's too early to sort of speculate what what may or may not happen.
But again, we'll we'll work with their customers on that front.
Okay I'll leave it there thanks guys.
Your next question comes from Linda ever Colas from TD Securities. Your line is open.
I'm wondering if you can maybe give us.
Some sense of of seasonality around your marketing business.
Typically you recorded an.
Unrealized mark to market gain.
Is it reasonable to assume that it will be.
Booked a realized in Q2.
81 Theres a.
As dean putting up before in our hedging program, we concentrate on the near months and then as you go further out with little bit less liquidity, we don't.
Agitated, we don't hedge as much going further out.
So on a margin basis from from hedging being used to protect margin for example day Swat team business. That's the profile you would see you would see more near term.
Effects there.
So then it's really just dependent upon on where where our Bob Udell BTI and those kind of variables move in the near term and then Meanwhile, we also hedge our inventory and so again a lot of the inventory is hedged on a month to month kind of rolling basis, and so again, you would see bit more of a and near term impact on on that depending on which we again.
In the BTI moves and other prices.
So is it reasonable to say that your confidence in reaffirming guidance is based on what you've already locked in and given that you hedge your inventory substantially that.
Significant losses are unlikely at this point.
Yeah, I mean from our from our point of view and you've seen it in the past on the on our side our hedging strategy with respect to inventory is generally proven to be I'm very successfully so that in 2014 you saw that in 2018 you saw this past this past quarter.
As well in that area.
Okay, and I'm wondering the rationale for deferring.
Your plan for the 19th Cavern was it a function of social distancing wanting to defer any sort of capital outlay commitments.
Or market conditions.
And what factors would be quiet, we required to resume plans on that.
Hi, Linda Dean given the uncertainty of of where we are I mean, we thought it was prudent to preserve capital. This at this point, so we decided to for the 19th Cavern, obviously demand looks relatively strong we can resume.
You know.
The development of that cavern very easily I mean, if it's on our site. We've developed a lot of caverns over the last number of years. So.
So now we've just we just defer to just given the environment that we're in the uncertainty that we've we've seen.
Okay. Thank you and just a clean up question on your cash tax outlook in 2021 and beyond is it reasonable to assume that.
We'll be paying cash taxes for the.
Foreseeable future <unk> for.
People in that you might.
Enjoy some recovery in the next couple of years similar to this year.
Yeah, we're definitely pleased to see the recovery for this year, we don't generally give guidance on a go forward basis, I think I would just points you again to the to the disclosure and the fact that we have.
A continued a suite of projects that are a that are coming into service this year.
Which will again provide provide pools so.
It leaves us in a pretty strong position.
Okay. Thank you I'll jump back in the Q.
Your next question comes from Robert Catellier JVC capital markets. Your line is open.
Hi, Good morning, everyone. Just a couple of thoughts here I wanted to start with the the comment on the dividends.
So notwithstanding the fact that.
You don't want to attempt say.
You are in a pretty good financial position and with the the capital spend slowing down the free cash flow position.
Looks pretty good too. So my question to you is what do you need to see.
Turning to resume a dividend growth was it just a general level.
Oh stability and a reduction of the uncertainty in the environment or is there something else so look into on the financials.
Oh, Thanks for the question, Rob It's Dave here.
It's hard to be specific I mean, you know every quarter, we have a conversation with our board about the dividend and.
And we take into account a whole bunch of factors as you can appreciate our outlook for cash flow our outlook for capital requirements, what we think they.
The impact will be on on balance sheet and all of those all those factors way into it I think ultimately.
We never want to increase the dividend unless we're confident that we can sustain at that level and so I just think we'll see tremendous uncertainty that we're dealing with.
Over the coming over the coming months, we're probably going to be inclined to be a little bit more cautious, but it's hard to be specific about but what the conditions would be that would you know that would cause us to two.
You know to change that stance I think ultimately it's going to be determined by what we see as the.
The the level and the confidence that we have in our cash flows going forward.
Okay. So just a level of prudence appropriate for the current environment.
Absolutely.
Okay. Then following up on just the the cost reductions.
Thinking.
Exclusively of the optimization plan, but.
Just the June any other opex, what's possible in terms of.
Reducing opex and.
I wanted to packs I might have on GMP margins for example.
Rob I don't think were quite ready to be able to provide any kind of a an indication on that question. We are going through a further analysis right now on to the strategy and the timing around the digi and P. optimization effort I think I've suggested.
In the past that we would probably be in a position to provide a little bit more color on that with our Q2 release in in August.
We are in the midst right now of reviewing.
Operating costs more generally across the portfolio, but it's premature to suggest what that might look like and similarly, with with our where that with our gionee.
Focus I think it's a little bit premature to estimate what that might look like.
On the DNA side, you know keeping in mind that we are reducing the size of the portfolio in the gathering and processing world and we are reducing our our activity level.
In terms of capital projects and so for those two reasons, we expect that a DNA support and Thats required is you know is going to were is gonna be reduced as well, but it's as I say, it's a little early to estimate what that looks like.
Sure. Okay, I understand and then just on the gathering and processing business based on what you know today, what do you think as possible in terms of the depth of the decline in terms of operating margin in volumes.
What are you looking to her to in terms of green shoots that make you might make you more confident but volumes in activities normalizing is it still the condensate price and.
So what levels do you think you need to see for sustained recovery in volume and drilling activity.
Hi, Robert I mean, certainly we can provide guidance a you know in terms of our GNP business and then you know part of it is if you. If you look at the customer is behind our facilities or other facilities.
They are reluctant to sort of provide a lot of future guidance or what the plans are but certainly in the north portfolio a lot of the economics, there are driven off of condensate prices and and natural gas prices certainly helps what a lot of its driven off of condensate.
You know to be quite honest when this this all rolled out and we.
But the system is not does not built for demand shock like we just saw no taking 25 million barrels of demand offline. It's just it's just not something that as ever happen before so obviously it creates a lot of having both physically and financially in the market. So what we were concerned about initially was that.
No 225000 barrels of condensate demand comes offline very very quickly.
You know what does that come from does that does a physically shut in people in the field, one storage fills out and with what we're seeing today a lot of that a supply has been cut off from the U.S. and there has been shut ins in Alberta, and the montney, but far far far less than.
Then what we're sort of prepared for so from a from a shut in perspective, we think that that risk is much lower because demand for gasoline is building in the mid continent.
You know refining capacity is ER utilizations moved up from a from 65% to 73% and hopefully we'll see that continuing to grow.
Condensate prices have firmed up as we've talked about so sort of in that low twentys and U.S. dollar per barrel and so with that we have we know that theres a number producers that have production that where the wells have already been drilled and they don't want to bring them on until they get a better price environment. So we think is.
Currency prices continue improve we'll see some of that not production that's shut in ready to flow and.
Whether that happens in Q3 year Q4, Q1, we can't determine that at this point.
Sorry for the long winded answer no. It's a it's very good detail I appreciate.
There are lots so really it's up to the customers at this point.
Okay. Thank you.
Your next question comes from.
Okay.
Yes Your bank your line is open.
Hello, everyone.
Just a follow up on that last conversation, so arguably probably have the best condensate information in the market just given your existing assets. So when you've seen condie imports kind of decline in April and what you've seen so far in may just want to confirm that.
Do you think a big content the risk of a condensate shock the market is.
Behind us just given that the less imports have have come down or no.
Yeah, I mean, we certainly believe the the worst is behind US I mean, you know the estimates that we've seen is that there's roughly.
A million barrels of.
Diluted bitumen offline right now.
And then so if you look at.
WCS Diffs, which are $3 ish at least as of yesterday I haven't checked this morning.
But I think that that signal that.
Sort of supply demand as rebalanced and maybe over balanced and so as we see.
Refining runs continue to increase in the Midwest They are very dependent on.
On their feedstock from Canada.
So again, so as that demand picks up.
We'll see more oil sands come back online production come online and it's going to require more diluent. So again, we believe that it's going the right direction, but we're cautiously optimistic I mean, we don't know if another significant wave of cobot breaks out and everybody else get locked down for weeks or months.
Those are all the uncertainties that we just have to be aware.
Alright, thanks for that.
And then actually another follow up question going back to the the Opex at the GMP business.
No I appreciate your earlier comments, but it was ticking up in Q1 versus the Q4 of last year, despite lower volumes. So.
Are there some one time severance charges or.
Onetime charges there associated with your rationalization plan and that moving forward, we shouldn't see them starting to.
It's a trend downwards.
Rob It's Brad I don't think there was anything significant in our in our and are in the Opex component I think certainly as Walt but do you continue to ramp up that would have contributed to some of the incremental operating cost and certainly.
We have the with some of the.
The other activity that's going on out there we've tried to manage those cost appropriately. So I don't think there's anything really significant then it just a more northern driven than anything else.
Okay, and I get to kind of operated the outage costs, where there would they be flowing through there or was that mainly a revenue impact.
No they would through they would flow through there as well as yes, the maintenance cost associated with the two outages.
Great. Thank you.
Next question will come from Robert Kwan from RBC capital markets. Your line is open.
Good morning.
Thank you can start with JMP.
So operating margins down $17 million versus fourth quarter.
You reference.
Thanks.
Even higher level.
Are you able to quantify what.
For the outage was both revenue and Opex, how much was attributable to lower volumes and then how much was attributable to the fee reductions that you put you guys have John first.
Yeah, we didn't we chose not to go through that much detail I think if you. If you parse out that 16 million into equal buckets, you're probably in the ballpark in the range for that.
And again, not all would be recurring.
I do I wouldn't highly that we do a put on our.
Our web site, the supplemental data, which shows you the throughput through up any as well and so again, if you normalize that for.
For no outages then you can see again see continued performance on the on the Lapine plant as well.
Okay.
And just see reductions that came in as of June 1st with that delivered to your customers in advance some of the optimization.
Activities like shutting off the six plants.
Have you already delivered the lower season revenue, but you haven't been able to strict cost.
Yes, that's right.
We've we've renegotiated or we've we've negotiated maybe different fee structures, where we felt we needed to and a and again typically we're trying to get longer term commitments out of out of that as well, but each deal is different and but certainly independent of that we we are aiming to be.
We were competitive with our business and part of that is driving costs down.
Okay. So are you able to me you could quantify what that lag might look like or said differently. Just so much opex is associated with a six plants or you can be taken offline through next year.
Yes again.
Robert I don't think were quite ready to be able to provide any any kind of indication of that.
Thanks.
Just on finishing on GP.
I just talked about what the volume is going to the facilities are.
Right now versus what was going through in Q1.
Yes, I think.
You know the the data is published monthly by the by the are so.
People can can look there I think we've been.
Reasonably satisfied with the with volumes or will they continue to they bounce around at times as producers continue to look at.
On.
Pricing, but I think we've been reasonably happy with how volumes of kind of stabilized over the last little while.
So let me maybe answer.
Yeah, Robert maybe just let me jump in just to kind of try and clarify I think we have been concerned about the possibility of shut in production, particularly a four or five weeks ago, when when condensate pricing and and ER and.
The some of the uncertainty just caused.
A lot of consternation within the industry, but as things have stabilized and recovered we really haven't seen any material amount of shut in production a little bit of gas in the south region similar to what we saw last year in fact.
Which is probably more seasonal than anything else, but.
But but otherwise we really haven't seen any material shut in production at to this point, we're we're simply being a bit cautious lets say tremendous uncertainty that we've seen over the over the last few weeks.
So call it 7% sequential decline from Q4 given.
Obviously, we haven't seen any of this data given the lag, but as we start this year, we'll probably see that decelerate does that Sharon for Q2.
Yeah, I think Thats fair and I think a significant part of that 7% was the outage it was pretty.
Got it okay, I'm, just trying to marketing what would need to happen.
Fold versus your expectations to take you out of the guidance range, whether that's a lender the high end.
Oh, Stephen your I'll take a stab at Alan again, we've tried to provide guidance on marketing has to make it easier for people. There's just a host of variables that go into it.
Some of the variables that are have a larger impact would be the isooctane premiums.
And so that would include the our Bob over Debbie T.I. premium, which is which you can see on the market and again, we hedge a lot of that in the near term. So we've been very fortunate that way.
And as well the isooctane premium above our Bob and so those two elements are key elements to continue to monitor butane as the as a feedstock again, we believe it will still be we still believe them or market prices today are still.
Versus long term are still attractive definitely not the the and the low market prices, we saw last year, but but still still reasonable. So again, if you had a big shift in that that will see an item. There and then I think is deemed was pointing to before you know to the extent you had a you know continued locked down and.
Nobody driving then that would have an effect on a on gasoline demand, which then impacts those those premiums that we that we saw earlier.
Yes, I remember that marketing is you know that we benefit from diversification across four or five different products and liquids blending and so.
We have a variety of.
Ways to make our guidance and but again you need those those different commodities to all be working well.
[noise] since I'm sorry.
Yeah, I mean, you know Robert it's it's a it's a different question. The this type environment, because you've seen massive swings in in a lot of bulk reveal obviously in commodity prices and so.
So that sometimes tough to say will what could happen and that could affect your marketing book I mean.
One extreme case would be there's massive shut ins and 25% of the NGL volumes disappear overnight you know, we think thats highly unlikely but.
You know I guess, it's theoretically possible.
I mentioned that our ball prices were trading negative will something happened wearable paraphrases to great negative.
For an extended period that that would hurt.
We don't believe that's going to happen and we believe that the a the front month strength that we're seeing is going to continue in the Bakken, which again thats. The the trend we've been seeing for the last several weeks.
So.
We believe we're very comfortable with the range that we have based on the hedges we have in place and everything that we see and.
But again, there's still some uncertainty.
Okay. That's good color and I just finished on on hedging.
Talking about some of the ball but.
First were there any reliance marks in the first quarter that really related to future periods. So anything that was rolling in the inventory.
Or even just closing sessions enrolling and then the second being it looks like from the disclosures. The book is net short.
I guess it has that changed and was there anything that you've been able to do when we've seen some of the craziness in the contract rolls.
I'll try and answer but I think we what you're asking in that first question. There. So on the hedging side. There again, so there was a modest impairment of inventory or that was more than offset.
By the hedging side and again, not a bad match, but but more than offsets and so it. So it did its job there and so then but that does that lower inventory cost does set up for margin on the on the go forward basis on the physical side as well so as so again the hedging did what we wanted to do.
And remind me again, what your second question was.
It looks like in the hedge book that you're running all day, yeah, Yeah, Yeah, and so again, we try and protect the the margin and the inventory and so a lot of times butane well most of time butane and condensate trade on a Wi Fi basis, and so we use Wi Fi as the hedging tool.
Because most of time it is actually priced off a DTA and secondly on the on the margin side of the business.
For the Isooctane business, you're you're trying to we're trying to make sure we hedge that complete margin rate from butane feedstock all the way up too as far as we can go on the isooctane sale, which is which is our Bob and so in between is a Wi Fi component and so that's why we're we're selling debit <unk> as well.
Maybe just some volatility.
Jeff I couldn't be see.
I guess is that.
For TV for you.
What we are fortunate that we see lots of not lots. We we have a skill set internally that does find opportunities in these kind of environments, where we do have a volatility.
And so we expect as we go forward, we'll continue to see pockets of opportunities.
I'm not sure where you're getting it to with your question, but I guess, what I would point out is that we're not we're not traders the.
We're generally sellers most most were Walt will always be short when it comes to the hedge book because were generally sellers of Wi Fi and sellers of the our Bob spread a and sellers of the NGL commodities to protect our inventory.
And you know certainly there is always somebody that says should we take this physician off when when you've got all big unrealized gain but that's not the approach. We take you know where I'm, where the hedges are in place to protect the value of our of our future production at our and our inventory.
[noise]. Thank you.
Your next question will come from Prime me cities from Wells Fargo. Your line is open.
Hi. Thank you just just one question for me I was just wondering if you could comment a bit on your contracting on your crude storage assets and.
Whether there's any available capacity there to take advantage of a contango in the market.
Our baseline terminal is a is fully contracted.
You know range contracts, ranging up to 10 years and length because some of those would be two years after that so.
Eight years, they just now.
And then or Wildhorse terminal out of the 4.5 million barrels of storage.
You know three or three and half million barrels of that is a is contracted to third parties.
But it's not thank operational it's not operationally at no not till later this year.
We're where we have seen an opportunity where we have seen an opportunity is on the condensate side. So we got you know we care operates the largest volume of or the largest capacity volume of condensate storage with our underground caverns. It forces catch one and we have seen opportunities to contract more of that capacity a in there in the recent with the recent Paul.
Utility that we've seen.
Got it thank you.
Your next question will come from Andrew Nowinski from Credit Suisse. Your line is open.
Thank you good morning.
Needless to say it was extremely volatile for the year to date and a number of commodity markets.
In that kind of context, how did your risk management hold up in.
And particularly in the marketing like clearly the results are impressive but.
It all your risk management systems behave as you anticipated and behavior, where they are tweaks third quarter.
No I would say that it behave the way we wanted it to behave yeah. We were we were quite happy with how our our hedging worked both on inventory objectives as well as a as margin in the near term.
And then Andrew.
Sure Android add that as Steven as Steven mentioned earlier its times like these where the the the efficacy of our of our hedging program is really demonstrated a you know we've had tremendous volatility but this is this is what our risk management practice is intended to protect against and I think when you see the the realized.
An unrealized gains that we've seen it's a reflection of the fact that are that the system works as you know and as we said many times, we have a risk management committee that meets weekly that includes several of the people around this table and we pay close attention to it and we and we try and be disciplined and I think the results of that.
That were born out in our Q1 results.
So then on a go forward basis for the remainder of the year gets does anything change from a risk management basis is when we look at your marketing margins, you're basically half way to the top end to your guidance really just after one quarter of results. So do you lay off risk.
Or does the guidance not change just because the outlook you have on the environment is just more cautious.
I think it's more the latter I think what we've been trying to convey here as a certain degree of caution caution and prudence.
But as with the hedges that we have in place and with the fundamentals that we see in the business now I wouldn't I would suggest that we're pretty confident certainly in the lower end of the range and I think as things unfold, we could we could very easily be capturing opportunities over the next three quarters, you know that would take us.
To the higher end of the range or beyond I think you know our history would demonstrate that our team, it's sometimes difficult to predict but when when when mertz. When we're in an uncertain times. Our team is really good it finding opportunities to add margin through a you know through acquiring.
Whether its condensate or propane or butane or isooctane.
Or taking advantage of the facilities that we have and their relationships that we have to you know tad margin to the to the portfolio. So.
You know I think with respect to marketing and with respect to the gathering and processing comments that you've heard this morning.
You know, we're we're being cautious I think because because there's still a lot of a lot of question marks about how how we how how we get through this the current crisis.
Bite at the same time I think as we sit here today. The fundamentals are are stabilizing and and I think we're cautiously optimistic.
That's helpful and one final one for me and just on the context on storage how much product storage do you have really for your own purposes beyond operational requirements on a day to day basis, and caverns tanks and really railcars.
We really don't disclose that Oh, let's say the majority of our storage is contracted out to third parties.
But we do have some that we use for internal purposes, but that again, we don't disclose that.
Okay. Thank you.
Your next question will come from Chris Hill with Barclays. Your line is open.
Hi, good morning listening questions have been asked already but just one follow up here on a whopping feeds to actually if you don't mind.
Through the comments in the in DNA mentioned that.
You know you're going to go ahead and commission phase two at the end of this year sort of as originally planned now don't expect.
To that need to capacity necessarily so.
Yes, just curious strategically kind of whats behind that decision are you just contractually obligated to to commission that facility by the end of this year or is there they're more to it than that and then second when do you think you might actually that capacity.
So I think.
The good news is it was pretty were we're basically mechanically complete we bring clinically completed that facility on schedule and it's a it's ready to go with the with the outbreak of pandemic. We chose to move everybody off site. There was no immediate demand for that capacity. So we chose to protect the.
The integrity of the the operation out there and move any.
Non required people off site, which included all the commissioning stuff the went with that.
As we look over the rest of this year.
We don't see a demand for that facility, but certainly from our reliability and redundancy perspective, there is value to having train two available for use and that's really the motivation to get it back up and running or get a commissioned in the back half of this year and then we are able to respond to any.
Market scenarios of Mike.
Be available to provide additional services to customers in the area beyond what our current contractual obligations or.
Yes.
Okay.
That's very helpful. Then that was it from me. Thank you very much.
Okay, and if anybody has a question. Please press star one on your telephone.
Question comes from Ben Ben Pham from beam <unk>. Your line is open.
Okay. Thanks, Good morning, I wanted to go back to come to the commentary on your outlook and.
Volumes, and whatnot and and I'm wondering what the public disclosures on the Canadian oil sands shut ins.
Are you guys able to do a detailed.
Or have you been able to a detailed bottoms up analysis to stress test your cash flows and and be able to figure out and pack on your condensate volumes and gas processing volumes and then what that range and production you can you can figure out the range of.
Outcomes for this years that is that pretty visible to you guys. If you do that or is it is as clear as much right now.
Yes, we have done that exercise been where we've we've modeled in different scenarios. I mean, we do have the benefit of a lot of public data plus the what what moves on our system. We see the nominations every month what comes in and out of it. So we have pretty good data.
But but again there are some uncertainties and.
And part of that is where the oil sands supply is sold and most of that's mid continent, and we sort of see that is advantage today. The mid continent refining refiners, there have complex refineries and they can make more more gasoline and that's the highest value prop.
Right now the Cillizza weakened so as Jeff.
So.
Again, we see as the Lockdowns Eve, we certainly see demand picking up or continued demand picking up for gasoline and again, that's going to draw more supply from from Canada, and but we've modeled out three different scenarios and.
Just to just to see what it looks like in our in our business.
Okay, that's great to hear and can you remind me when when you decided captured drip with that tapped the Farrell.
Are you are you self funded then.
Regardless of praying capex.
Up next year as or do you have to bring back a drip program as you ramp up caps.
Yes, Stephen here the a the primary reason for turning off the drip is obviously the of the share price level and just the amount of dilution. It was it was causing in that respect there.
And as well the deferrals caps gave us some flexibility as well on financing I think it think again because of the.
The situation around us.
Like our view is that as we get to next spring and hopefully move forward with caps will just evaluate our our balance sheet and our operating cash flows and the outlook and a and make the prudent choice then as to as to how to how to fund that that project.
At this time I will turn the call over to the presenters.
Great. Thank you everyone for joining in on our Q1 conference call that complete fit as David said, we continue to stay healthy and positive. During this interesting time. Thank you.
This concludes today's conference call you may now disconnect.
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