Q1 2020 Earnings Call
[music].
[noise], ladies and gentlemen, thank you for standing by welcome to the Pembina pipeline Corporation, 2021st quarter results Conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session to ask a question. During the session you will need to press star one on your telephone.
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I would now like to have the conference over to your Speaker today, Scott Burrows Senior Vice President and Chief Financial Officer. Thank you. Please go ahead Sir.
Thank you Chris Good morning, everyone and welcome to 10 minutes Conference call and webcast review highlights from the first quarter 2020.
Scott Burrows senior Vice President and Chief Financial Officer on the call with me today, our Mick Dilger, President and Chief Executive Officer, James Noon, Senior Vice President and Chief Operating Officer pipeline, Jerry Brown, Senior Vice President and Chief operating Officer facility, and Stu Taylor Senior Vice President marketing, New ventures, and core development officer.
I'd like to remind you that some of the comments made today maybe forward looking in nature and are based on Pembina. Its current expectations estimates judgments and projections or forward looking statements. We may expressed or implied today are subject to risks and uncertainties, which could cause actual results could differ materially from expectations. Further some of the information provided refers to non-GAAP measures to learn more.
These forward looking statements and non-GAAP measures. Please see the company various financial reports, which are available at having a dot com and on both SEDAR and Edgar.
Let me start by saying, we hope everyone and their families are safe healthy and finding a way to manage through these uniquely difficult times. In addition to those impacted by the pandemic resident support Macmurray are top of mind with the recent flooding in that city Pembina is pleased to be supporting the community with donations to both the with Buffalo food banks and the Red Cross fun for flight relief effort.
As a challenging time for everyone both professionally and personally at each day, we are feeling a bit more optimistic there is evident here in Alberta that we have successfully flatten the curve of the cobot 19 pandemic and we are perhaps passed the peak parts. The economy are starting to open up with various jurisdictions, putting plans in place to do cost and cautious we do more.
As well, both our share price in oil price or well off their lows, while the road to recovery could be long and bumpy. We can all be excited to progress is being made.
Today Pembina has delivered strong quarterly financial and operational results as we have completed our first full quarter. The benefit of the recent acquisition of Kinder Morgan, Canada, and the Cochin pipeline.
Earnings of 314 million during the quarter were in line with the same period last year, while we benefited from the contribution of additional assets from the tender acquisition. This was offset by lower margins on crude oil and NGL sales in our oil mark and our marketing business. Despite higher unrealized gains on commodity related derivatives also net.
Finance costs increased during the quarter. However, the increase was primarily attributable to unrealized foreign exchange losses associated with the decrease of the Canadian dollar relative to the U.S. dollar to the tune of approximately 100 million or 18 cents per share.
Adjusted EBITDA in the quarter was 830 million, a 7% increase compared to the same period last year. In addition to the contribution from new assets. Following the tender acquisition Pembina saw increased revenue volumes on the peace pipeline system. These positive contributions were partially offset by lower margins on crude oil and NGL sales in the marketing business as a result of Ashar.
Declining commodity prices during the first quarter of 2020 and lower contribution from alliance due to narrow eco Chicago natural gas price differentials driving lower interruptible volumes.
While the first quarter results are indeed strong and reflective of the hard work. Our teams have done in executing committed strategy. We know the impact of Kobin 19, pandemic and the results and decline in global energy prices will begin to materialize more fully in subsequent quarters Pembina as customers employees communities and investors are rightly focused on a few more on the future than in.
Passed and we and we have previously announced Pembina has taken decisive action to protect all of its stakeholders. Since early March Pembina has taken significant action to respond to the current crisis. We took the net necessary steps to protect human help and support government and community efforts to slow down spread of the cobot 19 virus.
In line with recommendations from health authorities Pembina restricted business travel cancel large group meetings and required non essential employees and contractors, who can work from home to do so.
Pembina is classified by the government is an essential service.
We determine the essential staff in critical infrastructure required to ensure uninterrupted service to customers, while maintaining the safety of our assets employees and other stakeholders, Kevin has not experienced any operational disruptions to its assets as a result of cobot 19.
And we announced the deferral of some of our capital projects to reflect current market realities and uncertainty over the duration of this downturn additional discretionary capital investment has also been removed for Kevin as 2020 capital budget. The result is a $900 billion to $1.1 billion reduction to the company 2020 capital investment plans. These reductions will be directed.
Towards reducing pembinas leverage and enhancing its final financing condition. The remaining Capex program remains self funded importantly, beef cost reduction measures will have no impact on pembinas existing asset base or its ability to continue to operate safely and reliably the decision to continue spending on the remaining projects was informed.
By the fact that all were well advanced or nearing completion, and therefore expected to contribute incremental adjusted EBITDA in the near future.
Okay.
Okay.
By contrast, the deferred projects for any early stage the pioneer construction planning engineering and regulatory work done to date on the deferred projects will allow cabinet to resume these projects to meet customers' needs when global energy prices and the broader economic environment are supportive. This recent action complements our longstanding commitment to our financial guard rails, which has.
Mission Pembina, well to address todays challenging business environment to recap the key point underlying pembinas resiliency. We are currently benefiting from the following first the underlying business remained highly contracted with between 90% to 95% of 2020 adjusted EBITDA supported by long term fee based contracts, including approximately 68 72.
Percent coming from cost of service or take or pay arrangements. This is coupled with a payout ratio and fee based cash flows that more than covered as dividends.
Second direct commodity exposure and Pembinas business is limited to the marketing and you mentioned division and we have hedged approximately 50% of Pembinas frac spread exposure in 2020 and 35% in 2021, excluding off stable.
Third approximately 80% of the company's credit exposure is with investment grade and split rate Counterparties or were counterparty secured by letters of credit and non investment grade and split rated counterparty exposure is well diversified across industries.
Fourth the balance sheet is strong pembina is fully committed to protecting its triple B rating. We are currently rated triple B was stable outlook by both standard and poors and Triple B with stable trend by Dvrs. Both agencies have public you from those ratings within the past two weeks.
Finally, the company has ample liquidity with $2.5 billion available cash and borrowing capacity, including a new $800 million revolving credit facility Pembina recently announced and the proceeds from a five year 250 million dollar us non revolving term loan that we announced yesterday with our recent main note repayment we have no further maturities in htwo.
20.
Given the challenging circumstances facing us we feel we have taken steps necessary to protect pembinas financial position and we are demonstrating the strength and the resiliency of pembinas diversified and integrate fitness during the most difficult period pivoted history.
In addition to our own actions, we are carefully monitoring our customers responses as energy prices have fallen are producing customers of drastically reduce or capital spending plans, which will result in slower growth or declining volumes. While we expect some of the volume declines across our system much of Pembinas business is protected by strong contracts overall, we see.
The impact to 2020 adjusted EBITDA in the pipelines of facility division to be modest we do however, expect marketing business will be more negatively impact by the rapid and significant decline in energy prices in light of these headwinds to the business. We have implemented approximately 100 million of operating and administrative cost savings throughout the business overall consider.
All these factors together Pembina continues to expect 2020 adjusted EBITDA to remain within the previously disclosed guidance range, albeit we expect to be near the low end of the range based on our current forecasts.
While we have factored in reduced volumes and lower commodity prices as Jack mentioned previously the duration of the current situation and large scale shutdowns could cause patented to fall below the low end at the guidance range in closing is worth remembering that pembina has face adverse fee before and always emerged strong we face to 2008 2009 financial.
Crisis, and the 2015 16 energy price collapse and remained resilient throughout the cycles.
Thanks to our financial guardrail, and decisive action to deferred capital spending Kevin has a balance sheet strength and liquidity to whether the current store and ensure that upon a return to more normal normal economic conditions at higher energy prices Pembina will be ready to be able to continuous long track record of delivering value to all stakeholders before we wrap things up I want to inform you.
And in light of the current circumstances Pembina will not be holding its annual Investor day, which we were looking forward to presenting in early June we will continue to evaluate our auctions for rescheduling this events in the future.
We do however look forward to providing an update at our ATM, which is held today at two P.M. Mountain time four PM Easter time. This year. The ATM will be held as a virtual only meeting which will be conducted via live audio webcast participants a recommended to register for the virtual webcast at least 10 minutes before the presentation start time.
Further information on Pembinas virtual ATM, including a copy of the ATM presentation. Please visit the shareholder information page under the Investor Center tab at Www Dot Com and Dot com.
We would once again like to thank all of our stakeholders for their support with that we'll wrap things up Chris. Please go ahead and open the lineup for questions.
Thank you at this time I would look to remind everyone in order to pass two questions first turns on the number one on your telephone keypad.
Your first question comes from Germany.
We see Morgan your line is open.
Hi, good morning.
Good morning, Jeremy.
I just wanted to go into the assumptions in your guidance a little bit more if that's possible. When we think about slowing activity, possibly curtailment that are you able to share kinda anymore color as far as like the depth and duration.
That might be kind of baked into.
Changes in your guidance and I guess, what what levels would push you below that bottom in there.
Jeremy we studied what's going on in the markets and.
We've we've done quite a forensic analysis around.
Where they shut ins might might happen what the impact on deal you in demand is what the impact on on GAAP demand is.
Proceeded with reduced diluent and and so quite a quite a comprehensive.
Customer by customer analysis, including their their liquidity and ability to execute through these difficult times and and so.
So all that thinking went into our guidance clearly didnt take take our guidance.
Likely, but we do reaffirm where we are.
Fair enough got yet.
Just kind of curious on your conversations with producer customers there the extent to could there be.
Actions taken to help out or where producers asking for blend and extend or change of contract terms or anything like that just trying to get a feeling for what you guys are seeing up there.
We do have some inbounds as you would expect everything from.
You know reductions on sub leases to blend and extends to lower fees.
And.
Of course, we're willing to consider all requests but.
Our view is they have to be a bargain.
Pembina is not going to be the shock absorber for the whole industry.
But we are open to making bargains and it'll depend on.
Each customer their credit worthiness, how large of a customer they are where they are what our capabilities are so it is on a case by case basis.
But where we just can't.
Transfer wealth from our stakeholders to their stakeholders.
That just can't happen and we need to defend ourselves.
That makes sense that makes sense and just one last one if I could.
Wanted to see you guys had talked about asset sales being the possibility and didn't know if the and then kind of broader thoughts about M&A that that could happen in the industry here or if that doesn't make sense, given all the dislocation and and back to your last purchase with came out with everything kind of proceeding to plan with regard to integration and synergy.
The expectation granted that everything that changed now at Cobiz 19, but didn't know if you could say anything there. Thanks.
Absolutely starting in reverse order.
Our team I mean, I'm, I'm humbled and amazed with what's been happening kind of tier during this.
You know remote operations, the fact that we've been safe.
Our safety records as good as it's ever been our reliability is as good ever been weeks. We've moved every mcf of gas every barrel of oil tendered.
And so doing great our tender.
Integration is completely on track POSIDUR, the synergies are tracking well.
The last kind of thing on the list. This is training.
US based operators that we're going to come up in and.
Be do that face to face doing that remotely now so that the cater integration has.
Has gone out without a hitch are getting the quarter Roe was.
Very well done the projects continue in the field, so older going very well.
It's astonishing and part of the topic of of the ATM, what we've been able to.
Accomplished it really stabilize or balance sheet included.
The additional liquidity on the balance sheet.
When it comes to now.
I kind of.
Wrote the guys a note yesterday after our board meeting, saying the the the stabilization effort is now formerly over at with the Board meeting and now we can get back to doing what we love to do which is making money and so.
We are we're now looking forward and I'm I'm pretty sure shareholders and all stakeholders are glad with the actions we took but now its game on against so we'll be looking at everything.
Got it that's very helpful Thats It for me thanks.
Your next question comes from Matt Taylor of Tudor Pickering Holt Your line is open.
Hey, good morning, guys. Thanks for taking my questions here just.
Just following up there on Jeremys question, if you mind just.
Can you just give a bit more detailed there, especially on the levels pricing weakness duration that you're assuming and then.
More on what you mean by large scale shell and the reason I'm asking you. Your competitors will go to San Canadian shut ins can be as high as a million 10 million a happy medium term so.
Any further thoughts there would be most helpful.
Yes, I mean, what we've done as a customer by customer analysis. Our people are speaking with customers all the time so.
We factored in what we within the market, what we know when a customer by customer basis.
When we when we last spoke with you folks we shocked our our 2020 forecast and made some high level assumptions on what could happen now weve since gone in and on a customer by customer analysis on on deal you in demand on gas.
Processing volumes, and and you know what order diluent supply.
We'll we'll.
Our supply or demand disruptions will occur for example.
You know a will southern lights turn off before kocian or will you know deli CSP suffered developed billion with demand erosion. So we've we've come around this in great detail and we were comfortable with.
What we said now the shot in words and I know some of that gotta attention from some of you.
Those are those are lawyer worth please don't interpret that as as that we don't really stand behind our guidance because because we do.
What that meant to address is is you know for for a while I think we all lived in.
What happens at Enbridge shuts down entirely and the whole system gets backed up and and I think you'd all acknowledge that is possible but.
Not that likely and so.
So we we put those words into reflect that kind of Armageddon scenario.
But but please don't interpret it as as a that were not standing behind our guidance I would just add in terms of the question around around duration. The way we modeled it I would say extremely similar to what we're seeing as kind of all third party analysis and what peers are generally looking out which is Q2.
Probably going to be the hardest hit with a recovery through Q3, and then through Q4. So we're not assuming Q Q twos, the worst and it stays that way we are assuming some recovery through Q3 in Q4.
But again were those those aren't things we were guessing at those are those are.
Based on what we know from our customers.
That's great. That's really helpful. Thanks, Thanks for that guys and just to help clear the Arabic can you provide some thoughts just on what your expectation is on base level EBITDA because I mean, obviously your assets are highly contracted sweetness. There is some potential downside there.
Just framing that against the backdrop books of highly contracted assets.
Yes for sure I mean, if he does zummo permit we came into the year without a huge contribution from from our marketing group and now that contribution is is less and so were 90% to 95% I don't know the exact math, probably closer to 95% fee for service right now.
And so were at or around the level where.
We're we're protected by by agreements.
And so we will have a great resilience.
It was agreement subject to underlying.
Creditworthiness, and and liquidity of of customers, which seems to be holding up.
Quite well and so.
I think that that I hope that's helpful that we should have a.
You should start to get pretty sticky around these levels.
That's great one more if I may then on opinions PPD other major project.
The province is looking for partner can you just to address that is is there anything.
You'd be willing to combine there is there any contractual provision that venture partner from from moving over to that project, which is you know as everyone knows is currently under construction versus staying with your currently deferred project.
I mean, yeah, I mean in terms of our project job one was too.
Safely.
The for all of the projects Scott talked about we proceeded with the ones that were.
Well advanced then and we could safely executing this this market and which will once in service provide incremental EBITDA. So that was job one.
Job too is to safely to for projects that were early innings.
Phase 789.
And then the the petrochemical project and we have hundreds of millions of dollars invested in those projects that we want to safeguard so that when we pick those projects up if we've got you know X hundreds of millions of dollars invested that when we pick them up to that previous investments still has the same value and we don't suffer.
For any destruction of of capital and we have a meeting of the mines with our Kuwaiti partners on.
Directionally on how to do that.
Our all of our teams are working to safeguard that that to that value. So that was job one as I said earlier you know we have now I think very successfully.
Safeguarded Pembina.
We are extremely resilient at this point and.
Your question would be something that we wouldn't dare to dream about until we got here.
You know where were aware of this situation there we have great relationship with with with the inner pipeline, but our current focus is.
It is bringing our project back at at the right time.
Okay. That's helpful. Thanks, guys for taking my question.
Your next question comes from Linzess as or does with TD Securities. Your line is.
Thank you good morning switching to your cost savings.
Im wondering first of all how much of that 100 million is already reflected in Q1, and if it's not fully reflected which I'm assuming it's not.
How might we think of the ramp over the year, how much might be deferred versus sustainable prospectively.
Hi, temporary labor.
Can you just also confirmed that it's all incremental to any sort of previously identified synergies relating to that Kinder Morgan, Canada, and Latin American integration.
Yeah, well into the EUR 100 million.
Was a internal target that we set.
And it is up what we consider a permanent savings, but if that saving was for the balance of this year and that saving did did not double dip any kind of Kinder Morgan synergies I think that's what you're after it was it's truly incremental.
Most of it has to do with taking a billion dollars out of our investment plan and it takes a lot of talented people to invest $1 billion wisely.
But you know we're not we're not.
I'm going to do that this year most likely.
So when we look forward to two next year you know your question might be well, it's a it's a bill if the 100 million was four 712 for the year and by the way that none of it was a prior to this reporting period.
Would that be more.
Annualized next year and.
As a you know I don't want to I don't want to get to too much into to forward looking but.
You know.
I think most of that can be maintained a four.
The foreseeable future.
That's helpful.
And recognizing that youre reporting systems might be a little bit more challenging to access remotely well everyone's working safely I'm wondering if you could give us a sense of what April looks like for your marketing business. You know did you see any sort of reductions in volumes on the condensate side whether it.
Cochin or on your local production.
Can you talk about your NGL contracting year, and how things might have shifted versus.
The attributes are the contracts that you established I'm on April 1st this year versus last year.
Yeah, that's a fair amount of detail what I don't know, we can get into into that but led to the what we're seeing on the ground week by week is is.
More favorable than what I think people might expect and yeah. So the you know I know, there's obviously lots and lots of press on volumes going down, but you know.
If you would.
As he zoom out and you think about the you know for example, the.
Curtailment program that the Alberta government that normally government put in a half a million barrels.
That came and went Antamina had absolutely no impact from that and so you know we have and again, we'll talk a little bit more about it at the ATM.
But we are a surprisingly resilient when you go into what our product mix is so.
You know our oil sands pipeline for example, or synthetic crude and so and cost of service so they're not impacted.
We don't have a lot of touch points with Sag D producers other than Diluents supply and southern lights is looking like to the initial shock absorber for that to that Oh God deal you end demand disruption and you know kocian and.
Our systems are again to the extent, we start to cut into two or to that supply.
As a secondary.
We are protected by by agreements and so there when you get a bit forensic about it and and you know.
We are very very resilient.
In terms of the marketing business. So you know again I don't want to get to two forward.
April is you know looking kind of the same as marks and then it looks like it's getting a little little bit better again, but it. It's it's highly volatile see forward looking information. We just we just don't really really no.
But consider it's only 5% or 7% of what were what we're now forecasting.
Okay. Thank you just as a follow up on your marketing the early finding different ways to make money under different market conditions and I'm. Just wondering one of the opportunistic aspects that might manifest itself, but might not is around a storage and maybe finding opportunities for the industry to potentially a store product.
Crude in unused pipelines and your system or anything like that or you are you seeing any opportunity to kind of bring back at the capacity to to healthy industry or is that something that's not really.
A possibility.
Well I mean command a enbridge further there they're brainstorm to use Oh.
A large pipeline out of service pipeline for storage I thought that was a terrific ideas.
And did a great example of how the infrastructure companies can can work with the ERP companies.
You know, we've got 30 million barrels of storage and so.
The our teams are working very very hard at.
Even even storage that we use typically for Ngls can we use it for for crude can we use storage. That's normally reserve for operations for the next next number a month. So that is something we're we're certainly looking at do we have tanks that are fully leased out a financially but aren't.
Paul and his or sublease possible. So that's a you're bringing up a good point that those are some of the some of that Jim said.
You know may provide us additional resilience and we're not factoring a lot of good news right now into into our guidance.
But undoubtedly there'll be some some good news in the event.
There is theres more bad news.
But if you do I'll just add just really quick and I I think it's.
We've got we've taken approach to term out our storage capacity in many cases and its not as it could sitting there being on utilized and the team is exploring every opportunity that we can to find a as Mick described if there is bear space not being utilized we're we're looking at that it's not we have contracts.
That's our model that we call upward with so as contracts roll off we'll look at what we're doing with the that capacity, but right now we've termed most of that out there looking at only be available capacity that isn't being utilized.
And Linda it's just a little finer detail on your your question about the savings we some amount of that savings I guess is in the first quarter when you consider.
You know our compensation Slas and things like that obviously.
It's not going to be the best year for our staff in terms of of comp our plans or are.
Our design to be correcting for when we when we don't deploy all the capital that we hope to deploy and we're at the low end of the range versus the middle of the high range.
Our comp plans reflect out so.
Some of that was present already in the first quarter based on on those results, but but not much.
Thank you appreciate the context I'll jump back into queue.
Your next question comes from past Attorney of National Bank Financial Your line is.
Hey, guys hope everyone is keeping well.
If we assume that you know quite a few of your money customers will be accessing the a 100 million dollar federal BDC loan program, which.
You will need to pay back in 12, 18 24 months.
Wondering if that.
Relatively urgent needs for them to raise cash and de lever presents a unique opportunity for you guys too.
Knock on the all sense or anything, but no acquire some higher quality gas processing infrastructure.
From certain producers as part of any take or pay contract renegotiation.
While it's insane, making sure you don't transfer any wells in the process.
Yeah I mean.
You wouldn't believe that number of ideas that that we all have on on what's possible in this in this market, but we've been focused mainly getting ourselves here and being able to.
You know.
A stabilized the company, we've we've got tremendous balance sheet flexibility I think as I said were sticky on on our ability to make money, but but you make a fair point. The you know when whenever you get in these situations.
Pat the difficult thing to know is what's the right amount to to pay.
I think the market right now for example is wondering what multiple.
I'm going ought to have what multiple ambridge ought to out.
You know and is there a new world like on one hand, you've got conflicting conflicting signals David stable dividends are worth more because interest rates are low so that should should bush valuations up but then you have it you know a backdrop of how long is the demand destruction didn't Alaska offsetting that.
You have generally lower growth. So those are things that the markets got it got to figure out and we're trying to figure out and so you know if there were a good gas plant opportunity.
I don't know what to pay for that right now so.
That's one of the things we've got to grind through here as we come out in and.
Transition from.
Our always.
On top of mind defense, two to two offense, but but certainly that could be a capability.
Right, Yeah, and kudos to you guys for all the actions on the liquidity front and.
Sustaining the triple B, a slot credit rating, there as well with stable look.
Just a moving over to the marketing side, so 30%, 35% hedged I guess on the Frac spreads were 21.
I'm not sure if there will be an opportunity to move that up through the back half the year, but not the same time, we're seeing the propane market has tightened up a little bit here. So just curious.
If your marketing team is able to take advantage of some seasonal arbitrage on the curve right now.
Could help support your marketing cash flows into next winter and into 2021.
Thanks, Pat I'll start with that I mean, so so we have a systematic hedging program that will show that will.
Get us to 50% hedged in 2021.
By roughly October timeframe, when we set our budget and by that time will be will be roughly 10% hedged for 2022 as well. So we will continue to be rolling hedges as we move throughout the year I mean, you're bringing up a great point on propane as we sit here today, we're adding inventory at a relatively cheap price.
And as Mick pointed out all this discussion today has been around what can go wrong and what the downside is no one's no one's looking across the valley and see what can go right and when we hit our marketing business essentially reflecting about 5% of our EBITDA based on the current forecast, there's really not a lot left there so any sort of pricing.
Mitch we could see some pretty big swings to the upside and certainly with propane inventories coming down significantly and you add being pretty low in Canada.
There is there is that opportunity for the upswing in it propane I'll turn it over to students see if he wants to add any incremental color I know, we're we're tracking of caught them and again right now the opportunity to secure the product at very low cost a we're undertaking and we do believe there there's some upside in the near future.
For for that commodity and there are tracking a closer so we're looking.
We're looking at following that on a daily basis and planning for a across the valley of Scottish describing think you know are optimistic that will be equal seeing some some increases in pricing. Yeah. We've got we've got a lot of like our physician in terms of how we are we've got a lot of capacity available right now to the store through this.
Summer and sell through through the winner.
So it's not like like we're you know.
Full here like like the oil situation, it's a very.
Yes, they have very different animal and and you know again not be something we talk about a little bit at the ATM people.
It may have forgotten that were only 40% oil and condensate as a company and that some of our other businesses.
Our.
Based on just gas economics.
You know ethane ethane demand safe staying relatively strong and so even propane and butane are not fantastic now, but we're not selling them now we're going to we're selling most of that.
We generally store in the in the summer. So again, it's it's kind of a an interesting mosaic of resilience. When you when you get into the details of both Oh Pembina makes money.
[noise], Okay. That's great color less cleanup question, if I could just on alliance. If we can get an update on both the re contracting process to extend commitments beyond 2020.
And then also the belt the Balkan expansion, just given the pullback in North Dakota production.
What's the status there and when we might see the need for incremental take away capacity.
So I'll start with a this is Jason.
The the pull back in the in the development the crude oil within the Bakken, It's obviously impacted the associated gas so that it's definitely a bit trickier to to keep that expansion moving forward. So.
For the time being I'd say, it's it's not that project is a bit more challenge that I wouldn't say it was last year, but there still is a fairly big.
Challenge with ER flaring gap in the Bakken and so that that's an area that pembina was queuing up to have some discussions with some officials, but obviously with the environment that we're in at the moment, we weren't able to have those so we're open to start those discussions through the summer.
In terms of re contracting we.
Number of the contracts rollover annually and some of those rolled over annually last year. We're also working through details, but with a number of our customers in terms of extensions.
It's again in the first quarter, the you're obviously with what's been going a lot other conversations on that front, we've been pretty quiet I eat I don't think fundamentally things have changed much.
At the moment the spreads between.
Alberta in Chicago work or you could see Alberta prices are looking good but if you look forward into to winter in 2021, those things started to widen though.
So so we think theres some strength talk on the alliance and the long term in terms of re contracting.
Hey pattern here also any disruption that we have seen on the processing side in the Bakken through the oxy velocity hasn't been due to a fundamentals it's been that the customers haven't been able to access storage.
So it's kind of a short term so in the areas that we're processing.
You know there's still is light at the end of the tunnel as Jason mentioned through the flaring and and the economic development of that resource to expand the launch.
Got it okay. That's great. Thanks, guys.
Your next question comes from Robert Kwan of RBC capital markets. Your line is open.
Good morning.
So when you refresh guidance.
In almost two months since then so.
Since that time, what's come up its meet you're more optimistic or is a little bit better than than you had originally to watch and then what's transpired.
As an incremental headwind.
You are thinking she talked about [noise].
No.
Headwind is is really the continued.
Degradation of marketing earnings and not that's fully baked in we don't have.
A lot of hope baked in or are there I think as a previous questioning.
We think there could be upside there, but we're not we don't think it's prudent to forecast that Robert I think it's just really when when you kind of get into that got so how pembina works and you know.
It would be easy and I think the them the when I when I see how our stock price has been correlated to to oil and I've got a fantastic route but the ATM to talk about that.
It would be if the general market said, if if you know a million barrels came out of the market of of supply that.
Of call. It 5 million barrels were 4 million barrels that you know call out of 20 or 25% reduction that air go Pembinas EBITDA would dropped by 20 or 25% if it's almost as if.
That's what the market assumed.
So when you get into the the into the guts of it you know the various an acquisition was all gas and so gas is doing pretty good and when you look at you know a condensate supply.
It's the Montney, that's producing a lot of that condensate in behind piece and and.
The mining is a gas play it's not a condensate play it gets talked about in the condensate Lake as condensate was making all the money, but right now gases is pay paying for people's costs, and so people are going to produce at two to harvest the gas maybe a little more than it's been condensate.
And then you look at where does the condensate come from well you know 100, 250 that comes up southern lights, and and I think the industry generally knows that the largest customers on on that line, our marketers and that's out of the money right. Now. So they are there, they're probably going to shut it off or whereas our customers.
Are you actual users of the of the product and and so.
So the underlying.
Economics of continue to flow that that product are pretty good and then you you kind of going behind all of all of that into what protection do you have from from the contracts.
It's it's pretty good and you know ethane demand. It is still pretty good people forget you know pembina is the ethane back FATCA backbone of the whole a country and demand because of all the packaging and medical supplies and things like that demand stays as it stayed pretty.
Good there so it's really going from you know kind of.
The original view, we took on guidance that you know a bunch of our interruptible volumes were going to go away and that was obviously correct. But then taking this at the time between then and now to working through.
Based on what order oil.
Output in the basin would drop and you know so you obviously to the least economic reservoirs will probably stop producing first and then who are those people and is it Sag D is that a mining at say de where do they get their daily good.
Oh, and they don't get it for Pembina or yes, they do but theres a contract in and then are they are they if they want to continue to biocon and sake.
What's their creditworthiness and if they don't want to continue buying condensate Willy do they have the wherewithal to keep paying the contract. So it's it's getting behind.
Kind of the the banner numbers and working through how that actually.
Works at Pembina, and again a topic for this afternoon is.
We've we've taken a amazing steps forward and diversification since the 2015 oil price crash and a including buying at a $10 billion natural gas based company and buying up four and a half billion dollar.
Company that owns a major import pipeline and has you know all investment grade credit in behind or a edmisten storage location. So that that diversity is serving us extremely well right now.
On a if I can just finish with.
Just digging a little bit more on the guidance so.
I mean, the commodity volumes just wondering if you could highlight within those two buckets, where some of the specific she exposures that you're monitoring or put differently what needs to happen to go below the low end.
The range can gifts.
There is something on the commodity side. If you do you go below on commodity side, how much of that might just be shifting into 2021, you see but when you talked about earlier.
Audience I mean, maybe this year you just put it in storage and that's been theory should.
Spreads just one.
Yeah. That's a you know with so many moving parts I understand the your desire to understand thats very very difficult.
Difficult.
Question debt to answers.
You know the you alluded to it in your note. This morning, you know.
The though the words the lawyer words, we put in into our guidance.
You know those those lawyer words reflect hitting tank tops you know work.
You know the scenario, where you have massive system wide.
Shut ins and it looks ever less likely that that's going to happen that that the industry will continue to work curtailed rather than than than than shutdown, but you know the what could what could take us below our guidance. For example is if we had a major mid cap failure.
A mid cap customer failure or something like that but.
With a little bit of Backstopping from the federal government and you know a credit to our mid cap I mean that there are starting to announce a there there are announcing stronger than I expected they've got some support from the federal government hopefully.
More to come in and and.
You know, they're making money on gas like they're supporting themselves on gas like all of our larger midcap customers 70, a vintage of.
They're they're doing okay on the gas side and so there's there's going to be quite resilient resilient, but what could take us lower there would be unexpected failure of one of those.
Companies or.
A violent second wave of cold in the U.S. and and you know reversing the is slowly improving gasoline demand picture things things like that could take us lower but we don't think those are on balance likely but you know we I thought we thought was prudent and responsible.
To point out that towards are still possible and I would say to a different way had we not put those words in.
You know you would have qualified the guidance that way any way yourself you would have said, yes haven't is eminent still guiding but man. It if we hit we if we hit a storage comps than you know there their guidance is probably not going to hold so you would have added for those words anyway.
[noise], so just to maybe summarize either commodity prices stay slot and don't recover or go down just one second would be much more significant.
Today and in the third would be a externally major.
Bankruptcy.
Yeah, and I think you're item one and two are the same.
You know if if if prices are low then your second condition happens and then and now you're now you're asking yourself.
Comes from Robert familiar of C.A.B.C. capital markets. Your line is open.
Hey, Good morning, you batch of lost my courses just a couple of alter yeah first of all I want to thank you for your comments on the blend it in extending the import some protecting your own stake holders.
But the follow that up what is that of course for sure claims activity been like.
[laughter].
I don't think we'd had a single f. and and that doesn't surprise because our our legal team is don't believe that that condition would be met in our current agreements.
Okay, just a little bit of a detailed here see there was a little bit of.
Support payments or Ruby and you also guaranteed something for C.K.P.C. So.
So my question is how much support to think what would be wouldn't need for the rest of the rest of the waiting is not included in your Catholics died.
Yeah, I'll take I mean, she K.P.C. I mean, that's really good and it's more of an accounting. So remember back in February we entered into a project finance agreement with our partners for C.K.P.C. with both Pamina N.P.I.T. guaranteeing that loan.
So it really that guarantees discounted future difference between what the rate would've been had <unk> had gone it's versus the rate on that facility. So it's really I'd call. It almost accounting noise. We wouldn't expect that number to change you know as we proceed through that project of course that that differed right now so I would almost called addict.
Counting noise right now Rob.
And then on Ruby I mean at Ruby consistent with I mean every quarter. That's been the same note into financial statements were advertising about 16 million a quarter for another one year, we just entered into a term loans or or one more year for a note that we do a couple of years ago and we're just slowly.
Advertising that no down.
[noise] Ah okay.
And just just the last question here.
Thank you.
Clearly indicated that where you stand with a guidance and.
You know if things get worse.
2021, you might have to do for a couple again for those projects over the fruit from 20.
In that circumstance, you'll be in a what I would call a meaningful free cash flow.
<unk> situation.
I just want to know what your view is on dividends in that circumstance.
Indicated that for a 2020 it does make sense to on the different in any more than we already have [noise], which is perfectly understandable <unk>, what what's wrong with paper 2021 on the circumstance, where there's more project the fertile some very minimal capital.
[noise].
You know certainly that if that were to occur you know, we I think right now.
The the committed capital for 2021 discuss about three $400 million.
You're right you know if we if we maintained our current level, let me, but you know we got a bunch of projects that are coming into service. It ought to supplement what we have Ah now. So you know argue you could argue it it ought to go off but if if we had offsetting.
Weakness in in in the market, maybe you know, let's say a downside case would would be that it would be flat with our our current guidance, we we'd still we'd be producing a lot of free cash flow no. No question about it and you know the to the extent, we can bring back those projects that week.
<unk> market circumstance isn't right you know, we we could we could put that money toward the our normal 5% kinda dividend increase which would probably be top of mind, but it also with put us in a position where we could we could buy something I mean, if if that circumstance happened you could art.
Q multiples ought to be dropping by sharply to to acquire things and multiple ought to be established I think with the to my earlier point, which I don't know what to pay for things right. Now so that certainly we could we could rather than.
Deployed capital on on those projects.
We could to play capital into a acquisitions and and increased and increased evidence. So I I think it would be you know in that circumstance I don't I don't think our first.
Our first use up capital would be further debt repayment you know we're gonna be you know, we're extremely well positioned now will be extremely well positioned then even in a position of weakness. So it would be probably first I'd give it an increase in second.
To take advantage of an ongoing weaker mark.
That's very good color. Thank you.
Yeah.
[laughter].
Next question comes from Ben town of <unk>.
<unk>.
Okay. Thanks, the more and I know a couple of questions on on your guidance and lots and takes him and whatnot, but I guess I.
I guess, we got I. Appreciate that you guys are working with with some pretty tight ranges pay on on guide them, So really going down lower and there's really not.
Not that they go in terms of materiality. So I guess my my question really is on your dividend payout and you're yield and you mentioned sustainability and and also elaborate I mean.
Even if you do.
<unk> below the lower end up your rain, perhaps I mean.
It has to be really traumatic for you to see concern around your dividend your balance sheet is that correct.
Correct.
We know concerns about the dividend.
Okay, and as you mentioned two times covered with.
It's pretty conservative real peers, there you've been through several cycles, 15, 16, and and a natural cries because there is there right labore range that you're comfortable with and where you want to get to a long term.
[noise] <unk> are you talking referring to pay a ratio.
Yeah exactly.
That is that a good good range, just an update upmarket them down markets.
Yeah, I I would say longer term will probably be between 55 and 65%.
Okay. So you are lower and okay.
<unk> can I ask banana you had some good commentary around 15 16 hours don't you work during that time and and the facts are pretty clear 15, 16, you were quite resilient, maybe one or two quarters, you saw pressure and hi topics you have a trip program on so.
Much better position now, but I'm I'm curious to the way that you're responding to this <unk> downturn is it's much more dramatic or [laughter] quicker than 10 15 16. So.
It is really a function of this downturn is is so uncertain or is it something I do.
<unk> flexibility or is there something else that's that's driving it.
I mean.
It it does the first thing that that drove it is safety.
If we were early <unk> on a 4.5 billion dollar projects and we have thousands of workers working in a in a relatively confined.
Location, our first concern with differing the pet Cam project was was safety and and you know <unk>.
Rewind eight weeks nobody knew you know what a mortality rates would be things like that no idea what productivity might be like trying to build a worldscale petrochemical facility and so our our initial reason to delay those projects.
Was was for for for safety not putting people at risk that we didn't need to.
But at risk so the secondary was preserving.
Preserving capital and and.
You know also got a the the third was our customers I mean.
Did did our customers really need us to put another billion and a half dollars a pipe in the ground four volumes that they don't happen. So when when we you know I called most of the the C.E.O.s associated with.
Those expansions and they were quite great grateful that we were.
You know gonna differ a year because you know they were all under contract. We built those pipes put him in service they had to pay so we're just exacerbating their own situation up liquidity when they're volumes are flatter going down the last thing they need is a bunch of additional capacity to pay for and so you know it it.
It was first safety second customers, you know really and then thirdly test to to stay well within our in our guard rails and defend our our our credit ratings.
But make no mistake those those projects we are.
We are preserving our ability to bring them back when the signals are are right.
We've we've had some staff transitions, but we are preserving our core capability to snap back and so we we very much you those as as to for all we are investing more than we would need to you know in a scenario like we we could pull back even more capital on those.
<unk>, but then we would we would destroy value and a week. So we're we're investing the more than we need to to ensure that we we for example, with petrochemical facility that we can complete long lead items, rather than you know turn turn them into scrap metal because that would destroy values. So we're we're investing a bit x.
<unk> to make sure that long lead items are or the engineering, Spanish and and those are completed module. So that we can we can bring bring them back. So it's much much more than a financial exercise. It's it's a an exercise that that to contemplate all of our stake holders.
Okay, that's great. Thanks, everybody.
Your next question comes from Rob Hope of Scotiabanks <unk>.
Morning, everyone. Just a a follow up question just on the Nitty gritty of how the systems work.
I I guess I, just want to get a sense of whether you buy your view is a daily when stored in the base and and whether or not southern lights will move down enough from its volumes and potentially coach into a upset the demand of.
Off at the lower demand or the oil sands and then the follow up there would be if there is no story would that be a forest mature acclaim for your customers.
So they ask for your second question is we don't believe so.
To your first question is absolutely you know at stake needs go down there there is a lower <unk> and what we see so far is that that's not coming at our expense I mean, we're we're seeing slight reductions in in kocian, but still at or above contracted level.
On on on peace or or at or around are contracted levels with physical barrels.
And so we we are not seeing that coming out of our system. So there's only one other place that can come from so far we've asserted that for years.
Because our our customers you know and kocian are the users about products and on and on on on peace. They have gas economics to help support them, whereas importers don't have that on on southern like so we've we've assorted for some time that that would be the initial shock absorber.
<unk> rolls past the entire imports there to kosher and and two piece we have the <unk>.
I appreciate the color. Thank you.
There are no further questions with this time.
Return the call to Mister <unk> for closing comments.
Yeah first thank God for doing all the reading for me he's a a voracious reader. So he he's a lot better at it than I am I don't read a lot. So thanks God.
They want to think you know all that listeners those <unk>, we're supporting us through this this tough time I'm very proud of the actions we've undertaken.
And I've got some some great charts and graphs. This afternoon for the.
The H.T.M., which Ah I'm looking forward to to sharing with U.N. at a appealing cautiously optimistic where we are today. So thank you and we'll see it yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating human I'm just gonna.
Oh.
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[noise] [laughter].
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