Q2 2020 Pembina Pipeline Corp Earnings Call
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I like to hit the conference over to your first speaker today, Scott Burrows Senior Vice President and Chief Financial Officer. Thank you. Please go ahead Sir.
Thank you Julie and good morning, everyone and welcome to Pembinas Conference call them webcast to review highlights from the second quarter 2020.
Scott Burrows senior Vice President and Chief Financial Officer on the call with me today, Mick Dilger, President and Chief Executive Officer, Jason <unk>, Senior Vice President and Chief Operating Officer pipeline, Your travel senior Vice President and Chief operating officer facilities.
Do Taylor senior Vice President marketing New ventures.
Sure.
Well, they vice President capital Mark.
First I hope everyone listening to this call date seep unhealthy.
I'd like to remind you that some of the comment made today, maybe forward looking nature and are based on timing. This current expectations estimates judgment projections or forward looking statements, we make expressed or implied today are subject to risks and uncertainties, which could cause actual results to differ materially from expectation.
Further.
You can provide it refers to non-GAAP measures to learn more about these forward looking statements and non-GAAP measures. Please see the company management discussion and analysis August 2020 for the period ended June Thirtyth 20, which the available online at <unk> Dot com and on SEDAR and Edgar before we just got second quarter results.
I'd like to first get make a chat make them opening remarks, Nick what do you.
Thanks, Scott good morning, everyone.
Doing well.
The World is certainly changed a lot since our call in early may even a second quarter results feel like distant memory.
However, the second quarter was very important one.
Because it was proof of concept for many of the themes you've heard us talk about for many years.
First and foremost remains our commitment to each of pembina stakeholders customers investors communities and employees.
Good 19 assessment.
By the challenge on like any in our company's history.
We remain proud of the actions, we take into balance needs all stakeholders.
Mmm business continues to operate safely and reliably throughout the pandemic.
During uninterrupted service to our customers, which is a testament to the companys dedicated stuff.
We also continued its project in flight to ensure customers had the services they need it.
Second is our commitment to the financial Guardrails.
Strong contractual underpinning ebay take or pay revenue streams.
Dividend payout.
They went to a credit triple B credit rating and focus on working with solid counterparts.
Oh, our elements that have contributed pembinas resiliency through this historic crisis.
Indeed, do libert diversification of eminent business across geography.
Jason commodity type Counterparties has positioned us very well.
Witnessed strong foundation, we expect 2020.
<unk> financial position, providing flexibility to restart various capital projects when it is prudent to do so.
Further we remain confident in our ability to provide able and growing dividend as we have through past recessions.
It's worth noting too that our top customers many of which I've just the part of their own Q2 results are performing well under the circumstances.
Although higher prices are likely needed to add significant growth in the basin given the recovery in commodity prices. Many are generating free cash flow after dividends and topics and are focused on paying down debt and strengthening their balance sheet.
This is very supportive having us counterparty credit portfolio I congratulate all of them.
Now I'll pass it back to Scott to discuss the second quarter highlights and our outlook for 2020.
Thanks, Matt in addition to the impact of Kobin, Nike and the declining commodity prices. The major factors impacting the second quarter relative to the same period. The prior year with the tender acquisition. The acquisition continues to outperform our expectations for 2020 and the quality of the customers in cash flows from the data showing through in the second quarter, providing greater stuff.
Realty during a challenging time one of the major drivers within your acquisition the opportunity to diversify strengthened the quality of having this cash flow the acquisition of strategically located assets supported by strong contract with investment grade counterparty strength and Pembinas masked by rail and provided in half diversification basins currency markets.
Adjusted EBITDA for the quarter with $789 million, a 3% increase compared to same period last year increases due to the contribution of new assets. Following the can your acquisition and a realized gain on commodity related to business. These positive contributions were partially offset by lower margins on crude oil and NGL sales in the marketing business and.
Lower interruptible volumes on alliance is resolved the narrow equal Chicago price spread.
Second quarter earnings of $253 million were down 62% over the same period in the prior year largely due to non cash factors, including higher deferred taxes due to be NAC, making the second quarter. The prior year, Alberta is built three which produced Alberta corporate income tax rate in 12% higher.
Higher unrealized losses on commodity related derivatives and lower contribution from marketing in Hawaii. As mentioned previously these declines were somewhat offset by the contribution of it gets.
And your acquisition and lower DNA and other expense.
During the second quarter impacted low crude oil and NGL prices received through lower producer activity and a temporary decline in physical volume certain of permanent businesses total volumes. During the second quarter were just over 3.4 million Boe per day up 1% over the same period in 2019 or down 2% when compared to the first.
For 2020.
I'd like to highlight two important points regarding volume.
Firstly it is worth noting that the vast majority of the quarter over quarter reduction contained in our conventional pipeline business unit volumes in our other pipeline business unit as well ability division were essentially flat.
And the first the second quarter secondly, the high proportion of take or pay contract in our business leads to the catch up with volumes and revenue in the second half of the year.
It continues to expect 2020, adjusted EBITDA to remain within the previously disclosed guidance range of $3.25 billion to $3.55 billion, albeit due to low end of the range. This outlook contains an expectation that the 2020 adjusted EBITDA contribution and the marketing any ventures division will be approximately $125 million.
Lower than was assumed in the midpoint of the original guidance range the impact of lower Interruptible revenue me asset base business is expected to be largely offset by operating and administrative cost savings. We predict the majority of these savings can be maintained in 2021.
Turning to our balance sheet and funding ability eminent further enhances our liquidity position during the second quarter by terming out approximately $850 million of debt drawn on the company's credit facility and establishing a new $800 million revolving credit facility.
During the early redemption in July of $200 million in senior notes originally due in 2021 eminence liquidity position currently at $2.8 billion with no magic with no debt maturities for the balance of 2020 600 million a maturity distributed throughout 2021 eminence liquidity position at Apple.
The recent debt issuances at a weighted average term to maturity of 17 years and a rate of approximately 3.2% quite a strong endorsement from abroad Cross section of the debt capital market combined with the recent affirmation of Pembinas Triple B credit rating by both S&P and be Brad We believe the company's strong financial position believe it or.
Moving onto the capital investment program during the first quarter the company to the prudent steps of deferring $4.5 billion of capital projects. How many is on track to realize the reduction due in 2020 capital investment plan of approximately $1.1 billion, however, challenging weather conditions and coping 19 related Washington delayed resulted in capital cost overrun.
In 2020 of approximately $100 million. Additionally, during the second quarter, having to also added approximately $90 million and projects.
With a modest improvement in commodity prices. Many investors are asking about our deferred project and the conditions under which they would restart we view the deferred project in three groups.
Firstly, the face 79, Pete expansions will continue to be evaluated in consultation with our customers based on their need and an assessment of future transportation requirement in the western Canadian sedimentary basin Pembina is well positioned to handle all customer volumes secondly, regarding TBD PDH pp facility. The project team has to stay.
Actually completed the activity safely and cost effectively to bear the project.
Fabrication of critical long lead items that you and key talent and knowledge of being retained all to preserve project value for an efficient potential restart pembina and as joint venture partner continue to evaluate a number of factors related to project.
First the necessary condition.
Evolve personnel to be assured second while the immediate incremental costs associated with over 90 retained by the decision to further project the future an ongoing risky to be understood priced into the project cost estimate.
Sure the full impact of Kobin 19 on the global economy, and future demand polypropylene remains uncertain and needs to be careful evaluation.
For the federal and provincial governments as well as they're probably fanatic, indicating extra capital will be back that we remain confident the original investment parameters, we reconfirm finding to project retarded subject.
Management Committee approvals each partners board.
Thirdly, the Prince Rupert term, all fashion and the efforts Cogen facility are progressing for potential return. These projects are entirely discretionary and commence at any time with that I'll turn it back to men.
In closing the first half of 2020 impairment arrive to an unprecedented challenge reacting quickly and effectively in service of its stakeholders.
Seven as growth and diversification over recent years combined with an unwavering commitment to its fine actual guardrails shirt. The company was well positioned for adversity.
Pembina expects to deliver financial results within its original guidance range and exit 2020 in strong financial position.
This will allow the company to risk limits deferred capital projects continue its long track record of growth providing customers valuable integrated service.
As always thank you to all of our stakeholders for your support.
I will wrap things up.
Operator. Please go ahead and open the line for questions.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from Jeremy Tony from JP Morgan Your line is open.
Hi, good morning.
Hi, Jeremy.
Just want to start off with you know how volumes are working today have all the kind of you know shut ins returned as you expected and just wanted to get a sense for kind of producer discussions.
What you're seeing right now in and how you think you know volumes could trend over the in in the different basins over the balance of the year just trying to get a feeling for how that you know resumption is going.
Ill ask that question to Jason as Scott said, most of the wobble in conventional and and so well Jason I'll address that.
Jeremy so.
You know I guess to me as we mentioned in our in our release with how does the low point for our volumes. We had one we can be aware where volumes hit hit their low quite some time they've slowly been recovering sense then.
As of this moment, we're not quite backup where we weren't January February but we are seeing things sort of recover steadily in that direction I think our discussions with our customers.
Continue to be positive there is still positive developments out their customer theres still committed to it to their forecast, but obviously, they're looking at.
Their budget right now and what that what they're planning to do for the 2021 year. You know, there's some M&A activity I'm sure you've seen going on a market that we think is positive and will lead to continued strength in some of those areas.
You know, but at the moment things are recovering slowly I.
Out of an unprecedented situation. So I wouldn't really say, whether it's as expected because I don't know necessarily what to expect the kind of depends on the demand for the commodities.
Got it that makes sense and so I mean, obviously some a lot of moving pieces here, but just was wondering yes, we think about 2021 and capex there.
It would you expect it to kind of be in line with what you're doing in 2020 or really kind of stepped down from there granted some of the projects could kind of come back into focus as you described in there just trying to get a sense for how it might shakeout.
So maybe I'll speak very fair that piece expansions.
So obviously, we are evaluating phase seven eight I guess, the first thing to recognize I guess on all of those are all.
All of those expansions, including but PCB business are highly contracted.
So including the expansion. So there we have the ability to go out execute those projects and they'd be underpinned by the contracts that are in place.
We thought it was prudent to go out and pull our customers and find out what their timing and expectations were four of those expansions before we just go and execute them. So I. We're in the process of wrapping up those conversations with most of our customer if you would expect to make a decision not on the timing of both expansion.
Before the end of this year.
Jeremy Mick if if we have a lot of flexibility in 21, I mean work our capital program as sub half a billion I mean of the stop we know we're doing so.
Kind of contrast that with where we thought we would be.
Coming into 2020 2019, we are to an App billion, we saw the billing give or take off and audits and then our Capex program at 21 would be yet another billion lower so we have a lot to.
Dry powder.
Cash flow in excess of of capital in 2021, and so is Jason indicates.
You know and same with with Teekay PC, we have the capability to bring those baskets. Just you know what makes sense for for our customers I mean, the last thing. They need is is as more capacity and take or pays with no volumes going through it. So part of hurdle is is really a.
In line with.
With customer needs.
Got it that makes sense and just wanted to hit marketing real quick here. If I could just wanted to get a sense, you said 125 million lower off the midpoint guidance expectation for marketing at this point just wanted to get a feeling directionally speaking for guidance.
It for marketing and the back half, 20% 2021, just think just wanted to seize.
Marketing kind of hit a new you know kind of a lower tremain based on the current commodity prices here just want to get a sense for you know directionally, how that could shake out based on where the curve it.
Okay.
Jeremy its too so we bought yeah, I think you've seen we hit a low coming out Oh, Oh, the commodity price co-op, we're seeing some strengthening and we believe will shrink through the last half of 2020 related to volume increase as well some commodity price uplift and we see some first.
Coming into 2021 as well so yeah, we believe we come out at the low period and will strengthen the remainder of the year going into 2021.
I mean that thing to watch I mean, what's what what what kinda crash test this year was resilient and gas and and imploding liquids, so that frac spread got squeezed and so those are the key things that are going to unlock.
Hundreds of millions of dollars that if we get kinda into a stable gas price with a with with liquids prices going up into 2021 that I will answer.
Locker full capability again.
So.
You can watch that Jeremy and kind of gauge for what you think is going to happen in 2021.
Got it. Thanks, so much just real quick <unk> does the caps deferral has that been impacting I guess, a re contracting on piece at all that is that you know been helpful in any sense.
No I think existing infrastructure always has advantages because it's real its reliable and though.
Your customer you've got to think am I going to am I going to count on the pipeline that there are going to count on a pipeline that might be there and so.
We think overall it's been positive.
For our discussions with customers.
Great. That's it for me thanks for taking my question.
Your next question comes from Matt Taylor from Tudor Pickering Holt Your line is open.
Hey, guys. Thanks for taking my questions here I'm just wanted to follow up on Jeremys question on marketing since the 125 million dollar impact does that include any offsetting assumptions on realizing once your contango I notice that you had proactively added some lower cost Ngls and then.
Also is the sharp recovery and crude pricing and volumes returning in that $125 million impact as well.
Yeah, Matt It's Scott here, I mean that that forecast is out of a couple weeks ago. So it reflects the best information at that time I think it's also since we're talking about marketing important to point out to other point number one we did have a 10 million dollar cavern law.
In Q2, which was a onetime event, which drag down earnings that quarter. We also if you look at the NGL sales volume you will see Q to Q2, they were down quite a bit and just given where margins, where we decided to store incremental NGL, which we hope to monetize through the back half of this year at potentially in early 2021.
So part of the weakness in its second quarter was also a conscious decision.
To defer some of our NGL sales volumes as well.
Great. Thanks for that Scott and then I wanted to move over to baseline.
You comments on the expansion potential there and how you're thinking about adding tankage at this facility I had a TMX I know where a couple of years out but I'd imagine customers are starting to think about a you know as we're getting closer to that any color on that.
Hi, This is Jason So we're currently working with our partner there.
Our valuating the cost of not expansion. We're currently looking at the same spreading said get some of the prep work done.
On the ground to to get I'd say ready for expansion.
During the estimates together to figure out exactly what that expansion with cod, but but we are aligned with your thoughts there once that comes into service. We believe there's an opportunity to provide you know boats storage and terminaling services to be able to provide needle batches onto the TMX and things like that for our customers as well.
That's storing product so that does seem to be a catalyst and just trying to narrow in on the timing of when that is it's a bit at the a bit of the science that we're trying to give us a moment.
Great. Thanks to that and then one last one from me you talked about interruptible revenues being offset by Opex in gene a savings is that target still 100 million Bucks and all that said she disclosed on Q1 and I'm just wondering how much of that is left to be realized in the back half of this year.
We have a high confidence we'll achieve that we're currently running at or above that.
In our forecast so.
Good very good competence and.
And we anticipate those savings to us to continue, especially if you consider that are committed capital is a billion lower than in 21 that it wasn't 20, we don't see any reason we can maintain.
The 50 million, a DNA and 50 million of Opex savings through through 21.
Thanks, It's just to clarify is that that 100 million was realized in Q2.
No it will be realized by the end of the year like we recall, we kind of announced it early Q2 by the time Weve got real organized to it. We were we were starting those savings it's kind of in the June timeframe, and so that 100 million was really realized and call. It six months given.
Take off the back half of the year, but we're forecasting.
Meeting or exceeding not rate right now and expect to be able to continue that level of oh efficiency through anyone.
Thanks for the quarter their mix that's that's it for me.
Your next question comes from Linda Ezergailis from TD Securities. Your line is open.
Thank you I'm wondering if we can follow up a little bit a and drilling downtown understanding pass some of the.
Moving parts in your marketing business in the quarter can you elaborate a little bit more on the nature of the operational issue in the storage cavern has it been resolved is it discrete to this one particular cavern or is there some systemic.
Things that you might want to remedy across your franchise.
Good morning, Linda Jared here, yes, it was contained to one cavern and it has been mitigated.
As we speak so it it's not a systemic issue Nelson.
And can you describe a little bit what happened in the product or.
Product was C plus and I won't get into the technical nature of.
The loss, but yeah. It was C plus.
Okay. Thank you and.
With respect to the guidance range I'm wondering what my moves the 2020 results to the upper end of the range is it purely volume's and margin are there other factors and maybe you can talk a bit I mean things to look out beyond liquids pricing.
Yeah, let I can unfortunately safely say, we're getting to the top end to the guidance range.
Which is $150 million I get 3.55 billion is not in the cards.
We're going to be between the midpoint and the low point.
Oh at least that's what we're projecting now for us to move.
From the low point, we need to see a decent resurgence from fields like Drayton Valley, where we're still we're still off quite a bit as you know that's a that's.
One of two systems, the other being Swan Hills, where we don't have a great deal a take or pay contracts. So we need to see some resurgence down and the Drayton cardium.
We need to see how wider crude WCS spreads I know there they're trending in the right direction and then we'd need to see a nice pop in the price of.
Propane as Scott said, we've got a lot of propane in the ground.
We didnt pay that much for that propane because.
Commodity prices through the second quarter, and if propane popped and we have a healthy margin on the fourth quarter. So those are the kinds of things that could get us to trend from the low point.
Trending back towards the midpoint, but we don't see a scenario where were above the midpoint at this point.
Okay. Thank you and that just as a follow up with respect to Youre, a peace and northern systems, you've got a.
Quarter of a million barrels per day of currently available physical capacity.
I'm wondering how much of that is take or pay capacity or is that not all.
Your spot capacity I'm, just wondering if as that fills out but just.
Some of the margins might not be entirely added it was are displacing releasing other customers and their take or pay obligations.
Hi, Linda Jason.
So in terms of the take or pay.
Most of our customers are operating somewhat close to their take or pay so.
When you think about how much take or pay revenue were actually recognizing at the back half the year, it's not it's not a huge amount.
Let's take or pay revenue so all incremental.
Volume that we do get it it's really going to be.
Topic.
From that perspective.
Yes, so I think like if we do get.
Incremental volume from customers under contract that allowed incremental margin to that.
Some of the trucking volumes are where you see some of that some of the volume back half whether they come through third party terminals or our own truck terminal. So so that's where some of the opportunity lies for normal.
Great. Thank you I'll jump back in the Q.
Your next question comes from Rob hopes from Scotiabank. Your line is open.
Good morning, everyone I'm a follow on question on the deferred projects when we take a look at say 789 of the piece expansions.
Are you looking to pick those up as they were originally planned or do you have some flexibility to to alter some of those projects to better serve your customers volume, but it looks.
Yeah, I mean, that's a great question and we actually probably in the last six weeks, we did look at.
Different derivative of the Master plan as it were.
And we certainly have less.
Capital intensive options that are near term, but where we remain focused is building the right system for the future and that remains core products or pipeline.
Almost all the way from the BC border and just gives us a ton of flexibility way less reliance on on storage.
Allows us to tie products and kind of mid pipe rather than just at storage hubs.
Allows us to partially loop system than it just gives us.
Incredible future flexibility and so as it stands today, we remain focused on on.
Building the right Master plan.
All right. That's helpful. And then just a follow up question can you comment on the changes that were made with the TJ any ruby contracts.
We can't we can't specifically comment on customer contracts, but I think really I guess the way to characterize as it is the gave both them and thats more flexibility.
All right. Thank you.
Your next question comes from Andrew Cookie from Credit Suisse. Your line is open.
Thank you good morning.
Question really relates to the producer M&A that we've seen and the reduction the counterparty risks that stuff, but that does for you on the front and I.
I guess when you think about our longer term basis, what does it mean for you do you wind up having better counterparties and effectively bigger volume metric opportunities or do you see a little bit or competition for some other producers that like to do their own thing on the process inside.
No I guess it as.
Customer bye bye bye customer I think your intuition that fit that deals are going to get a bigger and more integrated that that's probably on balance correct.
You know.
Case in point in the last five years, our transaction with Chevron Qubec JV.
Kind of an area alliance, where we build processing.
We transport we frac.
We collaborate depending on product and marketing, we we think those larger deals.
And make a lot of sense, because they bring the kind of economies of scale that I think the modern oil and gas business needs to amortize costs over large amounts of volume and be very very.
Competitive 10 and.
There's just so capital intensive to drill six or 12, well pads with with many many horizontal segments and and huge.
Liquids handling capability water needs.
So those are really capital intensive and but they deliver incredible longevity and economies of scale. So those are going to be what impacts pembina. The most of course, we're really happy to work with with some of the smaller producers they might last kind of more in that Drayton Valley Swan Hills area.
Elsewhere, we still have surplus.
Pipeline capacity, they don't need to sign Big Big agreement.
And and but there will be a little more commodity.
Instead of I think gerrick, you want to add anything for that.
Thank you you nailed it mix I think.
And this new world, where everyone needs to higher net back I think not only will you see consolidation on the upstream side, Andrew but I think.
As Nick said adjacent said, we've got a lot of capacity on the pipe, we need to stop overbuilding, our infrastructure and consolidating a lot of this and putting maximum amount of molecules through these facilities. So even though some customers I would say may typically have wanted to build those assets themselves I think they may be looking at I will turn.
Third of solutions to focus their core competencies on what they do and and let people like ourselves focus our competencies or we do a great.
Okay. That's helpful. And then I'll go from a big brought a bit more narrow and.
Just on the Vancouver Wars business, how are you thinking about that and I guess about the year that you've had it on the books thereabouts.
Well I mean for people who are familiar with it not a lot of that terminal is is hydrocarbon based and so.
We are assessing the opportunity.
For hydrocarbons, there I mean as an example, there diesel will be enamel three dot facility.
Currently there there are hydrocarbon tankers theirs.
A bunch of spare land the birds are fully utilized but you're in the middle of a big city and that's Citibank coover. So.
We are weighing all of that and trying to find out what the appropriate.
You said and.
As for our company versus what it might be worth and other People's now.
Okay. That's great. Thank you very much.
Okay.
Your next question comes from Robert Kwan from RBC capital markets. Your line is open.
Good morning.
Just wanted to come back to some of them off small projects and.
You laid out the three buckets and as it stands right now.
Which of those three buckets or can you order.
Which ones you think are most likely to come back the fastest.
Well, that's a that's like.
A great question.
It's like trying to judge what is going to happen next with Covance I think because coal it drives demanded and you know if demand were.
For example, if if if you ask wouldn't have had all the cases than.
I think than we're probably going to bring.
All of those projects back but.
Trying to judge.
Robert what what what demand is going to be for hydrocarbons and slipped pricing falls out of that which will be drilling.
It's difficult I would say, though.
The positive quarters that our customers I've said in the east is really encouraging and so we're going to be consulting with them in and we're going to put the baton their hands on go no go and.
We'll go from there I think the little bit more opaque one is is CK PC because.
We need to get comfortable with global GDP marching forward, and that's really quite old opaque right now.
Of course.
Nobody knows exactly what's going to happen I think you were 2025 would be the Onstream date now so that is a long way out so we're making some educated guesses there but.
I can tell you in the next eight weeks, we've got to make some decisions weather this winter or or.
Yes.
Going to reaffirm note.
This year or we're going to wait another year so.
Stay tuned. These are these are really difficult decisions hope you can appreciate that.
And I guess the mix at the beginning of the call you made a statement.
Okay to exit 2020, strong and you're looking at the ability to resume the gross prudence just if you pair that with your outlook guide the business is.
Uncertain and you're trending lower house.
The guidance range.
Just on the outlook you've got it is there any reasonable possibility that you bring these projects and start putting them into construction in 2020 or is this very squarely 21 in house.
Well I mean, I guess I guess, yes third there is a chance, but that said we come forward and say, yes, we're going to go in 2021.
The start date for Teekay BC would be March up 21.
You know the start for based seven we've got 65 kilometers in the ground and based Evan and stockpile to fight. So it we've got a class three estimate we were approved.
So I mean, we could bring not one back faster so literally no will be calling customers here in the next four weeks and.
And.
In conversation kind of goes like this you got a contract.
We can start do you want to start or do you want to you want to delay and if they say on balance we want to start we're going to start.
So.
We'll have to see what they say.
Okay and then just last on this topic can you maybe square some of that out Wes.
It's pretty small number admittedly, but the new gross you put on the books gives the nature of that just kind of.
I returned.
Payback.
Case.
Do you think about 79 versus some of the lower capital.
No more configuration.
Options versus.
New pipe in the ground.
I mean, yes, some of the smaller projects like.
No.
Prince Rupert expansion or Empress cogeneration, those or no.
Those are.
Projects weaken unilaterally start when we think the times right, we want to see what the lay of the land is on on exports here coming into the fall.
So that'll that'll gauge, whether we start that went up or not cogeneration I mean, we can start that at any time, so we'll be assessing that but fairpoint. Those those can come back anytime they aren't as reliance like the cogeneration its self supply power, we're doing very well.
At our other cogeneration.
Facilities and so we may we may well bring that back we talked about that the baseline tank project, that's something that we could we could bring back certainly our marketing group could become the customer or that.
For a for many many good reasons or we could we could farm that out for customers on a fee basis for the TMX coming into service. So we up we have lots of projects and many more of that.
That we didnt.
Didnt pullback or defer that we're getting what we call shovel ready which means.
Adequate to precision in engineering, and and regulatory approval. So that we can really respond quickly too.
To market developments I mean.
Getting regulatory approval in engineering and the scheme of.
Now the size of our capital program is is a rounding error and that's one thing we can do.
And these are slower times is.
His get ahead of that instead of always being a little bit behind on on those two factors.
We can get to get ahead of that and it's going to give us a lot of flexibility overall, we're we're we're cautiously optimistic that.
That we will see gradually improving circumstances for for the for the sector.
And if I can just finished a question on marketing showed $125 million down from your original midpoint.
How does this changed recently or is this just you, giving more granularity to the street and I'm just wondering some it doesn't look like your 5% to 10% of EBITDA coming from commodity.
Some prior disclosures.
Yeah, Robert did I mean really again this is kind of the best information you have at the time because our current forecast is really about giving incremental disclosure trying to give people. The information that the vast majority of the kind of reduction to the low end of the guidance range was from the commodity exposed.
Portion of the business most of it is coal bed related but and the downturn pricing, but to be honest. Some of this was starting to kick in in February when we had the initial kind of price price for between Saudi in Russia. So, it's it's kind of be that trend throughout the year end to end point, where we are today and then add as incremental disclosure we.
Thought we'd let the street no so you're right our kind of commodity exposed portion of the business, we've kind of talked about in that 5% to 10% range. We were to update that today, it would be 5% or last maybe 5% to 3%.
And I'll just build on I mean, when we set our guidance.
We truly a set it at the midpoint of what we think it's going to happen in the wiggle in our guidance is usually highly correlated to kind of a attend 90 on marketing.
Net of what we think we might be able to mitigate the down market. So.
Go two years back when we raised our guidance twice, but that's because we were kind of at a 95 and then last year. We were in the upper end of our guidance and so it did cover the positive wiggle in guidance and this year.
You know.
You bet, a hard work and it still is cut covering the negative wiggle in in marketing outcomes and so I.
I think looking back.
The way, we do guidance.
It served us quite well.
That's great thanks very much.
Your next question comes from Robert KEPCO Yang from T.I.B.C. capital markets. Your line is open.
Hi, good morning, everyone and thanks your comments so far.
I was wondering if you could give an update on the outlook for alliance pipeline with respect to see eventual renewal there and why they would be a it goes Chicago differential and some recent customer comments in both the fee structure and maybe if you could add to that.
For the so soon DASL Balkan plays into the equation.
Hi, Robert it's Jason so.
2020, it's been a kind of a different year for alliance in terms of the spread between Chicago an acre historically open.
Barry and the money.
This year, it's been a bit of an anomaly. So when you look out beyond.
Q3, Q4 into 2021, we're seeing those spreads come back so.
We're pretty optimistic.
In the second half here the site the volumes start to recover and and we think there's.
Reason for both in terms of renewal historically, it's always been a good hi, good market for our kind of what we believe there still like that diversification and we also think bottom you kind of mentioned the associated gas comparable I kind of if you think about the whole lower 48 gas production.
Picture.
I think thats reason for optimism that gas prices will be pretty strong the Chicago market with the long term so.
I think that.
You know, we're fairly confident that over time. Thanks, I'll start to look look better for alliance in terms of re contracting business than it has.
Putting 20.
Yeah, and I would just add if you zoom out and and Jay Jason comments are wrong, we're going to make a lot more money on our on our extraction business, because I mean gas prices.
There are lower and so whether it's an OCC stwol or.
At Empress they're kind of is a bit of a natural hedge in there right.
Right.
Just a moving to the KBC and what's required to restart there you have some pretty good color.
But yeah, I just want to make sure I understand the nuance here.
And what you're looking for on the future Poly propylene demand given that you do have some contracts. So are those contracts still in place and still valid and what do you really need to see levels contracts from the demand side of equation or is it just a question of.
How about partner and everyone has to be comfortable on where they see demand.
Robert.
We're looking at I think the global context, Oh, you will we'll revisit [noise].
And look at.
In the project economics, ensuring that.
The investment thesis is still valid and hole.
To to drive through we still believe that again, the western Canadian sedimentary basin provides.
Cost advantage produced the polypropylene product, we think we are in a and logistic advantage location for market access and we'll re run the economics here in the third quarter and and update our perspective, both our ability to be a low cost polypropylene provider into the north American in global markets.
That's the intent of thought the statement and then in terms of contracts just like you don't face a the phases a piece those contracts remain good invalid and and.
They don't they don't have any kind of outside date concern.
At this time, so when we go those contracts will will go as well.
Okay, and just on the security about propylene supply I know you're working on the project Ambrose stuff.
You know.
To help with that but in light of the decreased production of Ngls.
That might be temporary.
But there also increasing export options so how do you.
How comfortable are you with the.
The being a low cost supplier in the context, we don't propane situation.
Work, we remain comfortable I mean whenever this basin has seen any kind of a price signal. So I mean, they let just play it out.
You know.
Ill.
A west coast terminal start to pull hard on propane theres, a temporary blip it starts to become more valuable and people just pulled down their plan and take out more propane or somebody built another.
Now there are deep cut.
If you look at that we've always looked at how the ethane business has done over the last 40 years and these concerns I guess I've got an old but these concerns have arisen from time to time in situations like this and and.
Things looked like there wouldn't be enough supply for the polyethylene business I think thats a quarter of a million barrels a day and now ethane ethylene every single gas pipeline is.
Whether it's the you know that the Enbridge system more TCPL or alliance were all running it complete Max eat capacity and there's tons and tons of ethane export it from from the province, and and so were awash in ethane. So we think that base and it's just so prolific.
Okay and good as soon as there is a price signal sent a we'll we'll we'll react and.
Uh Huh, it's just because the the quality of the rock at the end of today.
Okay. Thanks, very much guys.
Karen.
Your next question comes from Ben Pham from BMO. Your line is open.
Okay. Thanks, Good morning, and also a question on a teekay peace tea and.
One of their references the three you didn't mention is perspective.
The government.
Just wondering is that there's any due to the royalty credits there something let's say to know about in terms of exploration dates or ability to monetize those credits.
Yeah.
The we've gone back and we have confirmed and reconfirmed our of the both the provincial and federal governments commitments to the the funding.
Again, the relative credit the the Alberta go rich has come and stated that those are there. Some we're we're working with them on documentation for the extensions and we're working as well with the federal government on the shift program grants that we receive and are.
Confident that everything will be extended that's for the government grants.
Okay. So it's happened it sounds like when this was set up I think Kevin 16, or so that there was some sort of exploration that you might be heading into and it sounds like you're you feel pretty good what extending that.
Yeah, I would think ahead of schedule and vendors requirements for information filings and so we've been diligently working with the both federal and provincial government, so providing all the documentation and working through extensions of those agreements okay.
All right.
Is there is there anything in a way of.
If you this should censor really low cost that and it looks like we're in this world of almost zero percent interest rate is there anything to do with balance sheet optimization, you see what are buying back preferred shares are causing some debt is there anything it looks interesting arena.
Hey, Ben it's Scott.
We did we did capitalize on some of those low interest rates recently it as we disclosed subsequent to Q2, we did refinance.
One of our existing 2021 note.
Interest rate, 3% to 4% below where it where that no with issued at so we started to chip away at that we also have roughly $800 million on our credit facility, which will likely look to term out in the back half the year as well the capture some of that long term interest rate savings, but in terms of optimization of the preferred shares.
We've looked at it but ultimately doing at normal course issuer bid for your preferred shares just no liquidity in that market. So those that would be very very top two two and act. So it's something we've thought about but at this time not something we're pursuing.
Okay.
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Kevin Smash then lastly, this this big news flow around Dominion and Warren Buffett on I guess this year on possible Colocation M&A I mean, if your stock Prince wasn't some mispriced and no. One has been a bottleneck natural one question and is that strategic.
The most type assets, so that would that strategically fit with what pembina.
I mean, I think you made a hell of a deal like.
Only bought the railroads, what a decade ago it at or at the right timing and looks pretty smart down and looks like he's going to look really smart again.
Here I mean, those those assets a long life and there's a scarcity value associated with them because that part of the world's hard to build new one.
But but for us it too to do that we again, we're trying to grow our business. So that one plus one plus one equals equals five not for through the value chain and so we've been disciplined.
We continue to be disciplined to make sure that whatever we buy has had synergy and notwithstanding that was a good by it it doesn't create the kind of synergy that we've seen when we bought Providence and added a downstream piece to our pipes or Kinder Morgan with the storage.
And then the cross border pipes that that attached to our infrastructure or export facilities that that connect through through our rail fleet.
But those are the kinds of things that we think can create exceptional results over over time and it is tough to to watch.
Deals come and go that that maybe aren't as synergistic butter. Nevertheless, good deals, but we remain on our on our path.
Okay, all right. Thanks, everybody.
Your next question comes from Patrick coming from National Bank Financial Your line is open.
Hey, guys just to clarify on CK PC, if the project might be eligible for these additional grants that are being rolled out by Alberta. This fall I believe.
On top of the royalty credits that you've already secured.
And then also just any thoughts on how this new program might bring some of your ethane based infrastructure opportunities more into focus over the near term.
So we've we're investigating that again.
Our facility was granted under PDP, one royalty credits.
PDP too was put forward by the Alberta government.
And they since then come out with the New program you cannot as we understand collect both PDP too and the new program credits, we are investigating whether there would be additional.
Opportunity for us given that we were in the PDP one program.
We look at it and we're trying to manage that and we have meetings set up to go and invest in more of that.
You know at a macro level.
Ethane painful for gas value right now, it's just been sold as he said no premium and so it.
It seems like the sector is right for.
Additional ethane consumption infrastructure, and we're well positioned to BB ethane production infrastructure.
The new program again, I think the governments as well.
Listen and then it's trying to look at how other jurisdictions.
Have gone up out there, they're incentivized incentivizing development and infrastructure development.
This is a program that is not a onetime events that its ongoing which I think from an investment cycle purposes, that's a advantageous and the government is picking winners and losers.
Here, they're saying if you go forward and do you build your assets there are credits.
That could be made available to you. So I think it is an improvement.
As far as the ethane development. It I think it opens up a more people and perhaps greater competition for development as well.
Okay. That's it that's good stuff thanks for that.
And then on the potential sale of the $2 million to $500 million of non core assets.
I guess given all the actions you've taken over the past few months to boost your liquidity position doesn't seem to.
Be the same financial incentive to sell these assets at least relative to maybe earlier in the year.
So maybe just to comment on what the benefits might be from a synergies or strategic rationale perspective that still support the decision to is to dispose of these assets.
Yeah Pat.
Decisions to potentially monetize some assets were made kind of well before Kobe 19 hit we started at some of this work late last year and in the early part of this year really we just disclose did in March for threats. The initiatives that were going on since it was underway.
Really just started pre pre Kobe didnt appoint area that these were never done or liquidity or balance sheet reason. These are really born out of some some pretty significant inbounds that we got and we thought it was our job to at least explore them. So I think the point I'm trying to make sure. All this is where we're in the process of embed.
The gating some of those but if he ended the day if they don't hit our retention value that we will sell we don't have dealt with it we weren't selling specifically for Colgate 19 or balance sheet reason, so we'll assess the bid tonight in the context of our retention value and if we get that value, we'll make a decision at a time and if we don't get good value we are happy.
In the assets.
Got it okay.
And then also I appreciate the updated disclosure on your Frac spread hedges.
Just back to your comments, though on on looking to monetize your propane storage position that you've been building here recently.
Adam next winter are you also looking to lock in some of your propane marketing margins on top of your frac spread exposure or.
Well those barrels be mainly supposed to an open position.
Pat We do have in addition to our in addition to our crack spread positioned that that we talked about in our release. We also do have some of our winter inventory hedged as well. So we do have a price protection through the winter.
Okay. That's great that's it for me guys.
Your next question comes from Shneur Gershuni from you'll be asking your line is open.
Hi, good morning, everyone glad to your everyone as well and surviving covered well.
I want to be the.
Got here just a follow up on all these the propylene related questions in the fact that you've you've introduced this variability in your guidance on 125 million given the fact that you've you've sort of hedged it and so forth. You said will be just kind of the timing things you've got you've got it and you got the NGL storage right now some of it.
Based on where Frac spreads shake out means you could realize it in Fourq you were could rolling to one Q and so forth and is it really just a timing issue and that's why you've kind of introduced this variability you were 125 million dollar opportunity completely it's an opportunity loss at this point right now.
Yeah, I think hit a large portion of it the vast majority of it would be would be pricing degradation in margin, but there is there is a small piece of it timing depending on when we monetize some of the volume that and stored in Q2 some of those will likely be monetized in Q1 of 2020.
One so there's a small portion of that that timing, but the majority of it is generally lower lower volumes on the crude oil side just due to shut in that we've seen in kind of Q2 and into Q3, and then NGL margins as well.
It did everything came back I realize it seems like with a goal.
But everything comes back full boat volume wise do you have the capacity to take everything out of storage while running your systems full both at the same time, where would that create a timing issue or capacity issue as well.
No that.
Obviously, we couldn't do it instantaneously, but no we do have the infrastructure in the capacity to.
Process, all the incoming NGL volumes and be taking adequate storage at the backend.
Okay, what would it take us.
Okay.
Just one last question on costs.
You've done a great job on it.
Think we sort of seamless kind of across the board within the industry like the thing that that is the notable and simply is how depth how deep some of the costs have been at some of the midstream companies in some of the broader energy companies as well to.
I realize that huge huge we've definitely delivered on it.
Good for you challenging your staff to potentially double the type of cost reductions that you've seen it will forego even more than that.
Just in which we've talked that Youve gone through local shelter in place type of environment.
Have you been able to like reassess everything and do you think that there's opportunities that we could see.
Significantly more cost reductions being announced over the next couple of quarters.
I know, we're really proud and thank you for for.
Saying, we've done a good job.
I agree with that.
The.
We're not looking at further staff reductions like we think we want to maintain the capability that we out though we do think things are going to come back and so having people that can you know.
When commercial contracts build facilities.
Make sure we have.
The flexibility and IP and systems, we need those people and.
We're going to keep them.
We do think there is future opportunity I'm not going to nail it.
Any given quarter, but a lot of those opportunities for going to come with.
With technology for example, we're we're completing.
A brand new telecom system, along our piece right away that will give us incredible bandwidth to do things remotely with with cameras and telemetry and things like that that we didn't have before and and so it opens up at.
A new possibility with machine learning and other other ways to and Jason talked about key space and that a lot of that you know unearthing, another 50 or 100000 barrels a capacity bye bye.
Optimizing your pipeline flows.
That's very very possible. We've just never really had a lot like this if you think about we've I think employed roughly $50 billion in green and brownfield.
Projects over the last 10 years.
Never really caught our breadth and said, okay, well, here's what we got let's really optimize it. So I think theres theres not just cost synergies, but revenue synergies that we're going to we're going to work really hard on and we said as our top priority for 2021 to improve.
Return on our Investor capital and and.
There is theres a lot of enthusiasm and the company to do that.
I think maintaining the synergies that weve outlined in 2020 into 2021 that is our near term objective, but that's not the end of the journey at all we think we can take more ground, but it's going to take seven sometime.
No I completely appreciate those come to just to clarify with thinking about further lay offs I was just thinking more about productivity enhancements.
As you were able to assess and it sounds like you're you're seeing opportunities too.
See those enhancements all and kind of unearned revenue optimization basis is that set a fair characterization I revenue and cost what we're trying to do is is.
You know along with getting project shovel ready to question, we're asking ourselves it and if we built all those projects how would we do that without adding people and so the way to do that amortized. Your your people costs in your asset cost is through technology. It is having people every person that.
I cannot be able to do more through technology and so it's not just.
Okay.
Cost in our existing business. It's how do you have you grow without adding people and I think that's really were technology can can help in so I do think its revenue synergies thats going to be op cost synergies, it's DNA synergies, but it's also growing without adding fixed cost and I think.
That does the left the last thing I mentioned is perhaps where the biggest opportunity as.
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No that makes perfect sense really appreciate the color guys.
Public safety and enjoy the weekend.
As well.
Your next question comes from Penny Satish from Wells Fargo. Your line is open.
I think you just one quick question for me I think you mentioned in the prepared remarks that youre seeing higher spot volumes on Ruby This quarter I guess, what's driving that and is there any opportunity to turn some of those interruptible volumes into longer term contracts. Thanks.
Yes, so really just driven by the spreads between you know the land hotel in Alberta, and so, whereas with the stronger gas prices in Alberta, we're seeing.
Some opportunity to move spot barrels on par with Ruby pipeline and yes, we do we are looking at.
You know with Kindred Morgan that at how do how to actually locked in with into some long term contracts and.
Lastly, looking at that as we speak.
Yes, I mean, it at the macro you can see at ease and our base, which I know better than in the U.S. basin, there's some boente for GAAP base.
Producers East eight and.
That means obviously gas prices are going up which means gas volumes can go up so bad point the continues we're.
Back to an earlier call, we get we get ever more optimistic that that.
The alliance re contracting will continue as it has positively.
As well as as Ruby that all kind of hangs together if you're optimistic on prices then you're going to be optimistic on on volume. So we'll see it's early days I'd also just add that meaning goes to show you over the last couple of years all these different.
Pricing points have changed over time, so most producers like to have diversity of endpoint because you do you actually can't predict which markets going to be making more money than the others. So we still think that having the alliance and the Ruby multi band in Chicago exposure is great because lots of producers are going to want to diversity of supply points.
Okay, that's great and do you think do you think these these spot opportunities will persist for the next several quarters.
Or do you think it's just kind of a one quarter benefit.
We've seen it on and off over the last year. So let's from my perspective fairly fairly positive continue for some period, but with the market as bullish as it is kind of hard to predict.
Great. Thank you.
We have no further questions I would like to turn the call over to mix filter for closing remarks.
Yeah, well, thanks, everybody for your interest.
I'm really proud of what we were able to do at through the second quarter. If you think about how we all felt in March and where we sit.
Sit today, there's a world so full of challenges, but it does seem to be slowly getting more constructive. Thanks to the hard work of all of our staff and the resilience of our our customers so hats off to our customers and.
We are we are starting to feel more and more constructive as time goes on.
Have a great balance of your summer and that stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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