Q2 2020 Pembina Pipeline Corp Earnings Call
[music].
The World has certainly changed loss since our call in early May even the second quarter results feel like distant memory.
However, the second quarter was very important one for pembina 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.
Who is 19 in Texas, all and provided challenge unlike any in our company's history.
We remain proud of the actions we've taken to balance the needs of all stakeholders.
Pembinas business continued to operate safely and reliably throughout the pandemic, ensuring uninterrupted service to our customers, which is a testament to the company's dedicated staff.
We also continued project in flight to ensure customers has the services they need it.
Second is our commitment to the financial Guardrails.
Our strong contractual underpinning fee based take or pay revenue streams.
Prudent dividend payout.
Commitment to of credit Triple B credit rating and focus on working with solid counterparties.
All our elements that have contributed to pembinas resilience through this historic crisis.
Indeed, the dose liberty diversification of Pembinas business across geographies.
Basins commodity types, and Counterparties has positioned us very well.
With this strong foundation, we expect to exit 2020 in solid 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 stable and growing dividends as we have through past recessions.
It's worth noting too that our top customers many of which adjusts reported their own Q2 results are performing well under the circumstances.
Although higher prices are likely needed to send significant growth in the basin given the recovery and commodity prices. Many are generating free cash flow after dividends in capex and are focused on paying down debt and strengthening their balance sheet.
This is very supportive pembinas counterparty credit portfolio I congratulate all of them.
Now I'll pass it back to Scott's to discuss the second quarter highlights and our outlook for 2020.
Thanks, Mick in addition to the impact of Koby, Nike and the decline in commodity prices. The major factors impacting the second quarter relatively the same period in the prior year with the tender acquisition. The acquisition continues to outperform our expectations for 2020, and the quality of the customers and cash flows from these assets as Sean through in the second quarter, providing greater stuff.
Realty during a challenging time, one of the major drivers of the tenure acquisitions the opportunity to diversify and strengthen the quality of Pembinas cash flow. The acquisition of strategically located assets supported by strong contract with investment grade counterparty strength and Pembinas matched by rail and provided enhance diversification of basins currencies end markets.
Adjusted EBITDA for the quarter with $789 million, a 3% decrease compared to same period last year. The increase was due to the contribution of new assets. Following the tender acquisition and a realized gain on commodity related derivatives. These positive contributions were partially offset by lower margins on crude oil and NGL sales in the marketing business and.
Lower interruptible volumes on alliances result, narrow equal Chicago price spread.
Second quarter earnings in $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 the math meant in the second quarter. The prior year, Alberta is built three which produced Alberta corporate income tax rate from 12%, 8% higher unrealized losses on commodity related during.
It is and lower contribution from marketing in Alliance as mentioned previously these declines were somewhat offset by the contribution of additional assets on the tender acquisition and lower DNA and other expenses.
During the second quarter impacted low crude oil and NGL prices received through lower producer activity and a temporary decline in physical volume in certain of Pembinas 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.
After 2020, I'd like to highlight two important points regarding volumes.
Firstly it is worth noting that the vast majority of the quarter over quarter reductions contained in our conventional pipeline business unit volumes in our other pipeline business unit as well as the facility division were essentially flat.
From the first the second quarter secondly, the high proportion of take or pay contracts in our business leads to a catch up of volumes and revenue in the second half of the year.
It continues to expect 2020 adjusted EBITDA remained within the previously disclosed guidance range of $3.25 billion to $3.55 billion, albeit you to low end of the range. This outlook contains an expectation that the 2020 adjusted EBITDA contribution from 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 in the 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 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 and senior notes originally due in 2021 Pembinas liquidity position currently stand at $2.8 billion with no magic with no debt maturities for the balance of 2020, and 600 million a maturity distributed throughout 2021, pembinas liquidity position and Apple.
The recent debt issuances at a weighted average term to maturity of 17 years and a rate of approximately 3.2% provide a strong endorsement from abroad Cross section of the debt capital market combined with the recent affirmation of eminent Triple B credit rating by both S&P and DB or as we believe the company's strong financial position is fully upper.
Moving onto the capital investment program during the first quarter the company to the prudent steps of deferring $4.5 billion of capital projects, having is on track to realize a reduction due in 2020 capital investment plan of approximately $1.1 billion, however, challenging weather conditions and coping 19 related precautions and delays resulted in capital cost overruns.
In 2020 of approximately $100 million. Additionally, during the second quarter Pembina also added approximately $90 million of projects.
With a modest improvement in commodity prices. Many investors are asking about our deferred projects and the conditions under which they would restart we view the deferred projects in three groups.
Firstly, the faced 79 piece expansions will continue to be evaluated in consultation with our customers based on their need and an assessment of future transportation requirements in the Western Canadian sedimentary basin Pembina is well positioned to handle all customer volumes secondly, regarding teekay BT PDH pp facility. The project team has to stay.
Actually completed the activity safely and cost effectively defer the project the fabrication of critical long lead items has continued and key talent and knowledge of being routine all to preserve project value for an efficient potential restarted pembina and as joint venture partner continue to evaluate a number of factors related to project.
First the necessary condition is that the safety of all personnel previous year second while the immediate incremental costs associated with opened 19 were contained by the decision to further project the future an ongoing risk need to be understood and priced into the project cost estimates.
Sure the full impact of Cowen 19 on the global economy, and future demand for polypropylene remains uncertain and needs to be carefully evaluated.
Fourth we supposed to federal and provincial governments as well as our private financing, indicating exar tab or will be granted we remain confident the original investment parameters can be reconfirm. Finally, the project restarted subject KBC management Committee approvals and each partners Board.
Thirdly, the Prince Rupert terminal expansion and the Empress Cogen facility are progressing for potential researcher. These project our entire the discretionary and commence at any time with that I'll turn it back to mix.
In closing the first half of 2020, Antamina rise to an unprecedented challenged reacted quickly and effectively in service of its stakeholders.
Feminists growth and diversification over recent years combined with an unwavering commitment to its fine actual guardrails ensured the company was well positioned for adversity.
Eminent expects to deliver financial results within its original guidance range and exit 2020 and strong financial position.
This will allow the company to resume its deferred capital projects and continue its long track record of growth by providing customers valuable integrated services.
As always thank you to all of our stakeholders for your support.
With that we'll wrap things up operator. Please go ahead and open the line for questions.
Thank you as a reminder to ask the question. Please press star followed by the number one on your telephone keypad.
Your first question comes from Jeremy Tonet from Jpmorgan. Your line is open.
Hi, good morning.
Let Jeremy.
I wanted to start off with.
How volumes are looking today.
All the kind of shut ins returned as you expected and just wanted to get a sense for kind of producer discussions.
What you're seeing right now and how you think 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.
Resumption is going.
Ill ask that question to Jason as Scott said most of the wobble as in conventional and so we'll Jason I'll address.
Hi, Jeremy so.
I guess may as we mentioned in our in our release was kind of the low point for quality as we had one we can may where where volumes hit hit their low points in that lift slowly been recovering since then.
As of this moment, we're not quite back up to where we were in January February that we are seeing things sort of recover steadily in that direction.
I think our discussions with our customers.
We continue to be positive there is still positive developments their customer theres still committed to it to their forecasted obviously, they're looking at.
Their budget right now what that what they're planning to do for the 2021 year.
Theres, some M&A activity I'm sure you've seen going broader market that we think is positive and will lead to continued strength in some of those areas.
But at the moment things are recovering slowly.
It's kind of an unprecedented situation. So I wouldnt 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 I want to moving pieces here, but just was wondering as 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're describing there just trying to get a sense for how it might shakeout.
So maybe I'll speak first piece expansions.
So obviously, we're evaluating phase 789, I guess, the first thing to recognize I guess on all of those are.
All of those expansions, including the PC based business there are highly contracted.
So including the expansion so there.
The ability to go out execute those projects, maybe underpinned by the contracts that are in place.
We thought it was prudent to go out in total our customers and find out what their timing and expectations were for those expansions before we just go and execute them. So.
We're in the process of wrapping up so it's called with patients with most of our customer if you would expect to make a decision on the timing of both expansion.
Before the end of this year.
Jeremy mix, if if we have a lot of flexibility in 21, I mean were our capital program as sub half a billion there I mean of the stuff we know we're doing so.
On a contrast that with where we thought we would be.
Going into 2020 2019, we were to an App billion, we saw a 1 billion give or take off and audits and then our Capex program at 21 would be a yet another billion lower so we have a lot to.
Dry powder with cash flow in excess of of capital in 2021 and so.
Jason indicates.
You know and same with with Teekay PC, we have the capability to bring those baskets just.
What makes sense for our customers I mean, the last thing. They need is is is more capacity and take or pays with no volumes going through it. So part of hurdle is is really in line with.
With customer needs.
Got it that makes sense.
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 into 2021, just think just wanted to seize.
Marketing kind of hit a new.
Kind of a lower trend line based on the current commodity prices here just wanted to get a sense for you know directionally, how that could shake out based on where the curve is.
Okay.
Yeah, Jeremy its too so weve, yes, I think you've seen we hit a low coming out of of the commodity price collapse, we're seeing some strengthening and we believe will strength through the last half of 2020 related to volume increase as well some commodity price uplift and we see some parts.
Right coming into 2021 as well so yeah. We believe we come out of 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 crushed us 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, if we get kind of to a stable gas price with a with with liquids prices going off into 2021 that will and.
Unlock our 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 just 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 so if 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 just wanted to follow up on Jeremys question on marketing. That's the 125 million dollar impact does that include any offsetting assumption on realizing once your contango I notice that you had proactively added some lower cost Ngls and then.
Also is the sharp recovery in crude pricing and volumes returning in that 125 million dollar impact as well.
Yes, Matt as Scott here, I mean that that that forecast is out of a couple of 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 cavern law.
Off in Q2, which was a onetime event, which dragged down earnings that quarter. We also if you look at the NGL sales volumes 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 ahead of 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.
Valuating.
Cost of that expansion. We're currently looking at the site spreading said get some of the prep work.
On the ground to to get I'd say ready for expansion.
The estimates together to figure out exactly what that expansion with cod.
But we're aligned with your thoughts there once TMX goes into service. We believe there's an opportunity to provide you know both storage and terminaling services to be able to provide needle batches onto the TMX and things like that for our customers as well as storing product. So that does seem to be a catalyst and just try.
The narrow in on the timing of when that is submitted to a bit of the science that we try to give us a moment.
Great. Thanks to that and then one last one to me you talked about interruptible revenues being offset by Opex in gene a savings is that target still 100 million Bucks and all that touchy 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 high confidence, we'll achieve that we're currently running at or above that in our forecast. So a good very good confidence 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 typically don't see any reason we can maintain.
The 50 million, a DNA and 50 million of Opex savings through through 21.
Thanks, We it's just to clarify is that that 100 million was realized in Q2.
No it will be realized by the ended the year like we recall, we kind of announced it early Q2 by the time, we've got real organized to it. We were we were starting those savings kind of in the June timeframe, and so that 100 million was really realize it and call it six months give or.
Take over 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.
Efficiency through anyone.
Thanks for the color there Mick 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 drilling downtown understanding 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 tavern or is there some system.
Nick.
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 as we've done it gives you know.
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.
C plus.
Okay. Thank you and.
With respect to the guidance range I'm wondering what might.
New 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 I can.
Unfortunately safely say were.
Getting to the top end of the guidance range.
Which is $150 million I guess 3.55 billion is not in the cart.
We're going to be between the midpoint and the low point.
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 big Swan Hills, where we don't have a great deal a take or pay eight contracts. So we need to see some resurgence down in the Drayton cardium.
And we need to see you know quite or a crude WCS spreads I know theyre 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 of commodity prices through the second quarter and if propane Boston, 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 your peace and northern systems, you've got Oh.
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 there are displacing releasing other customers and they 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 in the back half the year, it's not it's not a huge amount of take or pay revenue. So all incremental.
Volume that we do get is it's really going to be.
Profit.
From that perspective.
Yes, so I think like if we do good.
Incremental volume from customers under contract that will add incremental larger than that.
The trucking volumes are where you see some of the some of the volume back half whether they come through third party terminals are on truck terminal. So so that's where some of the opportunity lies.
Great. Thank you I'll jump back in the Q.
Your next question comes from Rob help 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 it looks.
Yeah, I mean, that's a great question and we actually probably in the last six weeks, we did look at.
Different derivatives of 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 for pipeline Oh, you know almost all away from the BC border in it just gives us a ton of flexibility way less build.
Science on on storage.
Allows us to type products and kind of mid pipe rather than just historic hubs.
Allows us to partially loop system than it just gives us.
Credible future flexibility and so you know 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 had we can't specifically comment on customer contracts I think really I guess the way to characterize it is they gave both them at us more flexibility.
All right. Thank you.
Your next question comes from Andrew could be some kinda <unk>. Your line is open.
Thank you good morning.
Question really relates to the producer M&A that we've seen and the reduction a counterparty risks, but that does for you in the front end 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 volumetric opportunities or do you see a little bit of competition for some of the producers that like to do their own thing on the process inside.
Oh, you know I guess it is.
Customer bye bye bye customer I think your your intuition that that 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 at you know, we collaborate on depending on product and marketing, we we think those larger deals.
Can make a lot of sense, because they bring the kind of economies of scale that I think the modern oil and gas business needs. It to amortize kossover large amounts of volume and be very very.
Competitive and and.
That theres, just so capital intensive to drill you know six or 12, well pad with with many many horizontal segments and and huge liquids handling capability water needs.
So those are really capital intensive and 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 live kind of more in that Drayton Valley Swan Hills.
Areas, where we still have surplus.
Buying capacity, they don't need to sign Big Big agreement.
And and but there will be a little more commodity sensitive I think George you want to add any.
So when you you nailed it Mick I think in this new world, where everyone needs to higher net back I think not only what you see consolidation on the upstream side, Andrew but I think.
As Nick said adjacent says like we've got a lot of capacity on the pipe, we need to stop overbuilding or infrastructure and you don't consolidating lot ADESA, 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 altered.
No solutions to focus their core competencies on what they do and and let people like ourselves focus our competencies or we do great.
Okay. That's helpful. And then I'll go from a big broad 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 as diesel being handled through dot facility.
Currently there there are hydrocarbon tankers theres.
A bunch of spare land the birds are fully utilized but here in the middle of a big city in that city Vancouver. So.
We are weighing all of that.
And trying to find out what the appropriate.
Use and.
It is for our company versus what it might be worth and other People's now.
Okay. That's great. Thank you very much.
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 for three buckets and as it stands right now.
We should 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 its like trying to judge what's going to happen next with Covance I think because coal it drives demanded and you know if demand were.
For example, if if if the U.S. wouldn't have had all the cases than I think Dan we're probably going to bring.
All of those projects back, but I'm trying to judge.
Robert what what what demand is gonna be for hydrocarbons, and what pricing falls out of that which will be drilling.
It's difficult I would say, though you know the positive quarters that our customers I've said in the east.
It 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 sewer 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, you know, we're going to reaffirm nodes.
This year or we're going to wait another year so.
They stay tuned. These are these are really difficult decisions hope you can appreciate that.
And I guess.
At the beginning of the call you made a statement.
You have so guest to exit 2020 strong and you're looking at the ability to resume the gross when prudence just if you pair that with your outlook guide.
So uncertain and you're trying to keep that lower house.
The guidance range.
Based on the outlook you guide is there any reasonable.
Stability that you bring these projects and started putting them into construction in 2020 or is this Jerry squarely maybe 21 at best.
Well I mean, I guess I guess, yes, there is there's a chance that as we come forward and say, yes, we're going to go in 2021.
The start date for Teekay PC would be March up 21.
You know the start for based seven we've got 65 kilometers in the ground and based covenants stockpiles of pipe. So if you know we've got a class three estimate we were approved.
So I mean, we could bring not one back faster. So literally you know will be calling customers here in the next four weeks and and it conversation kind of goes like this you got a contract.
We can start do you want to start or do you want to do 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 didnt admittedly, but the new gross you put on the books gives the nature of that just kind of high return quick payback and if that's the case.
How do you think about see 79 versus some of the lower capital.
No more configuration.
Options versus.
I mean, you pipe in the ground.
I mean, yes, some of the smaller projects like you know.
Prince Rupert expansion or Empress cogeneration. Those are you know those are you know projects weaken unilaterally start when we think the times right. We want to see what the label and 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 you know fairpoint those those can come back anytime they aren't as reliance like the cogeneration its self supply power, we are doing very well.
At our other cogeneration.
Facilities and so we may we may well bring that back.
We talked about the baseline tank project, that's something that we could we could bring back certainly our marketing group could become the customer that up 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 sort.
So we have we have lots of projects and many more of that.
That we didnt.
Didn't pull back or 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 responded quickly to.
To market developments I mean.
Getting regulatory approval in engineering and the scheme of.
You know the size of our capital program is is a rounding error and that's one thing we can do.
You know in these are slower time says is get ahead of that instead of always being a little bit behind on on those two factors.
We can get a get ahead of that and it's going to give us a lot of flexibility. Overall, we're you know we're we're cautiously optimistic that.
That.
We will see gradually improving circumstances for for the for the sector.
Okay.
I can just finished the question on marketing Sue the $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 just changed some prior disclosures.
Yes, Robert did I mean really again. This is just 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 below into 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 a kind of been a trend throughout the year end to end the 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. If we were to update that today would be 5% or last maybe 5% to 3%.
And I'll just build on that I mean, when we set our guidance.
We we truly.
Set it at the midpoint of what we think is going to happen then and the wiggle in our guidance is usually highly correlated to kind of a a 10 90 on on marketing you know net of what we think we might be able to mitigate the down market. So.
Okay go two years back when we raised our guidance twice 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.
Through better hard work and it still is cuts covering the negative wiggle in in in marketing outcomes and so I.
I think looking back.
The way, we do guidance.
Service quite well.
That's great thanks very much.
Your next question comes from Robert Catellier 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 lines pipeline with respect to the 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.
Well for so say does from a blog.
Plays into the equation.
Robert It's Jason so.
2020, it's been a kind of a different year for alliance in terms of the spread between Chicago in April historically about them.
Fair enough money.
This year, it's been a bit other than normally so when you look out beyond.
Q3, Q4. This 2021, we're seeing those spreads come back so.
We're pretty optimistic.
During the second half here the site the volumes start to recover and and we think there's.
Results for both in terms of renewal historically, it's always been a good good market for our customers. We believe there still like that diversification and we also think you've kind of mentioned the associated gas from the block and then if you think about the whole further lower 48 gas production.
Picture.
Thanks, guys reasons for optimism that gas prices will be pretty strong the Chicago market with a long term so.
I think pot.
You know, we're fairly confident that over time, so far so look look better for alliance is going to re contracting business than it has.
Putting 20.
Yeah, and I would just add if you zoom out and and Jason's comments are wrong, we're going to make a lot more money on our on our extraction business, because I mean gas prices.
Our lower and so whether it's an OCC stwol or.
At Empress they're kind of is a bit about natural hedge in there right.
Right.
Just a moving to the.
Because they see 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 calling drug so are those contracts still in place.
Still valid and what do you really need to see later was kwan drugs from the demand side of equation or is it just a question of.
You have a partner and everyone has to be comfortable on where they see demand.
Robert do you know, we're looking at I think the global context, Oh, you will we'll revisit and look at the back in the project economics, ensuring that.
You know the investment thesis is still valid and whole to drive through we still believe that again, the western Canadian sedimentary basin provides.
A 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 of and update our perspective, both of our ability to be a low cost polypropylene provider into the North American and Global War.
Okay. That's thus the intent of thoughts as Dave and then in terms of contracts just like you know phase they did the phases a piece those those contracts remain good invalid and and are they don't they don't have any kind of a outside date concern.
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 the hope with us, but in light of the decrease production of Ngls and all that might be temporary.
But there also increasing export options so how do you.
Yeah, how comfortable are you with the.
The being a little color supplier in the context, we don't probing situation.
We are complete we remain comfortable I mean whenever this basin has seen any kind of a price signal. So what do they lets just play it out.
No.
You know.
The West Coast terminal start to pull hard on propane theres, a temporary blip it starts to become more valuable and people just pull down their plant and take out more propane or somebody built another.
Another deep cut or if you look at that we've always looked at how the ethane business has done over the last 40 years.
And these concerns so I guess I'm getting all that these concerns have arisen from time to time in situations like this and.
And you know 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.
You know ethanes campaigns.
Every single gas pipeline is you know whether it's the you know that the enbridge system or TCPL are aligned for all running it complete Max eat capacity and there's tons and tons of ethane being exported from from the province, and and so were awash in ethane. So we think that.
This base and it's just so prolific and good as soon as there is the price signal sent a we'll we'll we'll react and.
You know, it's just because the the quality of the rock at the end of the day.
Okay. Thanks, very much goods.
Karen.
Your next question comes from Ben Pham from BMO. Your line is open.
Okay. Thanks, Good morning, and also a question on a T.K.P.T. and.
One of the references the three dimensions. The his perspective to the federal government. I was wondering is that there's any due to rotate credits there doesn't seem to know about in terms of expiration 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 to the Alberta government 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 ship program grants that we receive and are.
Confident that everything will be extended us for the government grants.
Okay. So its out and it sounds like that when this was set up.
2016, or something that there was some sort of exploration then you might be heading into and it sounds like you're you feel pretty good what extent here.
Yeah everything ahead of schedule and then there's requirements for information filings and so we've been diligently working with the both federal and provincial governments, so providing all the documentation and working through extensions of those agreements okay.
Right.
Is there isn't anything in a way as you've issued some can really low cost debt 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 I wonder buyback preferred shares are causing some debt is there anything it looks interesting arena.
Hey, Ben it's Scott.
Yes, 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 at an interest rate, 3% to 4% below where it where that no with issued at so we've 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 a normal course issuer bid for your preferred shares just no liquidity in that market. So those that would be very very tough to to an act. So it's something we've thought about but at this time now so I mean, we're pursuing.
Okay.
<unk>.
Mashed then lastly this.
Good news flow around Dominion, and Warren Buffett, and and I guess this year on bottom cost allocation M&A I mean, if your stock price wasn't some mispriced then you wanted to get into about snack natural one question. It is that strategically the most type assets that would that sort of physically fit with what Pat.
Uh huh.
Oh, I mean, I think he made a hell of a deal like.
Only bought the railroads, what a decade ago at the right timing and looks pretty smart down and he looks like he's going to look really smart again.
Here I mean, those those assets, a long life and Theres, a scarcity value associated with them because that part of the world's hard to build new ones.
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 equal equals five not for through the value chain and so we've been disciplined.
Continue to be disciplined to make sure that whatever we buy has had synergy and and notwithstanding that was a good bye 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 candor Morgan with the storage.
And then the cross border pipes that that's 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 overtime and it is tough to to watch you know.
Deals come and go that that maybe aren't as synergistic butter. Nevertheless, the deals, but we remain on our on our path.
Okay all right.
Your next question comes from Patrick Pennies from National Bank Financial Your line is open.
Hey, guys are 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 were investigating that again.
Our facility was granted under PDP, one royalty credits.
PDP too was put forward by the over to government.
And they are 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 being 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.
As far as a new program again, I think the government says.
Listened and is trying to look at how other jurisdictions.
Have gone up both are incentivized incentivizing developments and infrastructure development.
This is the 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 so I think it is an improvement as far as the ethane development 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 noncore assets.
Yes, you know given all the actions you've taken over the past few months to boost your liquidity position.
Doesn't seem to.
It'll be the same financial incentives 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 you know still support the decision to as to dispose of these assets.
Yeah Pat.
The decisions to potentially monetize some assets were made kind of well before Kobe 19 hit we started at some of his work late last year and into early part of this year really we just disclose did in March with the rest initiatives that were going on since it was underway.
But really just started pre pre colgate into point there that these were never done for liquidity. Your balance sheet reasons. These are really born out of you know some some pretty significant inbounds that we got and and we thought it was our job to at least explore them. So I think a point I'm trying to make sure. All this is where we're in the process of.
Instigating some of those but if he ended the day or 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 attached value and if we get that value, we'll make a decision at the time and if we don't get good value we're happy.
On the asset.
Got it okay.
And then also I appreciate the updated disclosure on your frac spread hedges or.
Just back to your comments the one on looking to monetize your propane storage position that you've been building here recently.
Adam next winter or you're also looking to lock in some of your propane marketing margins on top of your frac spread exposure or.
Well those barrels be mainly exposed to an open position.
Pat We do have in addition to our in addition to our crack spread positions 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 from you guys.
Your next question kind of sense, there's good Sunni something you'd be asking your line is open.
Hi, good morning, everyone glad to your everyone as well and surviving coldwell.
I do want to be the.
[noise] could that tier just.
A follow up on all these the proclaim related question to the fact that you you introduce this variability in your guidance on 125 million given the fact that you've you've sort of hedged it and so forth.
It's just really just kind of the timing things you've got you got anything you got the NGL storage right now some of it based on where Frac spreads shakeout means you could realize it in Q4, Q or could rolling to one Q and so forth in is it really just a timing issue and that's why you've kind of introduced this variability you will.
<unk> was 125 million dollar opportunity completely if you want that to me loss at this point right now.
Yeah, I think it a large portion of it the vast majority of it would be would be pricing. So 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 2000.
21, 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 ins 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 the technical.
But everything comes back filled the volume wise do you have the capacity to take everything out of storage while running your systems full both at the same time or would that create a timing issue or capacity issue as well.
No that obviously, we couldn't doing instantaneously, but no. We do have the infrastructure in the capacity to you know process all the incoming NGL volumes and be taking adequate storage on the backend.
Okay, what would it take as well.
Okay, and just one last question on costs.
You've done a great job on it I think we sort of seamless you know kind of across the board within the industry Blake. The thing that that is the notable and simply is how dept compete some of the costs have been at some of the midstream completed some of the broader energy companies as well too I realize that you you definitely deliver.
On it blood or you challenging your staff to potentially double the type of cost reductions that you've seen will forego even more than that just in the fact that youve gone through local shelter placed type environment.
Have you been able to like reassess everything and do you think that there's opportunities that we could see you know significantly more cost reductions being announced over the next couple of quarters.
You know, we're really proud and thank you for for.
Saying you know 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 have 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 in IP and systems, we need those people and Uh huh.
We're going to keep them.
We do think there is future opportunity I'm not going to nail it to do at 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.
And Jason talked about piece space and that a lot of that when everything 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 law like this if you think about we've I think employed roughly $15 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 less 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 invested capital and and.
There is there's a lot of enthusiasm in the company to 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 some.
Sometime.
No I completely appreciate those come to in just to clarify was.
Thinking about further lay offs I was thinking more about productivity enhancements, because you were able to something it sounds like you're you're seeing opportunities too.
See those enhancements all and kind of unearned revenue optimization basis is that got a fair characterization.
Revenue and cost what we're trying to do is is are you know along with getting project shovel ready to question. We're asking ourselves is and if we built all those projects how would we do that without adding people and so the way to do that it's amortized your your people costs in your asset cost is.
Through technology. It is having people every person that eminent be able to do more through technology and so it's not just.
I'd.
Cost in our existing business. It is how do you how do you grow without adding people and I think that's really were technology can can help you. So I do think its revenue synergies that's 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 is future.
No that that makes perfect sense really appreciate the color guys.
Public safety and enjoy the weekend.
As well.
Your next question comes from Tony.
Cash 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 you're 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 it's really just driven by the spreads between you know the land hotel in Alberta, and so, whereas you know what the stronger gas prices in Alberta, we're seeing so it was some opportunities in the spot barrels off the really Pipelay, then and yes, we do we are.
Looking at.
You know with Kindred Morgan that at how do how to actually lock those into some long term contracts and obviously looking at that as we speak.
Yes, I mean, it at the macro you can see it at ease and in our base, which I know better than in the U.S. basin, there's some buoyancy for GAAP based.
Producers these days and.
So that means obviously got prices are going up which means gas volumes can go up so bad points. He continues we're.
Back to an earlier call, we get we get ever more optimistic that that you know the alliance the re contracting will continue as it has positively.
As well 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 it 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 gonna be making more money than the others. So we still think that having the alliance and the Ruby Midland 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 or 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.
You know we've seen it on and off over the last year. So let's from my perspective fairly fairly positive is that it will continue for some period as I said with the market as volatility as it is kind of hard to predict.
Great. Thank you.
We have no further questions I'd like to turn the call if I can make a filter for closing remarks.
Yeah, well, thanks, everybody for your interest.
No I'm really proud of what we were able to do a through the second quarter. If you think about how we all felt a in March and where we sit to sit today. There is 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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