Q3 2020 Pembina Pipeline Corp Earnings Call
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I'd now like to hand, the conference over to your speaker today Scott.
Your Vice President and Chief Financial Officer. Thank you. Please go ahead Sir.
Thank you good morning, everyone and welcome to Pembinas Conference call and webcast to review highlights from the third quarter of 2020, I'm, Scott Burrows Senior Vice President and Chief Financial Officer on the call with me today are Mick Dilger, President and Chief Executive Officer, Jason Vanwees, Senior Vice President and Chief operating Officer pipeline Jets.
<unk> Senior Vice President and Chief operating officer facilities, It's due Taylor senior Vice President marketing and New ventures, a corporate development officer.
I'd like to remind you that some of the comments made today maybe forward looking in nature and are based on Pembinas current expectations estimates judgments and 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 some of the information provided refers to non-GAAP measures to learn more about these forward looking statements and non-GAAP measures. Please see the company's management discussion and analysis dated November five 2020 for the period ended September Thirtyth 2020, which is available online under dot com and on both SEDAR and Edgar before we discuss the third quarter results.
I'd like to first turn things over to Meg to make some opening remarks, Matt over to you.
Thanks, Scott Good morning, everyone I hope you and your families or are doing well.
Once again I'm really pleased with.
The corridor, particularly in our assets.
The base business says the pipelines and facilities, which once again displayed the resilience pembinas business and the underlying strategy, we've been executing for more than a decade.
Our focus on integration across the value chain.
Yeah in over 10 years ago as its been extended many times for both construction and acquisition.
Along with the integration came greater diversification of customers commodities and currencies and we have become a stronger and more diversified company.
We are proud of our resilience and the fact that Pembina expects 2020, adjusted EBITDA to remain within the company's original guidance range, albeit near the lower end of that range.
While this guidance was provided almost one full year ago and despite all that has happened in the world to both the energy sector and our business, we still expect to be about 95% of the midpoint of that original range. That's.
That's a strong testament not only to our business model, but you the strength of our customers and the commitment of our employees, who are tasked with delivering over $100 million in cost savings.
And who operated these assets safely and reliably through this challenging year.
Looking ahead, we see positive signs.
All the nation amongst Canadian energy companies is beginning to occur.
And well strengthen our customer base, we are hopeful that in effect. It pulled it 19 vaccine will be broadly available in 2021.
And we expect the balancing of oil supply demand by 2022, and all which those statements in tail.
Pembina remains well positioned.
Liver tremendous shareholder value by sticking to the same basic principle, we have used in the past.
Me, we will focus on our four stakeholders customers investors communities and employees.
We'll continue to prudently allocate capital to the projects that provide competitive returns improve our customers' problem problem profitability excuse me and make them in a better.
We will also continue to fund stable and growing dividends in the future with that I'll pass it back to Scott.
Thanks, Mick similar to last quarter, the major factors impacting the third quarter relative to the same period in the prior year, where the positive impact of the tender acquisition offset by the impact of COVID-19, and the decline in commodity prices adjusted EBITDA in the quarter was $796 million and eight per.
An increase compared to the same period last year. The increase was due to the contribution from new assets. Following the candor acquisition. These positive contributions were partially offset by lower margins on crude oil and NGL sales and the marketing business as well as lower contributions from alliant due to lower interruptible volumes and a lower contribution from other people.
Largely due to lower NGL margins, and a narrow eco to Chicago price spread which reduced revenue.
Third quarter earnings of 318 million were down 14% over the same period last year largely due to lower contribution from marketing. These declines were somewhat offset by the contribution of additional assets from the tender acquisition and lower DNA in other expense.
Total revenue volumes during the third quarter were over 3.4 million Boe per day consistent with the same period in 2019 and up slightly when compared to the second quarter of 2020.
On a physical basis activity levels have stabilized and are beginning to improve pembinas conventional pipeline business.
Physical volumes in July and August were consistent with levels seen at the end of the second quarter of this year or roughly 8% below first quarter levels and well above the lows experienced in April and early May we saw physical volumes declined in September due to operators electing to perform routine maintenance and turnaround activity, which is typical in the third quarter.
As well as extended unplanned outages at third party facilities October physical volumes recovered and increased to levels slightly above those seen in July and August.
Subsequent to the quarter, we are pleased to bring into service new fractionation terminaling facilities at our Empress facility. This project was placed into service on time and on budget and added approximately 30000 barrels per day of propane plus fractionation capacity, enabling pembina to optimize propane marketing from the facility between eastern and Western market. This project.
Along with you Bernie too and the basic peace pipeline expansion brought into service earlier. This year are part of the roughly $1.5 billion capital program that we continue to deliver in 2020.
The company is advancing the construction of do you have any three which is scheduled to come into service before year end and the Prince Rupert propane export terminal our first project to provide global market access, which we expect to complete in the first quarter of next year, we continue to evaluate our portfolio of deferred project and with the peace phase seven piece.
Plant expansion in particular engineering work is ongoing and focus on optimizing the scope of the project to meet customers need and future transportation requirements in the basin. As a result of this work estimated project costs are trending materially lower.
Phase seven and other deferred projects, including sea KBC, PDH pp facility and the conditions under which they may be restarted continued to be evaluated within the context of our customers features fine and ongoing COVID-19, pandemic and resulting global economic outlook. Finally, we continue to assemble a multi year inventory of development opportunities.
Scale breadth and diversification of our business inherently affords us a strong suite of Greenfield brownfield optimization and new market development opportunities. These opportunities range in size from 100 million to several billion dollars and have risk adjusted rates of returns consistent with Pembinas track record, but the timeline is not certain.
We are diligently advancing a number of opportunities.
Turning to the outlook for the full year with three quarters of results behind US. The company has narrowed its guidance range and expect to generate adjusted EBITDA of 3.25 billion to $3.3 billion in 2020. The primary drivers of the range include the results of the crude oil and NGL marketing business the level of interruptible volumes timing and complete.
In a typical fourth quarter integrity, and maintenance expense spending as well as the company's share price specific Lee relating to the impact on share based incentive compensation.
Filmed in this guidance are the previously discussed reductions in operating in General administration expenses, which we now expect to be in the range of $150 million exceeding our original target by approximately 50% a significant portion of these savings are excess expected to be sustainable.
In his opening comments mix spoke about the resilience of Pembinas business, which was achieved by building an integrated value chain.
Diversifying across commodities customers and currencies and developing reliable and predictable acid revenue streams equally important has been our unwavering commitment to Pembinas financial guard rails have an underlying business is highly contracted with approximately 95% of 2020 adjusted EBITDA supported by long term fee based contract including us.
Approximately 72% coming from cost of service or take or pay contracts with no volume or price risk approach.
Currently 75% of our credit exposure is with investment grade and split rated counterparty or with Counterparties secured by letters of credit.
Direct commodity exposure and permanent business is limited to our marketing business and we're not reliant on this to fund our dividend.
As we have maintained a strong balance sheet and have been recently affirmed a triple b by both S&P and DBRS with the outlook for trend maintained a stable. It is worth noting that emanates among a select group within the energy infrastructure sector, there's not suffered a negative ratings action over the past five years. In addition at the end of the third quarter available liquidity totaled $2.5 billion.
We will exit 2020 in a strong financial position with the ability to fund the next wave of future growth pay down debt or return capital to shareholders with that I will turn things over to Mick for some closing comments.
Thanks, Scott the job so much political and economic uncertainty amid the ongoing pandemic. The overall industry sentiment remains understandably cautious.
Yes, as we approach the end of 2020 and prepare for 2021, we remain optimistic rough.
Roughly half of our Calgary staff have now returned to the office.
As we refocus our efforts on the growing business. The in person collaboration amongst our teams which has been the key ingredient to our success has returned.
In early December we are looking forward to providing a fulsome business update including the latest status of each of the companies currently deferred capital projects as well as our 2021 outlook capital budget.
And funding plan.
Finally, with growing attention on E.S.G. issues, we're looking forward to the release of our next sustainability report in the coming weeks. The 2020 version of this report will again provide.
A comprehensive perspective on commitment to all of our stakeholders.
And in this report will also be significantly enhancing our disclosure, particularly in the areas of environment and employee diversity.
As always we thank all of you all of you shareholders, who have literally stuck with us through this difficult time.
With that we'll 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 for.
Sorry your question please.
Our first question comes from Jeremy Tonet from JP Morgan. Please go ahead. Your line is open.
Hi, good morning.
Hi, Jeremy.
Hi, just wanted to start off with consolidation in general here and wondering if.
You could talk a bit more as far as a producer consolidation what that means for pembina, what you've learned now versus what you knew before and also I guess in the midstream sector as well.
What do you think happens with regard to consolidation and how does that impact that pembina there.
I'll I'll start and then I'll turn it over to.
Scott or or others.
Generally in the past you know, let's take a longer timeframe.
Over the last 10 years consolidation has helped pembina.
You know that.
In the depths of March and April I think you know.
Masters, we're worried about some of the the weaker layers.
Players out there and they're starting to.
Be consolidated and become a stronger players. The recent Terminaling example, I think is.
Is an excellent one where.
Two of our.
No less strong customers will be consolidated into an industry leader, which.
Helps not just with credit but also capability.
Tougher time, so you know we.
We we welcome it we think it's good for.
Areas in which we operate and it's good for credit in terms of your second question needs.
Midstream consolidation.
You know.
Pembina has been a consolidator over over the years.
But in Canada that so that's that's a rare thing it happens very slowly I expect.
In the U.S. to see much more consolidation.
Then in Canada, Canada has.
You know much greater on average much greater balance sheet strength.
Then what we see in the U.S. and indeed, I think you know just scanning some of our sector a competitor say, they're all around.
Around their guidance range so.
They are on average doing I think better than what we see in the U.S. I'm Scott you want to add anything.
No.
Your next question comes from Linda Ezergailis from TD Securities. Please go ahead. Your line is open.
Thank you just building on Jeremys question with respect to how I guess North America might consolidate.
Might there be an opportunity for pembina to extend into the U.S. and ER and maybe find some opportunities to.
Hi, there do more with the hydrocarbons you have as it's been Youre successful strategy, so far or actually extend into other markets in basins given some of the weakness that you are U.S. peers have.
[noise] lender, that's a that's a great question and I'm going to answer it as best I can right now, but realize things things change.
Again, taking a longer term perspective, you know, let's let's go back to 2015.
We we kind of sands you know.
Vantage U.S. in that timeframe and we we want it to just start to March the value chain into the U.S. and the result was.
There's an acquisition, which was done to diversify into a nat gas away from just liquids, but also to our U.S. exposure is.
As we look forward and I'm not trying to predict the election, but as we look forward.
The the relative.
Environments of Canada, and the U.S., assuming Oh Biden win.
We think its advantage, Canada, particularly as as we develop he grass so whether it's the shell LNG Trans Mountain you know our export terminal.
Al to gas is export terminal.
You know as we get eat grass.
We think that to the best markets in the world will be non North American markets in the future and I don't mean the next.
Five years I do think we'll have a robust and.
North American market, but beyond that.
If you're looking for 20 years, we think the Asian Indian.
Indian market is going to be the place to be and where the closest to that and you know we have a.
And produce some of you know that the cleanest hydrocarbon most ethical hydrocarbons in the world in the basin and so we now think it's advantage Canada.
That doesn't mean, we're never going to look in the U.S. of course, we will we have baskets there, but we're we're most comfortable I think with our capital allocation in Canada in the next number of years.
Thank you and maybe just as a follow on recognizing that the Alberta government is is promoting our petrochemical investments and in the province, I'm wondering how that my influence youre.
Relative attractiveness of that opportunity versus others and maybe we can also ask your your updated views on whether there might be some emerging hydrogen opportunities for pembina as well.
Hi, I'm, obviously that that.
Kind of support at all levels of government or is helpful.
And you know, we we hope people step into that that space and it's it's certainly helpful. When we think about CK, PC, which will be providing an update for in in early December.
In terms of hydrogen it's early days for us I mean clearly.
Clearly we have infrastructure that that can be used in that development, but it really is early days for us. We think it's a number of years away and we are studying it and in fact, we have a presentation to our senior management I think next week on on hydrogen and how we can purchase.
Participate, but as Steve any additional thoughts.
No I mean, we're we're watching it closely Linda and and.
We are excited about what that opportunity may develop into with respect to pembina itself and and the industry in general.
We're quite positive and I think our efforts in in some of our work on the petrochemical side and export we're getting we're getting lots of contact and and are excited to to be recognized and have conversations with.
Future opportunities that may present itself.
Okay. Thank you I'll jump back in the queue.
Your next question comes from Matt Taylor from Tudor Pickering Holt. Please go ahead. Your line is open.
Yeah. Thanks for taking my questions here guys can you be pick conversations you're having with customers. It seems physical volumes seem to be slowly recovering here, but more importantly on new projects or.
More to come in December obviously, but is there some caution here that you're seeing with customers I mean, ER and is it fair to say that you'll you'll be prudent about adding new projects that match customers willingness to backstop that capex guidance contracts.
I I'm going to start and then Jason I'm sure you're eager to test to respond to that.
You know we we we are unwavering really on how we do projects and because of that we slowed down in the pandemic and when the market is supporting us and we have adequate financial backstopping from the right kind of customers then we will restart.
We will talk more about that in December.
We are literally following the pembina playbook, all the guardrails decent rates return good counterparty credits the geology, all those things and you know and you know we'd love to grow fast.
We have over the last 10 years, but.
That is just has not been in the cards and so since we had this kind of double pandemic.
But as as things resume we'll be ready, we'll actually be more ready for.
What I perceive will be a return to normal than we've ever been because for the first time in a decade. We've we've been able to you know measure twice and cut wants and project readiness, So Jason maybe a bit of color on what you're seeing on the ground.
Sure thing.
Thanks, Mick and so Matt we we've actually canvassed all of our customers, particularly on on peace pipeline in the core door and and determine what their needs were and had a number of discussions with customers who need to make changes around their contracts and things like that so.
You know relative to what Mick was saying we were trying to make sure that we weren't building.
Thats the customers Didnt need as we were going going through that process and so it's you know we've gotten a lot of positive.
Indications from our customers in terms of their continued need for capacity on our assets. There is continued growth in certain areas that were continuing to pursue so there's some optimism around those things.
And I would say it also gave US time as Mick pointed out to look at the project and determine how to how to right size. It for you know since 2013 Weve been building pretty rapidly just trying to keep up with our producer expansion. This time, we actually get to go through and do a lot of assessment.
Exactly what we need and planet very effectively and you know the market is good for services as well. So our capital is is looking looking really good at this stage. So so we think we can match you know the timing with the customer needs and then also do it on a very economic basis.
Jason do you want to talk a little bit about what you're seeing on the ground with with volumes.
Sure Yeah.
As Scott mentioned it earlier in the call that.
We have seen volumes recovering.
Her in August or or are typically turnaround season in the summer is generally break up and slow drilling season, we're starting to see albeit very slow recovery in drilling.
In the base and we are seeing volumes.
Amp up the facilities came back from term.
A very strong.
And we've seen consistent volume growth on both the the LDP and the HVP side of the.
System. The HBP has been performing very strong across the board actually staying relatively close.
To what our expectations were when we set our budget.
We're seeing things growing back.
Closer to.
You know what we expected to see at this time of year were both about level with what we were at this time last year, so with with every week and every day going by seeing the volumes continue to grow.
The the counter to that I would say is that trade and I think in some of our other midstream peers talking about that area is a bit a bit slow.
A little behind the curve in terms of recovery, but we're starting to have discussions down there as well.
That's great. Thanks for that color there and then if you could them can you just slot, obviously, you're being prudent about the backlog here can you slot then you put some items in a press release on gross debt repayment and increase shareholder returns.
My prioritizing those items and then the stock sits today, how are you thinking about buybacks and that increase shareholder return box.
Scott do you want to start that one or are we going to defer sure of that.
Press release, well well, Matt obviously, we were not were still working through our budget and the project backlog, but but your question is a valid one you know as we sit here today and I think we've said this a couple of times if none of the projects come back, we're obviously going to have significant.
Free cash flow available.
If we bring some of the projects back we'll have a little bit less obviously in that we bring them all back will need all that free cash flow for the project. So those are kind of the goal posts about where what were thinking about but in the scenarios, where we are generating free cash flow.
Certainly when we think about how we funded the business weve.
We funded it typically 50 50 debt equity over the last decade, or so and so when we think about redeployment of capital.
Starting point really is to think about redeploying. It back 50, 50, so potentially 50% of the of the free cash flow will go to debt repayment, 50% will go to share buybacks now that all depends obviously on a couple of factors, where we see the leverage trending if we if we get to a level that.
Slightly higher than where we're comfortable that I think will skew a little bit more.
That capital towards.
Debt repayment and likewise, depending on where the share value is that could also skew something to the upside or the downside on share buybacks, where we sit today, a yielding nine little over 9% certainly we see value in our own shares as we feel they're being under appreciated.
Great. Thanks for the color.
That's it for me.
Your next question comes from Ben Pham from BMO. Please go ahead. Your line is open.
Hi, Thanks to Martin on.
On asset sales.
Anything to update us I.
I didn't see much in the pockets on now.
Scott you want to address.
Yep.
Yes, so we continue to work through two asset packages.
And that's about all we can say there Ben we'll probably provide a little more color and should have a little more clarity with our December update.
[laughter].
And maybe just more of a detailed question on your exhibit on deferred revs.
Revenue is on makeup rights on.
Recognize revenue.
His expectation ahead into Q4, that's a.
You're going to see that that balance get closer to zero similar to last year.
Yeah for the most part those are 12 month makeup rights bend, so that's a fair assumption yes.
Okay. So when you when you say when you say 12 months I assume like as you go.
12 months, that's on a calendar year basis like there is not a there's not some portion in Q3 o'clock and it pushes into next year.
There is a small amount but for the most part it's on the calendar year.
Okay all right. Thank you.
Yes.
Your next question comes from Rob Hope from Scotia Bank. Please go ahead. Your line is open.
Good morning, everyone I'm, just trying to get a sense of how you're thinking about a contract roles at alliance given the dynamics in the basin, including potentially a little bit of a delay in LNG, Canada as well as any update on Ruby.
Maybe Jason you can talk about alliance role and then Scott.
Scott over to you after.
Sure Hi, Rob.
So.
You know I think the debate.
The basis between Alberta, and Chicago is going to be a challenge to as we're all aware.
2020, and so.
I think we have seen.
Seen some of the the interruptible volumes a.
Little bit lower than we had seen in the past, but we're starting to see a step.
Drink tuning in that in that basis between Alberta in Chicago at the moment.
Especially in the winter so a lot of our.
Capacity that came available this.
This year, we've been able to do seasonal.
Sales to keep the pipeline at high utilization so optimistic there.
We have.
[music].
A few words the ended 2021 the pipeline is still highly contracted and.
We're we're currently working with customers both in Alberta in the Bakken to determine there.
Their needs for for you, Chris we do think it.
It's a.
In a challenging at the moment, but we do think think things are looking positive and there are some some certain areas, where we do think there's opportunity to be able to bring gas onto that pipeline.
On a term basis, we've had some some smaller successes recently.
Terming up some volume there.
And then on on Ruby.
Similar similar story in terms of re contracting the basis between old Pal in the land is is very narrow, it's making it quite difficult.
For for Ruby to attract.
Two tracks volumes, we still have the the PG any contract there that that goes on for a number of years.
So.
We're working with our partner Kinder Morgan on on assessing some options there.
The California market for gases is a bit challenged with a with a lot of renewables and things like that coming on in California. So we're looking at opportunities.
To use some of the advantages that that Ruby houses as a low carbon pipeline.
To to be able to access some of the some of the California market there.
Scott did you want to add anything to that.
No Jason I think you covered it.
All right. Thank you.
Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead. Your line is open.
Hey, guys appreciate the update on the Frac spread hedges into next year, but just looking more specifically at the the propane inventory from the summer that you'll be a.
Looking to flush out this winter can you just confirm what percentage of your expected propane sales through the winter.
Assuming average weather of course that that you've locked in with forward sales.
And then maybe perhaps you could just comment.
No more to come in December, but just directionally for marketing into 2021 relative to 2020.
How you're seeing things play out here based on current market dynamics.
You are on the table.
Jeremy Yes, so in Europe in terms of our our propane sales were largely sold on a forward basis. So.
We still expect based on our current sales program to exit March.
As we typically do with little to no propane in storage.
Im not good I disclose the specific amount path, but what I can say is a.
Hi, Hi percent, 75% or higher has already sold on a on a forward basis. So we feel confident about our forward sales profile as it relates to 2021.
Based on the current forward strip that we typically used to run our budget, we are seeing slightly higher NGL prices.
Compared to 2020, offset obviously by by that the higher natural gas prices. So on an all in Frac spread you know I think were a little higher on a on a younger basis.
And a little lower on a Mont belvieu bases. So net net on a frac spread we're looking to be roughly the same as we are in in 2020, and then crude oil again the strip is slightly higher than 10, where 2000 twentys track, but the key to US is the differentials and the differentials look.
Arguably are the same as what we saw in 2020, so as we sit here today absent volatility or movement in prices.
We see kind of margins are forecasted to be roughly the same in 2021 as we see in 2020.
Okay. That's very helpful. Thanks, Scott.
And then just wanted to clarify to you on the customer contract renegotiations that were publicly announced in the quarter and I know some of the fee reductions are tied to the heist developments still coming on but.
Can you just confirm from a same store sales perspective, how much if any do you expect your conventional tools and processing fees to be down in 2021 versus 2020.
I think from a convention.
I'll take that I mean from a conventional pipeline basis and gas services in a fractionation I don't think we see any degradation and tools.
Okay, perfect and last one for me Scott just going.
Going back to your comments around share buybacks and.
Uses a potentially some excess cash here until your growth the secured I know you've taken a look at the mass for behind trying to go out and buy back some of the Pref shares.
Obviously that would be at a big discount to par.
I think that mass was was pre cobot, but you know now with further pressure on the market value of the Prefs and.
Canadian hybrid debt market opening up the summer just wondering if you have refreshed that look at what a meaningful refinancing of your perhaps might do to open up some room on the balance sheet.
Yeah, Pat I think I think we're always looking at at what those options are.
From from a common perspective, you know if you look at if you look at the yield at buying out of crap compared to yield the buying out our common plus you know assuming that we're going to get back to growing the dividend at some point. It still makes sense. We believe from a cost to capital. If you have a spare dollar to buyback a share versus buyback.
A preferred now that being said we are looking at all options around the preferred and certainly assessing the hybrid debt market, especially given where rates are today.
We see that to be an attractive market. So it's certainly in in the tool kit as we as we formulate our 2021 financing plan.
Excellent Thanks Scott.
Your next question comes from Robert Catellier gave some guidance he capital market. Please go ahead. Your line is open.
Hi, Good morning, guys I, just want to follow up the capital allocation questions a little bit here and just to clarify what you said previously.
I appreciate the Oh, the logic and effective 30 funding, leaving to how you might deploy cash flow free cash flow.
Something repayment of debt and some to love returning to shareholders I just want to clarify in 2020, we haven't seen a dividend increase other than the one related to.
Kinder Morgan closing and then.
Pointing to a very high yield right now and the and the current dividend. So does that suggest that there is no chance or we'll go another year without a a dividend.
Dividend income.
And Chris or can you still stomach one.
Even though the yield is high in 2021 with a view more towards long term.
We're studying that obviously, that's we'd love to keep the streak going but at some point.
Rob It doesn't make sense, either when you're yielding 9%.
When I when I do conferences I always ask.
I always ask who I'm talking to what what they would do and so.
Im going to ask you what you would do here is it's it's it's it's a difficult question.
To answer.
On one hand, you you want to keep the streak alive on the other hand.
Yeah, no one's appreciating what you're paying them now so why would you pay a more you can.
Redeploy that capital into.
And to project so what would you do.
Well, it's a good question and it's one housekeeping, but it also obviously, it's a pretty circular discussion but.
I would say you know capital.
You know next year people.
It was the most precious thing you have so.
You know, 9%, there's just a lot no.
Just to know installation, but relative to the spreads and fixed income and other options you have in front of you.
You know and.
Yes timing is really a matter of trivia I guess you could always.
And then more later Oh, when it went out say more attractive toys, so that's kind of where I sit the other part of it though of course is your dividend yield now is not really a normal us.
Versus the U.S. peer group.
But at the same time, they're not raising or so.
So it's a challenging one I mean.
Steady consistent dividend grow probably gets the best value over time.
But you know there's a lot in the sand per every one and maybe cross it.
Yeah, and and there you have it.
Your your argue both sides of it and you can see our our our dilemma as well I mean theres no doubt.
I can give you assurance that pembina is going to you know maintained its dividend and we do want to grow over overtime. It's a hard question right now and then in this unusual trough Ah it becomes clear.
I think as a world returns to normal and certainly I mean, our payout ratio is I think it's you know 60 or sub 60%, we certainly could do it I just don't know if.
If that's really what the shareholders would want us to do so.
<unk> very challenging question and the good news is we have many months to.
Noodle on it before we get to that time of the year, where we have to make that decision. So thanks for the question.
Yeah, plus point now I mean, there's not a ton of money, but to do it because they have it tells me is one Oh, yeah. You just don't want to do the best again with it so just on not just to pull that up.
As you're well aware, there's been a lot of conversation in the market recently about terminal values. So I'm wondering how that's going to bring into how do you look at comfort.
Capital allocation, specifically, obviously, the return thresholds and knowing the both compete with share buybacks, but.
Also is that having any impact.
On screening out certain asset classes or otherwise accelerating sales and other operating cost is just too.
Tighten up the idea is to profile.
We hear that argument honestly it it doesn't impact our thinking.
Like we were pretty confident the world's gonna need this.
The services, we provide for for decades to come for longer than many of our assets will physically last so our view of terminal value in the life of these assets. We we don't see you know.
Laying down any of our infrastructure because there's no demand for for the product suite, we look at that.
Oh pack in the who and others, who you know suggests that we're.
We're not at peak hydrocarbon yet even if we.
Where to get there the next decade.
You know, that's a long long long tail and particularly.
Western Canada.
Fought hard to get a west coast eager to us and we'll we'll have that you know aneel and enhance form here in the next two or three years.
And that'll make that tail much much longer.
Even if north America is the demand slot environment.
Okay. Thanks, a lot for those answers.
Your next question comes from Robert Kwan from RBC Capital markets. Please go ahead. Your line is open.
Hey, good morning, I'm just to start off on the last call you alluded to evaluating.
Projects, and making some decisions or.
The coming weeks post that call and then potentially restarting some of that growth. So I'm just wondering what changed in the environment.
Got you.
Were expecting but getting on.
Such that everything is on hold right now.
I think really it was cold bids Robert I mean, we.
We we believe that the time I think the world.
Good that that we you know we understood what was happening and.
We saw as a result oil starting to come back to not gas was pretty strong.
And so you know we.
We we had hoped we could speaking to the Mike on our deferred projects.
Which is what we're going to do and in December. So it was just just a little bit of.
Second guessing going on on on on timing as you know the.
Rob was saying.
You know you just have to be very cautious you you have to really be careful with your capital and so it was just a out of an abundance of caution that we we decided to.
We continue to evaluate different options.
Sure. She is it fair to say then.
Nothing materially changes here in the next month, where we should expect in December is really more as a framework for how youd move forward versus.
Sanctioning.
Starch.
That's just not the intention in December not.
Not not really no.
Jason mentioned earlier, we we have consulted now with with all of our customers and stakeholders on on all of our deferred projects. So we expect to give it a detailed update.
On those and we'll we'll do so with with more confidence and we would have had a compared to the time you're referencing.
And if I can just finish with.
Coming back to the share buybacks. Thanks, Scott you mentioned earlier on the call.
It sounds like the decision to go forward with buybacks is going to be a function of how many of these projects come back how much is left over.
So I'm just kind of wondering now if you turn that around is it fair when you look at your yield and really that's just.
Did you are probably more like in the mid teens on a free cash flow.
Not all of these projects the returns are you doing.
That number.
Yes.
Maybe taking that and I'll I'll start.
Generally yes, Robert like.
We we were aware of that.
Marker of our cost of money and and it's a fair question.
And we do look at that as a marker I mean, we we.
We can buy our own stock and we love, our upside and and and very not every project can give you a risk adjusted rate of return of the same way buying back our shares have to the problem with just buying back your shares is it doesn't increase.
Your company's capability.
So, let's just say to answer your question there was a tie.
We would always.
Expand our our business in a tie because we increase our capability, we increase our customer service and we increase the the leverage and the platform for when things return and so its high we would.
We would choose to deploy capital to projects because it'll create additional leverage whereas redeem your shares won't but it is it. It you can assume that we are on a risk adjusted.
Return basis that.
What are the things, we say go to we'll have equal to or favorable returns to buying back our shares.
Yes.
Scott you want to add something.
No I think that was well said it it's certainly a marker that we love to Rob.
That's great. Thank you.
Your next question comes from Shneur Gershuni. Please go ahead your line is open.
Hi, good morning, everyone I'm glad to hear you're all safe I'm, sorry for the probably 11 to question on buybacks.
Interesting last question I was wondering if I can flip it the other way.
If you look at you know when you sort of considered the environment that you know hydrocarbon demand is clearly uncertain right now for at least a period of time until the vaccine rights and so forth have.
Have you sort of looked at the same free cash flow yield type of analysis, but looked at it more on a time continue or you know.
The NPV of a project remit usually remains the same NPV boy, if you were to delay capital for a year and buyback instead would that not be a potential optimization strategy that you know you can buy back your shares where they're yielding where they are today, yet still retain the option.
Now I'd of being able to deploy the Capex you know 12 to 18 months from now and who knows where your share price would be at that point you may not have the same opportunity.
Yeah, that's that's an interesting idea and [noise].
I got to think about the math of it but it seems logical that.
The part that that's missing though from that question is is.
Your customers.
You know your customers the things, we're selling they want to buy and we have contracts and so they get to they get to say when when you have that option for that project we can't.
Unilaterally delaying projects a year when when customers want.
I want them and so in theory, I think you're right but in practice.
You know that project may not be there if you delay a year or competitor may step step into that project and so.
It's not quite quite as easy some some of our projects to be fair like our Empress Cogen. We we we can think about it that way, but when we think about.
No CK, PC or or peace pipeline and things that are contractually.
Contractually back we we have to do them when the customer wants them as well.
Well that makes perfect sense, just it was more of a thought.
Your results this quarter in your guidance with respect to cost reductions frankly.
Frankly been pretty impressive as you sort of gone through this entire process and you know you've been kind of on a gross claim sprinkling in your more understanding still mode. Right. Now do you see further optimization opportunities and potential cost reductions as well on the opportunity flood was kinda.
Of the 150 million kind of what we should expect going forward or do you see you think you're in the second or third inning of this exercise.
I you know the 150 realized some of that was incentive based comp.
Because you know share prices.
Much lower so on this side of the phone, we're all going to make make less money and as it should be you know.
You know, we don't love that but it is as it should be one.
The shareholders aren't doing quite so well either should the employee so we accept that.
But we are like the way I would characterize it is is we are exiting 2020.
Having achieved things you know cost savings were proud of but I would I would characterize those as the things that we know how to do.
And in the next year, we're going to get some third party help to take us beyond what we know how to do into a realm of the thing we don't know how to do and we expect there to be further opportunities.
You know what I say they go over 150 in total it's hard to say because we got to make up for you know.
Hopefully a incentive comp getting back to target getting back to normal which will eat into that 150, but but would I guess that we could replace that.
That you know that that incentive comp.
Deficit I I.
That would be an objective we would have for for 21 and 22.
Perfect I'm really appreciate the color today, guys have yourselves are safe they integrate weekend.
Thanks for your question.
Your next question comes from Anderson from Credit Suisse. Please go ahead go ahead. Your line is open.
Thanks, Good morning, I promise not to ask a share buyback question.
But in relation to the negative sentiment that exists in the sector and just for the producers in general do.
Do you see an opportunity to really surface value within your existing asset base or even extend your asset base by partnering up with other part of the capital so private equity or pension funds and other targeting existing also put your housing surfacing value to the market.
Or engaging in M&A with a partner that has deep pockets.
Hi, I'm going to answer that in the two parts I have never been Antamina, where we have greater.
Embedded value in our asset base, just consider that where we're only operating at about three quarters of capacity.
And our market marketing businesses that.
Decade.
Lows right now so the embedded value that we have is unbelievable I mean, if we if we add 10% throughput. It. It's a lot of money you know and if our even if our marketing business reverts to the mean, that's a lot of money without spending.
A dime.
You know as we think about a future projects and the leverage in our pipeline systems of you know complete segregation of products in different line the impact of non batching.
The throughput is.
Is massive.
And as the previous caller mentioned, where we're still mid stride in terms of.
Finding efficiencies after years of years of growing we actually have a.
Time, as I said earlier to measure measure twice and cut wants and SaaS. So we have tremendous.
Inherent value and we're really excited about.
You know getting back to normal because we.
We think that that will really shine through in the quality of what we have and.
And the underlying quality of our customers and the the geology.
In terms of M&A and other we call what you're talking about opium other people's money, certainly we've watched coastal gaslink and some of those.
Deals and the leverage that can be liberated with with partnerships or or partial sell downs and that those are certainly available to to us we have the quality of asset base to do those in different places and that's on our minds.
We're we're not too excited about issuing equity at these prices, but you know it is.
As long as you can buy.
In a way that's reflective of your your share value can still do things that make that make sense you know for sure. It's much harder, though does that help at all.
That does and I guess it starts with the heart.
The book the Oakley atmosphere of your call, but if you had opium does that allow you to grow buyback.
And Paul.
Possibly drama that that check all the boxes at once it will be massively accretive.
Yeah were and as I said, we're looking at that and you know.
I have been for some time and we're intrigued by.
Some of the things others, others have done.
Okay, great. Thank you.
Your last question comes from Jeremy Today from JP Morgan. Please go ahead. Your line is open.
Hi, Thanks for let me back here just wanted to come back.
Pick up a bit more on how you see activity trending cross basins in your footprint and couldn't improvements that you talked about and producer activity. The volume is picking up as you said lead to an uptick in EBITDA overall next year I know, it's a pretty early look but seems like you benefit also from a full year of cost reductions at that point. So just wondering how you feel about that at this.
Point.
Hi, Jeremy I hate to be evasive, but that's really what we're going to talk about in in or just you know in three weeks or so if you kindly to hang on we will get the the whole the whole picture suffice to say you know volumes are improving.
On some systems, but on other systems, we're going to enter the year you know significantly declined from the year.
Earlier, so there's lots and lots of gives and gives and takes so sorry, I I can't answer that but really putting our full effort into giving you a fulsome answer in early December.
Got it I appreciate that and then maybe just separately hate to touch on this I feel like it's been kind of beaten into the ground, but when it comes to the topic of share repurchase repurchases within the context, I guess I've just returning capital to shareholders has your thinking changed at all over time, just given how high the yield is right now.
And how the market is not rewarding and would it ever make sense to kind of be flexible on your return of capital strategy, we take some of that dividend cash flow and buyback shares at what could be kind of you know historically cheap levels.
Scott do you want to.
Take a crack at that.
Yes sure.
Jeremy I understand the math, you're talking about but I think it at this point, we have no plans whatsoever to to cut the dividends and buyback shares.
Got it fair enough I'll stop there. Thank you.
We have no further questions I would now like to turn the call back over to Gallagher President and Chief.
Second a blockbuster for closing remarks.
Thank you operator, I'm going to leave you with an interesting staff here that we did a bit of work.
And given that this is a shareholder call us shareholders.
Shareholder stakeholder call.
Our top 20 shareholders from a year ago.
Oh, roughly the same number of shares that May do now and so I was just delighted to learn that that people are sticking with us and they see the potential that remains in the company.
And its ability to operate safely and reliably and maintain.
Its ability to earn money in its dividend so.
I really do Ah Ah Ah.
Appreciate that and we won't let you down so thanks for the support.
With that closed the line.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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