Q3 2020 Pembina Pipeline Corp Earnings Call
Agree staff have now returned to the office.
As we refocused 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 to on E.S.G. issues, we're looking forward to the release of our next sustainability report in the coming weeks to 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 [laughter]. How 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 the pembina there.
Yeah, I'll start and then I'll turn it over to to discard or others.
Generally in the past you know, let's take a longer timeframe save the last 10 years consolidation has helped to pembina.
You know the.
In the depths of March and April I think Ah you know investors were worried about some of the.
The weaker layers.
Players out there and they're starting to.
Be consolidated and become a stronger players to the recent Tourmaline example, I think is is an excellent one where you know two of our.
You know less strong customers will be consolidated into an industry leader, which you.
You know helps or not just with credit but also capability.
In tougher times. So you know we we welcome it we think it's good for.
The areas in which we operate and it's good for credit in terms of your second question.
Midstream consolidation you know Oh Pembina has been a consolidator over over the years.
But in Canada, that's a it's a it's a rare thing it happens very slowly I expect in the U.S. to see much more consolidation. You know then in Canada, I think 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.
Competitors say, they're all you know around their guidance range. So you know there are an average doing I think better than what we see in the U.S. I'm Scott do 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 a 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 and maybe find some opportunities to either 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're U.S. peers have.
[noise] lender that's a that's a great question, then and you know I'm going to answer it as best I can right now, but realize you know things things change.
Again, taking a longer term perspective, you know, let's let's go back to 2015.
We we kinda sense, you know a advantage U.S. in that timeframe and we we wanted to just start to March the value chain into the U.S. and and the result was.
Ah the Verus, an acquisition, which was done to diversify into a nat gas away from just liquids, but also to up our U.S. exposure.
As we look forward and you mean I'm not trying to predict the election, but as we look forward.
No the the relative environments of Canada, and the U.S., a assuming biden win.
We think its advantage, Canada, particularly as as we develop eager EPS. So whether it's the shell LNG Trans Mountain you know our export terminal al to gases export terminal.
You know as we get he grass or we take 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 and.
A north American market.
But beyond that you know if you're looking for 20 years, we think the Asian.
Indian market is going to be the place to be and we're the closest to that and you know we have a and produce some of you know the cleanest hydrocarbon most ethical hydrocarbons in the world is a basin and so we 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.
Yeah baskets are there, but we're we're most comfortable I think with our capital allocation in Canada and in the next number of years.
Thank you and maybe just as a follow on recognizing that the Alberta government is.
Is promoting a petrochemical investments in in the province, I'm wondering how that might influence youre, the relative attractiveness of that opportunity versus others.
Maybe we can also hear your updated views on whether there might be some emerging a hydrogen opportunities for pembina as well.
[laughter] I'm, you know, 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 P C, which will be providing an update for in in early December.
In terms of hydrogen it's early days for us I mean, clearly we have infrastructure that that can be used in in that development, but it. 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.
Participate, but as Steve any additional thoughts.
No I mean, we're we're watching it closely with them and.
Our excited about.
What that opportunity may develop into with respect to pembina itself and and the industry in general.
We're quite positive and and I think our effort.
In in some of our work on the petrochemical side and and export Oh, we're getting we're getting lots of contact and and are excited to be recognized and have conversations with you know 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 speak to conversations you're having with customers or physical volumes seem to be slowly recovering here, but more importantly on new projects are more to come in December obviously, but is there some caution here that you're seeing with customers and and is it fair to say that you'll you'll be proof.
Instead of adding new projects that match customers willingness to backstop that capex with contracts.
I I'm going to start and then Jason I'm sure you're eager to to to respond to that.
You know we we are 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 than we will restart.
And we will talk more about that.
In December but.
But we are literally following the pembina playbook all the guardrails you don't decent rates return good counterparty credits good geology, all those things.
And you know and you know, we we'd love to grow fast or as 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.
Oh, 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 once in project readiness, So Jason maybe a bit of color on what you're seeing on the ground.
Sure. Thanks.
Thanks, Mick and so Matt we we've actually canvassed all of our customers, particularly on on peace pipeline and the core door and and determine you know what their needs were and you know had a number of discussions with customers who need to make 'em changes around their contracts and things like that so.
You know relative to what Mick was saying, we're trying to make sure that we weren't building you know.
Thats the customers didn't need as we were going going through that process and so it you know we've gotten a lot of positive.
Indications from our customers in terms of their continued need for capacity on her assets. There's continued growth in certain areas that they 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 you know 2013, we have 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.
So on exactly what we need and planet very effectively and you know the market is good for 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 I 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, you know Scott mentioned it earlier in the call that a we have seen volumes recovery.
Her in August or or or typically turnaround season in the summer is generally you know breakup and slow drilling season, we're starting to see albeit very slow recovery in drilling in the basin. We are seeing really ramp up the facilities came back from term.
A very strong.
And we've seen consistent volume growth on both the the Lv appealed the HVP side of the the system. The HVP has been performing very strong across the board actually staying relatively close to what our expectations were when we set our budget, where we're seeing things growing back.
Closed third who you know what we expected to see at this time of year, where about 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 counter to that I would say is that trade area I think in some of our other.
Midstream peers talking about that area is a bit a bit slow with it.
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 then can you just slot.
Obviously, you're being prudent about the backlog here can you slot then you put somebody comes in and the press release on gross debt repayment and increase shareholder returns you might prioritizing those items and then where 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 that you're that.
The press release, well well, Matt obviously, we were not were still working through our budgeting 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 goalpost about where what were thinking about but in the scenarios, where we are generating a free cash flow.
Certainly when we think about how we funded a the business.
We funded it typically 50 50 debt equity over the last decade, or so and so when we think about redeployment of capital you know our starting point really is to think about redeploying. It back 50, 50, so potentially you know 50% of the of the free cash flow to debt repayment, 50% will go to share buybacks now.
Now that all depends obviously on a couple of factors you know, where we see the leverage trending if we see if we get to a level that's slightly higher than where we're comfortable that I think will skew a little bit more of that capital towards.
Repayment and likewise, depending on where the share value is that could also skewed something to the upside of the downside on share buybacks, you know where we sit today.
Yielding nine <unk> little over 9%, certainly we see value in our own shares as we feel they're 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, good morning on on.
[laughter] sales.
Anything to update us up I didn't see much and pockets on now.
Got you want to Indra Yep.
Yes, so we continue to work through two asset packages and that's about all we can say there a ban will probably provide a little more color and should have a little more clarity or with our December update.
[laughter].
And then maybe it's just more of a detailed question on exhibit so on deferred revs.
Revenues on makeup rights and recognize revenue or is the expectation ahead into Q4, that's oh.
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 then 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.
<unk> 12 months, that's on a calendar year basis like there's not a there's not some portion in Q3 at book and it pushes into next year.
There's 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 help from Scotiabank. Please go ahead. Your line is open.
Yeah. Good morning, everyone I'm, just trying to get a sense on how you're thinking about a contract roles at alliance given the dynamic from a base when including potentially a little bit of a delay in LNG, Canada as well as any update on really big.
Maybe.
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 in Chicago, it's going to be a challenge to as we're all aware in 2020, and so you know I think we have seen.
Seen some of the the interruptible volumes, you know a little bit lower than we had seen in the past, but we're starting to see a strengthening in that in that basis between Alberta in Chicago at the moment <unk>.
Especially in the winter so a lot of our capacity that came available. This year, we've been able to to seasonal sales to keep the pipeline at high utilization. So optimistic there you know we have as.
You know a view towards the end of 2021, but the pipeline is still highly contracted and we're we're currently working with customers both in Alberta in the Bakken to determine their needs for for you. Greg. We do think its you know in a challenging farm at the moment, but we do think thanks.
Things are looking positive and there are some some certain areas, where we do think there's opportunity to be able to bring gas on to that pipeline on a on a term basis. We've had some some smaller successes recently in Alberta terming up some volume there.
And then on on Ruby similar similar story in terms of re contracting you know the basis between old Pal in Midland is is very narrow, it's making it quite difficult.
For for Ruby to attract to attract volumes, we still have the the PGN E contract there that goes on for a number of years.
So Ah you know, we're working with our partner can't or more again on on assessing you know some options there.
The the California market for gas is is a bit challenged with 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 will.
Movie houses as a low carbon pipeline.
To to be able to access some of the some of the California market there.
Got to do you want to add anything to that.
No Jay 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 <unk> propane inventories from the summer that you'll be.
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 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.
Our Garrett yeah. So in terms of in terms of our our propane sales were largely sold on a forward basis. So you know we still expect based on our current sales program to exit March as we typically do with little to no propane in storage.
I'm not good I disclose the specific amount path, but what I can say is a high high percent, 75% or higher is already sold on a on a forward basis. So we feel confident about our forward sales profile as it relates to 2021, you know based on the current form.
Were to strip that we typically used to run our budget, we are seeing a slightly higher NGL prices compared.
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, a 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 than where 2000 twentys track up but you know the key to US is the differentials and the differentials largely are the same as what we saw in 2020. So as we sit here today, you know absent volatility.
ER 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 you know publicly announced in the quarter and I know some of the fee reductions are tied to.
Hi, Steve elements still coming on but can.
Can you just confirm you know 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 in a gas service is an approximation I don't think we see any degradation in tools.
Okay, perfect and last one for me Scott just going.
Going back to your comments around share buybacks and so you know the uses of potentially some excess cash here until your growth is secured I know you've taken a look at the mass for behind trying to go out and a buy back some of the the Pref shares.
Obviously that would be at a big discount to par.
Picked up math was was pretty cool bid, 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 a at what those options are a you know from a from a common perspective, you know if you look at if you look at the yield of buying out of crap compared to yield the buying out our common plus you know assuming that you know 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 at all or to buy back 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, you know, we see that to be an attractive market. So it's.
Only in in the tool kit as we as we formulate our 2021 financing plan.
Excellent okay. Thanks, Scott.
Your next question comes from Robert Catellier Sunday, I do see 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 or previously.
I appreciate the Oh, the logic in affected 15 funding, leaving to all your body in white collar small freak out of fall.
Something repayment of debt from two of 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.
Are you pointing to a very high yield right now and the and the current dividend.
Does that suggest that there is a chance or we'll go another year without a a dividend increase.
Yeah, Chris or 10 is still stomach one.
Or even though the yield is high in 2021 with a view more towards long term.
We're we're studying that obviously, that's we'd love to keep the street going but at some point.
Rob It doesn't make sense, either when you're yielding 9% then.
When I when I do conferences I always ask.
I always ask who I'm talking to what what they would do and so Oh I'm going to ask you. What you would do here is it it's it it's it's a difficult question.
To answer.
On one hand, you you want to keep the streak alive on the other hand.
Your 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 you know what would you do.
Well, it's a good question, that's why I'm asking but it all the other side. So it's a pretty circular discussion, but I would say you know capital.
You know next year people.
The most prestigious thing you have so.
You know, 9%. It was just a lot it's not just in isolation, but relative to the spreads in fixed income and other options you have in front of you.
You know and.
The timing is really a matter of trivia I guess it could always raises ever done more later oh when it went out say more attractive choice. So that's kind of where I see it 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.
Well, it's a challenging one I mean.
Steady consistent dividend girl, probably gets the best value over time.
But you know there's one in the sand for every one of them 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, there's no doubt.
I can give you assurance that you know 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 that in this unusual trough Ah It becomes clear I think is 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 it yeah.
If that's really what the shareholders would want us to do so a very very challenging question and the good news is we have many months to.
10 noodle on it before we get too to that time of the year, where we have to make that decision. So thanks for the question.
Yeah, No I'm not plus point I mean, there's not a lot of money, but to just because they have it tells me is one oh, yeah, just going into the past again with it. So it's just one not just double that up.
As you're well aware, there's been a lot of conversation the markets recently about terminal values. So I'm wondering how that's going to bring into how do you look at count.
Capital allocation, specifically, obviously, the return thresholds and knowing that those compete with share buybacks, but.
Oh, so is it is that having any impact.
On screening out certain asset classes or otherwise accelerating sales and other off for Clos is just too.
All right enough to his to profile.
You know, we we hear that argument honestly it it doesn't impact our thinking.
Like we were pretty confident the world's gonna need or 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 are look at you know Oh pack and the Guy who and others, who you know suggests that a we're not at peak hydrocarbon yet even if we are.
Where do you get there the next decade.
You know that it's a long long long tail and and particularly.
Western Canada was fought hard to get a west coast eager EPS and we'll we'll have that you know whenever you know enhance form here in the next two or three years.
And that'll make that tail much much longer.
Even if north America is a 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.
Hi, Good morning, just to start off on the last call you alluded to evaluating some of your growth projects and making some decisions over the.
The coming weeks post that call and then potentially restarting some of that growth. So I'm just wondering what changed in the environment that you were expecting but getting on field such that everything just children, maybe on hold right now.
[noise] I think really it was cold bid Robert I mean, you know we we we believe that the time I think the world or did.
Good or bad that we you know we understood what was happening and.
We saw as a result, you know oil starting to come back to not gas was pretty strong and.
And so you know we we had hoped we could speaking to the Mike on our deferred projects or.
Which is what we're gonna 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 are you just have to be very cautious you know 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 <unk> nothing materially changes here in the next month, what we should expect in December is really more the framework for how youd move forward versus.
Sanctioning right starch.
That's just not the intention in December now.
Not not really no you know 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 oh on those and we'll we'll do so with with more confidence than we would have had.
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 Josh is left over.
And so I'm just kind of wondering now if you turn that around he is it fair when you look at your yield and really that's just show that you're probably more like in the mid teens on a free cash flow in Kansas. So yield at all of these projects their returns are eating dot number.
Yes.
I mean are you taking that are not be too I'll I'll start.
Generally yes, Robert like.
No. We we were aware of you know that the 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 can buy our own stock and you know, we we love our upside and and and very not every project can give you a risk adjusted rate of return or the same way.
Buying back our shares have to the 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.
You know we would always [noise].
Expand our ER business in a tie because we increase our capability, we increase our customer service and we increase that the leverage and the platforms for when things return and so in its high we would oh, we would choose to deploy capital to pro jeffs, because though it'll create additional leverage whereas.
Reading your shares won't but it is it is you can assume that we are on a risk adjusted.
Return basis that.
Those are the things, we say go to a will.
We'll have a equal to or favorable returns to buying back our shares.
<unk>.
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, Yes. Please go ahead your line is open.
Hi, Good morning, everyone I'm glad to your your own safe I'm, sorry for the probably 11 to question on on buybacks. Yeah. We can interesting last question I was wondering if I can flip it the other way.
If you look at you know when you start considering the environment that you know hydrocarbon demand that is clearly uncertain right now for at least a period of time until the vaccine rights and so forth have you sort of looked at you know the same free cash flow yield type of analysis, but looked at it more on a time continuum.
The NPV of a project you know really 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 ops.
And 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 it that's an interesting idea and [noise].
I got to think about the math of it but it seems logical.
The the 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 you can't you.
Unilaterally delaying projects or a year when when customers want them in 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 a competitor may step step into that project and so.
Hi, 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 that way, but when we think about.
No see KBC or or peace pipeline and things that are you know contractually back we we have to do them when the customer wants something as well.
Well that makes perfect sense I'm just it was more of a thought <unk>. Your results. This quarter in your guidance with respect to cost reductions frankly been pretty impressive as you sort of gone through this entire process and you know you've been you know kind of on a gross claims sprinting and good morning.
Standing still mode right now do you see further optimization opportunities and in potential cost reductions as well I'm on the opportunity fluid was kind of a 150 million kind of what we should expect going forward or do you see you think you're in the second or third any of this exercise.
I I you know the 150 realized some of that was incentive based comp.
Because you know share prices are 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.
No we don't love that but it is as it should be one.
The shareholders are aren't doing quite so well either should or the employee so we accept that.
But we we are like I 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 hot.
To say because we got to make up for you know hopefully a incentive comp getting back to target getting back to normal which.