Q4 2020 Keyera Corp Earnings Call
Ladies and gentlemen, thank you for attention.
Just curious on what he's hearing 'twenty 'twenty.
And of the home.
On my call webcast at this time, all participants are in Virginia.
After the Speakers' presentation goes kind of question on your question and answer session to ask the question who asked the question.
Just kind of wanted your telephone please be advised for today.
The reported if you require any.
Other restaurants.
I hand, the call the sort of your confidence on what you're listening comprehension of the shopper.
Please go ahead Sir.
Thank you and good morning.
Welcome to <unk>, 2024th quarter and year end conference call. Joining me today will be deemed set of Gucci, whose promotion to Chief Executive Officer took effect on January one 'twenty 'twenty, one Eileen Barker Senior Vice President and Chief Financial Officer, Jamie Urquhart, Senior Vice President and Chief Commercial Officer, and Brad Lock Senior Vice.
President and Chief operating Officer will.
We will begin with some prepared remarks from the management team after which we'll open the call to questions I'll remind listeners that some of the comments and answers that we will provide speak to future events. These forward looking statements are given as of today's date and reflect events or outcomes that management. Currently expects. In addition, we will refer to.
Non-GAAP financial measures for additional information on non-GAAP measures and forward looking statements refer to our public filings available on SEDAR and on our website I'll also point out that there's a revised investor presentation available on our website.
Please note that any detailed modeling questions can be handled by the Investor relations team after the call with that I'll turn it over to dean to kick us off.
Thank you Dan.
And good morning, everyone.
I want to start by acknowledging and thanking here is former CEO, David Smith, who retired on December 31.
Has 22 years of service.
Jamie Eileen's, Brad and I wanted to thank David and our board of directors for the robust executive succession planning, which has set us up for future success.
The COVID-19 pandemic brought several challenges to our industry and our company.
Our priority continues to be the health and safety of our people and communities.
I'm proud of our employees many of who have remained physically at our field locations since the onset of the pandemic.
Their dedication and commitment keep our assets running safely and reliably providing essential services for our customers.
Early in the pandemic here took a series of decisive actions to preserve shareholder value. These.
These included the for.
<unk> capital spending.
Discontinuing the drip.
Maintaining ample liquidity.
And implementing cost reduction programs.
In addition, our risk management program protected our product inventories and margins from extreme price swings and what was the volatile year for commodity prices.
<unk> performance throughout 2020 demonstrates the resilience of our company.
<unk> for the year's challenges EBITDA was down only 7% compared to the prior year, which was a record.
Distributable cash flow for the year came in at $718 million a new record.
As a result, we have entered 'twenty 'twenty, one with a solid financial position and no need to allocate capital to debt repayment.
Shifting to our team priorities Keira has a long history of delivering returns for our shareholders.
We've done this by being disciplined in how we allocate our capital.
<unk> value proposition will continue to be the delivery of a sustainable dividend underpinned by low debt leverage and an asset base and strategy that allows for steady growth and distributable cash flow.
To deliver superior shareholder returns, we will continue to be focused on the following.
Safety and reliability.
<unk> financial discipline drives.
Driving efficiency through technology and innovation.
Continued strong ESG performance.
And playing an important role in the transition to a low carbon economy I'll briefly touch on each.
In terms of safety and reliability, we had outages at both of our Wapiti gas plant and our <unk> facility this past year.
The combined impact of these outages on the adjusted EBITDA was approximately $45 million.
Excluding these two outages are assets rather than the average reliability rate of 98%.
We can and will do better putting more focus around our processes for <unk>.
Prevention of unplanned downtime.
Moving on to capital discipline, our conservative approach has served us well through several commodity price cycles.
This will continue to be the hallmark of our company, while keeping a clear focus on generating returns for shareholders.
This means living within our financial framework and priorities.
Helene will speak more to this in a few minutes.
Looking now technology and innovation our goal is to be the most efficient operator, providing a high net back for our customers.
Innovation will play a major role in helping us to get there.
Turning to ESG and cures role in energy transition.
I've long believed that embracing ESG principles reduces our risk and creates value for shareholders over the long term.
Keira, our board of directors overseas, our ESG priority areas.
We've taken the step to link management compensation to ESG performance.
Last year, we released our inaugural ESG report, which is aligned to SaaS be standards.
We have committed to studying emissions reductions targets and aligning to phase one Tcf day reporting in 2021.
The World is the energy mix is undergoing a transition towards the lower carbon future and <unk> is well positioned to evolve with this change.
We continue to look at opportunities that would leverage our existing core competencies and asset base we.
We see great potential in helping our customers decarbonize with initiatives like supplying and transporting sullivan to reduce carbon emissions from the oilsands.
To sum up we've demonstrated our resilience in 2020 across all aspects of our business.
And we're excited to keep the momentum going into 2021.
The commodity price markets and the outlook for our customers are improving and we are well positioned to capture the upside of the recovery in global energy demand.
As we look ahead, we intend to keep our focus on all aspects of ESG performance and transparency.
And we will continue to investigate ways that we can play an active and meaningful role in energy transition.
I'll now turn it over to Jamie to provide an update on our operations and major projects.
Thanks Dean.
Announced on this mornings news release that we are revising the expected gross cost of the Kaps project to $1 6 billion up from the original estimate of $1 3 billion.
This means <unk>, 50% share of the investment would be $800 million with the project scheduled for completion in 2023.
The returns for the project are largely underpinned by contracts for more than 70% of the initial pipeline capacity with 75% take or pay commitments for an average term of 14 years.
This project further integrates our existing value chain by linking our gas plants located in the highly economic montney fairway to our condensate and NGL infrastructure in Fort Saskatchewan.
In addition to generating predictable long term cash flows the project unlocks numerous future growth opportunities within our upstream and downstream businesses.
We are excited about this project because of the superior to the geology in the capture area and how it significantly enhance our enhances our competitive position provides our customers of much needed alternative for condensate and NGL transportation.
We have several catalysts in the near term that are contributing to EBITDA growth. The Gulf Coast Galena Park facility, which is designed to provide fee for service inline butane blending into gasoline is now complete with full connectivity of expected this month.
The Wild horse terminal in Cushing, Oklahoma was mechanically complete in January commissioning activities have begun on the project is expected to be fully operational in mid 2021.
On the gathering and processing segment the.
The pipeline the Pipestone gas plant was placed into service five months ahead of schedule with initial throughput surpassing our expectations.
Successfully completing the first phase of our optimization plan with the safe and orderly shutdown of three gas plants in central Alberta.
On the optimization program continues with the planned shutdown of three additional central Alberta gas plants over the next couple of years.
The program will increase overall utilization rates drive down per unit operating costs reduce overall emissions and provide competitive net backs to our customers.
Going forward, our priority and focus in our gathering and processing business will be to grow earnings by striving to be the most efficient service provider.
In the marketing segment, we continue to access the highest value markets for our customers, while maintaining a disciplined risk management strategy we.
We are excited about the potential opportunities the federal clean fuel standard may present for our isooctane business. This.
This is one of many opportunities that we continue to investigate to increase shareholder value.
I'll now turn it over to Aileen, who will run us through our financial priorities and results.
Thanks, Jamie I want to Echo, what Dean said earlier about our focus on capital discipline and maximizing total shareholder returns.
First off with the refresh of our financial priorities.
Our number one financial priority remains preserving the strength of the balance sheet.
This means targeting of long term net debt to EBITDA ratio of between two and a half and three times for covenant test the purposes.
We believe that this conservative range will also ensure we maintain our investment grade credit ratings.
We ended the year with the leverage ratio of two nine times.
Next is to maintain the current monthly dividend with the focus on growing distributable cash flow on a per share basis, allowing for further growth in the dividend over time.
We target a payout ratio of 50% to 70% and we ended the year with the payout ratio of 59%.
Third maintain our capital disciplined capital allocation, which includes evaluating investments based on returns.
Strategic Merit.
S G considerations and other risk factors.
We're particularly focused on continuing to stabilize our cash flow and increasing the level of long term take or pay contracts with strong counterparties.
With that said for 2020, we delivered a return on invested capital of 11, 4% within our targeted range of 10% to 15%.
This was an exceptional outcome given the unprecedented events of this past year.
I'll now run through select highlights from our 2020 results.
Adjusted EBITDA for the year was $874 million, while distributable cash flow was a record $718 million, representing an annual increase of 21%.
Net earnings were 62 million for the full year of decrease from 2019. This was largely because of a $371 million impairment expense stemming mostly from the shutdown of gas plants as part of our asset optimization program.
The gathering of processing segment delivered margin of $260 million in 2020, a decrease of 12% compared to the prior year because of lower overall volumes the reductions at certain plants in the south region and unplanned outages at the Wapiti gas plant.
We delivered yet another record year in our liquids infrastructure business with realized margins hitting $399 million, representing more than 40% of overall company realized margin.
This strong performance can be attributed to the high level of take or pay contracting and high quality customers.
And our marketing segment delivered of realized margin of 295 million for the full year $5 million below the bottom end of the previously provided guidance of 300 million. This was the result of recognizing $12 million and realized hedging losses for <unk>.
Which the inventory remained unsold at year end higher margin will be realized in Q1 2021, when the product itself.
Turning now to guidance for 2021.
We'll expect growth capital capital to be between 400 and $450 million with the majority of this amount anticipated to be directed to construction of the kaps pipeline system.
The increase in the cost estimate for the Kaps project does not affect capital guidance for 2021.
The <unk> portion of the Kaps project will be funded through a combination of internally generated cash flow and incremental debt.
2021 maintenance capital is expected to be between $25 million on $35 million and we are guiding cash tax expense to be between 20 million on 30 million.
For the marketing segment, we expect to achieve the base realized margin of between $180 million and $220 million. However, further guidance will be provided with our first quarter results.
With that I'll hand, it over to Dean for some closing comments.
Thanks Aileen.
Over the past year of curious just demonstrated our resilience.
This is a testament to our culture and the dedicated efforts of the.
The people at all levels of our organization.
Come to work every day committed the safety and giving the best.
Looking ahead, Keira will continue to be of safe reliable and sustainable operator, and continuing to focus on generating value for our shareholders.
We're excited about the future and we're confident we of the culture people and assets to succeed for decades to come.
On behalf of <unk> Board of directors, and our management team I, Thank our employees customers shareholders and other stakeholders for their continued support.
With that I'll turn it back to the operator for Q&A.
As a reminder to ask the question to answer the question.
Hello, Pedro you can issue price of oil.
Your first question on line of Rockwell kind of wrong.
Scotiabank.
Good morning, everyone.
First question on China.
A little bit of of that kind of of all.
Okay.
We've seen an increase on the cost estimates however.
Okay.
Turn on capital capital all of it.
Hi.
Uh huh.
What's driving the <unk>.
Guidance for that Guy for the profile.
Are you able to pass through higher cost of our recalls for top or are you seeing sales better than expected in the volume at all of us given the commodity price environment the price environment.
Yeah.
Okay.
Hi, Robyn it's dean.
Thanks for the question and.
Overall, we still believe the.
The project is the is needed for the basin I mean again, there's need for for competition. If you look at the overall for the metals of what's happened in the basin is that I think.
Where we get mired, sometimes and what what just happened in the pandemic, but if you look at the bigger macro.
You know certainly we're seeing much better fundamentals as you can see on the Ford markets in the in the spot market's for for both natural gas.
Crude oil and we also think that propane is is going to be pretty robust in the years to come. So when we look at our at our customers and what their plans are yes in the near term they are repairing their balance sheets, but you know as we look forward I'm certainly they do plan to expand their programs and I think part of the.
The bottlenecks that we've historically had on or based on all relates to regress.
So when you look ahead at the expansions on N G. T. L. Coastal gas link are being built and in service towards the middle of of this decade, you know which is the only another four years out and then you start thinking about you know also the expansions on the on for crude oil on T. M P L and and line three.
And in other small bulk of the bottlenecks.
You know that really.
Frees up a lot of the you know the.
On the reserves that can hit the markets both for crude oil and natural gas. So again just.
The way we look at the project the contracts that we have in place already low when we look at the basin and whats happening. We think that this is the tremendous project.
But at the end of the day you know we are we won't be incurring significant expense until the middle of the year. So we expect to have a formal sanctioning before that time.
Yeah.
Your next comes from the line of Patrick Kenny with National Bank portion of today.
The financial.
Good morning, good morning.
Yeah, it looks like vehicles.
Sure.
Ian just wondering if you can just wondering if you could.
Still the 300 million dollar increases.
I know that.
There was an update of what's coming.
Coming.
Because of the deferral of the project, but the.
$300 million for <unk>.
The one year of pushback.
During what is obviously a fairly slow time for the industry in general So I know you referenced pipeline construction competition.
But the big ones like C. G L on T M X I mean the.
Who would have known for a while so again just wondering if you could walk us through how you get to the $300 million increase.
Hi, Pat Yeah, So I'm just going to repeat the question.
Just because of it sounds like there's an echo on your end we can here to on our end, but the question was just to provide more details on the $300 million increase associated with the Capex projects. So I'll turn that over to Brad lock.
Sure.
So I think as we went through the the re forecasting of the cash of the cost with the one year delay.
Certainly a component of the cost increase was related to that delay, but certainly the biggest the.
The biggest component of that was the activity that's existing on pipeline construction projects you talked about <unk> on coastal gas link.
Those are big pieces and they draw on the same resources debt.
While the different contractors the of many of them draw on the same resources that we would be using for.
For our project. So so as we've advanced our contracting strategy of these costs have come to fruition the.
Nice thing is we are in the process of securing all of our contractors for the construction activity and making sure that we are ready to hit the numbers that we have that we've landed on right. Here. So we have strong confidence in those numbers to execute through to 2023.
Okay. That's helpful. Thanks, Brett.
And then just I guess with respect to the overall health of the customer base and.
Do you need.
Pointed out of commodity prices moving in the right direction, but.
The carbon taxes also.
Moving moving up as well over the coming years. So could you just provide a bit more clarity as to what $170.
Carbon tax per ton could mean for.
The gas processing economics.
And if you have flow through provisions.
How meaningful could this be on your customer net backs.
And then I know, it's still early days, but you know as you look.
Words energy transition what are the some of the projects you might have in the hopper to help reduce emissions of some of your larger plants.
Great question.
And your question was.
Largely related to what is the $170 of carbon tax being to our G&P business in the what.
Does that mean for maybe overall industry and our customers.
Great question.
And I guess really what it emphasizes to us is that it's going to drive a lot of efficiency in our basin and and.
And you know so it really emphasizes the steps that we're already taking to drive that efficiency. It makes it even more valuable.
What we're doing with the the optimization program again to direct the gas and herself portfolio to our most efficient facilities and driving higher throughput rate because its intensity based sort of calculation.
So we're I feel like we're already on the path to achieving that already and that's what's gonna have to happen across our whole industry. The fact that we have interconnected the facilities by pipe gives us an advantage to do that.
If you have a one off facilities and you have low utilization I think that's really going to hurt a lot of those players. So again, it's going be a lot about efficiency high utilization in and of those remaining facilities that we have now we have the scale and they'll make investments there to continue to reduce our carbon footprint.
And then maybe Brad if you want to elaborate any further on that.
Yeah, I think we are I mean, we see we see lots of opportunities within our our gathering of processing efficiency.
Right now with consolidation and certainly from a from a project execution side too to reduce our carbon intensity.
So as we advance our strategy and lead towards the target through 2021.
Lot of those will become identified in the and become part of our long term plan.
Okay great.
The last one.
Sorry last one for me if I could just maybe for Eileen.
It looks like the overall decommissioning liability is up.
The $50 million year over year to 300.
You've got the incremental 150 now to spend on caps just curious.
If you've had any recent conversations with S&P just to reaffirm the stable credit rating.
Yeah. Good question Pat.
We continue to have conversations with S&P, we actually did on the treasury team met with them last week and yeah. So far you know, they're very positive on our story and you know we we we certainly feel confident with with that relationship on the rating at this time.
Okay, great. Thanks for that.
Your next comes from the line of Ben Palm with PMO.
Okay. Thanks Kumar of everybody.
Not sure of you answered this earlier, but of in Akron and some of the question I wanted the perhaps on the loose ends on on the caps.
Reaffirming debt of 10% to 15%.
Return despite the Capex increase so there is a provision in the contract. So you can recover the capex overruns from shippers already of some other.
Positive Delta of you've seen since you've announced the project.
Yes for them, it's Jamie Urquhart no there there.
Our intent is not to pass through the increased the.
The capital cost to our shippers.
Really the the confidence that we have with respect to hitting that return on capital range is.
Based on our existing contracts and also our forecast with respect to being able to contract additional volumes based on conversations that we've had with producers over the last three to six months.
Okay.
And a lot of good commentary on <unk>.
Energy transition yet the history report you put out on you announcing that the seller for Paramount as well.
On top of what you.
I've sat there in the.
The opex reductions on on the gas processing racing emissions of any hang on.
You can share.
At this moment on how you plan to move along with the energy transition.
And carbon emissions broadly.
Yeah, well, you know without getting into too much specifics, obviously as Brad alluded to we see some some meaningful projects at our gathering and processing facilities.
We've touched before on on hydrogen where we're.
Looking at hydrogen in the in a very meaningful way with respect to the piece of land that we happened to have it up and force Saskatchewan on a pipeline that we have that's in hybrid debt is rated Friday in service its in the different service right now the connects Fort Saskatchewan to the striped Kona area in Edmonton.
We have the opportunities that we're looking at debt.
Yes, with respect to the clean fuel standards that I touched on in our remarks on those are the big rocks that we're looking at right now.
We should also point out to the.
Goodbye.
So we've been we should also point out too that we already do.
Carbon capture and sequestration of already with our acid gas injection, which we have that.
For facilities or facilities. So that's.
That's something that we do already and I think carbon capture and sequestration, obviously will be also of bigger solution of the future.
Yeah.
Okay.
My last one yeah. So.
So I think the newest disclosures on on take or pay exposure.
That 40% of I wanted to clarify it is taking the face value of EBITDA for <unk>.
For 2020 about normalizing for the base marketing.
Hi, Ben so the the take or pay is based on our overall realized margin, including the actual results for marketing in 2020.
Okay. So the.
If you normalize for our marketing and it take or pay is probably more north of 50% then that's correct right.
Okay.
Alright, Thank you very much.
Okay.
Your next question the line of Matthew Taylor, with Tudor, Pickering, Holt and company.
Hey, Thanks for taking my questions here, it sounds probably for I lean on.
On on.
Funding you talked about your targeted leverage range, but previously you've also talked about the potential to exceed your drink caps can can you just refresh your thinking on that has your funding plan changed at all in light of this Capex increase and then a follow on to that question would you be willing to bring on another partner to reduce the financial risks.
Thanks, Matt Yeah. Good question. So as we noted the growth capital for 2021 remained unchanged. So it's still about 400 for 450 million, even with the increase to the overall cost for cats. So yeah. As we said before you know we're okay to go over of our conservative target range.
So for two and a half to take time for a period of time, while we built out cash as long as there is a path down to the target range. So there are tools that are available to us like hybrids of preferred shares but hybrids in particular that have recently been issued at very attractive rate. So that is something that we we may consider as well on the future.
<unk>.
Yeah.
And then on the partner question is is that something that you'd be willing to the where are you comfortable still being at 50 50.
At this point, we're comfortable with 50 50, but again, you know partners and and our overall portfolio. It's something that we evaluate all the time. So there's nothing more to say at this point.
Okay, Great and then one more on capital allocation with your dividend yield at 7% today and like I already mentioned leverage is in good shape might start tracking up here over the build cycle. How are you thinking about restarting dividend growth versus retaining cash out on caps as.
As you go through this build cycle any thoughts on on dividend would be helpful.
You know as we said we're committed to the dividend and given the low payout ratio of maintaining that current dividend is very sustainable. Our focus is really on growing distributable cash flow on a per share basis. So you know in order to look at increasing the potential the potential dividend we.
Would need to see some sustained recovery for the industry as well before making that commitment.
Okay.
Great. Thanks, that's it for me.
Okay.
Next question the line of Robert <unk> with CIBC capital markets.
Brian.
We see kind of the market I just have a couple of quick follow ups on cash.
Personal opinion I just wanted to clarify that in fact the channel.
And the cost estimate is entirely due to a.
On a cost as opposed to any change in scope.
Can you just clarify that for us.
Yes, Robert Dot the is confirmed the scope still remains exactly the same as we've been describing all the way along.
Okay, and then what has to happen then to the.
The reach the formal sanctioning decision for you.
Sort of relative to you.
Your prior of final investment decision on the one year delay.
Yeah, I mean for US we are we just look at all factors.
All of the capital discipline that we've described we'll go into presenting of back to our board.
Before the summertime.
And to get the thanks, the final sanctioning decision but.
So we are all teed up for this project. So it is ready to go but it's a it is subject to a final. Thanks for your decision prior to the summer.
Right. So this was entirely chiara of just being prudent with the capital as opposed to any customer commitments, having run off or anything like that.
That's correct.
Okay.
That's one of the square some of your comments your optimism on the on the volumes.
Eventually flow.
Well the cap.
And grow over time.
Square that with everything we're hearing from the other brands about their intentions to keep production flat.
Obviously.
Pricing environment net back environment is better.
So.
Is it just a question of what you know.
Maybe sometimes upon by the producers on the short term of the square up the balance sheet.
And then longer term a little bit more optimism on so maybe in the.
The context.
Can comment on what a reasonable range of throughput changes for 'twenty 'twenty, one and the context.
Alright, I just caught the last part I missed the last part of your question could you just repeat that please rob.
Sure.
Just the last part was what a reasonable range of throughput change in 2021 day in light of your view of producer activity.
Are you just talking about the caps you're talking about just the G&P G&P G&P.
Yes.
Hmm.
Well you know what I mean, we are we always say, we're cautiously optimistic and after going through a year like 2020, obviously it was the year, where we had virtually no drilling.
You saw what happened and then obviously, we had some volume declines that are on our base facilities.
What we're seeing now is I would say stable to slightly growing and.
Remembering that the price rebound as the only been sort.
Sort of in play for the last for the last two or three months. So you know producers are obviously going to be prioritizing.
Just repairing their balance sheets, and making sure that that's a strong first.
But.
You know when you look at the economics from the from the environment. We just came in last year or two where they are in the.
Mid to high Fifty's W Ti price, which translates to a high condensate price.
Upper $2 for for April and a pretty robust Ford strips on on both commodities, even though they're backward dated today.
On the fundamentals of what's happening.
Just the world, where everybody I think is is being more cautious about drilling. So I think that's going to keep this likely to keep a supply a bit more on check, especially on the U S side of the border.
You know the binding administration and some of the regulations.
The regulations that that he's imposing I think it levels the playing field a lot more for for our Canadian hydrocarbons.
And again, you know I've said this before but you think about the the long reserve life, which is measured in the hundreds of 100 plus years for both natural gas and crude oil.
You know the the issue in Canada has never been our resource base and I'd argue that it's globally competitive in terms of the marginal cost to produce it as well.
You know I see companies like <unk> in Q. The can are you know they can maintain their dividend and other maintenance cap at 31 to $32 W. T. I I'd like to see another company on the planet that can do that so I think it just speaks to you know what we can accomplish in the space and then yes, we have to collectively work together to make it more efficiently.
<unk> and the Decarbonize, so that we have the best product, which also means the lowest carbon.
You know intensity product.
And I think we're going to work collaboratively with Lee as an industry to the to make that happen.
When you look at our at our sort of capture area, especially for GMP and one of the focuses on the south area, where again, we've we've been hurt in terms of our overall performance.
You know the the fundamentals there specifically are much better again with the outlook for natural gas.
Propane in particular and the other thing is is that we've done a lot of made a lot of efforts to make our processing fees a lot more competitive. So when you add all that together again, our fees relative to commodity prices today. The economics of that area are very very good.
And you know I would focus on the lakes I mean, there's the number of private companies that area, but look at Spartan and what Theyre doing and you know the so generally you know the feedback that we get from our producers is that the results that they're getting from their wells now or are better than expectations in both cost and performance. So I think thats for.
Pharmacy, you know even for since December or are some of the producers are expanding their programs and I'm not suggesting it's in the gigantic wave, but they're adding you know well here a couple of wells. There. So I would say once you get into the next winter, especially if you know.
The sort of price range sustains I think you will see more activity and again, it's just it's a factor of all of the producers, having a better balance sheets.
And and more free cash flow.
Yes.
Verticals from answer thank you very much for that.
Last question I, just had was on the.
On the ability for a off the benefits from the clean fuel standards and what that might look look look like are we talking about just more of a local sales or the blending or of capital opportunities available.
But in that vision as well.
Rob It's Jamie.
Not to be flippant, but all of the above.
It's early days with respect.
Understanding the clean fuel standard and really the impact that it will have on our business, but we are based on our initial view discussions.
The discussions with some consultants that we're confident.
I have been involved in and are very up to speed on on that.
The program.
We are going to be involved in reaching out to government here during the review period to understand that more but yeah.
Yes, there are opportunities.
At that facility to increase efficiency.
We certainly see as a clean burning fuel additives debt.
There is.
Potential for more of blending opportunities and you hit the nail on the head as if we can if we can find.
Sales that are not down in the Gulf Coast, which has traditionally been one of our bigger markets. We can save significant costs on transportation costs, we spend over $55 million a year of transporting isooctane down to the Gulf.
The if we can find a fraction of that to be located.
To supplement existing relationships on a new relationships within Canada.
That's a significant value contributor to this organization. We also believe that potentially we can also firm up contracts and extend the duration of contracts.
That will also create value for our shareholders.
Okay excellent well just have to wait and see when it sounds promising thank you.
Okay.
Next question upon the of Robert Kwan with RBC capital markets.
Great Good morning.
I can come back to cash.
And Keith Youre not slowing.
The capital costs through the your shippers.
I guess just arithmetically it must mean that you've got a greater outlook for EBIT try to maintain the range. So I'm just wondering if you've got the additional specifics on how you get there or are you finding.
Planning on charging new contracts of higher coal more on interruptible or or do you expect just higher volumes than you originally expected on the line kind of in that 2020 fives that timeframe.
Okay.
Yes.
Robert is as we said before I mean, our plan is not to we want to make sure the tools of competitive so we arent planning to to increase our our tools for this increase.
But overall I mean, you know again, we talk to our customers.
You know again.
I think people will get mired on on what is happening today. It is 2021.
I would come into service in 2023, and we're talking about the time horizon, that's extends decades beyond that.
And so.
So you know again, I guess I guess, it boils down to a point of view and again, where we're basically and also with the discussions that we have with our customers that they don't plan to keep their production flat for for forever.
Some of them have commitments on the you know to deliver through.
The owners of Canada LNG.
All of the NGL expansions, if you look at the expansions that are being added for crude oil.
<unk>.
That would be of a very pessimistic view to think that all of that pipe capacity. That's getting added is gonna be all empty on.
The other thing I'd point out is that you.
You know the capacity if you look at the the combined forecast for for Ngls in our province, and if you think of the capacity of piece and you think of both the capacity of our of our pipeline the kaps pipeline.
Our pipeline is going to represent about 25% of the of the total capacity. So when we think of boats.
The future do customers want to diversify their service offering both for commercial reasons, but also for operational reasons and can we capture 25% of of that market.
You know what.
We have to obviously take a longer range view on and on all of these things and take all of the macro data we have to take the feedback we get from shippers and customers and we have to put all of that together and that's what that's what we're doing to make a final decision.
On it, but I guess I understand and correct me, if I'm wrong, the the 10% to 15%.
The range you put out of the gate.
And I think of as 2024, but.
And seniors 24, 20 fives of on the same.
The what.
The change between that pre pandemic guidance and today.
The $300 million cost increase.
Yes, I mean, we did extend the from 2024 to 2025 with the one year of deferral of last year. So that's the difference between the sort of us hitting our target rate.
Of return, we do have all of our shippers that are still committed to.
The contracts that were deferred from a year ago. So we have that basically of what it boils down to is you know there is a wedge that we have to we have to capture that's in addition to our contracts to hit that return and we believe that we can do it but we're very clear that we do need to contract the additional ones to make that happen.
Do you expect I guess more contracting than you previously debt.
Yes, that's right.
Okay.
I guess just to finish here.
Recognizing you buy on the other indices is there an impact from the increased butane price that we've seen particularly yet.
On the way, whether you think about you.
Near term results from Q1 or do you see that influencing.
The NGL all year the negotiations.
Robert It's Jamie yes, so our contract season, as it's progressing well for.
On the macro perspective, as you allude to on the butane side.
The butane prices and in the Gulf are very strong right now.
Youre not seeing that same level of strength in Western Canada frankly.
We're at a higher <unk>.
Storage level than we would typically see in western Canada.
I caution that you know.
We wouldn't expect to be contracting at levels that we might have seen a couple of years ago. During the 19 contracting season, we saw that that market corrected itself very quickly on barrels found their way out of western Canada into the U S. But certainly right now you'll work, we're pleased with respect to our.
On the results of our contracting season to date.
Got it and then just in terms of the finish of the comment in the MD&A around on.
Softness in the isooctane margins for first half of the year is that just for demand for the product itself or is that on then that includes.
Could you kind of inside of the equation.
Well, yes.
I mean, it's more of the the commodity but I wouldn't there's not a softness in the demand for the products.
There's just there's a little bit of an overhang on Oct team in North America, that's causing a little bit of softness that we're seeing get worked through the system.
As as we expect.
The demand to pick up for gasolines, and you're seeing that in the our Bob cracks. That's part of it I think the fact that <unk> got elected and he's revoking some.
Some relief from refineries around their obligations to meet renewable standards. That's also putting some upward pressure on our Bob cracks.
But you know there is a you know.
On effective rollout of the vaccine there's optimism in the market with respect to demand for gasoline and you know on we see even last year. When there was between the first wave and the second wave, there's a pent up demand for people to get out of their homes and frankly.
We just see of pension for people traveling via their vehicles rather than than the air and are on.
Our expectations Okay.
The summer driving season is we're going to see.
Our strong driving season, and that's really what's driving our Bob cracks, but also our view on on the demand for <unk> that overhang in our opinion as has already been <unk>.
Correct it but.
We expect to be more back into a normal environment by Q3.
Great. Thank you very much.
Next question point of Preneed, Satish with Wells Fargo.
Hey, Thanks, just just one quick question for me when you signed up for the solar PPA was there any appetite to maybe build this in house or enter into a JV did you look into the returns did they make sense.
Yeah to be clear the solar deals of contract for difference. So we basically procured electricity out of certain price and also.
Our given our granted the environmental attributes.
Frankly that that deal that was over a year in the making us much more attractive deal. Then it was you know when we signed it very pleased with that deal.
Our focus is always to you know.
Find good partners, if they're they've got expertise, where we don't it's not to say that at some point in the future.
Yeah, we wouldn't based on partnerships that we've established low.
Look too.
You know get into different lines of business. If it made sense not seen in this case that it would necessarily make sense, but it just means we've got a very reputable partner in this project, we feel very good about that partnership but.
Needless to say that this is not you know we're continuing to look at opportunities to get involved in the renewable power.
Yeah, that'd be on I think the leverage off of the leverage off of Samsung's expertise I think it is important I mean this is not our area of expertise, we're able to capture the economic benefits, including the the environmental credits to the that come with it. So overall, we're very very pleased with the with the arrangements that we have with them.
Some of the partnership we have.
Got it thanks.
Next question the line of Linda <unk> with TD Securities.
Thank you.
On a follow up on the outlook for the marketing recognizing that you'll give more guidance in the first quarter report.
Recognizing that the.
The contract some of the commentary you gave on the about the contract season and how it's looking like can you give us a little bit more of an understanding as to what factors might.
Great. Thanks.
The realized margin to the top of the range versus the bottom and then what.
What might also pumps easily above that range potentially again in 'twenty 'twenty one.
Well I'm not I'm not sure what more specifics frankly, we can share with you is that.
Yeah, well look I mean.
We touched on the fact of of sort of of our isooctane business and the fact that we've seen.
You know a significant run up in W. Ti over the last month in particular that everybody's aware of we continue to be disciplined on our risk management program.
I think one of the things that we would caution is that is it.
Or for people to think about is is that it was highly effective as the market came off but we've been very disciplined throughout the last six to nine months in and layering in sales as the market has improved as well. So just caution people from looking at a prompt month of $58 in thinking that that's where you know.
The Q1's going to going to land us but.
Certainly.
You know we will.
Our risk management program has some opportunity to take advantage of those higher prices towards the latter part of of this year and that's the.
That's positive or Bob cracks as we mentioned have strengthened significantly as well based on the fundamentals that I mentioned and the premiums that we get for the Isooctane is a result of the fundamentals of octane continue to improve as well so.
The positive view for isooctane touched on butane, a little bit propane pricing very strong that helps our GNP business and the economics of our producers but also.
You know supports our our program on the propane side, and then Dean alluded to condensate pricing very strong as well and driven off of.
A slight discount around on occasion of premium to the WTO. So right now all commodities.
You know I'm feeling good.
For our risk management program is it's.
Going to be as it has in previous years, helping us to secure a positive outlook for 2021.
Thank you.
Yeah.
Good morning.
Because of course.
Sorry go ahead.
Of.
How are you thinking about the.
On capital allocation possibilities over the next year recognizing that some of your energy transition opportunities are in the early stages.
I'm wondering when you expect to kind of replenish your gross backlog beyond caps.
Deferred and Mike your 19th Cavern previously what factors would need to the in place to assume that when you might you see opportunities related to cash manifest themselves, which he touched on as well and can you talk about the where you're seeing the opportunities of that might potentially include your total.
On the U S geographically.
Okay.
Yeah.
Maybe I'll start and then we shouldn't give it the Jamie after that Linda.
So that's the capital allocation certainly with caps, assuming we continue on with the construction in the second half of the year that is what we would be we would be committing to and again you know keeping in mind the balance sheet and how we've committed to fund it so that would be our focus so and and.
As we said before we're committed to the dividend et cetera, but looking at other projects and what we need to see maybe I'll turn it Jamie yeah. So yeah, we've never been shy about sharing our vision and the strategic nature of caps in the this the.
The the opportunities, we see not only downstream, but also upstream.
But you know on the downstream side.
You know, we we do continue to you know the.
<unk> uses the capsules like the arteries that are pumping blood to the heart. Thank you mean, where we just see them and we continue to talk to our customers with respect of what opportunities.
We can provide to them for their product thats flowing through cap debt leverage off of our existing <unk>.
Infrastructure or whether that's expanding our infrastructure contracting in different fashions that would be beneficial to our customer, but also beneficial to care and our and our shareholders.
Can't get into details, but we certainly continue to be encouraged by the opportunities that we discussed with our customers on the U S side.
The U S. We are it made sense for us to to initiate the the U S strategy that we have and we're happy with it it was really to ensure that we continue to have egress for our products.
And certainly the projects that we've.
<unk> taken on with Wild horse in Oklahoma, Homo liquids terminal, our Galena Park asset.
They are all landing spots for commodities out of the Western Canada, and we we continue to see the benefit of the that but I would.
Probably telegraphed that you know we.
That that's mission accomplished for at least for the for the time being you know the the.
We we we telegraphed at our Investor day of just over a year ago now that well we want to prove.
Those assets out.
So once again to reiterate we're happy with the you know the.
The the business thesis and what we're seeing from those assets but.
It's not our intention likely to have a focus around capital spend in the U S.
Let me just expand on on Jamie's comments is that they're on.
Our first priority is to maximize the profitability of what we have already and so some of that is including some of the new assets that are coming on line.
And so you know it's optimized they should and things like that and also capturing new growth in the basin as it happens because we do have extra capacity.
We've talked a lot of boats sort of post caps is that we plan to direct you know most of our growth capital of downstream to our downstream business, where we have.
Stronger barriers to entry and and it's obviously, a very profitable part of our business.
But the other thing is as you know to some of the Eileen's points is that we went out for drive sort of more like a stronger contracted returned based contracted return just just where our cost of capital as of today. So you know to the extent that we need more frac and storage in the future we're going to make sure that we have.
Satisfactory level of long term underpinning to make those investments.
We've talked a lot of boat.
Sort of our Heartland lines, and you know Jamie talked about it and you know again I think that this is you know the best develop a lot of industrial Heartland, where it's situated pipe connectivity the underground storage rights that we have their proximity to the Alberta carbon trunk line to do carbon capture of sequestration and again you know Jamie just describe.
The pipe that we have that's a rated for hydrogen so no I think in terms of some of the you know.
Pursuing a hydrogen solution possible. There theres also some other bio of pet Chem opportunities that we can also pursue there and then we also talked about a F and some of the potential there to expand the sorry to enhance our profitability. So those are just some of the highlights of the things that we'll be looking for in the future.
Okay.
Thank you and maybe as an operational question, I'm wondering which quarters, the Fresno River and better Creek gas plant type of turnarounds this year.
Linda the spreads are both scheduled for Q2 this year.
Great. Thank you.
Next question the line of Chris Tillett with Barclays.
Hi, guys my questions have all been asked at this point. Thank you.
Thanks for your next question, but that was the weak.
[laughter].
Next question, one of Andrew Kuske with credit Suisse.
Thanks, Good morning.
Maybe just focusing on the quarter you just reported you could give us some color across your businesses on the beginning volumes and commodity impacts on how the businesses for performing versus the exit rate.
And then just given some of the risk of Madison comments on this call for.
The volumes more important for you in the first half of this year and then maybe commodity pricing in the back half of for the year.
Yeah.
I'll take the first stab at Yours your question.
So when you look at 'twenty 2020, very very unique year I mean.
I mean, I think we forget what we faced last year and when you get to that.
The demand shock of the magnitude that we saw over a short period of time.
It's the.
There's obviously a lot of uncertainty and a lot of different ways for the whole energy sector.
And obviously that also translates to our base on here in Canada.
The overall from the front end of our business. The the G&P business as I've mentioned before I mean, we had very very little drilling like for.
For the last three quarters of the year. So obviously some decline set in and and we saw that interval <unk>.
The you know we had to provide some short term relief for some of our customers in the north just to get through again.
Really uncertain time, but are we also provided some fee relief to our southern customers do to be more competitive and.
Now.
I'll just stick with that business now as we exit the year as I mentioned, we're starting to see stabilization and some growth.
Okay and in that growth.
I wouldn't say as robust at this point, but at least the trajectory for the volume says sort of flattened and I believe that we're gonna start to see a bit of growth as we as we go through the year.
Customers are cautious because they want to be careful with their balance sheets, but again in this price environment economics are very strong in both of our north portfolio and herself G&P portfolio. So we're fairly pleased to both debt and the other thing is is obviously, we're seeing a consolidation amongst the.
Amongst the of.
For the producers and I think that's.
Translating the stronger counterparties, but they're also.
You know the need that they are or what what's valuable to them as more optionality and I think with our integrated service offering we're able to offer them the that optionality that the that they desire.
If you look at our liquids business it performed very very well last year and.
It's.
Really tied to the strength of our long term contracts with our Oilsands services for doing the handling storage.
Fractionation business was very strong with very high utilization rates.
Again, you know, it's a it's a core strength of our business with with high barriers to entry. So you know.
Certainly we expect that the business to continue to perform well in the in 2021 and and then you know finally.
Finally, our marketing business and you know we've talked a lot of both the effectiveness of our risk management program. So the first quarter of last year, we had a tremendous quarter of the best quarter, we've ever had for marketing and.
Obviously, the throughout the rest of the year with with falling commodity prices and the lack of demand a lot of that related to.
Our barbell of gasoline and our teams you know that translated to lower results as we as we went through the year. Jamie can you know Jamie has talked about a little bit of 'twenty 'twenty, one from a macro perspective.
Commodity prices are much stronger you know could there be some short term hiccups or blips to that yeah of course, but I think with the higher commodity prices generally that's obviously a tailwind for our marketing business combined with that you know what we see in terms of some you know of re contracting which we're not complete yet, but we will update that in our <unk>.
<unk> conference call.
You know that looks promising.
Promising as well.
The offset that though we've already hedged.
Hedged some of our commodities for especially for the first half of this year.
The commodity prices are much stronger than the first half of this year, we won't get the full benefit because we've hedged a lot of it but I think fundamentally if you look forward of the second half of this year and into 2022 and beyond absent. Another major shock. We think are you know of business is pretty strong.
That's very helpful. Thank you.
Again, if you would like to ask a question please pray for joining us.
Scott.
On all of your telephone keypad.
Your next question line of Alicia for Costco with Industrial Alliance Securities.
At least for <unk> Your line is open.
Sorry, I was on mute I apologize.
Just a couple of follow up questions and maybe they're directed towards Brad.
Could you just give us a bit of an update on wapiti phase two of them.
I know, it's a it's complete but do you see that the sort of thought.
Any update you can on that in terms of the volume ramp up.
Sure.
Thanks for the question. We are we commissioned wapiti phase two in the back half of the of 2020.
So that facility has been up in the and test it out and there's fully functional at this point, there's not an immediate demand for the volume. So we are.
We don't we.
We don't require both trains to run what it does do is provide us a real.
Hence the opportunity for reliability in that facility with the redundancy of provides and certainly as we go through 2021, we see opportunities to secure incremental volumes that will require of that plant to occur. So it's it's not required today, but it's certainly a strategic part of our plan through 2021 of onward.
Okay.
Thanks for that reminder, and the next one Brad.
I'm trying to get a handle on.
Run rate maintenance costs.
Partially for distributable cash flow out of state.
Primarily for distributable cash flow and in 2019 of all right.
I think we had 105 million in 2020.
29, 2021 guidance midpoint is 30.
Is there any way we can think about that in terms of a law.
Long term run rate number where we incorporate some in there.
And I think 2018 with it within the 50 range.
Comments on that.
Yeah. It's.
It's a great question I think certainly.
Through 'twenty 'twenty, we made the diligent effort to to preserve capital and certainly deferred of number of turnarounds with on a world Zeta Creek was a classic example of that was scheduled for deferral West Pembina was another one that we and our optimization plan, we elected to shut down.
As opposed to do the turnarounds, so we hadn't really no turnarounds in 2020.
<unk> on off the.
Partially because of the pandemic and trying to reduce.
Exposure to the workers, but the but certainly also of capital preservation going into this year, we have a rally to the modest turnaround year with only the Brazos River and set of Creek turnaround so call. It one of the small number as we go into 2022, we are going to see those numbers start to creep up.
A F outage is planned for 2022 and it certainly as we go out and tie in some of the larger facilities will start to see turnarounds as you go into the <unk> and <unk> et cetera. So so I think we're at a bit of of valley right here.
Relative, but it's going to be very difficult to predict a run rate basis because of the lumpiness of the large turnarounds at how they kind of enter into our maintenance capital schedule.
Yeah, Okay, clearly clearly our run rate would be lower than what it was you point of Florida, just given the number of up to my.
Correct stations that we have right now.
Okay.
Yeah.
Yes.
Lines with my thinking maybe one last question and it's not tremendously large and the SKU.
Of things.
One of the salt cavern storage facilities were deferred.
I still think as deferred is there any plans to bring that back up.
Yes, again, it just boils back to capital allocation and again, just just us being able to contract at the.
The and underpin the investment for that.
The next caverns so.
I would say that our storage services our.
Or it's still very high demand, we are the largest we of the largest storage underground storage positioned in Alberta and.
Although it maybe a good analogy.
The analogy is you know if you look at last year win win.
When a million barrels of crude oil went offline on the oilsands.
On the oil sands producers are still have contracts the by condensate, but also there's the commercial angle. There so not only operationally do they have the store that that condensate somewhere because it doesn't need to go up for the oilsands for commercially they really appreciated being able to buy all of that cheap condensate at less than 10 Bucks and stored in our taverns and obviously at the <unk>.
Input costs for them, so even though that they may not be flowing or for delivering a lot of crude oil I mean, the just explains that the value of the of the storage caverns that we have and why the one of the contract for them. So again, it's a very valuable service.
We will be disciplined about any capital investments, including our storage, but again when we of the demand where we can contract. It will we will start the next campaign.
Yeah.
Great. Thank you very much for that color on I'll turn it back.
And no other questions at this time.
Yeah.
Thank you very much everyone enjoy the rest of your day Goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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