Q3 2022 Pembina Pipeline Corp Earnings Call
Systems and strong performance within the marketing business.
Benefited this quarter from a wider Chicago eco gas price differential and a wider condensate price differential between western Canada, and the U S. Gulf Coast, However, while commodity prices and get freshmen differential certainly works in our favor overall the quarter was a great combination of volume driven results in the base business and tailwind in the marketing business. We are pleased.
It's stronger than expected year to date results have allowed us to raise our 2022 guidance you get with full year. Adjusted EBITDA is now expected to be in the range of $3 625 to $3 75 billion.
Along with strong financial results the quarter was punctuated by the closing of the transaction to create how many gas infrastructure or pgi with our partner KKR and the three 6% increase the permanent common share monthly dividend. The integration of Pgi is going well and we look forward to realizing the benefits of this transaction, we see tremendous opportunity to <unk>.
<unk> utilization across Pgi asset base and look forward to working with KKR to pursue future growth opportunities through this premier Western Canadian gas processing entity.
In fact, a key area of focus at permanent over the next 12 to 24 months, we'll be growing cash flow by increasing utilization at all of our existing assets gas plants pipelines and fractionation facilities. This is highly accretive growth given the modest capital spending required.
As volumes grow permanent continues to have success signing new long term contracts. In addition to the previously disclosed commercial agreements recently signed with three leading northeast BC producers has successfully contracted incremental volumes on its conventional pipelines and fractionation facilities. The latter reflective of a broader trend of increased.
<unk> and tightening of capacity across the industry.
Further the re contracting success, we've had during the first half of 'twenty two on the alliance pipeline continued in the third quarter, albeit for smaller volumes.
And with rising activity in the Clearwater oil play we are exploring options to reactivate the nip to see pipeline and are in discussions with various customers regarding long term contractual commitments.
We also continued to progress our portfolio of growth projects, notably by completing construction and undertaking commissioning activities at the <unk> co Gen facility and advancing construction on our phase <unk> and phase nine peace pipeline expansion projects as well, we advanced development of Cedar LNG and an additional fractionator at Red water complex and continue to work towards final invest.
Decisions on both projects finally, I would like to note that permanent recently released its latest sustainability report, which is available on our website. The report features and many accomplishments Pembina has had over the past two years, including those related to our greenhouse gas reduction target our progress on equity diversity and inclusion metrics and our transformational indigenous partnerships.
And notably the report enhanced our disclosure in key areas and better aligns us with leading ESG disclosure standards, namely FASB and Tcf D I.
I'll now pass the call over to Kam to discuss in more detail the financial highlights for the third quarter. Thank.
Thank you Scott.
As Scott noted preliminary reported quarterly adjusted EBITDA of $967 million.
Representing a $117 million or 14% increase over the same period in the prior year relative.
Relative to the prior period, the third quarter was positively impacted by stronger marketing results due to higher margins on crude oil and natural gas sales.
Higher share of profit from our stable, partially offset by lower NGL, Martin or NGL margins as a result of lower propylene prices and higher input natural gas prices.
Likewise, a combination of higher volumes on the peace pipeline system and higher inflation adjusted tools.
Higher contribution from alliance pipeline.
Higher contribution from the P. G I assets.
The lower realized loss on commodity related derivatives.
These positive factors were partially offset by a lower contribution from Ruby pipeline and higher integrity costs.
Notably in our marketing business, we typically see a lower contribution in the third quarter due to the seasonality of our NGL business. However, this quarter permanent benefited from a favorable oil price environment and certain price differentials that lead to an outsized contribution from the crude oil marketing business, which more than offset the typical ngls.
Seasonality.
Earnings for the third quarter were $1 8 billion.
Representing a $1 2 billion or 211% increase relative to the same period last year in.
In addition to the factors impacting adjusted EBITDA, excluding the impact of a lower contribution from Ruby.
Earnings in the third quarter were positively impacted by a $1 1 billion gain on the Pgi transaction.
Lower income tax expense as a result of the Pgi transaction.
And a higher unrealized gain on commodity related derivatives related to NGL and crude oil marketing.
Facilities results were negatively impacted by lower share of profits from equity accounted investees due to higher depreciation interest expense and an unrealized loss on commodity related derivatives, partially offset by higher revenue all within pgi.
Further relative to the prior period claims in the third quarter were lower given the $350 million received from the termination of the arrangement agreement within our pipeline in the third quarter of 2021, partially offset by the higher income tax on that payment.
Total volumes of 342 million barrels of oil equivalent per day in the third quarter were consistent with the same period last year.
A 1% decrease in pipeline volumes compared to the same period last year was largely driven by Ruby pipeline and an efficacy and Mitsui pipeline systems.
These factors were partially offset by higher volumes on the peace pipeline system Cochin pipeline eggs.
5% increase.
And facilities volumes relative to the same period last year was largely due to higher volumes at the red water complex and at younger due to less outage days during the third quarter of 2022.
It is worth noting that excluding the volume volume impact of contract expirations on the Nipper, <unk> and Mitsui pipeline system, and Ruby pipeline entering bankruptcy protection.
Quarter volumes would have increased by approximately 5% over the same period in the prior year.
Scott noted in his opening remarks <unk> has raised its 2022 adjusted EBITDA guidance range to $3 65 to $3 75 billion, which.
Which is $50 million higher than the previous guidance range and primarily reflects stronger year to date results.
Currently expect a 5% year over year increase in volumes on our conventional pipeline systems, demonstrating a level of growth in the western Canadian sedimentary basin that is exceeding the expectations that pembina and I would expect the broader capital markets had entering here.
The revised guidance also incorporates our expectation of a lower contribution from the marketing business in the fourth in the fourth quarter relative to the third quarter, given the outlook for lower commodity prices and narrow price differentials in the fourth quarter to date and implied by prevailing forward price curves.
I mean, it is generating substantial 2022 free cash flow, which is being allocated to strengthening the balance sheet and returning capital to shareholders.
During the third quarter, we raised the dividend by three 6%.
We repurchased $155 million of common shares toward our target of $350 million.
And we repaid $540 million of debt.
Additional incremental free cash flow generated in 2022, and 2023 is currently expected to be used to pay down additional debt further strengthening our balance sheet and preparing the company to fund future capital.
Finally, we announced yesterday, our intention to move from a monthly to a quarterly common share dividend payment in 2023 payments to be made in March June September and December of each year.
This change aligns come into dividend practices with the vast majority of its peers in companies within the <unk> 60.
Subject to approval by the board of directors. The monthly dividend is expected to end with the dividend to be declared in early December and paid on December 30th the first quarterly dividend is expected to be effective for the dividend to be paid in March 2023.
I'll now turn things back to Scott for some closing remarks.
Thanks, Ken.
<unk>, we are fortunate that our industry, leading midstream footprint affords us the opportunity to engage with most producers within the western Canadian sedimentary basin and therefore, we are uniquely positioned to gain valuable insight on industry dynamics. In addition to the current volume growth. We are seeing on many of our key system. We continue to observe significant positive momentum that we expect will.
<unk> results and producer sanctioning new development, leading to significant additional volume growth in the basin, we see several positive developments within the Montney, the Duvernay and Clearwater as examples and we continue to have a high degree of optimism regarding future based on activity and corresponding growth opportunities for pembina through three quarters of the year results have been outstanding and we are on track.
And to deliver another record financial year, returning capital to our shareholders, while pursuing opportunities that will benefit <unk> and its stakeholders in the coming years.
Thank you for joining us this morning.
Operator. Please go ahead and open up the line for questions.
Thank you, ladies and gentlemen, we'll now conduct the question and answer session. If at any time you would like to ask a question. Please press Star then.
Followed by the number one on your telephone keypad, if you'd like to withdraw your question. Please press star followed by two if you are using a speaker phone. Please lift the handset before pressing any keys one moment for your first question.
Okay. Your first question comes from Jeremy Tonet from Jpmorgan Jeremy. Please go ahead.
Hey, this is Steve Mcgill on for Jeremy.
I guess just starting out on the on the guide you hit on it a little bit there but.
Just wanted to see if theres anything that we should think through on the other side on facilities and pipelines are there any.
Downtick, there or is it purely just marketing going down.
Hey, Steve.
Yeah. So let me provide some context there first of all I'd say you know obviously, we raised the guide by $50 million on each end.
I think it's at this point our outlook is that we'd likely be trending towards the upper half of that guidance range.
When we look at the business first of all on the marketing segment I mean, I think you look across the commodity complex and pretty much all of the spreads were deeply in the money for Q3.
When you compare that to Q4 the curves across the board almost universally show compression, whether it be crude ngls or gas spreads.
On the NGL side, we were adding inventory during Q3 at levels that are obviously in excess of where the prevailing prices are today to the tune of 20.
20% to 30%.
And last year, we saw was an important quarter Q4 is for the full year results. So.
With all of those factors in mind that was the biggest piece of it.
I'd say in the rest of the business you know there are some there are some puts and takes I mean, obviously, we've got the benefit in the fourth quarter of a full quarter of the pgi transaction in the Pgi incremental contribution it's a bit of a tailwind.
We did have some some sort of more unique or.
Or circumstantial wins in the pipeline business in Q3 that did did offer another tailwind there that.
Our current outlook would see normalizing.
And when you roll all those factors together.
That's where we got to on the revised guide.
Okay, great. Thanks, Sam.
And then just hopping over to the caps with Pgi now.
Fully in.
I guess the next thing to look for is the is the caps.
Just wanted to see progress on that.
What are you thinking about proceeds there.
Where do you see them going could this go more towards buyback authorization is it.
How are you thinking about about that aspect of it.
Yeah. Thanks, Steve.
I appreciate everyone is quite interested in the outcome of this.
Think what I'll say and stick pretty tightly too is that the cap sale is progressing.
And until there is a signed agreement we'd probably don't have much more to say on it.
Out of respect for the process and all parties involved but it is progressing along nicely.
Okay.
Thanks, guys I'll leave it.
Yes.
Okay.
I call on it is there more questions on the line.
Oh, I apologize sorry, I had a brief technical issue there, yes, we have another question from.
Rob Hope from Scotiabank. Please go ahead.
Good morning, everyone.
Question is on the the next Frac, our next potential frac at at Red water with what.
What is a stronger than expected volume outlook, some contraction and as well as your existing advantaged land opportunity there what else do you need to see before you want to sanction that project.
Yes.
Good morning, Rob Jaret here.
Yes, great point that you just made you know we obviously do believe that that we obviously have a really competitive advantage here to provide our customers a great.
Opportunity to expand fractionation you mentioned the land.
We wouldn't require any incremental spec storage <unk> inlet storage, we've got the unit train capabilities today, It's got high contract.
On that utilization and that obviously keeps our customers opex per unit extremely low across the entire complex and then it gives us significant flexibility around outage planning.
For a fractionator, but.
Significant storage being able to accommodate our customers' volume so we.
We do think that that we have a really good solution for our customers, but we need to see Robbins, we're just going through the process of firming up and extending some of the base contracts.
Recall that RFS, two and three I think they were.
Alan.
16, 2017, so wanting to firm up a little bit of that base and pushed that out.
Get a little bit more tenure, there and then just where we're finding the capital as we speak so that's kind of where we're at right now, but those are kind of the two triggers let's get the capital online obviously theres been some inflationary pressures. So we're working really hard on to offset those by.
Different construction practice practices procurement contracting strategies et cetera.
On that basis.
Alright, thank you for that.
And then just on the volume outlook, Yes, you are correct. The 5% volume outlook I would say has been a nice surprise in 2022, when you look into 2023 and what are the tailwind to the headwinds that youre seeing for further volume growth, we did see a little bit of pipeline constrained on the gas side there through the summer but.
How how long do you think you can get this above average volume growth to persist.
We are seeing that continued strong volume I guess, it's kind of that slow and steady increase I think if you were to see some potentially.
Step changes would be and Janet could speak to this more if there's more clarity required but the blueberry River first nation resolution.
Obviously, we have some strong dedications in and around that area. So that could be a step change, but regardless of the step change Rob we're just continuing to seeing that.
Strong.
Drilling performance and a lot of wells being drilled right. So it just it just keeps coming it's not any one organization our customer that's really focus it it seems to be a multitude of all of our customers just continuing to.
We grow at a fairly moderate pace.
That's it for me thank you.
Your next question comes from Robert Katz.
<unk> from CIBC capital markets. Please go ahead Robert.
Yeah, Hi, everyone just a.
Quick question I, just want to make sure I understand.
The motivation to sellier you're.
Interest in <unk> six.
And how does that really change your frac spread exposure.
And does it is there any interplay there with PVH for example.
They have less access to propend that otherwise could have been used.
For PVH facility other your own or a third party.
Good morning, Yeah. Great question. So this is a little bit complicated so just bear with me.
We had so what we did was created a win win solution with <unk> with our partner.
At the complex so we were.
Working interest capacity in third.
Third party non operated facility that commercially it was extremely hard to access due to various reasons.
So what we did was we got together on a on a cashless transaction.
And we essentially.
Sold down our working interest ownership, but we in return we received a long term.
We'll call it a virtual processing agreement, so actually the physical volumes that that will be extracting liquids from across that virtual processing is it is it is in excess of what we.
Typically would've processed across that asset.
So it's a long term deal and what this will also do is provide the owner now they are the sole owner of that entire site it'll allow them to optimize the facility.
To.
Drive efficiencies specifically around the operating cost side of the business. So it's not a straight up disposition of Av.
Working interest capacity in return we received incremental virtual capacity.
I hope that made sense.
Yeah, I think it does I'm just curious I'm sorry.
And is there a frac spread exposure increased.
As a result of this or is it effectively unchanged.
Very slightly modestly increased okay.
And then.
You know we've had news of.
Attacks coming eventually on the.
Share buybacks.
I'm wondering how that impacts how you're looking at I know, it's early days, but how you might look at.
Returning.
Capital of the shareholders or other capital allocation priorities.
Yeah.
Rob even Scott even before yesterday's announcement.
I think you heard on the call today and messages over the last couple of months that with where we're seeing rates going in with our optimism around potential future projects incremental free cash flow in the near term here is going to go towards debt repayment both.
Obviously with the rising cost of debt, but also in preparation of hopefully a build out in 'twenty three and 24 so.
It's not like right now, we're allocating significant capital in 'twenty, three and 20 422 share buybacks, where that that may be an issue. So for now it's a bit of a moot point for permanent obviously that could that could change, but for now I think our allocation priorities towards debt repayment.
Okay got it thank you.
Your next question comes from Ben Pham from.
BMO.
Please go ahead.
Alright, Thank you and good morning.
Potential cap.
<unk> proceeds.
Are you actually able to our plan to take out.
Proceeds in the parameter for that or.
Is that all staying at the PGA level.
The proceeds would would likely be a dividend it out to the partners.
Okay got it and then.
On the Frac.
Expansion opportunity.
Should we think or is there something to think about in terms of.
Restrictions on market share and that that Frac business, our competition act to that.
As there are restrictions on that market share just just level of ownership.
This is Ed isn't newbuild with third parties are.
Not really signing up for this capacity. So we don't see any issues with that at all.
Okay. So it's not a situation that you had a couple of parties running fracs in the province, and Theres certain percent market shares and other restrictions.
Sure.
Yes.
Okay, and then maybe lastly on on Cedar LNG.
I'm wondering you have there is some noise around us competing.
LNG export project pivot north with an offer that I think was facing some adjacent first nation challenges is that that's something you're hearing with your project in particular here, Jason first nations around area.
No we're not hearing anything of that sort.
Okay, great. Okay. Thank you.
Your next question comes from Linda as a grilling from TD Securities Linda. Please go ahead.
Thank you I'm wondering if you could just help us understand a little bit in this dynamic environment when youre thinking about your dividend policy and balancing.
Growth sustainable growth and the dividend versus.
Retaining.
Free cash flows to finance projects, how do you balance that and.
Can you give us a sense of over the next couple of years as you're.
Looking at some of the opportunities what your thoughts are on the on the guardrails around that.
Linda the approach to dividends has been relatively consistent I think over the past few years and it's always obviously been anchored around the fee based business.
So if you use 2022 for a moment as an example, you know obviously, we saw outperformance in the marketing business throughout the year.
And really that cash flow as we said was redirected towards both.
Share buybacks and debt reduction what we've looked for.
Previously for consistent dividend growth as is the reliance on the on the fee based.
Growth in the business.
I think we obviously have been through an interesting time over the past two or three years here.
And obviously, we'll you know we'll be up more formally with.
With our guidance in December .
But the environment is quite constructive.
And as you can hear from the comments that chairman Scott are making on some of the project opportunities that we have that we do have apple fee based opportunities in the portfolio, which should continue to support.
That trend.
Thank you.
And maybe just also and I don't know if youre able to provide us today or maybe when you provide guidance would it be possible to get an app.
Get a sense of your views on your aggregate direct commodity price exposure.
Any key sensitivities recognizing that they might be imperfect that would be very helpful.
Yes, I think I think we'll certainly provide that information for 2023 in December in our budget release, our guidance release.
For now I think we've provided that information back in the 2022 guidance release for this year.
And I think the way we think about it is.
The marketing business contains our commodity exposed cash flow.
The pipelines and facilities businesses are our fee based businesses and so you know that.
That would be a fair way to think about the delineation.
Thank you Kim.
Your last question comes from Robert Kwan from RBC. Robert Please go ahead.
Great. Thank you good morning.
Just starting on volumes you noted that ex some of the run offset that volumes were up 5% year over year in Q3, So I'm just wondering.
Hey, How's that.
<unk> continued into Q4, but where our volumes sitting on your core systems.
The minimum take or pay levels.
Hey, Rob Yeah, I would say that you know it obviously varies it varies by business.
If you sort of look at.
Sort of look at the Frac business to Starwood, maybe backing up from there obviously the frac business is running very high utilization and you'll recall that the fracs that we built into 2016, 17 timeframe, where essentially 100% take or pay so.
We're right at running right up against those.
On the conventional business you know it does it does vary.
According to segment, but if you look at the capacity.
Which we talk about in a.
Really at the Fox Creek region, where were running right around the take or pay levels.
We have been running just shy of them and as we've seen sort of a you know obviously <unk> comments to continued and modest growth.
Bumping right around those and I think you can see that is.
And some of the disclosure around our take or pay recognition, particularly in this past quarter.
If you back up from there and then start to look at the gas business I would say, it's a similar story you know generally speaking across the board you know varies from facility to facility, but.
With with those facilities that have a take or pay component to them, which would be the legacy <unk> facilities are now sitting in pgi again, where were running right around take or pay levels in those businesses and those assets are in aggregate.
Got it so in short it sounds like where a lot of the volumes are growing in the basin, we're kind of now on the cusp of starting.
You got a little bit more directly and the result is that a fair characterization.
Okay.
But I think that's fair yeah.
Okay.
Just turning to guidance.
I know you said that you are training to the top half of the range, but you got $100 million top to bottom, which is pretty wide with one quarter to go I'm. Just wondering is that just being conservative or are you seeing some things in the quarter.
Whether thats being less hedged or what have you.
That's being more volatile than usual.
I think it's a fair comment you know, especially as we sit here on November 4th.
Keep in mind, we we haven't we haven't seen a R. Our October results just yet.
You know where we are.
Few days away from that and we're just recognizing that you know obviously, we saw where Q4 was for Pembina last year in 2021, and how you know obviously, a sharp change in the price environment in Q4 really led to our performance in that year I think we just recognize that clearly.
There's a lot of volatility in a lot of external factors influencing markets right now across the board both.
Commodities currencies interest rates and so.
It's a fair comment that the range could be perceived as a little bit wide you know with.
With a quarter to go here I think we're just reflecting that.
It's a wild wild World right now and Oh, we just want.
Want to make sure that.
We're appropriately capturing that.
Got it you mentioned currency, but just within the commodities is there any particular spread that you'd point to that you're most concerned about that where you might have more exposure or.
And maybe that the range of outcomes is wider.
You know I think it's just it's a it's a bunch of different things I mean, obviously and I sort of mentioned at a in a prior comment but if you look at say for example, the VA go to Chicago spread.
That was a shooting the lights out really in Q3.
And if you look at where it is today I mean, I think the current forward curve has it roughly half of what it was in Q3. Similarly on on the suite on this on the sweet crude environment those spreads.
Went from areas, where there was a.
More opportunities more optionality.
They've certainly narrowed into into Q4, obviously with the heavy spreads still staying wide.
It would it would suggest that those those opportunities would remain but that's not really much of our business. It's more sort of indicative and then clearly just back to the NGL price environment for a second you know to my earlier comment we've been we've been putting inventory into the caverns throughout.
Q2, and Q3 at levels, which are 20% to 30% higher than we're seeing in Q4. So.
Just.
A bunch of those factors together just lead us to.
Create some.
So some words to that guidance range.
Got it okay. Thank you very much.
We do have another question. This is from Patrick Kenny of.
National Bank financial Patrick Please go ahead.
Hey, good morning, guys.
Back to your comments around prioritizing debt repayment into next year.
Seen some of your peers sell down a minority stake in certain mature assets, which although it might be slightly dilutive financially.
Would be very accretive to your social license as an operator.
<unk> raised some cash for paying off maturing debt. So I'm just wondering as you look ahead at the strategy for 2023 and beyond.
How important you think it is to execute minority interest transactions with <unk>.
Various stakeholders across your legacy portfolio of assets.
Key part.
<unk>.
The overall value.
Thanks Pat.
Starting off we're pretty proud of that to indigenous partnerships that we have today and.
And we think we're working really well with our partners and looking to build and grow those partnerships. So we feel like we've made good progress on that front as it relates to asset sell downs I mean, that's always a tool in the toolbox and something that we consider well whether it's a.
Dispositions are minority sell down so not things on the docket right now, but certainly it's something that we run in our scenario analysis and talk about internally, but I do think as we sit today.
We're pretty happy with where the balance sheet is.
So there is no need to do anything like that.
But theres always the opportunity if there's financial benefits are intangibles that come along with it so on the drawing board, but nothing thats in active negotiations or discussions.
Got it and then I guess as a segue to the <unk> pipeline.
I apologize if I missed it but.
Would you be looking to bring in a partner for that system as well if you do reactivate.
And maybe you can just remind us.
I guess back in the day with the revenue or our EBITDA profile looks like on <unk>.
But the capital requirements might be.
It looked like to reactivate the system going forward.
So great Great question time, so right now we're just in the in the throes of executing some preliminary work to reactivate that pipeline.
We're fairly bullish on nuclear water, obviously everyone's seen the results, but we expect to have that pipeline.
In service kind of late Q3 of next year.
Do require some capital we're just working through that right now just some integrity digs some normal course.
And then some different Italian options once that pipeline gets into Edmonton.
Currently we have not explored.
The reactivation of with a partner.
Working with this partner as you were in the past, but that's.
That's not to say that.
No other strategy or any strategy. It just focused on the execution and getting it back online here right now.
And then that's great if not around around the EBITDA I think it was around roughly $32 million to $35 million of EBITDA.
Full run rate prior to.
Shutting down.
And Directionally.
I guess, if it does get reactivated.
Cash flows above or below historical contributions too early to say.
And I think ultimately our goal would be to get back there in Q exceeded but it's not going to happen in year, one it'll it'll be a ramp.
Okay perfect. That's great guys. Thank you.
Right.
There are no further questions at this time I will turn it back this all burrows for closing remarks.
Thank you everybody. Thanks for taking the time on a Friday to listening to our call. We're really proud of the results and just before I sign off when I say, thanks to all of their staff on the phone and to everybody that we're involved in the quarterly results. It was just a fantastic quarter. So thanks, everyone.
Ladies and gentlemen. This concludes your conference call. We thank you for participating and ask that you. Please disconnect your lines.