Keyera Corp. (KEY) Earnings Call Transcript & Summary

Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Keyera's 2026 Second Quarter Conference Call. [Operator Instructions] I would now like to turn the conference call over to Dan Cuthbertson, General Manager of Investor Relations. You may begin.

Thanks, and good morning. Joining me today will be Dean Setoguchi, President and CEO; Eileen Marikar, Senior Vice President and CFO; Jamie Urquhart, Senior Vice President, Liquids Business Unit; and Brad Slessor, Senior Vice President, G&P and NGL Pipeline Business Unit. We'll begin with some prepared remarks from Dean and Eileen, after which we will open the call to questions. I'd like to remind listeners that some of the comments and answers that we will give today relate 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 some non-GAAP financial measures. For additional information on non-GAAP measures and forward-looking statements, please refer to Keyera's public filings available on SEDAR and our website. With that, I'll turn the call over to Dean.

Thanks, Dan, and good morning, everyone. This quarter, we successfully closed 2 strategic acquisitions, the Plains' Canadian NGL business and the remaining 50% interest in KAPS. These acquisitions are part of a strong foundation we have assembled for the next phase of disciplined growth and long-term value creation. Our focus now turns to integrating these investments, executing our growth projects and delivering greater value to customers and shareholders. Our team is working hard on integrating the Plains business and continues to make meaningful progress on identifying and delivering synergies. We will continue to provide updates as that work progresses. After the quarter, Keyera also submitted its response to the Competition Tribunal regarding the Competition Bureau's notice of application. Because this is an ongoing litigation, we are limited in what we can say, but remain confident in the strength of our case and look forward to demonstrating the value creation that will result from this transaction. Turning to our quarterly results. In Gathering and Processing, we delivered a new quarterly record for realized margin driven by strong contributions across the segment. We also set a new quarterly realized margin record in liquids infrastructure, reflecting contributions from the Plains' Canadian NGL business. We continue to deliver and advance our growth projects. KFS Frac 2 debottleneck was brought into service in early June, more than 1 month ahead of schedule and 20% below its original budget. KFS North debottleneck, KFS Frac 3, KAPS Zone 4 and ACE Rail Terminal continue to progress well, all on time and on budget. These projects are highly contracted and will contribute to growth and stable fee-for-service cash flow, supporting the strength of our balance sheet and long-term dividend sustainability. Yesterday, the Board approved another 4% annual increase in the dividend. Dividend increase reflects our confidence in the business and allows us to preserve our balance sheet strength and financial flexibility to invest in further fee-based growth. Now turning to AEF. The facility was restarted at the beginning of June and has been performing well. We continue to view this asset as an important part of our integrated value chain and a meaningful contributor to Keyera's long-term value creation. During the outage, we completed a comprehensive review of the facility and its associated operating plan and have identified opportunities to strengthen performance and reliability. Our objective is to maximize iso-octane production over the full 4-year cycle while maintaining our focus on safe, reliable and efficient operations. With that, I'll turn the call over to Eileen to discuss the financial results and outlook.

Thanks, Dean, and good morning, everyone. Keyera's second quarter results reflect continued strength in our fee-for-service business, which was offset by lower marketing contributions. Excluding transaction costs related to the Plains acquisition, adjusted EBITDA was $309 million and distributable cash flow was $101 million or $0.39 per share. Net earnings for the quarter were $308 million. In our fee-for-service segment, Gathering and Processing delivered record quarterly realized margin of $128 million. In Liquids Infrastructure, we also delivered record realized margin of $222 million. Results included contributions from the Plains Canadian NGL assets and the KAPS acquisition. Turning to the Marketing segment. Realized margin was $36 million for the quarter. Decrease compared to last year was primarily attributable to the AEF outage and corresponding timing impacts related to risk management activities. The risk management timing impacts are expected to partly offset over the second half of 2026 as physical volumes are sold. Looking ahead, we continue to expect marketing to deliver strong contributions through the second half of the year, and we are reaffirming our 2026 realized margin guidance range of $360 million to $390 million. We ended the quarter with net debt to adjusted EBITDA of 3.3x, above our long-term target range. The increase reflects higher net debt related to recent acquisitions and lower marketing contributions in the first half of 2026. We remain focused on deleveraging and returning to within our target range in 2028. We remain on track to deliver a 16% to 18% fee-based adjusted EBITDA per share CAGR from 2025 to 2027, and a 7% to 8% fee-based adjusted EBITDA per share CAGR from 2027 to 2029. This growth outlook is underpinned by several clearly defined drivers, including our current synergy target of $120 million to $140 million, the continued filling of available system capacity and our portfolio of sanctioned growth capital projects. Beyond those drivers, we continue to see meaningful potential upside from additional synergies, further capacity optimization in our condensate system, additional KAPS contracting and capital-efficient investment opportunities across the entire asset base. As our integration work progresses, we're encouraged by the additional value creation opportunities we've identified. We're also identifying opportunities to further enhance reliability across the acquired assets, which may modestly increase maintenance capital requirements over the next couple of years as we continue to apply Keyera's operating standards. Lastly, Keyera's 2026 guidance for growth capital, maintenance capital and cash taxes remain unchanged. With that, I'll turn it back to Dean for closing remarks.

Thanks, Eileen. Keyera continues to deliver its strategy to strengthen and extend our integrated value chain, building a more connected and efficient system that supports customer growth and improves access to key markets. Looking ahead, we'll remain focused on disciplined integration, continued execution of our growth projects and delivering long-term value for our customers and shareholders. On behalf of our Board and management team, I want to thank our employees, customers, shareholders, indigenous rights holders and other stakeholders for their continued support. With that, we'll open the line for questions. Operator, please go ahead.

[Operator Instructions] And your first question is from Rob Hope from Scotiabank.

First question is on the Liquids Infrastructure segment. So the $78 million of incremental contribution from Plains was quite a bit higher than we were expecting as well as commentary when the deal was first announced. Can you maybe speak to the specific drivers of that strength, whether that could be annualized or where there, we'll call it, abnormally high volumes in Q2?

Good morning Rob and thank you very much for the question. I think the general comment that we'd like to emphasize here is that the Plains' Canadian NGL business has been performing better than the way we originally modeled it and envisioned it. And that's right across the board from the [ core ] pipeline, the frac business in Fort Saskatchewan and also Empress, the volumes have been strong and the extraction cuts there have been better than what we had modeled. So overall, the assets are performing and the business is performing very well. We're still getting up to speed, obviously. We -- it's been less than 3 months since we've taken over the operatorship of those assets. We see a lot of great opportunities across the portfolio that we're getting more details on and trying to prioritize and get at them as soon as we can. But I'd also like to caution that this is a partial quarter. And I would say it's premature to try to extrapolate a whole year's EBITDA based on a partial quarter right now. But generally, I want to emphasize that the business has performed very well.

I appreciate that. And then maybe moving over to your condensate assets. A key theme this quarter has been kind of the outlook for increasing condensate demand and supplies in Western Canada. Can you speak to how your business is positioned to handle an increasing condensate demand and what opportunities there are you seeing?

Yes, that's a great question. And first of all, I'd just like to comment that we are extremely excited with the developments that we've seen here and the cooperation that we've seen from the B.C. and Alberta government and also the federal government. And with that, we feel a lot more optimistic that we're going to see a lot more pipeline egress out of the province, which is going to help more oil sands growth in the future. As you know, we have the hub for condensate and roughly 2/3 of all the condensate that goes up the oil sands are dealing with originates off of our system. So when we think about the growth in oil sands production over the last couple of 2 to 3 years with Trans Mountain coming into service, we've seen that part of our business, our pipelines that receive the condensate in our storage business and also our interest in the Norlite pipeline those volumes have been increasing very well. And so that part of our business has been very, very strong. We anticipate more growth in the future with, again, more pipeline egress. So we certainly envision more capital-efficient debottlenecks on that system to continue to provide that service. But what I would say is that it is a tailwind for our entire business because a lot of that condensate is also going to come from the liquids-rich Montney and also the Duvernay for which we're very, very well positioned, both, I would say, in the Deep Basin and also up in the Montney fairway up to the Northwest in Alberta and also the B.C. So -- and I'd also like to emphasize, I mean, this is also part of the reason why we doubled down on cash because we believe this is going to be an essential service that will be required by the industry for the next decade. So we're very pleased to have 100% of that pipeline to provide that service. Incremental to that, we are looking at other solutions, which I think is premature right now. I mean we have capabilities to rail in more condensate, but also looking at other solutions to provide more condensate or diluent as that demand increases.

Your next question is from Robert Catellier from CIBC.

I just wanted to follow up on the condensate discussion. Maybe you can give us a little bit more color on your capabilities to deliver from the Edmonton up to the oil sands. And it looks like you're at contractual -- near contractual capacity in the Fort. So maybe some color on what you're looking at there to debottleneck and the timing of any potential opportunities. And the timing in particular, I wanted to talk about just because as the oil sands gets going, it might take a while before production ramps to meet the pipeline or the other egress in service dates.

Yes, that's a great question, Rob. And you know what, I'll turn that over to Jamie, and that's certainly part of his business and things that they're focusing on.

Yes. Thanks for the question, Robert. And I think I alluded to this last quarter as well is that we have a very well-defined sort of capital execution plan to basically increase the capacity of both the Fort Saskatchewan condensate system, but also working with our partner, Enbridge on the Norlite pipeline. And those things can either be fairly quickly implemented like DRA, drag-reducing agent or installing pump stations or even looping pipe for a segment of the pipeline where we can increase capacity. So we've identified all those. We believe that they're all very capital efficient, as Dean alluded to. But also, I'd like to emphasize is that we are in conversations with all the oil sands players with respect to making sure that we're in their minds and we're their solution as they think to expand maybe 2, 3, 5, 10 years out.

Okay. So lots going on. So we'll wait and see there. On the -- I just want to touch on the frac spread. You gave your levels or proportion of hedging and you've chosen not to disclose the price. But presumably, you're hedging at levels above your underwriting case. So I'm just curious about the '27 level, the 65% frac spread hedge. Is that all from the hedge level you had coming into the Plains deal, so the levels that were in place at closing? Or has there been incremental hedging since then and just pricing relative to your underwriting assumptions?

Rob, those are great questions. And we have layered in incremental hedges both this year and next year. So as you know, we had a 12-month hedge in place already with Plains. So it left us more exposed in the second half of 2027, and we've layered in a significant amount of hedges in the second half as well as topping up again, the first half '27 and the rest of this year. So we think that's important for a number of reasons. One is the frac spreads have been very strong, so well above our deal thesis. And two, as Eileen mentioned, we're beyond our stated range of where we'd like our balance sheet. We're still in a very comfortable range, but we'd like to be in a more conservative range. And this will ensure that we'll be able to delever our balance sheet as Eileen described.

Okay. Last one for me is just you're going to give an update, I think, on the synergies later in the year. But with what you know now, what areas are most likely to generate additional opportunities? Is that going to come from the cost side or the commercial side?

I would say all of the above. We -- as we've already announced that we delivered $90 million of synergies on day 1. And we're still operating redundant systems and things like that, we weren't able to convert them all on day 1. So we still have G&A savings, I would say, yet to come. We have operating savings yet to come, certainly synergies in maintenance and turnarounds as well. We've talked about logistics opportunities for more optimization there. And generally, what we've seen across the board is there's been an underinvestment in the business. So we just see a lot of opportunities both to integrate our existing Keyera business and the business we just acquired but also more growth opportunities, commercial opportunities on the Plains assets that we acquired as well. So we're very optimistic about the upside we see. We would also caution to you that there will likely be a little bit more maintenance costs in the first year, 1.5 years to 2 years, I would say. There are a few things that we would like to accelerate to get us to the operating standard that we like and to get to a steady state after that. But that initial maintenance cost that we might be exposed to, and we're still evaluating that is very small relative to the upside price that we see overall with the business.

Okay. Thank you and congratulations on closing those 2 acquisitions.

Your next question is from Ben Pham from BMO.

First question is on acquisitions. You've now closed 2 major ones, the Plains and the remaining KAPS. And I'm curious as you think the next couple of years going forward, should investors view Keyera as more of a harvest? You mentioned the deleveraging focus? Or do you think about your footprint, is there any white space or further M&A opportunities that you see in the next few years?

Ben, those are great questions. I really want to emphasize that our focus right now is 100% on capturing the opportunities that we see both in the KAPS acquisition and also the Plains NGL business. And those opportunities are very significant in our mind, and we can deliver a lot of value for our customers and our shareholders for the visible future. And Eileen described the upside that we talked about, the 16% to 18% from '25 to '27 fee-for-service EBITDA growth and then 7% to 8% out to '29. We see growth opportunities well beyond that, especially when we think about the macro environment that we're in. And I think that we're in a 10-year cycle of really great growth in our basin for which we're very, very well positioned. Will we consider future M&A? Sure, we will. But I want to just emphasize that our primary focus is just delivering on the value that -- of the acquisitions we've already made and our base business. I mean we have a lot of big projects that we're also executing on, and we want to make sure that we do the best possible job on that as well.

Okay. Got it. And maybe on the organic growth side, you had some good news on the KFS Frac 2 execution. And I know it's a small project, big percentage benefit on the budget. As you think about your remaining projects, you're moving -- advancing them for, do you see maybe potential read-throughs on some optimizations? And just on that topic, can you remind us with cost savings versus budget? Is that a benefit to Keyera customers? Is it a mix between the 2?

Yes. Well, maybe I'll start answering the question, and I'll pass it over to Jamie. But on the cost savings side, we're pursuing both. So there are areas where it will accrue 100% to us, especially at places like Empress, but some of the costs also at our KFS North location. But we also want to pursue opportunities where we create more value for our customers. So if we can reduce our costs and those costs that flow through to our customer provide a better service to them and more value to them, we are equally as incentivized to pursue those as well. But in terms of our overall execution of our program, maybe I can just talk -- turn it over to Jamie.

Yes. Thanks, Dean, and thanks for the question, Ben. Look, I mean, I think the factors behind ultimately the success that we've seen in the KFS 2 debottleneck and how we've seen success to date in the projects that we're executing the bigger projects is multiple fold. I think we've matured as an organization with respect to project execution. We've hit the market at a good time with respect to the service providers, the constructors in the field, but also shop spaces available. And that's benefited us in the short term, but it's also, we believe, going to benefit us in the long term because we've consciously developed partnerships with those service providers that are long term in nature. And for us, giving them line of sight to long-term business, we've reaped the benefits in the short term, but we also believe that we're going to reap the benefits in the long term because there will be a change in our environment. You can even see it unfolding right now in Western Canada with respect to more projects putting pressure on the skill set that's available. And we believe that, that will give us a competitive advantage going forward as well.

Yes. And maybe just to add one more thing to Jamie's comments is that one thing that we've really put more focus on is just more oversight on all our contractors, like in terms of fabrication shops and things like that, we have our people right embedded in those shops to ensure that the quality of what we're getting that gets delivered to site is in accordance to the spec that we set out to deliver.

And your next question is from Maurice Choy from RBC Capital Markets.