Keyera Corp. (KEY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Keyera's 2019 Year-End Results Conference Call and Webcast. [Operator instructions] I would now like to hand the conference over to your speaker today, Lavonne Zdunich, Director of Investor Relations. Please go ahead.

Good morning everyone. Thank you for joining Keyera year-end conference call. Our speakers today will be Dean Setoguchi, who is going to be promoted to President and Chief Commercial Officer in just a few days; Steven Kroeker, Senior Vice President and CFO; Brad Lock, Senior Vice President and COO. Also joining the call for the Q&A section at the end will be Jamie Urquhart, our VP of Marketing; Brian Martin, VP of Business Development; and Eileen Marikar, our VP of Finance. Unfortunately, David Smith, our CEO will not be on the call today due to the passing of a family member. David, our condolences to you and your family. As we released our financial results yesterday, the focus of our call this morning will be on our business strategy, operations, business development opportunities, and financing. After our prepared comments, we will open the call to questions. I would like to remind listeners that some of the comments and answers that we will provide speak the 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 also refer to some non-GAAP financial measures. For additional information on non-GAAP measures and forward-looking statements, please refer to our public filings available on SEDAR and our website. With that, I will turn it over to Dean.

Thanks Lavonne and good morning everyone. 2019 not only remarks the end of another strong year for Keyera, but also the conclusion of a transformational decade. Despite numerous challenges in the last 5 years, our industry has grown stronger and is now even more financially, operationally, and socially responsible. Keyera's foundation is strong and we're well positioned to capitalize on the long-term growth opportunities within the Western Canada Sedimentary Basin. In 2019, we delivered impressive financial results. Each of our 3 business segments generated record results and on the combined basis delivered 1 billion in released margin. We also achieved record-adjusted EBITDA in that earnings. Delivered distributable cash flow of 277 per share and an impressive return on total and service capital of approximately 14%. These results reflect a value of our integrated services and the new capital projects completed over the last 12 months. With confidence in our business, we maintain our dividend track record with 7% increase last August. At Keyera, we remain committed to responsible growth, including achieving the highest standards of operational excellence throughout the organization. During 2019, we continued to reinforce this commitment, achieving important performance milestones and safety, reliability, and environmental stewardship. I do look forward, I am very confident in Keyera's future. We have a significant capital program underway that remains on schedule and on budget. Our midstream services remain in high demand. Our fractionators at Fort Saskatchewan have operated at capacity for the past 2 years, and each year, we continue to handle more volumes through our condensate help. Our 2 new gas plants at Wapiti and Pipestone along with their KAPS NGL pipeline projects are all highly contracted with long-term agreements. I'll now turn it over to Brad to discuss our operations.

Thank you Dean. During the year, we continue to safely operate our facilities and advance our capital program. We completed several capital projects to service the needs of customers active in the liquids-rich Montney and Duvernay, including Phase-I of our Wapiti gas plant, the North Wapiti pipeline system, and an expansion and other enhancements at our Simonette gas plant. Phase I of the Wapiti gas plant continues to ramp up with Phase II on schedule to be completed midyear. In 2019, we invested almost $1 billion in capital projects, which also included poor gas plant turnarounds and maintenance outages at AEF and KFS. I am pleased to report that all of our turnarounds and maintenance work was completed according to plan and without a lost-time injury. In addition, we manage the 6-week unplanned outage at one of our fractionator units at KFS without interrupting the critical services that we provide to our customers. I'll now pass it back to Dean to talk about our business development opportunities.

Thanks Brad. This is an exciting time for Keyera. We continue to execute on our significant growth capital program with the second phase for Wapiti gas plant, Pipestone gas plant, KAPS pipeline project, and our Wildhorse Terminal at Cushing, Oklahoma. KAPS is on schedule to start up in the first half of 2022. We recently ordered the mainline pipe for the project. All of which will be sourced and manufactured right here in Alberta. Our project team is focused on finding the most cost effective and timely solutions, and it does add to our excitement when our capital projects are providing direct benefits to [indiscernible] economy. KAPS is a strategic asset for Keyera as it enhances our portfolio of infrastructure assets, integrates our upstream and downstream operations, and establishes a platform for growth beyond 2022. With KAPS in service, we expect to attract additional volumes to our liquids infrastructure segment, where we will continue to focus on long-term growth opportunities. We also continue to review our portfolio of assets to ensure we are maximizing our returns. For southern portfolio of 14 gas plants, we are currently reviewing various optimization strategies in order to reduce redundant cost attract volumes to our most efficient facilities, increased liquids recoveries, and ultimately increased customer netbacks, and profitability for Keyera. As an example, in the 4th quarter, we suspended operations at the Gilby gas plant and redirected substantially all of the volume to the Rimbey gas plant with existing pipe. We expect to realize the cost savings associated with the Gilby turned down over the next year. As we finalized the optimization plan, we will provide updates. With that, I'll turn it over to Steven to talk about our financial results.

Thanks Dean. As Dean mentioned, Keyera had a record year in 2019, achieving realized margin of more than $1 billion. Of this amount, the fee-for-service realized margin increased $74 million or 12%, to $670 million in 2019. This fee-for-service growth largely resulted from full year results at baseline tank terminal and the Pipestone Liquids Hub. Partial year results from newly commissioned assets, such as the Wapiti plant, continued growth in demand for Keyera's condensate services and higher NGL fractionation fees. The marketing segment generated a record realized margin of $373 million, surpassing our revised marketing guidance of $320 million to $350 million. The record results were largely due to strong realized margin from the sale of isooctane, which benefited from strong product premiums and lower market costs for butane feedstock. Demand for isooctane remains strong as it is a low-vapor pressure, high-octane, clean-burning gasoline additive, making it very attractive to refineries to help meet new gasoline specifications. We expect to release updated marketing guidance with the release of our first quarter results. Our growth capital program of 2.9 billion is almost 60% complete with 1.2 billion remaining to be funded over the next 2 years. We continue to forecast growth capital investments of $700 million to $800 million in 2020. We expect to fund the remainder of our current program without issuing common equity aside from the existing DRIP program. Our simplified net debt-EBITDA ratio at the end of the year was 2.7 times, and as a reminder for this calculation we include in net debt 50% of our existing hybrid debt. Our financial strategies continue to focus on allocating capital in a disciplined manner, preserving financial flexibility and growing shareholder value. Looking forward to 2020, our distributable cash flow per share is expected to benefit from a ramp-up of volumes to our new assets and from significantly lower cash taxes and maintenance capital. We now expect the current income tax recovery of between 15 and $25 million for 2020 compared to a $98 million current income tax expense in 2019. Finally, we expect maintenance capital in 2020 of between 35 and $45 million, which is significantly lower than $105 million incurred in 2019, as we only have 2 smaller gas plant turnarounds planned in 2020. With that, I'll turn it over to Dean.

Thanks Steven. Looking ahead, Keyera will continue to be a safe, reliable, and environmentally conscious operator while generating long-term value for our shareholders. We're focused on successfully executing our growth capital program, including the KAPS pipeline system. We have plans in motion to maximize utilization and increase the competitiveness and profitability of our gathering and processing segment. We're continuing to look at opportunities within our liquids Infrastructure segment for future growth, where we have significant competitive advantages. On behalf of Keyera Board of Directors and management team, I'd like to thank our employees, customers, shareholders, and other stakeholders for their continued support. With that, I'll turn it back to the operator. Please go ahead with questions.

[Operator Instruction]. Your first question comes from Matt Taylor of Tudor, Pickering, Holt.

[indiscernible] net return on service capital there in 2019, which at the top end of your 10%-15% guide there. Can you just speak to what went well there in 2019 and what you need to see to hit that guidance range sooner than what you had talked about in 2022.

Sure, Matt. Again, that would be sort of a carry on discussion from our messaging that we had at the Investor Day, where back then, we as well showed participants in that date, what our historical return on capital has been and, and again it's just in line with that same messaging. The reality is, as we continue to spend capital, it continues to put fresh capital into the denominator of that calculation compared to not the historical capital that's been in the calculation and what Keyera has invested over the years, but at the end of the day, it really is just continued strong projects that we have implemented in terms of the D&P side as well as the liquids infrastructure side. It's a weighted average capital for the year and so again just continues to give you a real look as to what the returns are as we go forward and we would expect that as volumes continue to ramp up in our new facilities that we would continue to have strong performance in that area.

Yeah, thanks a lot Steven. [indiscernible] 2020 marketing earnings being above the base level there, so commentary in the MD&A suggests you're baking in significantly higher butane cost, but what sort of assumptions are you making on product premiums, include pricing, given that we're seeing a massacre in oil pricing here over the last couple of weeks.

Maybe I'll talk to that first and then and then Jamie might have a couple of comments on that as well. No doubt in 2019, we did benefit from very favorable market values for butane in terms of, as a feedstock being lower than what it typically is. We are expecting as we go forward into 2020, and we are seeing it that butane will, as a percentage of WTI, will return more to historical levels. What I would point out is when that relationship is more like the historical level, swings in WTI don't tend to be the primary driver for cash flow out of that asset because butane is also priced off of WTI. So the, the strength of that asset really does come from the premiums that we collect off for that asset and we continue to see a very strong demand for octane in the US and maybe, Jamie, you might have a comment on that.

Yeah, the only thing I'd add Steven is that we continue to follow a disciplined risk management program and as such we're quite confident in 2020 that we've set ourselves up well for the calendar year.

Great, that's really helpful; and the last one, if I may, you mentioned both your fracs are operated above the inputs; what's your 2020 outlook there for utilization of the facilities and just fees when they get re-contracted in April.

Matt, it is Dean. It's, a little bit premature to discuss that; I mean, we have our annual contracting. So, some of our frac contracts are long term and some of them are short-term that are year-to-year. So in the year-to-year portion, those are the ones that we sign up starting from April to March of the following year. That's a contract season. Overall, we think that our frac business continues to be pretty strong, but we can't give you a lot more detail at this point.

Your next question comes from the line of Linda Ezergailis of TD Securities.

I'm wondering if you can give us a sense of what sort of impact the rail disruptions have had on your business so far and what are the bookends of what impacts there might be over the next couple of months as some of these disruptions unwind themselves and is there risk also furthermore to some of your physical hedging in place that there might be a mismatch in terms of timing of deliveries, etc., that might compound the physical rail disruption beyond just the length of transit.

Linda, it's Jamie. So thanks for the question. To date, the rail disruptions have had not a material impact on our business. The only commodity that would be impacted frankly is propane and those would be shipments, whether it be to the West Coast or the East Coast. We're confident that, although it's going to have some impact on sales in Q1, assuming that those rail disruptions are resolved, we fully expect that those volumes will be delivered within the calendar year. So, we don't expect that there will be any material impact to our business as a result of the rail disruptions.

Linda, it's Dean, maybe I can just add on top of that. I think it also benefits us that we have 4 terminals that are pipeline connected [indiscernible], Rimbey, our Edmonton Terminal, our ADT Terminal, and also Josephburg Terminal in Fort Saskatchewan. All those terminals have a tremendous amount of flexibility, and again with our pipeline connectivity and our access to both rail lines between that mix of terminals, gives us tremendous flexibility to make sure that we can move our product as efficiently as possible.

The other thing would be, Linda, it would be the fact that we've got the storage to be able to accommodate being able to get that product delivered later in the calendar year.

Okay. But despite the flexibility in your storage, it sounds like you're not going be able to capitalize on the unfortunate circumstances, but instead, it would be viewed as a headwind for Q1.

It would be a minor headwind if any headwind at all.

Okay, that's helpful. And maybe just moving on to your gathering and processing business, you've accommodated 2 customers to date in terms of reducing their fees in exchange for extending the duration of their commitments of volume. Are you in discussions with any other customers in that regard, and do you expect maybe to be approached prospectively as well with more requests for those types of amendments?

Linda, Dean; we have to be competitive, so in some circumstances we have to sometimes give some accommodation to extend the term for our contracts. But overall, I mean I wouldn't say that there is if anything significant other than what we've already disclosed.

Okay, that's, helpful. And maybe, just maybe on the financial side, can you give us a sense of how we might think of your cash tax outlook beyond 2020. You've got a recovery this year, is it reasonable to expect modest cash taxes for the medium term? And I guess part B of that question, is your maintenance capital with 2020 be a reasonable run rate going forward or should we expect a step-up in 2021 with some of your planned maintenance there?

Yeah, it's a good question Linda, and we appreciate it's a little bit more difficult when we go from expense to recovery. Obviously, we brought in a lot of capital in 2019 into service, and so using that, that helped us obtain a tax recovery in 2020. I think it's a reasonable assumption. We can't really comment just yet on future tax. But I think it's a reasonable assumption to believe that there is an ongoing benefit of bringing that much capital into service. And we will continue to be bringing in projects this year into service as well. So, that's about all I think I can really say right now.

Maintenance capital would be a step up again in 2021 or how might we think of the magnitude?

Yeah, sorry; maintenance capital in 2021 would start to reflect the AF turnaround as it was deferred from this year into 2021 because we had done some work back in 2019 already.

Okay, thank you.

Linda, just maybe to go back to your other comment regarding our G&P business, we did have an update yesterday from one of our customers and Steven maybe you can just provide a little bit.

Yeah, wasn't a direct fee reduction question there, but we did get notice yesterday that Bellatrix had disclaimed its commercial arrangements with us at Alder Flats. And so that was late in the day yesterday. Just for some background Bellatrix is 25% owner in the Alder Flat plant and the operator currently of that plant. And we have about 70% interest in that. It's still early days trying to fully understand their commercial needs, but that's our goal, is to continue to work with them to understand their commercial needs. In our view, we still believe there is a high incentive for them to bring volumes to their own facility that they have a material interest in, but we do have to work through what replacement type of arrangements would be put in place for their production if they want to continue bringing production to that facility. While we do expect a decrease in the future revenue from Bellatrix due to this event, we do not believe it will be a material number to Keyera as a whole in our business, but we thought we should just give that update.

Your next question comes from the line of Rob Hope of Scotiabank.

Just in regards to the Bellatrix, can you give a ballpark, how much net volume is accruing to you?

Yeah, we [indiscernible] 140 million a day of gas to that plant over the last few months, and we would expect that to continue. They still have a need to flow their volumes. And this is a preferred plan for them, so we don't expect to see those volumes move too much in the near term.

And then, one for you, but that would include some third party, wouldn't it? So do you know how much?

Yeah, there is some associated third party with that, but it is predominantly Bellatrix production.

Okay, and then just moving forward into the marketing outlook for 2020, with the outages that we saw in AEF in 2019, is it reasonable to assume that we should be able to get that low-cost butane into a good portion of Q2 as well?

Rob, it's Jamie. Yeah, certainly we've got some inventory that we would, that is associated with the lower cost butane that will benefit our results in Q2, but given the fact that we have had very good run time since our scheduled outage in late 2019, our inventory would be probably more in a historical level of the butane that we would have that we carry over into Q2.

Okay and then just finally, just on the DRIP, if we do have a good marketing contribution in 2020 and you remained, let's call it in the range of your debt-to-EBITDA metrics and you do see a decline in CapEx profile moving forward, how are you looking at the DRIP longer term, do you want to keep it on or could we see a shut off in 2020.

Good question, Rob; I would suggest that our answer is not really in our messaging around, it is not really any different than we had at Investor Day. At Investor Day, we tried to show that at the end of 2021 there are obviously different scenarios that could unfold and we indicated that if living within cash flow without the DRIP on, it would be that 500 to 600 million of capital, and if we had the DRIP on, it would be 800 to 900. So, it's all really a function of what capital program continues to get developed or looked at. Obviously, we want to grow shareholder value, we're obviously trying to be sensitive to different questions that people might have or investors might have on things like the DRIP. But at this point, I think we just want to continue to be flexible on how we look at things. And as you point out, it really does depend on, are there different shifts in cash flow that the company is generating in terms of fee for service or marketing. So, I think I'll just leave it at that.

Your next question comes from the line of Ben Pham of BMO.

Just had a couple of questions on the optimization valuations that's ongoing and it maybe just using Gilby as an example, you moving flows to different plants, saving maintenance and costs and it is a net impact of that, are you expecting absolute EBITDA to generally be consistent of what [indiscernible] was generating before?.

Ben, this is Brad. I think what we hope is going to happen with consolidations like others is that we're going to be able to preserve as much of that EBITDA. In some cases, we certainly hope that we can increase that through adding incremental services or reducing our operating costs. But the producers pay, that makes their economics look more attractive and also provide incremental to us, but I think our target initially is to enhance our business and just continue to create a more efficient business in the long-term, preserving as much of that value as we can.

Okay, and I mean, I guess there are situations where EBITDA might see some pressure, remaining free cash flow, sees a nice bump because of maintenance CapEx savings, and then maybe just comment on that, and how do you guys look at just a version of flows versus monetizing assets, I mean what are some of the things you guys look at, pros and cons?

Well, I think the advantage we have in our central foothills region is that over the last 20 years we've built a high degree of interconnectivity between those assets. What that allows us to do is hopefully move gas to the most efficient plants with the minimum on all our capital, thus preserving that in time. So, I would hope that we're going to continue by doing that, we're going to continue to reduce our maintenance capital opportunities that go with that. So, I think there are positives we have for both ourselves as well as the customers that flow to us.

This is Dean. Just to add to that. I mean, obviously, we think that there financial benefits for not operating as many plants and providing relatively same level of service. So again, there are some opportunities to in some circumstances pass some value on to our customer but we think a lot of that can be retained by our company and for our shareholders as well. On top of that, we see some very good opportunities to reduce our overall greenhouse gas emissions because, again, it's a lot less energy intensive to operate fewer gas plants. So, we think that's a positive from an ESG perspective and overall our optimization program. I mean we're looking at a variety of different alternatives, but at this point. we cannot provide more clarity than what we're providing now, but we think we'll have more updates, sort of, towards the mid and later part of this year.

Okay. So this sounds like, I know you mentioned asset sales in the package, but that doesn't seem to be a likely route at this stage, especially with [indiscernible].

Yeah, I can say. I mean, we're considering lots of different alternatives but I can't comment any further at this point.