Tidewater Midstream and Infrastructure Ltd. (TWM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Tidewater Midstream and Infrastructure Ltd. Annual General Meeting Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Joel MacLeod. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Welcome to the Annual General and Special Meeting of the Shareholders of Tidewater Midstream and Infrastructure Ltd. My name is Joel MacLeod, and I am the Chief Executive Officer and Chairman of the Corporation, and I will be the Chairman for this meeting. In terms of our agenda today, we will deal first with the formal business of our AGM, as described in the proxy materials that were sent to shareholders. Following the formal part of our meeting, I will open the floor and the phone line, and I will be pleased to answer any questions you may have. The presentation I will review following the formal business of the meeting is contained on our website. So if you are on the phone line, you can take the time to access it now. The meeting will now come to order, and I ask David Barva, Chief Legal Officer and Executive Vice President, Shared Services of the Corporation, to act as secretary of the meeting; and Patricia Selby of TSX Trust Company to act as scrutineer of the meeting. I now request the secretary to table proof of delivery of the Notice of Meeting, instrument of proxy, management information circular and accompanying documents to the registered shareholders of the corporation. Proof of mailing of the notice calling the meeting and accompanying documents has been duly filed, and I direct a copy of the notice with proof of delivery to be kept by the secretary with the records of this meeting. I would like to take a moment to discuss voting procedures. Voting will not occur over the phone line. Voting will be in person in the meeting room or by proxy duly submitted. Unless a ballot is requested in respect of any particular matter, voting will be conducted on a show of hands. We will have a ballot on certain matters to properly document the voting at the meeting. If you are a registered shareholder and have not received a ballot, please put your hand up, and the scrutineer will provide to you a ballot for completion. Any shareholder or proxy holder wishing to speak is requested to identify themselves and, when recognized by the Chair, provide his or her name before addressing the meeting. Any shareholder who is on the phone line, please hold your questions until the end of the meeting when we open the phone line for questions. The bylaws of the corporation provide that a quorum of shareholders is present at a meeting of shareholders if at least 2 holders or not less than 25% of the shares entitled to vote at a meeting of shareholders are present in person or by proxy. I have received the scrutineer's report showing that there are in attendance at this meeting, in person or by proxy, 115 shareholders holding 211,591,775 common shares. Accordingly, the total representation at this meeting by shareholders present in person and by proxy is 62.3% of the common shares of the corporation. Therefore, I declare that there is a quorum present at this meeting. I now declare that the meeting is regularly called and properly constituted for the transaction of business. The first item of business of this meeting is to receive and consider the audited financial statements of the corporation for the year ended December 31, 2020, and the report of the auditor thereon. I ask the secretary of the meeting to present these financial statements to the meeting. Copies of the financial statements and the report of the auditor thereon have been mailed to each registered shareholder, and they have an opportunity to review these documents. So I request a resolution dispensing with the reading of the auditor's report.

I move that the reading of the report of the auditor and the financial statements be dispensed with.

I second the motion.

All those in favor, please signify in the usual manner by raising your right hand. [Voting]

Any opposed? [Voting]

Motion is carried. The next item of business is the fixing of the size of the Board of Directors to be elected at the meeting for the forthcoming year. It is proposed that the Board of Directors to be elected at the meeting shall consist of 7 members. I now request a motion to fix the Board of Directors at 7 members.

I move that the Board of Directors of the corporation to be elected at the meeting be fixed at 7 members.

I second the motion.

All those in favor? [Voting]

Opposed? [Voting]

The motion is carried. Thank you. We will now proceed with the election of directors. Seven directors will be elected at this time to hold office until the next annual meeting or until their successors are elected or appointed.

I nominate the following individuals as directors of the corporation to hold office until the next annual election of directors or until their successors are elected or appointed subject to the provisions of the Business Corporations Act and the bylaws of the corporation, namely Joel MacLeod, Gail Yester, Doug Fraser, Greta Raymond, Robert Colcleugh, Michael Salamon and Neil McCarron.

I'll second the motion.

Are there any further nominations? No. I now declare the nominations closed. All in favor of the election of those nominated, please signify in the usual manner by raising your right hand. [Voting]

Opposed? [Voting]

Thank you. I now declare those nominated to be duly elected directors of the corporation to hold office until the next annual election of directors, until their office is vacated or a successor is appointed in accordance with the bylaws of the corporation. The next item of business is the appointment of the auditor of the corporation. The information circular and the instrument of proxy prepared for the purposes of this meeting contemplated the reappointment of Deloitte LLP Chartered Accountants as auditor. Could we have a motion with regard to the reappointment of the auditor until the next annual meeting? And could this motion provide that the auditor's remuneration be fixed by the Board of Directors?

I move that Deloitte LLP Chartered Accountants be reappointed as the auditor of the corporation until the next annual meeting or until a successor is appointed and that Deloitte's remuneration be fixed by the Board of Directors.

I second the motion.

All of those in favor? [Voting]

Any opposed? [Voting]

Thank you. The next item of business is to approve and adopt the ordinary resolution in relation to the approval of the unallocated equity-based deferred share units under the corporation's DSU plan.

I move that the resolution as more particularly set forth in the information circular prepared for the purpose of the meeting relating to the approval of the unallocated equity-based deferred share units under the corporation's DSU plan be approved and adopted.

I second the motion.

In order to record accurately the voting results of this resolution, it is necessary to conduct a vote on this resolution by ballot. I have received the report on the ballot from the scrutineer, and I declare that the ordinary resolution of shareholders regarding the approval of the unallocated equity-based deferred share units under the corporation's DSU plan has been duly passed. If any shareholder is interested in the exact number of votes cast in favor of and against any resolution in particular may be obtained from the secretary of the meeting. The next item of business is the advisory nonbinding shareholder vote of the corporation's approach to executive compensation.

I move, on an advisory basis only, that the shareholders of the corporation accept the corporation's approach to executive compensation as disclosed in the information circular.

I second the motion.

All those in favor? [Voting]

Opposed? [Voting]

The motion is carried. Thank you. If there is no further business to be brought forward before the meeting, I would ask for a motion to terminate the meeting.

I move to terminate the meeting.

I'll second the motion.

All those in favor? [Voting]

Opposed? [Voting]

The motion is carried. Thank you, everyone. I declare the meeting terminated. So I think with that, everyone, we will -- [ Trevor ], should we open it up for questions first or just jump right into the presentation and then open it up for questions post presentation?

I think whatever you preferred, Chairman.

Okay. I think we'll just jump into the presentation. Those of you that have questions, as always, maybe wait. We'll try and -- I think most of you are well up to speed with Tidewater Midstream. We'll keep the presentation fairly brief here, kind of aim for 15 to 20 minutes, and walk you through. Those of you that are at home, please feel free to pull the presentation up at home. You'll see it's our June 2021 presentation and it's on our website. But we'll plan for kind of a 15- to 20-minute presentation here and then open it up for questions. So Tom, if you could just maybe skip in, we're just going to probably skip to the first slide. I don't think we need to walk through the legal component on those first few slides. But to start, obviously, and for us, important to start with the map location of our assets, has been critical from our IPO, our 6-year history, has been absolutely critical to strategy. We want to be in areas where economic drilling production resides and control and help those producers with their netbacks but have control of infrastructure through the gas storage, fractionation and now even into refinery operations, with our main goal being helping producers with the netbacks. Gas, ethane, propane, butane, condensate and crude, great for us to have levers that can enable our customers to improve their netbacks. Maybe just quickly on the map there on Slide 4, those of you that are looking at the slide. Probably some areas of interest, how is activity going within industry, what type of activity and, in general, how are our assets performing. We've been very fortunate through COVID to deliver 8 record consecutive quarters of adjusted EBITDA per share. And I think that's just a huge checkmark showing the resiliency of our assets, our contract profile. But I think most of you are more probably interested in what's going on in our backyard of late, especially with WTI marching up to $72, and then AECO even this morning, on a spot basis, we saw in the $4 a GG range. So definitely at Pipestone, our team has done an incredible job. We are fully contracted. So our Pipestone there, kind of in the north part of the map, we're in the heart of the Montney within Pipestone connected to our gas storage facility. And our operations team has done an incredible job to be able to run that 95-, even 100-plus million cubic feet a day. You'll see we've revised our license up to 110 million cubic feet a day. Activity continues to pick up. And I would say, a potential for an expansion over the next 12, 24 months, so quite exciting Pipestone activity. I guess the negative would be that we are fully contracted. So there isn't today a big upside as far as unutilized capacity given we're fully contracted and the plant is full on a day like today. If we march down into Brazeau River where we are planning to close our Pioneer Pipeline at the end of the quarter, which is obviously -- I think we only have 1 more day in the quarter, remain confident we will close the transaction in Q2, as we previously guided. But we have definitely seen a pickup in activity down in Brazeau as well. And we've seen record third-party volumes probably since 2018, 2019. So again, team's done a great job, asset performing well. And now we are pipe connected to one of the largest power plants in Western Canada with our partner in TransAlta and great partners there. So great to see volumes picking up, activity picking up. And at Brazeau, we would have a small amount of underutilized capacity, but great to see activity picking up and our customers generating more and more cash flow from their netbacks. I think as we step over to Prince George, maybe just briefly, we'll get into more detail. you'll see it is directly connected to the B.C. Montney where we have seen quite a bit of activity. An entity like Tourmaline has done an incredible job at consolidating the Montney, especially on the B.C. side of the border. In the bottom of COVID, we saw Conoco, one of the first U.S. companies we've seen in a long time, step in with a $500-plus million investment into Canada. So to have Conoco, after purchasing the Kelt Inga/Fireweed Montney asset, be the largest supply source of crude condensate into the refinery, we are seeing counterparties strengthen. And you'll see there that 50% of our adjusted EBITDA is from investment-grade counterparties. So the consolidation is positive from a credit perspective. But being ourselves, being supporters of small- and medium-sized producers, would admit it is a little sad to see less and less small- and medium-sized producers, but it's definitely helping our contract profile, our credit profile, and are excited to see some of our large customers and counterparties grow and us to be a key part of that in helping them improve their netbacks. Key piece on Slide 4, other key pieces that you'll see us reiterate, is leverage. So most of you are well aware, we had 2 very large capital projects, Pipestone Gas Plant, Pioneer Pipeline build. Then we acquired the Prince George Refinery, all with debt at a cost of 5% to 7%, which was quite attractive to us. But at the same time, our leverage was up in that 4 to 4.5x range. With the closing of the Pioneer Pipe, we'll be at 3.5x debt-to-EBITDA here, instantaneously here in a week or so, and then continue to focus on that long-term leverage target of roughly 3x debt to adjusted EBITDA. And the team has done a heck of a job on executing, getting our leverage down to 3.5x here in the next week or so and then really pushing towards that 3x. But maybe, Tom, we'll get into the renewable initiatives as well, which are quite exciting as far as support from the B.C. government. Alberta government is also trying to be very helpful, which is appreciated and then the federal government as well. And we'll get into some of our renewable initiatives. Slide 5, we won't spend a lot of time. Just want to continue to strengthen our customers and contracts. 75% of our cash flow from long-term contracts. We'll do our best to continue to strengthen those customers' contracts. And as I mentioned earlier, 50% of our EBITDA from investment-grade customers. So Tom keep going, maybe flip the page. This, as I mentioned, 8 consecutive quarters of EBITDA per share growth. This goes back further kind of to onset, but you'll see for us to have 27% 6-year adjusted EBITDA per share CAGR. Pretty proud of what we've been able to do through COVID to show growth from outset to today, and we don't see that stopping. We aren't deploying large capital today, but we do still feel we can continue to grow our adjusted EBITDA per share, and it's a result of having a deep inventory of high rate of return, low capital projects. So probably not 27% type growth profile if we were to just plan on our existing capital program, which is fairly small in that $30 million to $40 million range a year. But then we also have our renewable diesel project whereby we need to have a financing plan and we would see similar growth to what we're showing kind of over the last 4 -- 3 to 6 years, should we move forward on some of our other high-growth projects. But today, our focus is bringing leverage down. It's great to see the market react. I would say we're likely outperforming our peers here over the last 3, 6, 12 months. So again, great job by the team. And great to see the market recognizing our performance. And the real focus is that bottom half of that Slide 6, which is bringing our leverage down. And it will be great to be down at 3.5x here in the next week or so. But Tom, keep moving. So renewable initiatives, a lot of questions from investors around our renewable initiatives. I do feel it's also brought new pools of capital to meetings and having interest in Tidewater Midstream, which I think is relevant to all of you on the line or here in person, quite exciting for Tidewater Midstream to be as involved as we are on the renewable side. Some would say luck in having 1 of 2 refineries in B.C., to have $100 million of government support on a $225 million project. We're not aware of a project globally with that type of government support and generating roughly a 2-year payout on net capital of $125 million. So definitely exciting times for Tidewater to have high rate of return projects with government support. And it does feel as though that government support will continue, both in B.C. but even the Alberta government, to see how they also do see us as a leader in clean fuels. Our team has operated hydrogen at the refinery for 30-plus years. And for us to be seen as a leader in hydrogen, in renewable diesel -- and also, we're definitely getting up to speed in renewable natural gas. We have large storage assets. We have our 6 investment-grade customers that are very interested in moving RNG and/or having us potentially produce RNG at some of our large sour plants where we have unit train rail at a few of those facilities. So definitely interesting times. We want to focus on projects that have true cash flow and true economics and significant returns. So definitely still some work to do, definitely on the hydrogen front as far as an offtake and what projects are economic, but definitely exciting for Tidewater as a whole. We can speak a little bit about carbon capture as well. But I think in the interest of time, we'll keep moving here. Tom, next slide, please. So some macro pieces, I don't think today, in the interest of time, we'll walk through. I think most of you are aware, the demand profile of renewable diesel, hydrogen, RNG. But I think for today, we'll jump into the next slide, Tom. So graph -- I think this map is also helpful. I know it's very helpful for our U.S. investors. And then for the first time, we've had some real interest and appetite from European investors. So it's a layout, a map. Most of you on the line, though, I know will know geographically where we sit. But it is important to be aware of other industries that can impact our renewable initiatives. So the lumber industry would be one. Most of you are likely aware, Canfor, one of the largest public lumber players, is a neighbor at Prince George, is a great partner, have a great partnership there on a future FCC coprocessing project with wood-based material. But the lumber industry is also right on top of Ram River, which is #3, and also right on top of Brazeau, which is #2. So to have wood-based feedstock for future projects right on top of us, obviously, Alberta beef, all of you would be well aware, beef-based tallow would reside in Alberta, Saskatchewan and a little bit into B.C. to have those feedstocks for our renewable diesel project. And potentially, other renewable projects is obviously very helpful. We don't have to source our renewable feedstock from another country or across the water where we are even being contacted by some of our refiner friends on the U.S. side of the border if we can help them with renewable feedstock into some of their projects. So I think at a high level, maybe carbon capture just quickly, those of you that aren't aware, I think Pipestone is a great example. The Pipestone Plant that we built roughly 3 to 4 years ago, one of the biggest risks the market felt was our acid gas injection wells. So we had to drill 2 horizontal wells, which some, most would argue, were exploratory. Our reservoir team, drilling completion team, even one of our Board members, Steve Holyoake, was heavily involved there. And the team knocked it out of the park to have 2 acid gas injection wells that have been running now for 2 years, have exceeded our expectation. But do want the market -- and those of you who are likely aware, but we also inject carbon dioxide, H2S and greenhouse gases down hole in those 2 acid gas injection wells. So we are set up well to be one of the lowest carbon intensity gas processors, but also to have carbon capture at Atchison, just outside of Edmonton. We also have acid gas injection or carbon capture at Ram River. We inject water into the Wabamun reservoir where we're confident we could also move towards carbon capture. And then our gas storage assets are large, significant and could definitely look at related carbon capture options around some of those smaller pools. So great to be set up well to continue to move forward carbon capture and also have big infrastructure in sour plants with aiming that are built to do that, to strip CO2 over to natural gas but to strip CO2 on other products as well. And we do look forward to those discussions over the next 2 to 3 years. We're starting to see inbounds on low carbon intensity chemicals to low carbon intensity fertilizer. And it's great to have large sour plants with carbon capture capability, and Ram and Atchison would also have unit train rail capability. So I think quite exciting over the next 2, 3, 5 years with some of our existing assets. Let's keep moving Tom. So HDRD project, just quickly, $225 million of gross CapEx, $100 million in government support, net capital of $125 million, generating $75 million to $90-ish million. And B.C. LCFS -- so British Columbia is the only province in Canada with low carbon fuel standard credits, and it is a big driver of our economics. And then we also have the Canadian Clean Fuel Standard credit program, which rolls out in 2022 into 2023. So great to be positioned incredibly well with 1 of 2 refineries in B.C. and then also with the B.C. government's support, which has been incredible, and very thankful for all their support, and we do think the potential for future support. They're also supporting our coprocessing project, which comes online here in 2 to 3 months, and then also a small FCC coprocessing project. So again, a big thanks to the B.C. government. Slide 12, I don't think we have to spend a ton of time. It's just walking through given the carbon intensity. So we want our shareholders to be aware of carbon intensity, of the related fuel as a big driver as to how many credits you generate and as a big driver of the economics with the B.C. government support. And I believe we are -- have now been awarded the largest grant by the B.C. government as far as LCFS. Carbon intensity is critical and great to have the B.C. government's support on our carbon intensities and the reduction of CO2 and greenhouse gases. But keep moving, Tom. So core business. I think we can spend a little time on natural gas, NGLs, crude and condensate. We kind of talked about this at the outset and the real focus on improving customers' netbacks. I think we do a great job on that through our gas storage, our gas plants on the NGL side, with our rail fleet as well on propane, butane. Some will recall how did we IPO Tidewater Midstream. I think it was off the back of 5 to 10 railcars and essentially started with sub-$5 million of capital. But great to see those railcars still helping producers improve their netbacks and great to work with the AltaGases of the world with their export terminal in B.C. and now Pembina as well. So definitely we're close with our large peers and big supporters of our peers and helping improve netbacks for all the producers and all of Canada. But Tom, I think we can keep moving. Prince George, I think an important one to touch on. Obviously, 40-ish percent of our EBITDA. Cash flow, through COVID, you'll see there on Slide 16, the asset performed incredibly well. When we closed the acquisition in November '19, we messaged, in our view, worst case margins or crack spreads of $43, $45 a barrel and was incredible to see crack spreads through COVID after closing the acquisition and then getting hit with probably the best stress test we could have on the asset, was great to see the asset perform as well as it did. Our margins held and even increased above that 43 to 45. Just I think it's a key driver of why we've had 8 record quarters through COVID. And again, our team has done an incredible job. We've been debottlenecking process units. You'll see there, we had, I think, record throughput and sold a record amount of refined product even through COVID. So what's driving that? Large capital projects, Site C Dam, $10-plus billion project; Coastal GasLink, $10-plus billion project; LNG Canada, $20-plus billion project. Very fortunate to have 3 plus Trans Mountain expansion, large projects in our backyard, and we haven't been able to keep up with diesel demand. So just an incredible opportunity. Team's done a great job of executing, continuing to debottleneck, high rate of return capital projects, lower capital, but still great to deliver 8 record quarters through COVID and a function of our assets performing well. I think we're getting close to wrapping up, Tom, just in the interest of time, and we can open it up for questions. But let's just make sure we don't miss any key slides. I think Montney, if we go here to Pipestone, I think that's a great slide to touch on quickly. Activity continues to pick up. We wouldn't say it's getting out of control, but activity is definitely picking up. We're seeing our customers generating significant free cash flow, their debt levels moving down. We are full at Pipestone. And operationally, our team has done an incredible job over the last 3 to 6 months where we're averaging north of 90 million cubic feet a day of throughput have been fully contracted. But even in May, we're in that 100 million a day average, which I would never dream we'd be able to achieve to build the plant at 100 million but actually process, on average, 99 million to 100 million cubic feet a day in the month of May, just a huge accomplishment. And a big thanks to our team but also all our customers for supporting us. True, start-up of any facility is a little choppy but great to show today that we're definitely leaders on operations within the Montney and I think really sets us up quite well over the next 12 to 24 months. Keep going, Tom. Deep Basin, I can spend -- just quickly. We talked about at the outset, activities picking up. Group like Spartan Delta is coming in, drilling wells. Economics continue to improve. But even groups like Baytex, public data would show that they're drilling in our backyard and really appreciate the support of our customers. But gas prices at AECO being $4, propane values moving up due to export, to even IPL's PDH/polypropylene facility coming online, so to see all commodities moving up is extremely helpful to our customers and is resulting in more volumes through our facilities. I think, Tom, we can probably wrap up. Maybe let's just go to the last slide that kind of lays out where we are today. ESG, definitely important. I won't spend a lot of time there. A real focus on clean fuels but also on governance, diversity, social side, supporting our communities, supporting our First Nations friends. We have some great partners, especially in Saskatchewan and Manitoba but definitely in Alberta, B.C. as well and want to continue to improve those relationships. But I think just to give everyone a sense of enterprise value, market cap, we've definitely seen a significant move up as Pioneer closes here in the next few days. Enterprise value, $1.2 billion, where we're delivering north of $200 million of EBITDA. It's now pretty easy to do the math as to -- we've had a lot of questions. I think most of you know, it's been a year waiting for Pioneer to close. Now it's here. We're going to be at 3.5x debt-to-EBITDA instantaneously, but we're clearly at a 6x multiple. There doesn't need to be any assumptions. $200 million of EBITDA on 1.2 billion of EV, 6x multiple, and then have some quite -- some growth projects that are definitely quite exciting for us, including that renewable diesel project, $225 million of gross capital, $125 million net, generating $75 million to $90 million of EBITDA. Quite, quite interesting and exciting, and it's driving quite a bit of interest from the capital markets, from institutional investors and even global investors. So great to have the support of all, of everyone on the line, everyone in the room today, really appreciate everyone's support. And with that, I want to thank our Board as well, our customers, our credit syndicate, through the bottom of COVID, has been incredible and incredibly supportive. But maybe I'll pause there and open it up for any questions. And no worries, if there aren't any questions, that's all right. But at all our AGMs, we like to answer a few questions and happy to stay here as long as need be if there's multiple questions.

[Operator Instructions] And there are no questions at this time.

Well, thank you. Thank you, everyone, for your time today and, more importantly, all your support. And please don't hesitate to reach out if we can help with anything. Thanks, everybody. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.