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

Good afternoon, everyone. We're going to get started here. Welcome to the Annual General and Special Meeting of the Shareholders of Tidewater Midstream & Infrastructure. My name is Joel MacLeod, and I am the Chief Executive Officer and Chairman of the Corporation, and I'll be the Chairman of 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 also take you through a corporate update/presentation, as you can see on the screen, where we continue to see strong outperformance of the business and expect this to continue into 2023. The presentation, I will review following the formal business of the meeting is contained within our website. So those of you who are on the phone line, you can take this time to access our corporate presentation now. After the presentation, as always, we'd like to open the floor up for questions. So please don't be shy. If any of you have any questions, please bring them forward, and we'll be pleased to answer any questions you may have. With that, the meeting will now come to order, and I asked 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. Thank you, David. Proof of mailing of the notice calling the meeting and accompanying documents has been duly filed, and I direct a copy of the notice and 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 you to 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 of not less than 25% of the shares entitled to vote at a meeting of shareholders are present in proxy or by person. I have received the scrutineer's report showing that there are in attendance at this meeting in person or by proxy 174 shareholders holding 212,972,936 common shares. Accordingly, the total representation at this meeting by shareholders present in person and by proxy, is 62.307% 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 the meeting is to receive and consider the audited financial statements of the corporation for the year ended December 31, 2021, and the report of the auditor thereon. I ask the secretary of the meeting to present the financial statements to the meeting. Thank you, David. Copies of the financial statements and the report of the auditor thereon have been mailed to each registered shareholder, and they have had an opportunity to review these documents. So I request a resolution dispensing with the reading of the auditor's report.

The Chairman, I move that the reading of the report of the auditor on the financial statements being dispensed.

I second the motion.

Thank you, Tina. Thank you, Doug. All those in favor, please signify in the usual manner by raising your right hand. All in favor? [Voting]

Thank you. Any opposed? [Voting]

Thank you. The motion is carried. Thank you, everyone. 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 board 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 be elected at the meeting to be fixed at 7 members.

I second the motion.

Thank you, Doug. Thank you, Tina. All in favor? [Voting]

Thank you. Any opposed? [Voting]

The motion is carried. Thank you. We will now proceed to the election of directors. 7 directors will be elected at this time to hold the office until the next annual meeting or until their successors are elected or appointed. I nominate the -- sorry, go ahead, Doug.

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 by the bylaws of the corporation, the following individuals: Joel MacLeod, Gail Yester, Doug Fraser, Greta Raymond, Robert Colcleugh, Michael Salamon, Neil McCarron.

I second the motion.

Are there any further nominations? I now declare the nominations closed. All in favor of the election of those nominated, again, please signify in the usual manner by raising your right hand. All in favor? [Voting]

Thank you. Any 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 unless 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 auditors. 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.

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

I second the motion.

Thank you, Doug. Thank you, Tina. All those in favor? [Voting]

Thank you. Any opposed? [Voting]

The motion is carried. The next item of business is [ to ] approve and adopt the ordinary resolution in relation to the approval of the unallocated restricted share units under the corporation's restricted share unit 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 restricted share units under the corporation's restricted share unit be approved and adopted.

I second the motion.

Thank you, Doug. Thank you, Tina. In order to record accurately, the voting results of this resolution, it is necessary to conduct a vote on this resolution by ballot. Thank you, Patricia. 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 restricted share units under the corporation's RSU Plan has been duly passed. If any shareholder is interested in the exact number of votes cast in favor of or against any resolution, particulars may be obtained from the Secretary of this meeting. The next item of business is the advisory nonbinding shareholder vote on the corporation's approach to executive compensation.

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

I second the motion.

Thank you, Doug. Thank you, Tina. All those in favor? [Voting]

Any opposed? [Voting]

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

I move to terminate the meeting.

I second the motion.

Thank you, Doug. Thank you, Tina. All those in favor? [Voting]

Thank you. Any opposed? [Voting]

The motion is carried. I declare the meeting terminated. Thank you, everyone. We appreciate your time. And now we'll take some time to run you through a business update and our corporate presentation. And as always, please, if you have any questions after we're done the presentation, we're happy to answer any questions. If you're not comfortable in front of the larger group, feel free to grab us aside or even reach out to us after the meeting. But look forward to the presentation here and any questions anyone may have. And with that, we'll jump right into it. To start, I think, as always, we like to start by thanking our staff, our board, our customers, all our team members and all stakeholders. So just a big thank you to everyone for all their efforts. It's been a heck of a ride through COVID. I think for us, we would be 1 of a very few select number of companies that delivered 12 consecutive record quarters through COVID, and it is something we're quite proud of, and that's a big thank you to our entire team for all their hard work. Again, I think, to emphasize, you'll see with our Q1, we announced guidance as it relates to 2022, deconsolidated $180 million to $190 million of EBITDA. And then on a consolidated basis, $230 million to $245 million. It's been great to see our business outperform, especially as crack spreads have moved up. Volumes have also moved up, and just a heck of a job by the team and don't be surprised if we would be fairly confident that we will continue to deliver that outperformance into 2023 and even to see our debt levels today point in time to be under 3x debt to EBITDA. It's been 3-plus years and sure feels good to see the outperformance of our business. Our customer is doing incredibly well and delivering that related cash flow. Slide 5 is peer comparisons. We're not going to spend a lot of time on this slide. I think as most are aware, multiple continues to be quite attractive, even our growth rates. When we look at our larger peers, obviously, our growth rates, our payout ratios are extremely low, with the free cash flow generation of the business is something that we're quite excited about here in 2022 and into 2023, and we'll get into some of the details here in a few moments. [ To a map ], we always like to kind of step back and update our shareholders and the market on activity in our various core operating areas. I think most are aware of Pipestone and the activity around Pipestone. Some recent statistics that Pipestone would be since January, we've seen over 200 wells be licensed in the Pipestone area. Definitely, the Montney is the focus. But I believe there was 25 to 30 Charlie Lake wells that have also been licensed. Obviously, the majority is Montney liquids and gas and for us to have our Pipestone gas plant fully contracted, running at 102 million cubic feet, 103 million cubic feet, 104 million cubic feet a day. Again, our operations team has done a heck of a job out there, and we're definitely 1 of the leaders as far as operational efficiency and run times at the plant and also a big thanks to our commercial team who continues to keep the plant full. And when we look at our kind of our priorities here over the next couple of weeks to a couple of months, number 1 is the refinancing of our notes, which is going extremely well. We've seen support from our credit syndicate to potentially see a credit facility bump here and a big thank you to the credit syndicate. It is a result of the outperformance of our business here over the last 60, 90, 120 days. So I really appreciate all the support from the credit syndicate, big focus and confident we will get our notes financed here in the next 30 days or so. And then the other key piece is our Pipestone Phase 2. We're not committed. We do not have FID yet, but we're sure as heck pushing forward, and it's definitely a priority and are confident that we will eventually get to a Pipestone Phase 2 FID, but we definitely have some work to do on both CapEx and and then a full financing plan on Pipestone Phase 2. But the activity of Pipestone is probably as active as we've seen it. We definitely saw activity through COVID through Pipestone and it being 1 of the most economic areas in all Western Canada, but with some of the blueberry issues that we've seen on the B.C. side of the border. We've seen some of the larger producers allocate capital into Alberta and specifically around Pipestone. So it is great to see the activity to support for a Pipestone Phase 2 and/or potential other expansions. And then also, I think markers in the market as far as valuation of gas plants in that area. The KKR, Pembina joint venture was a great marker for helping value some of our assets definitely up in that Pipestone area when the multiple was in that 11.5x to 12x range. So it's very helpful as we look at options to move Pipestone Phase 2 forward. Then maybe we'll march down into the Deep Basin. So that's down kind of in the bottom corner of Slide 6. Deep Basin activity is probably near a record high since Tidewater's inception. I think most of you are aware, we're about 7 years old. To see -- I think we've seen 75 or so wells spud here since January 1, 2022. Groups like Westbrick public data, which show they have been running 4 rigs, we are running 3 right now, but definitely at maximum activity levels or [ pies ] for them as far as activity. And then even to see down by Ram River, the likes of [ Havana Vista ] being extremely active where we've seen 9 wells licensed and/or spud here in the last few months. So it's great to see the activity. Our plants are filling up. That's driving some of our outperformance, Brazeau in particular but even around Ram River to see the activity that we're seeing. When you look at the gas price environment, we would never anticipate seeing $7, $8, $6 AECO. And even as you look through the calendar '25, calendar '26 gas prices, given this morning, we're still over $4.50 AECO for the next 4, 5 years. So it just sets up for, I think, incredible times for Tidewater Midstream with infrastructure, gas processing assets, gas storage assets tied to our assets as well, and then we'll also jump into the refinery. But all those are key pieces that are driving the outperformance of the business. Slide 7. I think most of you are aware, we've had a real push to improve our customers and contracts. Pipestone was definitely a big part of that to have 10-year take-or-pay agreements to be fully contracted and continuing to work with producers as we do look at a Pipestone Phase 2 to continue to strengthen those customers and contracts. But for us to have 80% plus of our volumes with minimum volume commitments, and that does include the refinery, given we have a 5-year offtake there with Synovus, previously Husky, want to continue to push to strengthen those customers and contracts. Slide 8, we get into, again, kind of our history, our 12 record consecutive quarters while also bringing down leverage. Nice to have our leverage in that 3 to 3.5x range around Q1. But today, with our outperformance to see us around or slightly under 3x is again something we should be pretty proud of and don't want to be back up in that 4x range and that's a hard guardrail for us today, 4x debt to EBITDA. So great, again, to be under 3x or right around 3x today with the outperformance of our business and looking forward to exploring some high rate of return capital projects. Slide 9. This is a new slide we put in. We thought it was important to just lay out the growth that we've delivered from inception through to Q1. And then with Q2 likely being another record quarter with our outperformance and just reflecting on what we've delivered over the last 7 years, and definitely probably 1 of the highest growth rates in the industry and with consecutive quarters of growth even in lower commodity price environments like COVID. So we've seen some impressive numbers over the last 7 years and do expect this to continue. Our renewable subsidiary, we won't spend a lot of time, I think just the key messages from our renewable subsidiary that we own 69% of key markers would be, we're also seeing outperformance down in the renewable side of the business. What's driving that? It would be diesel prices have been higher. So our canola coprocessing that occurs within Tidewater renewables. Our diesel prices have definitely increased more than we anticipated. BC-LCFS values have also increased more than we anticipated and great to see the outperformance within Tidewater renewables. The other key piece would be the used cooking oil collection acquisition is also outperforming and the renewables team is focused on more of those partnerships like we announced with Rimrock on RNG, but also tallow feedstock. Slide 11, I think most of you have seen this slide. It just reflects what is the value of that ownership in Tidewater renewables, and you'll see it equates to roughly $0.87 a share, $300-ish million. Just trying to show it is a fairly significant portion of Tidewater Midstream as a whole and don't feel that, that's being reflected in our share price. Again, this is more renewables. We're not going to spend a ton of time on the renewable side of the business, kind of our key pillars, our renewable diesel project, our RNG partnership and related project and then hydrogen would be lower on the priority list. We probably will just spend a little bit of time given the size and scale of the renewable diesel project. And given our 69% ownership in the entity, that project, I think most of you are aware, it's $235 million of gross capital. Key piece there is the government support. So we received 275,000 BC-LCFS credits. If valued at our IPO back in the summer, kind of roughly at $375 of credit. That equates to about $100 million. What we've seen since the IPO is credit values have gone, you'll see publicly disclosed forward sales at $425, $478 and more recently, $490. That takes the value of that grant, from $100 million up to that $120-plus million range. So very helpful to have net CapEx of in the $120 million range on a project of that size and scale that we would be confident today would deliver $100 million of EBITDA and definitely the strongest economic project of size that I've ever been involved in my career, and we have seen BC-LCF credit values be high, diesel prices be high and then feedstock prices even over the last few weeks have come down. So our margins on that renewable diesel project have definitely improved since the IPO. The other piece would be the new Canadian Clean Fuel Standard credit, which we do expect to roll out in the coming months, which is another added piece of value to Tidewater renewable. But let's get back and focus on Tidewater Midstream, our core business, the volumes, we're seeing crack spreads, et cetera, I just wanted to kind of touch on Tidewater renewables there quickly. So back to Tidewater Midstream, our core business, I think most of you are aware, natural gas processing, NGLs and then crude and condensate with our refinery, where we continue to see, I would say, outperformance across all pieces of the business. What's driving the majority of the largest chunk of outperformance. It would definitely today be our Prince George Refinery. We continue to see record throughputs even through COVID, and then we'll get into the crack spreads, which have definitely exceeded our expectations here over the last 60, 90 days and will reflect some related charts. This is also a new slide. So Slide 18. We are -- we do feel we're approaching payout of the Prince George acquisition. We closed the acquisition back in November '19. So we're about 2.5 years [ and ] closing in on 3 years. And the cash flow generation, especially in the last few months is getting to a position where we're near payout, which we're pretty proud of, main reason being we did take quite a bit of pushback when we announced the transaction. We do feel strongly it fits within our strategy. It offers an outlet for Montney C5 and light sweet crude and even the -- obviously, the economics, I think, speak for themselves. And what the assets delivered and here as we get into crack spreads, you'll see our cash flow generation from the asset is way ahead of what we anticipated when we acquired the asset. So here's some crack spread charts. We never want to focus on moment in time, where is our crack spread. We get a lot of questions from analysts and the Canaccord team I know is in the room, great supporters. But we get a lot of questions on what's your crack spread today versus yesterday, the day after. The crack spreads are getting to a level where we -- probably you'll see us focus on a range over a 30, 60-day period is when we bought the asset, it was a $43 to $45 crack would deliver $75 million of EBITDA, and that was back in '19, but to see crack spreads definitely north of $100 a barrel or even if we sit in that $100 a barrel range on a 90-day average, resulting in -- I think you saw a small amount of that. You'll see in March is where we started to see crack spreads move up. So Q1 definitely didn't have 3 full quarters of crack spreads moving up. Q2 -- the majority of Q2 has seen that move. And then as we look into Q3, we continue to see highs on crack spreads. Again, we're not planning for that, but we'll definitely take it and look at ways to continue to debottleneck the refinery and have those sub-3, sub-2-year payout type projects. Again, this is just another crack spread chart. Main thing we want you to focus on here is the lows, not the highs. Let's focus on kind of what happened in COVID. We announced the transaction November '19. How did the market view that? I think there was a lot of questions but then COVID came. 3, 4, 5 months after closing, COVID hit us, and that is definitely the best way to stress test the Prince George Refinery, and you'll see -- we felt the crack spreads would hold in almost any scenario. We definitely didn't know a COVID would come and hit us, but you'll see that our margins held in that $45-plus range. So we do view the Prince George asset as more of an infrastructure asset. I think it's shown what happens to margins when we get hit by COVID, and it definitely held versus Gulf Coast cracks definitely went down into single digits. And then what we've seen, we did not expect -- we definitely thought we'd see it move up, but definitely not to $100-plus a barrel. And again, you'll see the biggest moves are really in the last 60 or so days. So that will impact Q2 and likely also be helpful and result in outperformance throughout 2022, and we're even seeing that crack spread on forward curves in calendar '23 and even into calendar '24, start to get to near highs, which is quite exciting. And so it's a path for the next 12, 24 months, a very strong free cash flow from our Prince George asset. Slide 21 is more activity kind of Montney. What are we seeing within the Montney activity-wise? You'll see color-coated kind of last 12 months versus 2022, and we've definitely seen activity pick up. And as you can see, it looks like a dart board and it's extremely active around our Pipestone asset. And again, a big credit to our commercial and field teams to see how well we're operating and definitely leading and having run times of essentially 98%, 99%, 100% has been extremely helpful to receive customer support for future expansions. Slide 22, again, it's just more of a [ zooming ], again, just reflecting activity, majority is Montney, but we continue to see Charlie Lake activity pick up as well. Slide 23, I think it's important to touch on the Deep Basin. This again is activity where historically, Ram River, we had admit had been pretty quiet, but you'll see there's definitely more activity around Ram River than we've seen in a long time and likely within even greater than the last 7 years and continue to see [ lion sales ] and material prices being played for land, but then also drilling activity. But our core asset, the first plant we ever bought at Brazeau River built a fractionation facility is definitely getting near being full, both the frac and the gas plant, where we are tied into our own storage as well. And I think I missed that at Pipestone as well. One of the key pieces in attractive components of Pipestone is we have our own gas stores. We have a large storage pool there that Pipestone is directly connected to and offers essentially guaranteed egress for producers as it's also connected to both Alliance and TransCanada. Slide 24. Some would say our Edmonton asset has been fairly noncore and small, but it's always an asset that we are excited about around the next 5, 10 years, 450 acres of land on CN Rail, where we have a rail facility. We have a licensed fractionation facility. We haven't built that, do not have FID, but are in a great position to expand if the market and/or if our customers wanted us to in an existing sour gas plant with carbon capture. So we do have acid gas injection at Acheson, where we inject carbon today. Similar to Pipestone, we have asset gas injection where we do inject CO2 today. So our team, again, not a big focus carbon capture, but we definitely have some of the best expertise probably in North America on operating [ gaming ] units and stripping CO2 out of natural gas. So exciting times, definitely over the next 5, 10 years and exciting times for all of Western Canada as it relates to carbon capture. With that, I think we can wrap up and open it up for questions. Brian, [indiscernible], any updates over the last a little bit. Okay. [indiscernible] just gave us the thumbs up. We did get our press release here in the last 5 or 10 minutes. So there's nothing overly material, but I do think for the shareholders on the line and in the room, they probably appreciate just a quick summary of our press release. So we were able -- our credit syndicate has been incredibly supportive, obviously, working through a credit facility increase, which we continue to work through, and that's noted in the related press release. We did get a waiver, so a 30-day extension on our related credit due to the note refinancing. And I think the key messages in that press release are: one, outperformance of our business, which we walked you through; and two, the likelihood of a credit facility increase. So do want to thank our credit syndicate again for all their support and excited to get through this refinancing and move towards a Pipestone FID. But with that, I think I'll open it up for questions, and thank you, everyone, for making time today.

There are no questions at this time. There are no questions at this time.

Sorry, we have a question in the room. Go ahead, sir.

Sorry -- is that better?

I can hear you. I can hear you. You're good.

Are we going to be taxable?

So today, no. Mr. Beamer's in the room, I'll give you my best guess as to when we're taxable. I would say we're at least 2, 3 years out. But to your point, as we see crack spreads where they are, definitely, that's accelerated. So I don't believe, Doug, what's a horizon, I'd say, 2 to 3 years depending on how much capital we deploy as well. If there was a Pipestone Phase 2 in 6 months or a year, that would provide more pools. So then we're probably 4 or 5 years to be taxable. But the negative of outperformance is we're generating cash, and we're bringing in that taxable horizon. But we're still, Doug, I think worst-case scenario 2 years out, likely [ created ] case, we'd be 3, 4 years old and a really good question.

Okay. Then the next question is, are the producers going into Pipestone currently do they want Phase 2?

Yes, it's been crystal clear. Reed was here and our commercial team was here, you'd say is phones ringing every day for even 1 million cubic feet a day of space, there's definitely a lack of sour gas processing up at Pipestone, and there's definitely a need for sour gas processing up there. So the customers, the [ Reed ] and team, feel free to have a chat with some of the team members while you're here after, I think they'll tell you that there's definitely a need for sour gas processing of the Pipestone right now.

One other question.

Yes.

Can we capture the liquids on a [indiscernible] Pipestone and feed them into Prince George? I think you touched on that.

Yes. It's a great question. We can definitely capture the liquids. So I know you're aware of this, but just for the broader group and those on the phone, we definitely strip liquids. And today, we're close to recovering 18,000 to 20,000 barrels a day at Pipestone. So that's our condensate and then our ethane, our propane and our butane -- so it's definitely 1 of the highest liquids recovery plants in all the Western Canada as far as barrels per million of liquids. Your question is, can we send that condensate to Prince George? We definitely have Jarvis and [indiscernible] in the room. They run the downstream side of the business. We have done that at times. But because we have a pipeline in B.C., that goes all the way up to Taylor, our preference is to just put those volumes that are in B.C. on the pipe and come down rather than truck every molecule over. But longer term, there's potential for a pipeline to connect Pipestone into B.C. that could be a little bit of a stretch, but we definitely have run volumes, and they've run incredibly well, and we've seen good yields, which has been great to see.

One last question.

Yes.

Did renewables buy a part of Prince George? _

Yes. Really good question. Yes, there was $32 million of EBITDA that was dropped down from midstream into renewables. So there was a portion. Examples would be our existing biodiesel, ethanol tankage, existing renewable diesel tankage. Our hydrogen plant was dropped down into renewables as well. So a portion of our cash flow was dropped down, but the incremental crack you're seeing is all Tidewater Midstream. Tidewater renewables does not get to participate in the petroleum-based crack spread, which has moved up. So that's where you'll see outperformance in Q2 and Q3 and potentially for the next 12, 24 months would be definitely -- Prince George will be a big driver of that. Any other questions? Well, thank you, everyone. Thanks for your time today. Thank you for all your support, and please don't hesitate to reach out to us if anyone has any questions. Thank you.