Keyera Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Keyera's 2023 Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Kelvin Mok, Manager of Investor Relations. You may begin.

Speaker 1

Thank you, and good morning. Joining me today will be Dean Setaguchi, President and CEO Eileen Maricar, Senior Vice President and CFO Jamie Urquhart, Senior Vice President and Chief Commercial Officer and Jared Bastoni, Senior Vice President, Operations and Engineering. We will begin with some prepared remarks from Dean and Eileen, after which we will open the call to questions. I would like to remind listeners that some of the comments and answers that we will give you 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.

Speaker 1

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 Plus and on our website. With that, I'll turn the call over to Dee.

Speaker 2

Thanks, Calvin, and good morning, everyone. Keyera delivered excellent Q3 results. Leveraging our integrated value chain, We continue to execute a strategy that is driving strong performance across our 3 business segments. By growing our fee for service business, We're improving the quality of our cash flows, which supports sustainable dividend growth. Keyera recently received Corporate credit upgrade to BBB stable from S and P.

Speaker 2

This upgrade reflects the company's improved competitive position, Quality of cash flows and strong business outlook. Our G and P segment delivered its 2nd highest quarter ever With $94,000,000 in realized margin and our Liquids Infrastructure segment delivered a 3rd consecutive record quarter With a contribution of $128,000,000 27% higher than the same period last year. Over the last several years, we have invested significantly to create a fully integrated service offering from the Montney and Duvernay place through our core liquids infrastructure in Edmonton and Fort Saskatchewan. Assets like Wapiti, Pipestone, the KFS complex and most recently CAPS have all contributed meaningful volume and cash flow growth. As a result, we remain on track to reach our targeted range of 6% to 7% Annual EBITDA growth from our fee for service business out to 2025.

Speaker 2

SAPS continues to deliver ahead of our expectations with higher than forecasted volumes in the 3rd quarter As customers delivered above their contracted commitments, CAPS has fully integrated our value chain, making us stronger and more competitive. Customers are seeing the value of this much needed alternative that can support our full suite of NGL services from wellhead The additional interest acquired at our KFS complex is also performing ahead of expectations With strong fractionation utilization and higher than forecasted demand for storage assets. Today, we announced that our Pipestone expansion project It's now expected to be completed ahead of schedule and at the low end of our budgeted CapEx range of CAD60 1,000,000 to CAD70 1,000,000 This project adds 40,000,000 per day of processing capacity, driving further fee for service growth starting in the Q4 of this year. Our customers are in a strong financial position and have multi year growth plans that rely on our integrated service offering. This further reinforces the strong outlook for growth.

Speaker 2

Our marketing segment continues to outperform. We now expect marketing to deliver between 420 $450,000,000 of realized margin this year, putting us on track for a record marketing year. This strong result comes from our ability to leverage our physical assets and logistics expertise to deliver products throughout North America. Our marketing segment provides Keyera with a distinct Competitive advantage as it continues to produce strong cash flows that have enabled us to consistently deliver Above average corporate returns. Marketing cash flows are then reinvested into long life infrastructure projects such as Katz and the Pipestone expansion, in turn driving growth in high quality fee for service cash flows.

Speaker 2

With a number of successful strategic investments made over the past few years, Keyera is now delivering sustainably higher levels Last quarter, we took an important step, returning to our long history of sustainable dividend growth, Supported by the strength of our fee for service business, our capital allocation priorities remain the same. True to Keyera's DNA, our first priority is to maintain a strong balance sheet. From there, It will be a balance between disciplined growth capital investments and increasing returns to shareholders. In terms of future growth investments, they'll be primarily focused on projects that leverage and enhance our existing core asset position in Western Canada. These could include a debottleneck of existing frac, a new frac expansion and a potential CAPS Zone 4 extension.

Speaker 2

Any incremental investments need to generate a strong return underpinned by long term contracts. I'll now turn over to Eileen to provide an update on Keyera's financial performance for the quarter.

Speaker 3

Thank you, Dean. Adjusted EBITDA for the quarter was $288,000,000 compared to $247,000,000 for the same period last year. Distributable cash flow was $186,000,000 or $0.81 per share compared to $162,000,000 or $0.73 per share for the same period in 2022. These results Driven by record performance from our Liquids Infrastructure segment and continued strong performance from our Gathering and Processing and Marketing segment. Net earnings were $78,000,000 compared to $123,000,000 for the same period last year.

Speaker 3

Net earnings were impacted by higher finance costs and lower operating margin from the marketing segment, which includes the effect of unrealized gains and losses from Risk Management Contracts. Keyera continues to maintain a strong financial position, ending the quarter with net debt to adjusted EBITDA at 2.5 At the low end of our targeted range of 2.5 to 3 times. This allows us to retain maximum optionality to advance Moving to our guidance for 2023. As Dean mentioned, we now expect Our marketing segment to contribute between $420,000,000 $450,000,000 of realized margin in 2023. This is up from our previous guidance of $380,000,000 to $410,000,000 These results are largely due to the continued strength of ISO Optane Keyera's 3rd quarter MD and A released this morning.

Speaker 3

Growth capital for 2023 is now expected to range between $200,000,000 to $220,000,000 previously $200,000,000 to $240,000,000 The decrease is due to factors including the Pipestone expansion project coming in at the low end of its budgeted cost estimate. Maintenance capital remains unchanged at $95,000,000 to $105,000,000 Keyera continues to expect cash tax expense to be nil for 2023. I'll now turn it back to Dean.

Speaker 2

Thanks, Aileen. Keyera remains well positioned for the long term with strategically integrated assets that stand to benefit from decades of expected volume growth in Western Canada. Our basin continues to set new production records and Canada remains a preferred supplier of energy to the world. With LNG Canada and the Trans Mountain Pipeline Expansion Project on the horizon, Keyera will continue to play an integral role On behalf of Keyera's Board of Directors and management team, I want to thank our employees, contractors, Customers, shareholders, indigenous rights holders and other stakeholders for their continued support. With that, I'll now turn it back to the operator for Q and A.

Operator

Thank Our first question comes from the line of Robert Hope at Scotiabank. Please go ahead. Your line is open.

Speaker 4

Good morning, everyone. I was hoping you could give a bit more of a fulsome update on the Zone 4 project given what appears to be

Speaker 2

Good morning, Rob. It's Dean and thanks for joining our call. Listen, I think that first of all, the The announcement with the recommendation for approval of the Northeast Connector is very, very exciting for our basin. And as he mentioned, We certainly agree with the view that our basin is going to continue to grow in terms of its natural gas volumes and natural gas liquids. So when we look out to 2027, 2028, we think that there's 3 to 4 Bcf of growth, which will drive also a lot of liquids production.

Speaker 2

First of all, I want to say that we're very happy that zones 1 to 3 extend through the richest Liquids rich part of the Montney Fairway. So we're going to capture a lot of that growth there. But we also fully understand that there will also be more growth In zone 4 and also into BC. So we'd love to have the opportunity to connect our pipeline to the BC border to capture some of that growth as well. And just like we see a lot of interest in caps, producers want optionality And they want to make sure that there's competition for the long term.

Speaker 2

They also want to have operational reliability so that when they make 1,000,000,000 of dollars investments, They know that they have basically two means of transportation. So that's the opportunity that we provide for industry and for our producers. So anyway, we're very excited about the interest that we're seeing in Zone 4. But I do want to emphasize that we will not continue to proceed ahead of this project unless we have the commercial support from our producers. But again, I do want to reemphasize that this is a really exciting opportunity and we do have a lot of interest in it.

Speaker 4

Thank you. And then maybe just going back to the guidance that was announced at the 2022 IR Day of 6% to 7% fee based Growth. How are you tracking on that? And kind of how have your views changed on that through the year, just given what appears to be And could this be kind of revisited with the December update? And what is the December update?

Speaker 2

Yes. Well, first of all, maybe I'll just speak a few comments. Thanks for the question. And we are tracking very well against the 6% 7% fee for service EBITDA growth. And I do want to emphasize that natural growth out to the end of 2025 It's based on investments that we've largely made already.

Speaker 2

So everything that we do from here forward is going to be incremental to that. So We're very excited about how our business is performing across all three business segments. We had some maintenance scheduled maintenance in this quarter, so that created a little bit of noise with our G and P segment. But we're very excited about the volume growth and cash flow growth that we see there. Liquid Infrastructure, as you saw, was a record this quarter.

Speaker 2

And as you saw, we just increased our marketing guidance for the year. So we're very well positioned to deliver on the 6% to 7 And with that, maybe I'll just turn over to you, Eileen, if you had any other questions or things you want to say.

Speaker 3

Rob, maybe the only thing I would add is, yes, I think Dean answered that And I think, again, we will provide a little more color with our December update.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Robert Kwan at RBC Capital Markets. Please go ahead. Your line is open.

Speaker 5

Thank you. Good morning. Just generally as you're thinking about Returns, and you talked about putting new capital to work, having long term contracts. Your previous target or what you Sorry, articulated was a 10% to 15% pre tax unlevered return. And I guess just with the increase in interest rates, Are those targets higher particularly just with that low end actually Kind of being less attractive to begin with.

Speaker 2

Yes. Thanks for the question, Robert. And I'll also turn this over to Charlie to comment on as well. But what I'd say is that we certainly recognize that Our cost of capital like it is for everyone else has increased. And so we'd be targeting more to the higher end of that.

Speaker 2

We haven't revised our guidance, but We've certainly looked at targeting at the higher end of that range. And I do want to emphasize that It's the range that we're targeting on a specific investment. But especially now that we have a fully integrated system with CAPS, We are also going to capture the integrated benefits of any assets and any investment that we added any part of our integrated value chain. If that's on the gas plants, well, we're certainly going to be having contract discussions on caps and our frac and our Downstream storage terminalling marketing business. So that's the advantage of having a fully integrated system.

Speaker 2

And so When you look at our enterprise level returns, the expectations will be that they'll be much higher than that 10% to 15% range. And we've demonstrated over time that we've delivered superior return on cap returns at a corporate level. And again, That's part of that fully integrated strategy. But Adi, do you have anything you want to add?

Speaker 3

No. Adi, I think you did a great job with that. The main thing I think when we look at our Investment criteria very much focused on returns as well as the quality of the cash flow for the level of take or pay. And I think the Pipestone expansion that is about to Haman is a great example of living by that and absolutely the returns are at the higher end of that just given where

Speaker 5

Got it. If I can just finish with a question on caps here. I guess the first part is just specifically around the quarter, you said volumes were higher than you expected, customers delivering above or contracted levels. Were those spot volumes or were customers just delivering within the contract, but above the 75% MVCs and then just generally, can you talk about the prospects for additional contracting for the base cap system or should we just think about filling up the excess capacity being more linked to something like Zone 4?

Speaker 2

So that's a great question.

Speaker 4

I have to

Speaker 2

tell you, I've never been more optimistic on And first of all, I want to say that our operational performance has been very good and keeping in mind, I mean, we just brought this On stream in June of this year. So the operating performance has been very well. And when we modeled Our forecast, we're really going a lot off the take or pay part of our contract. So, yes, we've been seeing our producers deliver in excess of that. It's still early days, but we're encouraged with what we see.

Speaker 2

When we step back and we look from a macro perspective, as I mentioned before, We really believe in basin growth. I mean, our basin has always been blessed with significant reserves. I think one of the stats I saw, I read was that if you took the cumulative reserves produced out of the Montney today, it would only represent 8% of the total recoverable reserves In that fairway. So we're still in the very early innings of development. And now that we have Egress to the West Coast and Canada LNG starting up.

Speaker 2

This is going to unlock more of the growth in the productive capacity of our basin. So So we're going to help enable that growth. And so with that, it's helping us with our contracting on caps. I'd also say though that some of our caps contracts are larger contracts that we're working on are more complex because we're integrating multiple services. So that's what also makes it a bit more complex and some of the things that we're doing.

Speaker 2

But again, very optimistic in terms of the direction where contracting is going.

Speaker 6

Jamie, do you want to add anything to that? Yes. Robert, I think towards your first question is that the delivery of volumes above contract as noted, Yes, really is a reflection of our existing customers delivering more volumes than we anticipated. I think that's due to a couple of factors. Consolidation is one of them.

Speaker 6

The customers behind CAPS are all of the big players in the basin. And as we see consolidation in the And I think we benefited from that. And it's also just a reflection of growth, as Dean pointed out, of our core customers as well. At the end of the day, we're the competitive alternative and I think our customers are speaking with their volumes.

Speaker 5

Got it. Sorry, Dean, can you just clarify just around the complexity around potential future CAHPS contracts? Is it just complexity because it involves multiple services? Or is it complex because some of these services you don't either currently have the capacity or the assets to provide?

Speaker 2

No, no, it's anytime you're bundling services, it's just more contracts involved and everything else. So I just say that Some of our discussions involve multiple services. So it just makes it more than just one contract is I guess what I'm trying to say.

Speaker 5

Okay. Got it. Thank you.

Operator

Thank you. Our next Question comes from the line of Will Gu at CIBC. Please go ahead. Your line is open.

Speaker 7

Hi, good morning. Just wanted to ask about your opinion on the recent Supreme Court's

Speaker 2

Well, good morning, Will. That's a great question and something that has It's been very topical since that was announced. And I'm not a Paul, legal policy expert, but I think it's positive overall. I think it emphasizes the authority that the provinces have relative to the federal government. I don't think that it necessarily affects us directly on some of the projects that we would be looking at.

Speaker 2

But I think generally for the basin, I think some of the uncertainty That is required that is involved with big investments like and certainly the oil sands would be an example where the federal government always had this overlying authority to approve or not approve, which Took years to come to that decision. I think that that might help resolve situations like that where you have more regulatory certainty Because there's going to be more within the province, if this works out the way I understand it. And that should be more positive for investment in Alberta overall, which If that occurs, it's positive for our industry and for our business directly.

Speaker 7

Great. And another, if I could, just Consolidation mean for the development outlook and for some of your other facilities specifically? I know you mentioned previously How the consolidation has impacted CAPP's volumes, but just wondering on the other facilities as well?

Speaker 2

Consolidation of like within the producers, you mean? Yes. Yes. Okay. Yes.

Speaker 2

No, I mean, that's a good question. And we're it's The theme that we're seeing on both sides of the border, obviously, with some mega transactions with With ExxonMobil and also Chevron's announcement, but we're seeing that as well in our basin. I think overall it's positive. It usually means that a more well heeled company is acquiring production to create greater efficiencies. And a lot of times that can translate to more activity.

Speaker 2

One of the examples could be Buena Vista in our sales portfolio. And I think people would understand their history and how they were taken private and they had a lot of debt. Well, That business, as I understand, is looking a lot better now in terms of where they're able to pay off debt and get in a good position and sell. So But over that last several years, while they're paying down their debt, their activity was relatively low. I would just say in the last year, we started to see them become more active.

Speaker 2

And I think those activity levels will likely be more consistent with a player like Tourmaline behind there. So We think overall consolidation is good. It makes the basin more efficient overall.

Operator

Thank you. Our next question comes from the line of Linda Ezergailis of TD Cowen. Please go ahead. Your line is open.

Speaker 8

Great. Thank you. Maybe you can just give us an update on how we might think of the net effects of some tailwinds and headwinds associated with your marketing business, specifically ISO, octane margins, obviously some of the structural Changes and positive fundamentals in the basin are a tailwind, but There's a lot of moving parts, so maybe you can give us a sense of how some of the global dynamics are looking and how we might think of Maybe a discrete shift upwards in earnings power of your marketing business now that your fundamental physical business has grown as well.

Speaker 2

Yes. Listen, I think it's a great question. And I want to emphasize, I mean, I know sometimes the market Doesn't like our marketing business, but I can tell you that it's what helps us generate superior returns at a corporate level. As we discussed earlier, from the infrastructure level, we're aiming to achieve very strong returns on any infrastructure asset That we make an investment in. But when we flow that through our integrated system, including through our marketing business, that's what helps us Generate those superior returns at a corporate level.

Speaker 2

And really I do want to emphasize as well that it's a physical business. We're leveraging our assets And our logistics and marketing expertise to generate a margin at the end. So we're not making speculative Financial trades on screens to generate our margins from that part of our business. But with that, maybe I'll just turn it over to Jamie to provide more color.

Speaker 6

Yes. So thanks for that backdrop, Dean. I think that was excellent. And thanks for the question, Linda. Yes, 2023 has been an exceptionally strong year.

Speaker 6

We've revised our guidance and now expecting to deliver between $420,000,000 to $450,000,000 for the year and that would be a record year for marketing. Really the factors that's driving that performance in 2023 would be lower butane supply costs than we've seen over the last Couple of years. Strong run time at AEF and our ability to get a little bit more output out of AEF over the last couple of years. So always as Dean says, always thinking about the importance of those physical assets that drive the contributions from marketing, Continued strength in isooctane premiums and also our ability to deliver to the highest value markets and Eileen touched on that earlier in her comments. We've actually gained some new iso octane customers in advantaged markets in 2023 and expect that momentum to continue into 'twenty four and beyond.

Speaker 6

So regarding 'twenty four, we will wait until after our NGL contracting season to probably well to provide Our guidance as we traditionally do, so expect that we'll provide that guidance in Q1, 'twenty four. So overall, on track for record 'twenty three and we continue to see continued strong performance in 'twenty four and beyond.

Speaker 8

That's helpful. Thank you. And just then as a follow-up, if we're getting marketing guidance in Q1 as per You have in recent years. Can you give us a sense of, first of all, what day you're looking at for disclosing the December guidance? And is there anything and the outlook beyond your capital budget for 2024.

Speaker 3

Hi, Linda. Yes, we do plan to do The guidance update in the 2nd week of December and we will provide an update on the base marketing guidance, kind of that longer And as then Jamie said, we will then update again in Q1 with once the supply season is known at that point.

Speaker 8

Okay. And anything beyond marketing in terms of the guidance in December? Just trying to Understand kind of if your guidance philosophies are shifting.

Speaker 3

Yes, largely again CapEx, and I think we'll provide a little more color and context around that 6% to 7% EBITDA growth and how The quality of our cash flow has changed. I think overall, it will just be a more fulsome update than we've done in the past.

Speaker 8

Great. Thank you.

Operator

Thank you. Our next question from the line of Ben Tham of BMO.

Speaker 2

Please go ahead. Your line is open. Hi,

Speaker 9

thanks. On a last question around The business update, do you expect that to be more of a regular annual process on timing or is it

Speaker 3

Thanks, Ben. No, I think this is our plan that We will go forward be providing an update in December each year.

Speaker 9

Next question, maybe high level thoughts on appetite for acquisitions, whether it's Opportunistic to a more maybe strategic in the U. S, for example. And I'd say that in the context that You're blessed with a strong balance sheet relative to peers and rising cash flows and ample powder

Speaker 2

Thanks for the question, Ben. And it is a good question, just given what you're seeing in the industry today. You're very right that we have a very strong balance sheet and that provides us optionality. And for us as a company, we're trying to provide the most efficient midstream infrastructure services for our customers and for our basin as a whole and trying to make it more efficient. To the extent that there's opportunities to acquire assets that did not exist already And where we when combined with our assets, we can make our system more efficient.

Speaker 2

We'll certainly look at those opportunities. I do want to stress that we've been very consistent with anything that we pursue. And a great example would be the acquisition of I'm not sure if we're going to hear that static, but the true criteria is that We have to make sure that we stay within our financial debt parameters. And if we go beyond it, we have to have a plan to bring ourselves back The second one is that it needs to be on strategy so that We won't do anything that would be a surprise to the markets. And really it's about strengthening and

Speaker 1

Hi, Mark. Are you there?

Speaker 5

It looks like we lost a couple online there for the questions. So we'll regroup. We'll call the 2 that we saw didn't get a chance to Ask a question after the call today. And with that, we'll just wrap it up.

Speaker 1

Thank you all once again for joining us today. Please feel free to reach out

Operator

Ladies and gentlemen, this concludes your conference call for today.

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Key Takeaways

  • Keyera reported adjusted EBITDA of $288 million (up from $247 million) and distributable cash flow of $186 million ($0.81/share), demonstrating strong quarter-over-quarter growth.
  • The company received a credit upgrade to BBB stable from S&P, citing an improved competitive position, higher cash-flow quality and a strong business outlook.
  • The Pipestone expansion is now expected to complete ahead of schedule and at the low end of its CAD 600–700 million budget, adding 40 MMcf/d of processing capacity starting in Q4.
  • Marketing segment guidance was raised to CAD 420–450 million of realized margin for 2023 (from CAD 380–410 million), driven by strong ISO-octane premiums, asset run-time and new customer wins.
  • Net earnings fell to CAD 78 million from CAD 123 million year-over-year, impacted by higher finance costs and unrealized losses on marketing risk-management contracts.
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Earnings Conference Call
Keyera Q3 2023
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