Tidewater Midstream and Infrastructure Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 7 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the Tidewater Midstream Third Quarter Financial Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference over to Scott Bowman, Director of Capital Markets.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to Tidewater Midstream's Q3 2023 results conference call. I'm Scott Bowman, Tidewater's Director of Capital Markets. And joining me today are Rob Koclu, Tidewater's recently appointed CEO, Brian Newmarsh, Tidewater's Chief Financial Officer and other members of Tidewater's management team. Before I pass the call up to Rob to review some highlights,

Speaker 2

I want to remind everyone that some

Speaker 1

of the comments made today may be forward looking in nature and are based on Tidewater's Current expectations, estimates, judgments and projections. Forward looking statements we express or implied today are subject to risks and uncertainties, which can cause actual results to differ from expectations. Further, Some of the information provided refers to non GAAP measures. To know more about these forward looking statements and non GAAP measures, Please see the Tidewater Midstream Financial Reports, which are available at tidewatermidstream.com and on SEDAR Plus.

Speaker 2

And with that, I'll pass it off to Rob

Speaker 1

to discuss some highlights from the quarter.

Speaker 2

Thanks, Scott. Good morning and thank you for joining our Q3 conference call. I first joined Tidewater's Board Member back in May of 2017 and subsequently took on the role of Interim CEO about a year ago. Now taking on the role of permanent CEO and reflecting the past year, I can say for 1, I'm glad it's over. It's been a lot of work.

Speaker 2

But more importantly, I think we've largely done what we said we would do and have put Tidewater in a very strong footing as we look towards the future. I've had the opportunity to work closely with the team members across the organization and to take a deep dive into our assets, our operations and our commercial strategy. During this time, we've been impressed with our team's creativity, hard work and commitment to our business along with the company's safety first culture. Further, I believe that we've got the right leadership team in place to get our core assets performing as they should be and to surface new accretive opportunities. I talk for our priority over the last year has been clear.

Speaker 2

It's been creating and increasing shareholder value. I've been pretty candid in the last few calls, I think, on our asset review process, and we announced the outcome earlier in the quarter that results The sale of our Pipestone natural gas processing facility and Dimmsdale natural gas storage facility assets to AltaGas. There's no doubt these are 1st class assets and businesses located in the heart of the Montney. And we think that the transaction was truly a win win transaction for both parties. From our perspective, we're happy with the value that we received for the assets.

Speaker 2

Transaction proceeds will lead to a significant deleveraging for our business that will help to provide us with flexibility and the means to build out our business around our core assets. We continue to work towards closing the transaction and having received the key regulatory approvals in recent weeks, We expect the transaction to close within the Q4. As you're aware, this morning, we also announced the start of our commercial operations at our renewable diesel only mode. This has been a major focus for both Tidewater Midstream and Tidewater Renewables over the past year. We're very excited to be waving the Canadian flag as the 1st renewable diesel facility and anticipate that this project will line with our consolidated cash flow profile.

Speaker 2

We've also made considerable progress in the cost reduction and business controls front that will become more evident with future quarters. Over the course of the last year, we encountered and overcame 2 major challenges, The Alberta wildfires during the Q2 and Tidewater's first turnaround at PTR since acquiring the asset in 2019. Our current throughput volumes at both the Brazzel River plant and our Prince George refinery speak to the strength of our team and the resiliency of these assets. The team at Branso River Products restored the assets to pre wildfire levels during the quarter, safely bringing the facility throughput back up to the levels seen in the Q1 of 2023. The BRC is uniquely positioned in the Deep Basin, Having multiple egress solutions, natural gas storage infrastructure, a fractionation facility and liquids handling infrastructure to help enhance our customers' netback and price realizations.

Speaker 2

We've also seen an increase in upstream A and D activity in the area, and that should lead to additional capital only mode. Our downstream business saw record throughput at the Prince George refinery during the quarter following the Q2 turnaround. PGR continues to generate significant cash flow for our business and consistently demonstrates industry leading operational metrics, while operating in one of North America's best crack spread markets. Tidewater Renewables co processing assets Co located at the Prince George refinery were also approved for credit generation under the Canadian Clean Fuels Regulations during the quarter. Continuing with Tidewater Renewables, as I mentioned, the HDRD complex produced its first renewable diesel on October 22 and as of November 7 has progressed commercial operations.

Speaker 2

The facility is currently producing around 1500 barrels day of on spec cold weather diesel, and the corporation is actively working on safely increasing production rates towards the facility's 3,000 barrel a day design capacity. Despite the delays in commissioning the HDRD complex, project economics remain attractive with payback expected within 2 to 3 years. As production volumes ramp up during the Q4 of 2023, we expect that the HGRD project to generate run rate Annualized corporate adjusted EBITDA in the range of $90,000,000 to $150,000,000 once fully operational. This is a huge milestone for Tidewater and indeed for Canada. So we've made significant changes and accomplishment and accomplished a number of important goals over I'll now turn the call over to Tidewater Midstream's Chief Financial Officer, Brian Newmarsh to walk through our financial results.

Speaker 2

Thanks, Rob.

Speaker 3

During the Q3 of 2023, record throughput from our downstream business drove a 10% increase in consolidated adjusted EBITDA of about $49,000,000 This includes $15,000,000 of contribution from Tidewater Renewables that we report on a consolidated basis due to our 69% ownership stake. The Prince George refinery achieved record throughput during the quarter, averaging more than 12,700 barrels per day, helping to drive the strong Q3 results. Prince George 211 cracks increased slightly during the quarter, averaging approximately $87 per barrel, which was primarily driven by higher diesel pricing. Moving to our midstream business, our Pipestone natural gas processing plant and Dimmesdale storage facility continue to deliver strong financial returns. Volatile AECO natural gas prices early in the year allowed us to contract most of our parking loan volumes at profitable levels that contributed to the quarter.

Speaker 3

Additionally, we saw the Brazil River Gas Plant throughput return to 155,000,000 cubic feet per day, rates and are more consistent with what we saw during the Q1. The timing of working capital commitments surrounding the Q2 refinery Turnaround and finishing construction at the HDRD complex led to an increase in our overall consolidated debt during the quarter. This is the reality with these large projects as we see maximum capital deployment in the final stages of commissioning and then as we start producing marketable product generating meaningful capital. These projects rapidly delever. We are fortunate to have supportive capital providers who have been very helpful with our efforts to bring the HGRD facility online.

Speaker 3

Our 3rd quarter capital investments were focused on routine maintenance and optimization these and only mode activities that support higher corporate throughput during the second half of the year. We continue to forecast our deconsolidated maintenance capital budget Being within the previously guidance range of $55,000,000 to $65,000,000 The timing of the HDRD complex ramp up And the close of the AltaGas transaction will impact Q4 EBITDA that led to our revised $180,000,000 to $200,000,000 full year consolidated EBITDA guide. These are 2 significant milestones that will materially help delever our business. As we look ahead into 2024, we see enhanced financial flexibility and we're committed to properly capitalizing growth opportunities that will support TopBuild's future growth. I'll now pass things back

Speaker 2

to Rob for closing remarks. Thanks, Brian. We're excited for the events of our 4th order to unfold as we ramp up operations of the HDRE complex and move to close on the AltaGas transaction. Both of these events are transformative for Tidewater and are pivotal to the evolution of Tidewater. We will continue to evaluate the opportunity set that we have in front of us and take decisive action to create shareholder value.

Speaker 2

I'll now ask the operator to open the call up for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Robert Hope from Scotiabank. Please go ahead.

Speaker 4

Hello, everyone, and congratulations, Rob, on the appointment. I want to go back to Some of the comments you actually just made on taking decisive actions to maximize shareholder value. The asset review process with the AltaGas transactions behind you, What are you looking to or looking at for kind of further changes in the organization? And I guess more broadly, how are you thinking about the LCFS stake just given The stock is down quite a bit this year and relatively liquid.

Speaker 2

Yes. No, I agree. I think part of it is, we just got this up and running days ago. So we do want to take a patient look at how LCFS trades, we're not going to make any obviously, we're not making any announcements about anything, but

Speaker 3

I think that's I think it's

Speaker 2

fair to actually Let's let the thing settle in. We'll certainly, I expect people to be interested. We've had a bunch Questions already of just how quickly things can ramp up to capacity or design capacity and how quickly that translates into cash flow, which I think is pretty quick. So I think I would like to see how that materializes before we make any decisions. But As we've said before, that the process that we've gone through and the analysis that we've done and the Parties that we've spoken to, it's not complete.

Speaker 2

We got a good transaction over the line, but we continue to evaluate everything that we've got, whether it's the LCFS position or any of our other assets. So it's an ongoing process of sort of unlocking that value We're trying

Operator

to.

Speaker 4

Thanks for that. And then maybe just moving over to the AltaGas transaction, regulatory approval has Been received, but can you talk or can you walk us through where we are in terms of the other kind of gating factors to get the transaction done?

Speaker 2

Yes, I mean, they're sort of blocking things, a few commercial pieces that are I think we've got good visibility on. So when we say end of the quarter, I think we're hoping that that's conservative. But yes, they're in hand and moving forward.

Speaker 4

Maybe just to reframe, like is it the EPC contracts or the commercial agreements that are kind of where most of the work is being spent on right now?

Speaker 2

Well, yes, they're both, but they're well in hand, I think is the important piece.

Speaker 4

All right. Thank you.

Operator

Thank you. Your next question comes from Robert Kwan from RBC Capital Markets. Please go ahead.

Speaker 5

Great. Good morning. Just to kind of come back to the different options. You've been clear. You want to see how the HDRD facility And it ramps up.

Speaker 5

Are there other kind of options or things that are on the table that you're considering that Maybe more timely that you may either want or need to pursue in the near term or should we really be thinking about it as Obviously, closed the AltaGas, the Pipestone Dimsdale sale, let the RD facility ramp up, which As you talked about, it's kind of over the coming weeks, and then kind of reevaluate the situation at that point. Is that is it kind of more a 2024 thing for any other alternatives?

Speaker 2

Well, given we're almost in the middle of November, yes, Don't expect a giant announcement for us in the next couple of weeks.

Speaker 5

Okay. And then as you think about Can you talk about what some of the other things are on the table or without that's probably fairly exhaustive. Is there anything that you would be ruling out Whether that's material share buybacks or are there certain assets that are Largely untouchable in your mind from a sale perspective?

Speaker 2

No, there's not well, I'd say just in general, nothing is off table. I mean there's we will maximize value any way we can. Obviously, stock hasn't moved. We've Done transaction at multiples of our trading multiple. We're coming out of this with near nothing in debt.

Speaker 2

And we've got HDRD online. So I think I'd like to let this saddle and see The market doesn't have the best or I shouldn't say the market, the LCFS doesn't have best liquidity. So there's definitely an impact on its valuation because of that. But we'd like to see where things trade, but there's nothing that's off the table. And like I said before, There are all sorts of different options for us to force shareholder value to improve and we will pursue them.

Speaker 5

Okay, understood. And just one last question then. As you think about potential Your potential to deploy capital into growth projects, you previously talked about anything that you're going to do in midstream. It sounds like it's At the midstream level, is that still the case?

Speaker 3

Yes, that's still the case.

Operator

That's great. Thank you. Thank you. Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.

Speaker 6

Thank you. Good morning, guys. Maybe for Brian, I know that at the time the Pipestone deal was announced, you were going to take A bit of time to consider rightsizing your senior credit facility. Just wondering if you could share any updates Where you'd like to see that capacity come down to from the current 600?

Speaker 3

Yes, it will be lower. I think as Rob I mentioned at the outset here, if you take a look at the gross proceeds from the transaction and that will pay back all the debt we have outstanding that will put us in A pretty strong spot financially. You pay as you know, you pay standby load fees on credit capacity only mode. That you're not using. That is a drag on the business, although it is not a massive drag.

Speaker 3

So it will be lower. I think our intent here is just to make sure that we have the adequate To maintain the working capital in the business, as you know, running a refinery is pretty intensive from a capital an working capital perspective, given the amount of feedstock We buy having inventory and then process before we kind of receive the proceeds from the refined product sales. And then as we look to kind of No, at small kind of organic growth opportunities in around our asset base. We just want to make sure that we have the financing to support that. So just maybe more succinctly answer your question, lower, significantly smaller than it has been right now.

Speaker 3

And you've got our commitment that we will be running this business with lower levels of debt. And I think that's becoming more and more obvious given what we've seen In the industry market and the cost of capital and the cost of debt specifically.

Speaker 6

And maybe just on the proceeds to be received, I mean, I guess half of it's in the form of LTGAS shares. So Just given the shares are trading above where they were when you did the deal, is there any way to lock in your price to be received here Or everything officially closes or how you're thinking about maximizing your overall proceeds while minimizing market risk?

Speaker 2

Frankly, we're pretty happy with the LCAS position and we think it's going to go higher.

Speaker 6

Okay, great. Last one for me. I guess just from a pro form a business mix standpoint, Any updates on where you'd like to land from a percent midstream versus percent refining, As well as maybe just your overall appetite for commodity based cash flows As a percentage of run rate EBITDA, is it less than 50%, less than a third? Just any thoughts around Target cash flow quality profile would be great. Thanks.

Speaker 2

I mean that we can't dial it per se. We've got opportunities in front of us on both businesses. I think it's important to remember that this business has been capital starved for a couple of years. Debt levels were too high and some fairly obvious investments have not been made. And so we look at it less in terms of what the ultimate mix ends up being and more with the exact opportunity set that's in front of us right now.

Speaker 2

So We have got a few things on the downstream side, but they're really not large, it's kind of tankage types of stuff that will help us on trading and things like that. But It's not that we're directing capital because we prefer to see more of it at midstream versus more of it at downstream. It's just the opportunities that we've got in front of us and the one in downstream is fairly fixed. There's not a lot of Growth that we can build in there without having major expansions and things like that. So I don't think anybody goes out and well, I guess, I shouldn't say that.

Speaker 2

But we're comfortable with our Commodity exposure and I would characterize it a little bit more as spread exposure rather than pure commodity exposure. When you look at our Both businesses, both downstream with your crack spreads and then we've got a number of opportunities that It would be frac type spread opportunities on the midstream side and we like those. They create they've got a ton of optionality. They tend to be unidirectional and that we make money when those spreads widen and we like And we'd like to lock those in. When it goes the other way, it doesn't really cost us money.

Speaker 2

So it's truly kind of call options on spreads. So we're very comfortable with that business and the opportunities that we've got in front of us right now Frankly, the ones that we're going to do in the near term are a mix of there's some added processing capacities, some adding Customers under long term 10 year take or pays, that just happens to be in front of us. We'll do that business all day long. And then the other ones are also more a little more midstream focused right now. But again, it's cash flow generation is our primary focus.

Speaker 3

Got it.

Speaker 6

Thank you for your comments, Rob. Thanks, Brian.

Operator

Thank you. There are no further questions at this time. I'll turn the call over to Mr. Bowman for closing remarks. Please proceed.

Speaker 1

Thank you, everyone, for joining the call today. The team is available to address any outstanding items with their contact information at the bottom of this morning's press release. Thank you all and have a great day.

Operator

This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.

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Earnings Conference Call
Tidewater Midstream and Infrastructure Q3 2023
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