Pembina Pipeline Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 13 speakers on the call.

Operator

Thank you. Good morning, and welcome to the Pembina Pipeline Corporation Q2 2024 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 Friday, August 9, 2024.

Operator

I would now like to turn the conference over to Dan Tucano, VP of Capital Markets. Please go ahead.

Speaker 1

Thank you, Joanna. Good morning, everyone. Welcome to Pembina's conference call and webcast to review highlights from the Q2 of 2024. On the call today, we have Scott Burrows, President and Chief Executive Officer Cameron Goldate, Senior Vice President and Chief Financial Officer along with other members of Pembina's leadership team, including Jared Sprout, Janet Luduca, Stu Taylor and Chris Sherman. I would like to remind you that some of the comments made today may be forward looking in nature and are based on Pembina's current expectations, estimates, judgments and projections.

Speaker 1

Forward looking statements we may express or imply today are subject to risks and uncertainties, which could cause actual results to differ materially from expectations. Further, some of the information provided refers to non GAAP measures. To learn more about these forward looking statements and non GAAP measures, please see the company's MD and A dated August 8, 2024, for the period ended June 30, 2024, as well as the press release Pembina issued yesterday. All of these documents are available online at pembina.com and on both SEDAR and EDGAR. I will now turn things over to Scott to make some opening remarks.

Speaker 2

Thanks, Dan. Another strong quarter was highlighted by record adjusted EBITDA of CAD1.091 billion, record adjusted cash flow from operating activities of CAD837 1,000,000 and adjusted cash flow per share of $1.44 Record results were driven in part by the closing of the Alliance Ox Sable acquisition effective April 1st as Pembina benefited from increased ownership in those assets. Both Oxable and Alliance have been performing well and we are excited to welcome new employees to the Pembina team. With the release of our Q2 results yesterday, we were also pleased to announce that we have acquired the remaining 14.6% interest in Aux Sable U. S.

Speaker 2

Operations from Williams effective August 1. Since the Williams, Aux Sable acquisition and the Aux Sable assets have been outperforming Pembina's expectations and we are pleased to now have fully consolidated ownership of all Oksabil assets, thereby further simplifying corporate reporting and enhancing the ability to pursue long term opportunities. Pembina's business continues to deliver exceptional results. Volume growth across the Canadian Energy Industry is leading to higher volumes in our pipelines, gas plants and fractionators. And while we would prefer to see higher natural gas prices for our producing customers, the current weakness along with robust NGL pricing and strong oil prices is leading to continued strength in Pembina's marketing business.

Speaker 2

Given the strong year to date results, the incremental benefit of the latest Oxstable acquisition and our outlook for the remainder of the year, Pembina has raised its 2024 adjusted EBITDA guidance range to $4,200,000,000 to 4,350,000,000 dollars which at the midpoint represents $100,000,000 increase over the previous range. Finally, the Q2 was further highlighted by 3 other exciting developments. The first was a positive final investment decision on the Cedar LNG project. We are excited to be moving forward with a project that will deliver industry leading, low carbon cost competitive Canadian LNG to overseas markets and contribute to global energy security, while delivering jobs and economic prosperity to the local region. The Cedar LNG project aligns squarely with Pembina's strategy, offers attractive economics and is supported by a contracting strategy that prudently mitigates cost risk.

Speaker 2

The second was PGI's transaction with Whitecap Resources, which included the acquisition of a 50% interest in Whitecap's KaBOB complex and an obligation to fund further Latour area infrastructure development. We also signed long term take or pay agreements on Pembina's pipelines and fractionators. The deal is another example of PGI and Pembina's ability to provide unique and value added solutions to support the growth demands of our customers. And a third was bringing the Phase 8 Peace Pipeline expansion into service, marking the culmination of more than 10 years and more than $4,000,000,000 expansion program that was driven by growing customer demand for transportation services to support development in the WCSB including the Montney, Duvernay and other resource plays. The Peace Pipeline system plays an important role within Pembina's integrated value chain and I would like to thank our many customers, employees and communities that have supported Pembina to deliver this major infrastructure build out.

Speaker 2

As a result of the expansions and ongoing optimization efforts, Pembina is confident that its extensive pipeline network is best positioned to capture future volume growth and allow the company to continue to offer customers unparalleled advantages through safe, reliable, flexible and cost competitive services together with differentiated market access. I will now turn the call over to Cam to discuss highlights from our Q2.

Speaker 3

Thanks, Scott. As Scott noted, Pembina reported a record second quarter adjusted EBITDA of $1,090,000,000 This represents a 33% increase over the same period in the prior year and remaining a 21% increase adjusting for the Alliance Ox Sable ownership. In pipelines, factors impacting the 2nd quarter primarily included higher adjusted EBITDA from Alliance due to stronger asset performance combined with increased ownership following the Alliance Ox Sable acquisition, The Northern Pipeline system outage and wildfires in the Q2 of 2023, which had an impact of CAD 29,000,000 with no similar impact in the Q2 of 2024. Contractual inflation adjustments on tolls and the earlier recognition of take or pay deferred revenue on the Peace Pipeline system and the reactivation of the Nipissippi pipeline in the Q3 of 2023. In facilities, factors impacting the 2nd quarter included the inclusion within facilities of adjusted EBITDA from Aux Sable following the Alliance Aux Sable acquisition, the Northern Pipeline system outage and wildfires in the Q2 of 2023, which had an impact of $18,000,000 with no similar impacts in the Q2 of 2024 and higher interruptible volumes on certain PGI assets.

Speaker 3

In Marketing and New Ventures, 2nd quarter results reflect the net impact of increased ownership interest in Aux Sable following the Alliance Aux Sable acquisition as well as higher NGL margins at Aux Sable. Higher margins from the Western Canadian NGL marketing business due to higher marketed volumes, lower natural gas prices and higher propane, butane and condensate prices, realized losses on NGL based derivatives compared to gains in the Q2 of 2023, partially offset by higher realized gains on crude oil based commodity related derivatives as well as higher general and administrative expense. Finally, the corporate segment was largely unchanged. Earnings in the Q2 were $479,000,000 This represents a 32% increase over the same period in the prior year. In addition to the factors impacting adjusted EBITDA, earnings in the 2nd quarter were impacted by unrealized losses recognized by PGI on interest rate derivative financial instruments compared to gains in the Q2 of 2023, gains associated with the de recognition of provisions related to the financial assurances provided by Pembina which were transferred to Cedar LNG following the positive FID in June, larger unrealized losses on renewable power purchase agreements and unrealized loss on NGL based derivatives compared to an unrealized gain in the Q2 of 2023, higher depreciation and amortization, net finance costs and acquisition and integration fees.

Speaker 3

Pipeline volumes of 2,700,000 barrels per day in the 2nd quarter represented 11% increase compared to the same period in the prior year. The increase was primarily due to the increase in ownership interests in Alliance, higher volumes on the Peace Pipeline system resulting from earlier recognition of take or pay deferred revenue and the impact of the Northern Pipeline system outage and the wildfires in the Q2 of 2023 combined with the reactivation of the Nipissippi pipeline. Facilities volumes of approximately 900,000 barrels per day in the Q2 represent a 14% increase compared to the same period in the prior year. The increase was primarily due to Aux Sable volume recognition following the Alliance Aux Sable acquisition, higher volumes at Younger as the Q2 of 2023 was impacted by the Northern Pipeline system outage and the wildfires combined with higher interruptible volumes on certain PGI assets. Turning to our outlook for 2024.

Speaker 3

In addition to raising our 2024 adjusted EBITDA guidance, as Scott mentioned previously, Pembina has also revised its 2024 capital investment program to $1,300,000,000 The revised outlook reflects an approximate $140,000,000 net increase when compared to our original 2024 budget of $1,160,000,000 inclusive of then unsanctioned additional growth capital. Drivers of the increase primarily include the sanctioning of PGI's Wapiti expansion and K3 cogeneration facility, other increases in revenue generating capital within pipelines and additional non recoverable sustaining capital. The revised capital investment program reflects approximately $300,000,000 for contributions to equity accounted investees, including $240,000,000 of equity contributions to Cedar LNG incurred in the first half of twenty twenty four with no further contributions to SEDAR expected in 2024. Pembina continues to expect the capital program to be funded with cash flow from operating activities net of dividends maintaining its strong balance sheet. At June 30, based on the trailing 12 months, the ratio of proportionally consolidated senior debt to adjusted EBITDA was 3.6 times, which is at the low end of our target range.

Speaker 3

It's important to note however that given the April 1 closing date of the Alliance Ox Sable acquisition, the ratio includes all the debt associated with the transaction, but it's currently only capturing 1 quarter of EBITDA contribution. On a normalized basis, this ratio would be approximately 3.3 times. I'll now turn things back to Scott.

Speaker 2

Thanks, Cam. In closing, I'd like to reiterate for all of us at Pembina, it has been a strong first half of twenty twenty four and we are looking forward to continued strength throughout the remainder of the year. Amidst the backdrop of industry momentum and an expectation of robust volume growth, we continue to see increased utilization across our systems, pursue many opportunities to accretively invest capital and execute our strategy within our financial guardrails. Thank you for joining us this morning and for your continued support. Operator, please open the line up for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Jeremy Tonet at JPMorgan Chase. Please go ahead.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Jeremy.

Speaker 4

Just want to dial in on the acquisitions a little bit more. Our saleable alliance here, it seems like they're outperforming our expectations. And just wondering if you could talk a bit more, I guess, about the outperformance in really curious about looking forward, I guess. It seems like full ownership would bring new opportunities to Pembina and how that kind of impacts, I guess, the marketing opportunities as well? Just any more color on how we should think about what's possible there going forward?

Speaker 2

Jeremy, a lot of the strength really was driven at the Aux Sable level. Obviously, the low gas price and high NGL prices had a strong impact on that business. As we pointed out in our comments, we'd obviously like a little higher gas price for all of our producing community and hopefully add to increased drilling. But in the short term here, that low gas price has really led to strong frac spreads across the business, especially at Aux Sable. When you go back to our acquisition presentation and thesis, we talked about some of the longer term synergies more towards the end of the decade.

Speaker 2

And we think having full control of of Aux Sable will allow us to continue to capture those and give us a leg up in in terms of capturing those. It's a little too early to to start talking about what exactly those are, in terms of where we're headed, but we're actively working and planning on those today.

Speaker 4

Got it. Fair enough. Thank you for that. And in the release, I think there's language that highlights the expectations for 6% and 4% conventional and gas processing volume growth respectively in 2024. And just wondering is this a similar trajectory you kind of see in the near term post 2024 in general at a high level?

Speaker 4

And I guess my question is, if you're expecting kind of the mid single digit growth, is this filling latent capacity in the system? Or is this more capital intensity effectively? How much capital investment will be required to attain that kind of mid single digit growth mid cycle as could be possible?

Speaker 5

Hey, Jeremy, it's Jared here. So first, I'll talk a little bit about what we're seeing kind of in 2024 with respect to our conventional volume growth and then I'll touch on PGI just for a second. So you saw in our I think in our press release we dropped from roughly 9% to 6%. That really equates to approximately it's not that much material amount of volume, it's roughly 30,000 barrels. And what we did see in the first half of the year, which you'll probably recall from the previous quarters was we saw a significant reduction in volumes in January here in Western Canada with some extreme weather.

Speaker 5

That obviously set a lot of our customers back, and they really didn't make that up. We saw a larger turnaround season kind of in that May, June than we expected from some of our 3rd parties. All of the PGI turnarounds went as expected and the Phase 8 went that commissioning went extremely well. And then we had a short unplanned outage at our frac complex, specifically, RFS 1 that restricted some C2 plus volume. So that's a big portion of the overall reduction.

Speaker 5

And then in the latter half of the year, across a couple of 100 receipt points in the conventional system, it's really just timing of development that we're seeing from our customers. It's not that they're not drilling in these liquid rich areas. It's just that forecasting of when the volumes are coming on. That kind of leads into there's been some public disclosure recently around some drier gas either being shut in or not completed. We're not really seeing the effects of that.

Speaker 5

As you know, like the majority of our PGI assets all of our PGI assets, they produce significantly liquid rich gas. And you're actually seeing that in the overall revenue volume increase in PGI. I think we talked from 3% to 4%, 4% to 5%. We're seeing and we haven't brought on any new gas plants. So we're seeing really strong gas growth where we have lots of condensate and lots of NGLs which is extremely positive and I think one of the features of our footprint is that we don't process a lot of the drier gas.

Speaker 5

With all that said, our overall thesis for Western Canadian liquids growth hasn't really changed in that mid digit. And as we think about latent capacity versus expanded capacity, when you're in Alberta, kind of now that Phase 8 is in service, kind of Gordondale, follow the map all the way down to Fox Creek into Edmonton, that's going to be kind of latent capacity use and or pump station. No more linear assets required to get those volumes into the Edmonton market. And then as you go west of Gordondale into Northeast BC, that's where we will require some incremental pipelines, etcetera. So that's kind of the distinction and that's kind of all been built into our 3 year capital forecast and all part of our 3 year cash flow per share guidance that we gave at Investor Day.

Speaker 5

Anything else to add Cam or so?

Speaker 4

So maybe just, I guess, mid cycle CapEx or near term CapEx run rate levels, any high level thoughts there? Is there more processing CapEx that's required to kind of hit that mid single digit growth?

Speaker 3

Jeremy, I think I'd sort of go back to our message from Investor Day, which was if you sort of look at this year, next year, we're probably running right around that free cash flow neutral level. So the levels that you're seeing in 2024, 2025, it's somewhere in between that $1,000,000,000 to $1,250,000,000 range is probably the run rate for the next couple of years, assuming we continue to execute on the plan and the projects that Jared outlined. As Jared mentioned, obviously, big part of that is obviously completing our FS4, which comes into service in the first half of twenty twenty six. And likewise, as we continue to move forward and build out that Northeast BC Capital, Northeast BC Transportation then once you get to sort of the 2026 timeframe outward, obviously, the base core business capital starts to trail off as some of those assets come into service. Our BD teams obviously very hard at work and we continue to see opportunities.

Speaker 3

But for the next couple of years, I think that's probably the way we're thinking about it.

Speaker 4

Got it. That's very helpful. Thank you.

Operator

Thank you. The next question comes from Praneeth Satish at Wells Fargo. Please go ahead.

Speaker 6

Hi, all. Thanks. Good morning. Maybe just on Cedar, if you can give us an update here in terms of reassigning the capacity that you hold with 3rd parties. Are you seeing strong interest from customers there?

Speaker 6

What's the timeline to announce that contract? And also, how committed are you to kind of reassigning that entire 1.5 MTPA? And could you keep more of it and end up marketing more than 0.3 MTPA with your marketing group?

Speaker 7

Hi, it's Asstu. So we're now following the FID announcement and progress. We are ramping up our marketing efforts, looking at the remaining capacity of Cedar. I will say that as our project became more real with the FID announcement, our interest is high. We've been working with a number of potential off takers that we've had conversations for a long period of time, but we do have some renewed and new interest coming in as well.

Speaker 7

So, we're excited and optimistic of progressing those conversations to completion with a target to have as much of that completed in 2024. So we're optimistic and excited and continue to make progress with potential off takers.

Speaker 6

Got it. And maybe just switching gears and moving over to the Bakken, I have two questions here on the Vantage pipeline. First, if you can kind of remind us what the utilization is on the pipe and whether Vantage can be expanded any further with pumps? And then secondly, to the extent that there is excess capacity and it can be expanded at a low cost, can you satisfy all of your Dow ethane contract with Vantage? I guess, what would the cost be of moving ethane on Vantage versus some of the other options that you're considering?

Speaker 5

Good morning. Thanks for the question. So, yes, we currently do have some white space on the Vantage pipeline that is capable of bringing more ethane up into the ag system and then into the petrochemical feedstock takers there in Western Canada. With respect to our portfolio with respect to Dow, we're kind of taking a more diversified approach to this. So we think of it as ethane that comes out of our RFS complex that is C2 plus being extracted in Western Canada and then broken into its parts and fed into the crackers here.

Speaker 5

In Alberta, there is the C2 extraction component that's more like mainline extraction like our Empress or younger facilities that feed straight ethane into the system, into the crackers. And then you have the Vantage system that can bring product up from North Dakota. So across those kind of 3 portfolios, right now we're just evaluating what's the best use of capital to basically fulfill our entire Dow commitment. So we won't really specifically talk to where the majority of that capital is going to go right now. I think in that industry we talked about here in the next couple of quarters we'll be able to provide some more insight on where that capital will be going.

Speaker 5

But Vantage is definitely a part of the overall portfolio consideration to meet that contract.

Speaker 8

Got it. Thank you.

Operator

Thank you. Next question comes from Patrick Kenny at National Bank Financial. Please go ahead.

Speaker 9

Hey, good morning guys. Just maybe quickly on the Aux Sable or Alliance and Aux Sable consolidation. I know there's some accounting noise in there, but maybe you can just walk us through the headline, dollars 600,000,000 loss on disposal of your equity interest and maybe what that means for your corporate effective tax rate going forward?

Speaker 3

It's Kamir. You just made our accounting team's day with the question. It's not a really straightforward explanation other than to say that the accounting standards are pretty clear about how you have to treat a step acquisition. You basically have to act as if you've disposed what you've got as the equity accounted investment and then realize the entire fair value acquisition like you would any other acquisition. So obviously, you do the fair value on the existing interest and mark that to market.

Speaker 3

Obviously, I think what's important in recognizing that accounting is that there's an offsetting deferred tax recovery on that derecognition, which effectively nets you to about 0 or so. It's about a $9,000,000 gain when you net those 2 out. And then, obviously, then you go forward and you consolidate. And then, with the consolidation now, obviously, we own 100% of Alliance and now 100 percent of Aux Sable. But in Q2, obviously there was a small non consolidated interest on Aux Sable, which just gets netted out the back end.

Speaker 9

Great. And then I guess going forward, just any impact positively or negatively on the effective tax rate?

Speaker 3

Yes. I think there will be some positive effect on the effective tax rate. As you've seen, there is some benefit to the acquisition, potentially the larger acquisition as a result of some opportunities in the U. S. And so we do get a benefit there and I think that shows up in terms of the updated tax guidance.

Speaker 3

So you'll see it come down ever so slightly.

Speaker 9

Okay, great. Thanks for that. Then maybe just on the cost pressures here you're experiencing on RFS-four. Maybe you can just walk us through some of the scope changes that might be embedded in that new budget? And then also just given construction activity really picking up here for large scale projects in the Heartland area?

Speaker 9

Just how we should be thinking about your ability to lock in costs from a labor productivity standpoint?

Speaker 5

Great question, Pat. So think of the project increase kind of in the following 3 buckets. The first bucket being project scope changes and design modifications. This is really to enhance the overall operability of RFS-four specifically and the overall complex. As you know, like we can spread molecules to any one of the fracs.

Speaker 5

And it's specifically to accommodate a wider range of C3 plus feedstock composition. So depending on where your customer if your customer is extracting NGLs from a deep basin well versus a very oily Montney well, you get a wide range of NGL composition. So this we made a decision just to enhance the overall operability to have a wider range to take that product composition. The second bucket is we saw some incremental inflation over and above what we expected in the latter half of twenty twenty three when obviously there was a very large project sanctioned in Alberta here. So that was unexpected and caused some of the increase.

Speaker 5

And then the 3rd bucket is our decision when we sanctioned this project in February of 2023, it was going to be a typical Pembina project where we do all of the oversight and the execution. And as we saw these labor concerns as you identified the Heartland area getting busy, we decided to move to a lump sum to make sure that we could procure a Tier 1 contractor that we were confident could get the fabrication shop space, make sure they had access to high quality labor, make sure that they were going to execute with respect to our safety expectations and values and indigenous content, and deliver a high quality project on time. So we've shifted roughly 70% of that total project as we stated to a lump sum. We'll execute kind of more of that outside the lease boundary, outside the frac area. We'll do a lot of that execution.

Speaker 5

But we have made that shift and we did see with shifting that risk from yourself to a third party who's going to deliver that high quality labor and safety expectation, there is a little bit of a cost with that. So that's kind of how we break up those 3 buckets. And overall, the project, like we said, is still planned on being delivered on time, which is great. And then with respect to the commercial side, with this project coming out of the ground as we speak, we've been able to secure incremental contracts at the overall base complex, RFS 1, 2 and 3, which is obviously great for business. And then we've secured a lot of new contracts over and above our original base case when we sanctioned this with the Board in February of 2023.

Speaker 5

And with the incremental cost, we have seen that the overall sanction metrics have actually gone up. And then with respect to the overall portfolio, I'll just talk like the Heartland is seeing a little bit of increase, but overall our portfolio is still of projects, it's still industry leading and we have the full confidence in our team to continue with the current projects to deliver on time, on budget and the future ones.

Speaker 9

Okay. That's great color, Jared. Appreciate that. And maybe just real quick, were the incremental costs you've contemplated when with the PGI Whitecap transaction as well? In other words, like the all in economics of the deal, I know some of it has some downstream benefits embedded in the returns.

Speaker 9

Just wondering if those returns are still Absolutely. Yes.

Speaker 8

Okay. I'll leave it there. Thank you.

Speaker 10

Thanks, Matt.

Operator

Thank you. Next question comes from Rob Hope at Scotiabank. Please go ahead.

Speaker 10

Good morning, everyone. I want to follow-up on the frac discussion. I guess 2 parts there. First one is, are the incremental contracts that you signed on for the entire RFS complex reflective of the incremental capital for RFS 4? And then how much white space do you have at RFS?

Speaker 10

And kind of when could you need some incremental capacity beyond what you're building?

Speaker 5

There's limited white space, Rob, at the complex and even with RFS-four coming into service. So right now very focused on project execution of step 1 with respect to the execution teams. But obviously the commercial teams are in constant conversations with our other customers and it's a balancing act between ensuring that we have the base load of the first three fracs long term contract extensions, fill 4 under long term deals and then get focused on sanctioning number 5. But right now, it's really focused on number 4 and getting that customer interaction for 5 going, I'd say that's a little bit further out. With respect to your first question, I think you were asking about incremental contracts like has anything changed specific due to the cost increase.

Speaker 5

Is that accurate?

Speaker 10

Yes. Like are the incremental were fees adjusted up for the new capital cost and that's how returns were put back on side?

Speaker 5

Yes, it's a combination of it's specifically, it's a combination of volume, fees and then you also have the downstream auxiliary fees such as rail loading and terminalling etcetera and then obviously the marketing business as well. Some customers choose Pembina to do their full suite of marketing and some customers obviously do their own marketing. But we are advancing a lot of that business and then you're obviously seeing

Speaker 10

the upside through the marketing arm as well. All right. Thanks for that. And then maybe just switching over to the ethane opportunities that were highlighted at the Investor Day, how are those progressing? And then just given the, we'll call it a tightening labor market in the Heartland, could this deemphasize an RFS 3DS and kind of focus more out in the field?

Speaker 5

I would say no right now, Rob, because that's a fairly small project. As we've stated before, our FS3, and we just really need the tower. So it's not an extensive like it's not 500 people on-site and it's building a few pieces of equipment in some select fab shops. So you might see a little bit of cost pressure there, but I don't think that would be enough to deter us away from looking at that project. But since Investor Day, we have accelerated a handful of projects through Gate 1 funding.

Speaker 5

So that's small dollar amounts to get pre FEED kicked off. And then we'll be evaluating that near in the upcoming couple of quarters and making a decision on which projects go through Gate 2 and ultimately Gate 3 and which ones it won't be. Yes.

Speaker 2

I think Rob, we'll be able to understand kind of what current labor costs and what current costs are, which will help guide us in terms of which decision we make, which is, as Jared pointed out previously, one of the advantages we have is we do have numerous sources that we can source the ethane from. And so any updated capital cost will go into that mix in our decision making.

Speaker 8

Thank you.

Operator

Thank you. The next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.

Speaker 11

Hey, you've answered most of my questions by this point. But I just wondered, given the massive development of the P system over the last several years, what's your vision for developing it from here? What further optimizations are possible from this point?

Speaker 2

So, Rob, I think there's a few different things. And again, this question given the breadth of the system really depends on where the volumes show up. And so when you're in Alberta, for the most part, we will focus on optimization now that we have segregated lines and where can we use pumped optimization, product optimization to increase throughput. We've already found some wins across the system to unlock some incremental volumes. We do have other areas where we can add low cost pumps like from Fox Creek Inn to increase volumes there.

Speaker 2

And then we'll continue to look at opportunities in Northeast BC as LNG comes on LNG Phase 1 and other opportunities come online and we see incremental growth there. So it's a tough question to answer. There are certain areas that are tight where we'll have to expand and there are certain areas where we have utilization opportunities.

Speaker 11

Okay, understood. And I'm just wondering what the thought is on the frac spread hedging in light of both the current prices and your increased exposure now that you've consolidated ox?

Speaker 2

So, Rob, we have a pretty, programmatic hedging program based on where frac spreads are in terms of from a statistical basis P10 to P90 with very limited discretion as it relates to the hedging program. One of the benefits we did talk about on the original Aux A bolt acquisition Canada and we actually have about just under 50% of Aux ABL hedged for 2024 as well. Based on how frac spreads have trended the forward curve, we're somewhere in the neighborhood of 10% to 15% hedge for 2025, but we'll likely be locking in incremental hedges just given where forward frac spreads are compared to, I'll call it the 5 to 10 year historical average.

Speaker 11

Understood. And last question, just a clarification from Cam. I think I understood from your previous discussion of taxes that the 24% current tax is not materially changed despite the increased marketing guidance. Is that correct?

Speaker 3

That's correct, Robert.

Speaker 11

Yes. Thanks.

Operator

Thank you. The next question comes from Ben Pham at BMO. Please go ahead.

Speaker 12

Hi. Thanks. Good morning. Can you guys talk about the M and A opportunities in Western Canada? Do you expect more of the white cap JV sort of structures?

Speaker 12

Do you think PE firms could be looking to monetize or even strategics looking to dispose of

Speaker 2

assets? Hey, Ben. It's a really hard thing to predict. We couldn't have predicted that the Whitecap transaction was going to happen 6, 7 months ago. So I don't know.

Speaker 2

We're not seeing necessarily a lot right now. And there's still a fair number of producers that want to own that infrastructure. So it's very producer specific. But we're certainly we don't have line of sight to a large M and A pipeline. And then as it relates to PE firms, again, I can't really speculate.

Speaker 2

Still feels like a lot of the assets are relatively in their kind of early fund life. So we don't see anything that's kind of being driven by fund life. So I don't have a good insight now as to what PE firms may or may not be doing.

Speaker 12

Okay. Understood. And I know there's also some comments on Alliance Aux exceeding expectations and then the tuck in of Box 2 maybe solidifying the synergies a bit. Is that comment more suggesting that you might beat that 8 times multiple that you've commented about? And then what about that acceleration of the marketing volumes?

Speaker 12

Does that change now?

Speaker 3

Ben, I guess I would just say that I think, obviously, as Scott mentioned earlier, we've been fortunate in the sense that obviously the commodity complex has strengthened since we made the original acquisition and continues to show strength in this year and even out looking next year. In terms of the synergies, I think it does. I mean, any time you've got sort of full control of an asset, it obviously does put the wheel squarely in your hands to execute on those synergies. So I think it does support us in that regard. And I do believe that we will see additional opportunities as we sort of get our arms wrapped around and sort of keep moving things forward as we've done with other assets.

Speaker 3

Are we at a point yet where we're ready to put our hand in the fire and start to quantify those? Not yet, but I think we're definitely seeing things evolve positively and so far very pleased with the acquisition, the returns that it's generating.

Speaker 12

Okay. Thank you.

Operator

Thank you. Next question comes from Robert Kwan at RBC Capital Markets. Please go ahead.

Speaker 8

Thanks. Good morning. If I can start with guidance and just kind of some of the thinking around the asymmetric increase and just is that just more of conservatism on the high end, whether it's around some of the volumes that Jared talked about earlier or maybe potentially anything you see on the rail side of things versus the low end coming up and just the confidence you've got with some of the well, just the mechanical changes with the Aux Sable acquisition and the like?

Speaker 3

Yes, I think that's a fair comment, Rob. And as you suggest, I mean, there's a number of things that go into it. I think we obviously had confidence to bring the low end up meaningfully from where it was last time, just based on such a strong first half. When we look at the second half of the year, I mean, there's a couple of things obviously that are coming into effect, which some with certainty, some with less certainty. And so obviously, as we look forward to the second half of twenty twenty four, we've got the Cotion firm tolls are now under the revised tolling structure.

Speaker 3

While we continue to see strength at the moment, obviously, when you sort of look out in terms of interruptible flows through Q3 On Alliance, some uncertainty there could exceed our expectations, but obviously taking sort of what we know at the moment. And then lastly, clearly the big outstanding item or range is obviously the marketing book and how that shapes up. Obviously, some backwardation in the crude market here. This forward strip currently shows some strength in the gas market as we close out the year, but those are all uncertain. And so as we look at that and then on top of it, as you point out a couple of things which are outside of our control, you've got a rail issue, we're hopefully coming towards the tail end of wildfires in Alberta and Western Canada for the year, but that obviously always remains a risk through the summer here.

Speaker 3

So a few things on our mind that we bake in there and obviously wanted to show strength by bringing up the bottom end and obviously bringing up the top end as well, but recognizing the uncertainty in the back end of the year.

Speaker 2

Yes. The only thing I'd add Rob too is just given the given we don't control the closing of Whitecap, none of that transaction is in that outlook.

Speaker 8

Okay. Got it. Thanks. If I can just turn to the RFS for costs and really just how do you think about the parallels, if any, or lack of parallels, I guess with that versus what you're seeing from Cedar. And one thing just to touch on is I think Cedar had some off-site fabrication.

Speaker 8

And so is that going to put pressure on that component at a minimum on the project?

Speaker 2

None. None, Rob. Cedar, we had the lump sum at the time we press release, so that's all reflected in the cost and all the fabrication is being done in overseas, not really anything in the Fort. So we see 0 parallels between the 2.

Speaker 8

Okay, perfect. And then just the last just on the Whitecap deal, can you just talk about within PGI, you've got kind of the return that makes sense for the joint venture. How do you think about the upside you can get from all of the other pieces? I don't know if you want to quantify it, but just what are the different pieces that give you that upside and specifically, you just comment on the Musrow ethane angle under the Dow contract?

Speaker 5

Good morning, Robert. Yes, so downstream, so obviously, there's the base acquisition of the KaBOB facility through PGI. And then there's the capitalization of the La Torre battery, that white cap will be executing that. And then we'll be executing the pipeline to tie into Maseros. So really filling in white space through our K3 facility as we connect that to the KaBOB facility down into the southeast.

Speaker 5

And then when you go west, right, maximizing the utilization of our original cut bank complex or Muzrok complex as we call it. And then ultimately, we have the opportunity to take more gas through the deep cut at Muzro. So obviously that ethane can be part of our overall diversification portfolio to satisfy our Dow contract. And then obviously, you have current liquids that are extracted at K3 and the KaBOB facility. And then with incremental gas going through the KaBOB facility, obviously, there's incremental contracts required on through Peace and through the fractionator and then ultimately through the back end of the frac like terminalling and rail etcetera.

Speaker 5

And then when you shift over to Latour, all of the incremental condensate will flow on the P system. The incremental C3 plus that will be extracted from the gas and the C2 plus will obviously flow down the P system and all of those barrels, the condensate will be guided to various condensate outlets in Edmonton and the NGLs will go through the RFS complex. So that's kind of in totality how the deal the entire deal works. Base extensions on contracts and then new incremental volumes through the value chain.

Speaker 8

Got it. Thanks, Steve. That's helpful. Could you see the magnitude of the stuff outside of then PGI approaching the magnitude in terms of contribution of the acquired assets or?

Speaker 2

Rob, sorry, it's Scott. I'm just not sure what's it how to like what can you rephrase the question maybe I think we're

Speaker 9

just a little

Speaker 8

Yes. You've talked about I don't know, maybe if you put it kind of in the build multiple or acquisition multiple contacts, presumably what you did within the joint venture has to stand alone. So how much more of a kicker are you going to get from all the stuff that you would get downstream?

Speaker 2

Yes. I mean, that's obviously would disclose confidential information that I don't think we can disclose at this stage. I mean, I think suffice to say Jared tried to highlight the fact that in addition to the standalone PGI returns, we secured incremental utilization of our facilities through existing and expanded contracts. So I think we've said what we needed to say on the actual acquisition release. And then upon close, we'll update 2025.

Speaker 2

But overall, we found the consolidated multiple in line with previous acquisitions, if not slightly better.

Speaker 8

Okay. That's great. Thank you.

Operator

Thank you. We have no further questions. I will turn the call back over to Scott Burrows for closing comments.

Speaker 2

Well, thank you and especially thanks to the analysts who I know have had a busy 2 weeks and we're at the tail end here. So appreciate all the questions and the quality notes last night. And to any of our employees or to all of our employees listening to the call, thanks for all the hard work. It was a really good quarter. Thanks everyone.

Speaker 2

We'll see you again in November. Thanks.

Operator

Ladies and gentlemen, this concludes your conference for today. We thank you for

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Key Takeaways

  • Record Q2 adjusted EBITDA of CAD 1.091 billion (up 33% YoY) and adjusted cash flow from operations of CAD 837 million drove a 2024 EBITDA guidance raise to CAD 4.2–4.35 billion.
  • Pembina completed 100% takeover of Aux Sable U.S. assets and formed a 50/50 JV with Whitecap on the KaBOB complex, simplifying reporting and unlocking synergies while securing long-term take-or-pay agreements.
  • Key project milestones include a final investment decision on the Cedar LNG export terminal and the Phase 8 Peace Pipeline expansion in service, reinforcing the company’s low-carbon LNG strategy and pipeline capacity.
  • Second-quarter volumes rose 11% to 2.7 million bpd on the pipeline system and 14% to 900 000 bpd in facilities, with capital spending revised to CAD 1.3 billion for 2024 and fully funded by operating cash flows.
  • Balance sheet metrics remain robust with senior debt/EBITDA at 3.6× (3.3× normalized), and the company maintains a disciplined approach to hedging, cost management and free cash flow funding.
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Earnings Conference Call
Pembina Pipeline Q2 2024
00:00 / 00:00