Pembina Pipeline Corporation (NYSE:PBA) Q3 2023 Earnings Call Transcript

Pembina Pipeline Corporation (NYSE:PBA) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation Q3 2023 Results Conference Call. [Operator Instructions]. This call is being recorded on Friday, November 3, 2023. I would now like to turn the conference over to Cameron Goldade, Chief Financial Officer. Please go ahead.

Cameron Goldade: Thank you, Julie, and good morning, everyone. Welcome to Pembina’s conference call and webcast to review highlights from the third quarter of 2023. On the call with me today are Scott Burrows, President and Chief Executive Officer along with other members of Pembina’s senior leadership team including Jaret Sprott, Janet Loduca, Stuart Taylor, and Chris Scherman. 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. 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 management’s discussion and analysis dated November 2, 2023, for the period ended September 30, 2023, as well as the press release Pembina issued yesterday which are available online at pembina.com and on both, SEDAR and EDGAR. I’ll now turn things over to Scott to make some opening remarks.

Scott Burrows: Thanks, Cam. We were pleased yesterday to report our third quarter results which included earnings of $346 million and record quarterly adjusted EBITDA of just over $1 billion. The record quarter reflects the strength of Pembina’s business, including growing volumes and rising utilization across many systems, along with another strong contribution from Pembina’s marketing business. Whereas first half results were impacted by wildfires in Northern Pipeline outage, we believe the third quarter more accurately reflects the underlying positive momentum in the Western Canadian Sedimentary Basin. This is demonstrated most notably by the nearly 6% year-over-year increase in third quarter volumes in the conventional pipeline business.

Given year-to-date results and our outlook for the fourth quarter, we’ve raised our 2023 adjusted EBITDA guidance range to $3.75 billion to $3.85 billion. And Cam will address that more fully in a moment. On the commercial front, we signed new long-term contracts for 25,000 barrels per day on the Peace Pipeline system. And at our Redwater Complex, we extended an existing 25,000 barrel per day contract that was set to expire in 2027 and now runs through 2032. Further, we continue to advance discussions with customers related to the ongoing contracting of the recently announced RFS IV expansion. And on October 3, 2023, we reactivated the approximately 100,000 barrel per day Nipisi Pipeline system to serve customers in a rapidly growing Clearwater oil play.

The reactivation was supported by a significant long-term commitment with an anchor customer. And given the outlook for continued growth in the Clearwater, discussions continue with several producers in the area regarding potential additional long-term contractual commitments. On the major project front, we continue to progress our Phase VIII Peace Pipeline expansion and our RFS IV expansion at the Redwater Complex. Most notably, the Phase VIII project capital budget has been revised lower by $55 million to $475 million. The revised cost reflects highly effective project management and execution, favorable weather conditions, and productive contractor relationships. We will continue to bring new pump stations into service before year-end and expect the pipeline to be in service in the first half of 2024.

Our experience with Phase VIII is another example of supporting Pembina’s track record of strong project execution. And we continue to progress our Cedar LNG project with our partner, the Haisla Nation. The remaining final investment decision deliverables continue to progress, including finalizing the lump-sum engineering, procurement, and construction contract, the definitive liquefaction tolling agreements, and the inter-project agreements with Coastal GasLink and LNG Canada as well as project financing. Target FID continues to be by the end of 2023. However, given the need to align multiple work streams, FID may move into early 2024. And finally, given the volume of public and stakeholder interest in the TMX divestment process as it pertains to Pembina, I would like to clarify our perspective on this situation.

In 2021, Pembina was honored to have been selected by Western Indigenous Pipeline Group, or WIPG, as its industry partner to form Chinook Pathways, an Indigenous-led partnership in pursuit of ownership in the Trans Mountain Pipeline. The Federal government recently initiated the first phase of the Trans Mountain divestiture process to progress their commitment to meaningful Indigenous economic participation in the asset. There is no defined timeline for completion of this phase, and neither Chinook Pathways nor Pembina is eligible to participate in the first phase. A subsequent phase for the sale of the remaining equity interest is still undefined. Based on public information, the earliest that a divestment of the asset could likely occur is the end of 2024, and there appears to be outstanding regulatory, construction, and tolling issues that pose further schedule, cost, and divestment timing uncertainty.

Pembina, like any other prudent commercial purchaser, requires the many outstanding issues related to the project to crystallize in order to prudently and appropriately assess the opportunity and determine next steps. Further, as we evaluate any potential role in the TMX process, or just like any other organic or M&A opportunity, you can expect Pembina to maintain its financial discipline and commitment to the financial guardrails, including maintaining a strong balance sheet and strong BBB credit rating as we have in the past. Pembina continues to have a robust portfolio of in-strategy investment opportunities, and any opportunity, internal or external, will have to compete for capital against alternative uses. I will now turn things over to Cam to discuss in more detail the financial highlights for the third quarter of 2023.

Cameron Goldade: Thank you, Scott. As Scott noted, Pembina reported third quarter adjusted EBITDA of $1.021 billion, which represents a $54 million or 6% increase over the same period in the prior year. In pipelines, factors impacting the quarter primarily included higher revenues due to higher volumes on certain assets and higher tolls due to inflation, primarily on the Cochin Pipeline and Peace Pipeline system. Those were partially offset by a lower contribution from Alliance, higher integrity spending, and higher repairs and maintenance costs. In facilities, factors impacting the quarter included the PGI transaction and strong performance from the former Energy Transfer Canada plants and the Dawson Assets, as well as a gain resulting from a contract renewal of an asset now recognized as a finance lease.

In Marketing & New Ventures, third quarter results reflect the net impact of a lower contribution from Aux Sable as a result of lower NGL prices, lower natural gas and crude oil margins, lower realized losses on commodity-related derivatives, and higher margins on NGL sales. Finally, in the corporate segment, third quarter results reflect higher labor expenses, including higher incentives, higher information technology expenses, and partially offset by lower consulting and higher shared service revenue. Earnings in the third quarter were $346 million, representing a $1.483 billion or 81% decrease over the same period in the prior year. The decrease was primarily due to the $1.1 billion gain on the PGI transaction recognized in the third quarter of 2022.

In addition to the factors impacting adjusted EBITDA, earnings were impacted by higher depreciation and unrealized loss on commodity-related derivatives compared to an unrealized gain in the third quarter of 2022, an increase in the provision at Aux Sable, and lower legal fees. Total volumes of 3.398 million barrels per day for the third quarter represent a decrease of approximately 1% over the same period in the prior year. Volume decreases were attributable to the Facilities Division, which were partially offset by increases in the Pipelines Division. The change includes the net impact of the disposition of the E1 and E6 assets at our Empress facility, higher volumes at the Peace, Northern, and Drayton Valley pipelines, lower volumes at the Redwater Complex and at Younger due to planned outages in the third quarter of 2023, and increased gas processing volumes primarily at the former ETC plants and the Dawson Assets.

Adjusting for the impact of the E1 and E6 disposition, total volumes in the quarter would have grown by approximately 2% over the third quarter of 2022. Based on the results through the first 3 quarters and the outlook for the remainder of the year, Pembina has raised its 2023 adjusted EBITDA guidance range to $3.75 billion to $3.85 billion from a previous range of $3.55 billion to $3.75 billion. The revised range reflects the stronger-than-expected results in the third quarter across all divisions, as well as the current outlook for commodity prices and an expectation of continued volume growth in the fourth quarter. Based on our 2023 guidance, cash flow from operating activities is expected to exceed dividends and capital expenditures. Today, Pembina has repurchased $50 million of common shares and paid down proportionally consolidated debt by approximately $300 million using proceeds from the sale of PGI’s interest in the KAPS Pipeline, as well as cash flow from operating activities.

We will continue to evaluate the merits of debt repayment relative to additional share repurchases for the remainder of the year. At September 30, 2023, based on the trailing 12 months, the ratio of proportionally consolidated debt-to-adjusted EBITDA was 3.4x, reflective of our strong balance sheet and supporting a strong BBB credit rating. I’ll now turn things back to Scott.

Scott Burrows: Thanks, Cam. In closing, we are enthusiastic about our business given the current momentum in the WCSB and expect continued volume growth through the end of 2023 and into 2024. Our broader outlook remains unchanged as we see the potential for significant growth driven by near-term catalysts, including new egress from the West Coast LNG projects and the Trans Mountain Pipeline expansion, as well as potential new developments in Alberta’s petrochemical industry. Given the scope and reach of its assets and existing long-term commercial agreements, Pembina is uniquely positioned to capture new volumes and benefit from this growth. As we work to successfully close out 2023 and plan for 2024, we cannot be more excited for what’s ahead for Pembina and its stakeholders. Thank you for joining us this morning. Operator, please go ahead and open up the line for questions.

Operator: [Operator Instructions]. Your first question comes from Jeremy Tonet from JPMorgan.

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Q&A Session

Jeremy Tonet: I just wanted to start off with the guidance raised, if I could. I just wanted to see if there was anything in the third quarter that was strong and non-repeating because if I look at what it implies for fourth quarter, it looks like 4Q is kind of flattish versus 3Q, yet I think you noted a number of tailwinds, and plus marketing is usually stronger in 4Q. So just trying to get a sense for how that all mixes together and how you think about, I guess, base business growth at this point. I think you talked about mid-single-digit EBITDA growth as something that was possible.

Cameron Goldade: It’s Cam here. I mean, obviously, the third quarter reflected a couple of different things that were particular to it. First of all, we did have a turnaround in a couple of our facilities. Typically, Q3 is an active turnaround season, but obviously, we did have a major turnaround at our RFS I facility during the quarter. That was one piece. The second piece would obviously be the gain that we recognized on the conversion of a contract to a finance lease at Vancouver Wharves upon renewal. That was sort of in the range of about $15 million, and so there’s a couple of things there that sort of contribute the 2 of those things together. I mean, I think we’re probably down to splitting hairs a little bit after those 2 things.

But I would say that we are seeing, as much as in some elements of the marketing business, we’re approaching cautiously as we sort of look at propane inventories for the balance of the year. Obviously, the volatility in the crude complex and what we’ve seen there continues to show strong results month after month. We continue to see strong volumes and strong spreads in the transmission assets, particularly on the Cochin side. And obviously, in the gas and pipelines operations or the Conventional Pipelines operations, we continue to see our customers coming strongly out of sort of the I guess the headwinds of 2023, namely some operational upsets and the wildfires. And frankly, it’s been an opportunity for some of our customers. For example, our customers in Northeast BC, some have been able to optimize their assets and secure interruptible gas takeaway, which otherwise wouldn’t have been available, and allowed them to produce more than they otherwise would have.

So a few different things there have contributed to it. And then obviously, a couple of things in Q3 that were non-recurring.

Scott Burrows: The only other thing I’d add there is we typically have a higher integrity spend in Q4 just due to areas of the basin that need frozen ground to access so that we tend to typically have a slightly higher OpEx spend in Q4.

Jeremy Tonet: And just want to pivot here towards capital allocation and wanted to get latest thoughts from you guys on that. We’re in a bit of a higher interest rate environment now than we were last time when we talked. I’m just wondering how that influences, I guess, your thought process. At the same time, Pembina’s leverage seems to be really tracking quite nicely lower here. So just wondering how this all kind of mixes together in your mind at this point.

Cameron Goldade: Yes. I mean, I think us, Jeremy, like many have sort of seen this coming for a while and we’ve been preparing for it. So and it goes all the way back to our strategy around managing the balance sheet, not only the leverage, but how we ladder our debt maturities. We were very focused for a very long time on setting up our debt tower in a very rateable fashion. So we don’t have more than generally $500 million or $600 million which is sort of 6%, 7% of our maturities coming due every year. We’ve always termed out our maturities generally as long as possible. And so when you look at our maturities in this environment, we’ve got $600 million — $650 million coming due in January of 2024. As you’ve seen us use the lion’s share of free cash flow to reduce debt, it’s consistently been the same message from our perspective where in these high-rate environments that we’ve got free cash flow, there is a benefit, firstly, to having a very strong balance sheet and also an economic advantage of using that cash flow, especially with interest rates and cost of debt the way they are.