Keyera Corp. (OTCPK:KEYUF) Q3 2023 Earnings Conference Call November 8, 2023 10:00 AM ET
Company Participants
Calvin Locke – Manager-Investor Relations
Dean Setoguchi – President & Chief Executive Officer
Eileen Marikar – Senior Vice President & Chief Financial Officer
Jamie Urquhart – Senior Vice President and Chief Commercial Officer
Conference Call Participants
Robert Hope – Scotiabank
Robert Kwan – RBC Capital Markets
Linda Ezergailis – TD Cowen
Ben Pham – BMO
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 Instructions]
Thank you. I would now like to turn the call over to Calvin Locke, Manager of Investor Relations. You may begin.
Calvin Locke
Thank you and good morning. Joining me today will be Dean Setoguchi, President and CEO; Eileen Marikar, Senior Vice President and CFO; Jamie Urquhart, Senior Vice President and Chief Commercial Officer; and Jarrod Beztilny, 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.
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+ and on our website.
With that I’ll turn the call over to Dean.
Dean Setoguchi
Thanks Calvin and good morning everyone. Keyera delivered excellent third quarter results. Leveraging our integrated value chain, we continue to execute a strategy that is driving strong performance across our three 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 a corporate credit upgrade to BBB stable from S&P. This upgrade reflects the company’s improved competitive position, quality of cash flows, and strong business outlook.
Our G&P segment delivered its second highest quarter ever with $94 million in realized margin and our Liquids Infrastructure segment delivered a third consecutive record quarter with a contribution of $128 million, 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 plays through our core Liquids Infrastructure in Edmonton and Fort Saskatchewan.
Assets like Wapiti, Pipestone, the KFS complex, and most recently KAPS, 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.
KAPS continues to deliver ahead of our expectations with higher than forecasted volumes in the third quarter as customers delivered above their contracted commitments.
KAPS has fully integrated our value chain, making it 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 to end market.
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 is now expected to be completed ahead of schedule and at the low end of our budgeted CapEx range of $60 million to $70 million. This project adds $40 million per day of processing capacity, driving further fee-for-service growth starting in the fourth quarter 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.
Our Marketing segment continues to outperform. We now expect marketing to deliver between $420 million and $450 million 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 KAPS and the Pipestone expansion, in turn driving growth in high-quality fee-for-service cash flows.
With a number of successful strategic investments made over the past few years, Keyera is now delivering sustainably higher levels of discretionary cash flow. 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 KAPS Zone four extension. Any incremental investments need to generate a strong return underpinned by long-term contracts.
I’ll now turn it over to Eileen to provide an update on Keyera’s financial performance for the quarter.
Eileen Marikar
Thank you, Dean. Adjusted EBITDA for the quarter was $288 million, compared to $247 million for the same period last year. Distributable cash flow was $186 million or $0.81 per share, compared to $162 million or $0.73 per share for the same period in 2022. These results were 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 million, compared to $123 million for the same period last year. 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 times at the low end of our targeted range of 2.5 to 3 times. This allows us to retain maximum optionality to advance organic growth projects when they are ready.
Moving to our guidance for 2023. As Dean mentioned, we now expect our Marketing segment to contribute between $420 million and $450 million of realized margin in 2023. This is up from our previous guidance of $380 million to $410 million. These results are largely due to the continued strength of iso-octane premiums and Keyera’s ability to access advantaged markets.
For a full list of guidance assumptions, please refer to Keyera’s third quarter MD&A released this morning. Growth capital for 2023 is now expected to range between $200 million to $220 million, previously $200 million to $240 million. The decrease is due to factors including the Pipestone expansion project coming in at the low end of its budget cost estimate. Maintenance capital remains unchanged at $95 million to $105 million. KAPS continues to expect cash tax expense to be nil for 2023.
I’ll now turn it back to Dean.
Dean Setoguchi
Thanks Eileen. 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 enabling this growth.
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&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Robert Hope at Scotiabank. Please go ahead. Your line is open.
Robert Hope
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 strengthening our volume outlook in the basin as well as we’ve seen Northeast B or North River Northeast BB Connector project gain regulatory approval.
Dean Setoguchi
Hi. Good morning, Rob, it’s Dean, and thanks for joining our call. Listen, I think, that first of all the announcement with the recommendation for approval of the Northeast Connector is very, very exciting for our basin. And as you 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 three to four DCF of growth, which will drive also a lot of liquids production.
Jamie Urquhart
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 KAPS producers want optionality and they want to make sure that there’s competition for the long-term. They also want to have operational reliability so that when they make billions of dollars of investments, they know that they have basically two reads 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 emphasize that this is a really exciting opportunity and we do have a lot of interest in it.
Robert Hope
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 a stronger production outlook? And could this be kind of revisited with the December update? And what is the December update?
Dean Setoguchi
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% to 7% fee-for-service EBITDA growth. And I do want to emphasize that that growth to the end of 2025 is based on investments that we’ve largely made already. 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 scheduled maintenance in this quarter. So that created a little bit of noise with our G&P segment. But we’re very excited about the volume growth and cash flow growth that we see there.
Liquids Infrastructure as you saw was a record this quarter. 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% EBITDA growth. And with that maybe I’ll just turn it over to you Eileen if you had any other things you want to say.
Eileen Marikar
Rob, maybe the only thing I would add is, yes, I think, Dean answered that extremely well. And I think again we will provide a little more color with our December update.
Robert Hope
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.
Robert Kwan
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 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?
Dean Setoguchi
Yeah. Thanks for the question Robert. And I’ll also turn this over to Eileen 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. We haven’t revised our guidance. But internally, 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 KAPS, 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.
So if that’s on the gas plants, while 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. 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 Eileen do you have anything you want to add?
Eileen Marikar
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 flows for the level of take or pay. And I think the Pipestone expansion that is about to come on is a great example of living by that. And absolutely, the returns are at the higher end of that just given where cost of capital is today.
Robert Kwan
Got it. If I can just finish with a question on KAPS here. I guess the first part is just specifically around the quarter, you said volumes were higher than you expected customers delivering above their contracted levels. Were those spot volumes? Or are 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?
Dean Setoguchi
No. That’s a great question. I have to tell you I’ve never been more optimistic on KAPS contracting. And first of all, I want to say that our operational performance has been very good in keeping in mind. 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 their 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. 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 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, this is going to unlock more of the growth in the productive capacity of our basin. So we’re going to help enable that growth. And so with that, it’s helping us with our contracting on KAPS.
I’d also say though that some of our KAPS contracts or 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 in some of the things that we’re doing. But again, very optimistic in terms of the direction where contracting is going. Jamie, do you want to add anything to that?
Jamie Urquhart
Yeah. Robert, I think towards your first question is that the delivery of volumes above contract is noted. Yeah, 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. The customers behind KAPS are all of the big players in the basin. And as we see consolidation in the basin, 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. So at the end of the day we’re the competitive alternative and I think our customers are speaking with their volumes.
Robert Kwan
Sorry, Dean, can you just clarify just around the complexity around potential future KAPS contract? 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?
Dean Setoguchi
No, no. Anytime you’re bundling services it’s just more contracts involved than everything else. So I’d 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.
Robert Kwan
Okay. Got it. Thank you.
Operator
Thank you. Our next question comes from the line of Will Ge [ph] at CIBC. Please go ahead. Your line is open.
Unidentified Analyst
Hi, good morning. Just wanted to ask about your opinion on the recent Supreme Court decision on the Impact Assessment Act and its impact on development in Canada.
Dean Setoguchi
Well, good morning, Will, that’s a great question and something that has been very topical since that was announced. And you know what I’m not a 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 in some of the projects that we would be looking at. But I think generally for the basin I think some of the uncertainty 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 it’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.
Unidentified Analyst
And another if I could just appreciate the consolidation mean for the development outlook and for some of your other facilities, specifically? I know you mentioned previously, how the consolidation has impacted KAPS volumes. So just wondering on the other facilities as well.
Dean Setoguchi
Consolidation of like within the producers you mean?
Unidentified Analyst
Yes.
Dean Setoguchi
Yes. Okay. Yes. No I mean that’s a good question. It’s a theme that we’re seeing on both sides of the border obviously, with some mega transactions 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. One of the examples could be Bonavista in our self 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 are able to pay off debt and get in a good position and sell. But over the 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. And I think those activity levels will likely be more consistent with a player like terminaling behind there. So we think overall consolidation is good. It makes the basin more efficient overall.
Unidentified Analyst
Great. Thanks. That’s it for me.
Operator
Thank you. And our next question comes from the line of Linda Ezergailis of TD Cowen. Please go ahead. Your line is open
Q – Linda Ezergailis
Right. Thank you. Maybe you can just give us an update, on how we might think of the net effect 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 the earnings power of your marketing business, now that your fundamental physical business has grown as well.
Dean Setoguchi
Yes. Listen, Linda, 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 assets 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.
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.
Jamie Urquhart
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. We’ve revised our guidance and now expecting to deliver between $420 million to $450 million 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 cost than we’ve seen over the last couple of years. Strong runtime at AEF and our ability to get a little bit more output out of AEF, over the last couple of years. So, as Dean said, I was thinking about the importance of those physical assets that drive the contributions from marketing, continued strength in Iso-Octane 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 2024 and beyond. So regarding 2024, 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. So, overall on track for record 2023 and we continue to see continued strong performance in 2024 and beyond.
Q – Linda Ezergailis
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 in the outlook beyond your capital budget for 2024?
Eileen Marika
Linda. Yes, we do plan to do the guidance update in the second week of December, and we will provide an update on the base marketing guidance, kind of that longer-term view. And as then Jamie said, we will then update again in Q1 with — once the supply season is known at that point.
Q – Linda Ezergailis
Okay. And anything beyond marketing in terms of the guidance in December? Just trying to understand kind of, if your guidance philosophies are shifting.
Eileen Marika
Yes, largely again the 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
Q – Linda Ezergailis
Great. Thank you.
Operator
Our next question comes from the line of Ben Pham of BMO. Please go ahead. Your line is open.
Ben Pham
Hi. Thanks. On the last question around the business update do you expect that to be more the regular annual process on timing? Is it somewhat of a quasi Investor Day that you look at every few years?
Eileen Marikar
Thanks Ben. No, I think this is our plan that we will go forward be providing an update in December each year.
Ben Pham
Okay. And the next question maybe high-level thoughts on appetite for acquisitions whether it’s opportunistic or more maybe strategic in the US for example. And I say it from the context that you’ve lost a strong balance sheet relative to peers and rising cash flows and ample powder to deploy.
Dean Setoguchi
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.
So to the extent that, there’s opportunities to acquire assets that exist already. And when combined with our assets we can make our system more efficient. We’ll certainly look at those opportunities. I do want to stress that with anything that we pursue. And a great example would be the acquisition of KFS that we what we did earlier this year. So I’m not sure, where we’re going to hear that static, but the two sides to 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 into the 2.5 times to 3 times debt-to-EBITDA range.
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 market. And really it’s about strengthening and extending our existing integrated value chain in Western Canada. And lastly, it’s got to be value accretive for our shareholders.
Dean Setoguchi
It looks like we lost a couple online there for the questions. So we’ll regroup. We’ll call the two that we thought didn’t get a chance to ask a question after the call today. And with that, we’ll just wrap it up.
Calvin Locke
Thank you all once again for joining us today. Please feel free to reach out to our Investor Relations team with any additional questions you may have. Thank you.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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