Tidewater Midstream and Infrastructure Ltd (TWM) Q2 2021 Earnings Call Transcript

Tidewater Midstream and Infrastructure Ltd (TSE:TWM) Q2 2021 earnings call dated Aug. 05, 2021.

Corporate Participants:

Joel K. Vorra — Chief Financial Officer

Joel A. MacLeod — Chairman and Chief Executive Officer

Analysts:

Robert Kwan — RBC Capital Markets — Analyst

Presentation:

Operator

Good morning and afternoon ladies and gentlemen. Welcome to the Tidewater Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] Also note that the call is being recorded today, Thursday, August 5, 2021.

And I would like to turn the conference over to Joel Vorra. Please go ahead, sir.

Joel K. Vorra — Chief Financial Officer

Thank you. Good morning and good afternoon everybody. On the call with me today is Joel MacLeod, Tidewater’s President and CEO.

And as usual, before passing the call over to Joel for a review of the quarterly highlights, I’d just like to remind everyone that some comments made today may be forward-looking in nature and are based on our current expectations, estimates and judgments. Forward-looking statements, we express or imply today are subject to risks and uncertainties, which can cause actual results to differ from expectations.

Further, some of the information provided today, will use Non-GAAP measures. To know more about the company’s forward-looking statements and non-GAAP measures, please see our various financial reports, which are available at tidewatermidstream.com or on SEDAR.

With that I’ll pass it over to Joel MacLeod for a review of the quarter.

Joel A. MacLeod — Chairman and Chief Executive Officer

Thanks, Joel. Good morning and thank you for joining our Q2 ’21 conference call. We are proud to have delivered nine consecutive quarters of record per share adjusted EBITDA growth and delivered CAD52 million of adjusted EBITDA in Q2 2021. This represents a 25% increase in per share adjusted EBITDA year-over-year. We continue to see growth into 2021 with booster activity continuing to pick up, increased volumes, increased refined product demand, crack spreads and our canola coprocessing project coming online here ahead of schedule in Q3. We continue to execute and grow a significant inventory of high rate of return in capital projects with two to three year payouts.

On July 21, 2021, Tidewater announced the creation of Tidewater Renewables as a wholly owned subsidiary of Tidewater. Tidewater Renewables was formed to become a multifaceted energy transition company focusing on the production of low carbon fuels. The creation of and the initial public offering of Tidewater Renewables is a result of a thorough evaluation of financing alternatives with the goal of funding Tidewater Renewables portfolio of clean fuel projects while allowing Tidewater to continue to deleverage through 2021. We have seen significant institutional support and expect to close the IPO in August with the formation of Tidewater Renewables, CAD40 million of EBITDA will be dropped down into Tidewater Renewables from Tidewater Midstream.

The Tidewater Renewables IPO will enable the FID, the final investment decision of our renewable diesel and renewable hydrogen complex which accompanied with our two coprocessing projects do provide a view to roughly CAD150 million of EBITDA within Tidewater Renewables in 2023. The current plan is for Tidewater Midstream to retain approximately 70% ownership of Tidewater Renewables and Tidewater Renewables will be our high growth renewables business unit within Tidewater Midstream.

On June 30, we also closed the sale of our Pioneer Pipeline and the related CAD130 million of proceeds, taking us to approximately 3.5 times net debt-to-EBITDA. With the closing of the IPO of Tidewater Renewables, we expect to further reduce our leverage and achieve our targeted 3 times to 3.5 times debt-to-EBITDA. We remain focused on high rate of return capital projects and continue to evaluate multiple projects in the CAD5 million to CAD25 million capital cost range with payouts of under three years and we do remain committed to our leverage target of 3 times to 3.5 times net debt to annualized adjusted EBITDA.

During the second quarter of 2021, at Prince George, total throughput was approximately 95% of the refineries nameplate capacity at approximately 11,460 barrels per day. As a result of planned annual maintenance, second quarter throughput was down approximately 5% from the first quarter of 2021. Throughput during the second quarter of 2021 was approximately 8% higher compared to the same quarter of 2021. And today we’re back up to strong rates starting to track around 12,000 barrels a day. So refinery performing incredibly well. Demand has picked up and expect to see the Prince George refinery continue to perform extremely well for the remainder of 2021.

The other project out at our Prince George refinery would be our canola coprocessing project. Great to see that project tracking ahead of schedule and coming online here in the third quarter and excited to have our first renewable diesel product with 80% to 90% reduction in carbon intensity online here in the — in Q3, and wish to thank the BC government for all the support on our canola coprocessing project, but also on our renewable diesel and FCC coprocessing projects.

Over to Pipestone. Our Pipestone Gas Plant had a record quarter. Average volume throughput of 92 million cubic feet a day in the second quarter at 19% increase from Q2 2020 and an increase of 11% from Q1 2021. Facility availability for the quarter averaged 94%, an increase of 9% from Q1 2021. During the month of May, the Pipestone gas plant achieved a significant milestone by averaging a daily throughput of 100 million cubic feet a day, combined with a 100% facility availability. The Montney area continues to remain active and our Pipestone plant remains fully contracted with over 85% committed capacity on take-or-pay arrangements.

Over to Brazeau River, where we disposed of the Pioneer Pipeline. Brazeau performed well in the quarter and more recently we have seen near record throughput highs and do expect that to continue into the end of the year. So overall, assets performing incredibly well and expected to continue into the end of 2021. And I do want to thank our staff, our Board, shareholders, credit syndicate partners and all stakeholders for all of your support. We look forward to continuing to delivering strong results for the remainder of 2021.

I’ll pass it back over to Mr. Vorra and he’ll walk you through our financial highlights of our Q2.

Joel K. Vorra — Chief Financial Officer

Thanks, Joel. I’ll spend a little bit of time highlighting some of the key financial metrics for the quarter. A strong quarter on all fronts, commodity prices getting back to more reasonable levels. Throughput at our facilities near in some cases all time highs. Revenue for the quarter was approximately CAD370 million, which was about a 1% increase from the prior quarter and over 100% increase from the same period last year. That would be primarily driven by commodity prices but even Midstream revenue was up year-over-year as well. Gross operating margin, adjusted for hedges was approximately CAD57 million, which was a record and a 2% increase from the prior quarter and approximately 25% increase from the same period in the prior year.

Operating margin percentage was approximately 14.5% versus 15% in the prior quarter, which year-over-year on a weighted average basis had come down, but that’s what we would expect when commodity prices increase and you have consistent Midstream margins around 50%, but when you see increase in commodity prices at say an asset like the refinery, crack spreads remain the same and EBITDA contribution remains relatively the same, but the weighted average operating margin would come down, just based on the increase in not only the refined product side, but also feedstock. So we would expect those margins to come down when commodity prices move up, although the EBITDA contribution remains consistent.

Adjusted EBITDA again a record for Q2 was CAD52.3 million and slightly ahead of Q1 of CAD51 million and about a 25% increase from the same period in 2020. As Joel mentioned, the Pipestone Gas Plant was near nameplate capacity. The refinery again 5% or so down on throughput, but crack spreads did remain strong and despite what is typically a slower spring season, with spring breakup, the refinery continued to perform well. Again, Joel mentioned we closed the Pioneer disposition at Brazeau in Q2, which brought down our leverage, but also enabled us to pull gas that was at the end of the quarter but enables us to straddle gas off the NGTL system through the plant, which also brings throughput at the plant up. So all across the board, Pipestone area, Brazeau, refinery plants continue to perform well and near nameplate capacity.

Our distributable cash flow was approximately CAD17.2 million versus CAD16.9 in the prior quarter, resulting in a payout ratio of around 20% and then net debt was a decrease quarter-over-quarter, CAD743 million versus CAD857 million, a decrease of approximately CAD115 million quarter-over-quarter, primarily as a result of disposition of the Pioneer Pipeline and again bringing that total leverage around and slightly under 3.5 times with a path to 3 times with the Renewables transaction.

So I think with that, maybe we can open it up for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] And your first question will be from Robert Kwan at RBC. Please go ahead.

Robert Kwan — RBC Capital Markets — Analyst

Great. Good morning. Just with the strong volumes that you’re seeing through your facilities. Can you just talk about what you’re thinking or getting conversations with your customers around facility expansions and specifically, is there any greater talk about an expansion of Pipestone?

Joel A. MacLeod — Chairman and Chief Executive Officer

Yes, Rob. Good morning. So I would say definitely Pipestone probability of an expansion continues to increase with WTI at 68. ACO in that 3 and obviously touching CAD4 range. We do not have an expectation that equal will continue to be this high but it’s great to see activities picking up, even this morning to see Kelt expanding their capital. Nova said had great results as well. So great to see our customers performing well at Pipestone and I would hate to say it’s 100% probable and there’s nothing that’s 100% probability, but we’d be definitely probably above 50% probability now of a Pipestone expansion, definitely more work to be done. Understanding capital cost. Do we need a new gathering line or do we just need capital at the plant. So definitely some work to be done, but to operationally you’d see us running out 100 million cubic feet a day. Great, to be seen as operational leaders in the area as well and our assets performing well. So I would say probability is going up and we’re hopeful into the end of the year that that becomes a real opportunity that we can move forward with. But still some work to do, especially on the capital side.

Robert Kwan — RBC Capital Markets — Analyst

Got it. That’s helpful. And I guess just to finish a couple of questions here on the PGR. When you first bought it, there was some thought about running conde from your plants into the PGR. Is there any greater thought about how that could ramp-up and the benefits?

Joel A. MacLeod — Chairman and Chief Executive Officer

I would say with the growth in the BC Montney for us to be one and the only and I guess the only direct pipe connected refinery from the BC Montney right into our refinery and obviously Pipestone being on the Alberta BC border to prove to run different slates of condensate and crude around Montney production Pipestone being one and to see how well the refinery runs our yields of 85% to 90% low-sulfur diesel, low-sulfur gasoline. Long-term, I think the Prince George Refinery is set up extremely well to take advantage of the Montney as feedstock as LNG comes online. We expect to see continued growth in condensate and oil through the BC Montney, but also in the Pipestone. So I would say we are working through ways to potentially have more of a direct connection to Pipestone, but those obviously with the border will likely take some time, but overall it’s been great to see the likes of Conoco continuing to be active, even Kelt with their old play, Tourmaline and others, continue to just see growth and continued more and more volumes in the BC Montney, which is great for our refinery long term and want to continue to evaluate debottlenecks of our process units.

Robert Kwan — RBC Capital Markets — Analyst

And Joel, by when you’re saying take some time, are we talking about quarters or you’re talking about years?

Joel A. MacLeod — Chairman and Chief Executive Officer

I think we probably message years Rob rather than quarters. Today we wouldn’t have a defined plan, but there are options that aren’t years. We just don’t want to get ahead of ourselves.

Robert Kwan — RBC Capital Markets — Analyst

Got it. And just to finish on the PGR. With the year-to-date performance and just what you’re projecting here, does the contingent payment come into play?

Joel A. MacLeod — Chairman and Chief Executive Officer

I don’t think it will, Rob, given canola coprocessing, our debottlenecks are not included in the contingent payment calculation. We will get close, but I don’t think we will get into a position where the contingent payment will come into effect, mainly given even our butane blending, our debottlenecks, our canola coprocessing are excluded from the contingent payment calculation.

Robert Kwan — RBC Capital Markets — Analyst

Okay, that’s great. Thank you very much.

Joel A. MacLeod — Chairman and Chief Executive Officer

Thank you, Rob.

Operator

Thank you. [Operator Instructions] And at this time gentlemen, we have no other questions. Please proceed.

Joel A. MacLeod — Chairman and Chief Executive Officer

Thank you everyone for your time today, and please don’t hesitate to reach out, if you have questions or concerns. Have a great day everybody.

Joel K. Vorra — Chief Financial Officer

Thanks everyone.

Operator

[Operator Closing Remarks]