Pembina Pipeline Corporation (NYSE:PBA) Q1 2023 Earnings Call Transcript

Pembina Pipeline Corporation (NYSE:PBA) Q1 2023 Earnings Call Transcript May 5, 2023

Pembina Pipeline Corporation misses on earnings expectations. Reported EPS is $0.45 EPS, expectations were $0.54.

Operator: Good morning, ladies and gentlemen, and welcome to the Pembina Pipeline Corporation Q1 2023 Results. 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, May 05, 2023. I would now like to turn the conference over to Cameron Goldade, Chief Financial Officer. Please go ahead.

Cameron Goldade: Thank you, Joanna, and good morning, everyone. Welcome to Pembina’s conference call and webcast to review highlights from the first quarter of 2023. On the call today, we also have Scott Burrows, President and Chief Executive Officer along with other members of Pembina Senior Officer team including; Jaret Sprott, Janet Loduca, Stu Taylor, and Chris Sherman. I’d 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 May 04, 2023, for the period ended March 31, 2022, as well as the press release Pembina issued yesterday, which 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.

Scott Burrows: Thanks Cam. For the first quarter, Pembina reported earnings of $369 million and adjusted EBITDA of $947 million, which reflects continued strength in the Western Canadian Sedimentary Basin, growing demand for services from customers and another strong contribution from our marketing business. Overall, we maintained first quarter volumes across the conventional pipelines, consistent with same period in the prior year and we were happy to see volume growth from rising industry activity sufficiently offset the impact of the previously disclosed Northern Pipeline system outage. We resumed partial service of the Northern system on February 23 and look forward to the resumption of full service sometime in the latter half of the second quarter and with that, seeing our full impact of growing producer activity reflected in Pembina’s results for the rest of the year.

As we highlighted with our release yesterday, there’s been exciting progress on a number of fronts. First, Cedar LNG, recently received its Environmental Assessment Certificate from the BC Environmental Assessment Office and a positive decision statement from the Federal Minister of Environment and Climate Change, which collectively represent a significant step forward for the project. In addition, we signed a Memorandum of Understanding with ARC Resources for a long-term liquefaction services agreement for half the capacity of Cedar LNG. Work towards signing of definitive commercial agreements is ongoing. Cedar LNG is expected to be structured as a tolling business, providing a low risk, long-term cash flow stream, further strengthening Pembina’s financial resilience.

We continue to expect activities related to our four work streams; engineering, regulatory, commercial and financing to converge for final investments decision to be made in the end of the third quarter of 2023. Second, we have continued to achieve many commercial successes, securing and strengthening the contractual underpinning of our business. Strong liquid prices and financially well-positioned and capable producers are leading to current growth in the basin and longer term, we see the industry readying itself to capitalize on West Coast LNG development, the Trans Mountain pipeline expansion and growth in Alberta’s petrochemical industry. We maintain our positive outlook for growth in the WCSB and in the Northeast BC Montney, in particular, where certain large producers continue to signal the potential for significant visible multi-year growth.

We previously disclosed the long-term midstream service agreement signed in 2022 with three premier Northeast BC Montney producers for transportation and fractionation services. Based on the company’s public disclosure, this could represent in excess of 120,000 barrels per day of incremental NGLs and condensate by 2030 for which Pembina has contractual rights to substantially all. In addition, we have recently secured additional long-term production and facility dedications and executed new pipeline transportation contracts with existing customers for approximately 65,000 barrels per day of incremental volume across the Peace Pipeline system. Customers continue to demonstrate the value they place on the Peace system, the backbone of Pembina’s integrated value chain.

Given its many advantages, including its extensive reach capacity of 1.1 million barrels per day, product segregation across four commodities, high reliability, low operating cost and multiple delivery points, service on the Peace pipeline continues to be in high demand. Third, the sale of permanent gas infrastructure’s interest in the key access pipeline system was completed on April 26. Proceeds from the sale were used to reduce debt at Pembina gas infrastructure. Fourth, the Phase VIII Piece pipeline expansion continues to progress well. Pipe manufacturing is complete and construction progressed at several locations in the first quarter of 2023. The project has an estimated cost of approximately $530 million and is now trending under budget.

We expect Phase VIII to enter service in the first half of 2024 with three pump stations expected to enter service in 2023. This continues our track record of pipeline construction being a core competency at Pembina. And finally, I am pleased to say that we have raised our quarterly common share dividend by $0.015 per share, or 2.3% beginning with the dividend to be paid in June. Inclusive of the increased declared last September associated with the closing of PGI transaction, our dividend is approximately 6% higher year-over-year, reflecting both the impact of our strategy and our financial resilience. I will now turn things over to Cam to discuss in more detail the financial highlights of our first quarter of 2023.

Cameron Goldade: Thanks, Scott. As Scott noted, Pembina reported first quarter adjusted EBITDA of $947 million, which represents a $58 million or 6% decrease over the same period in the prior year. The combined impact across pipelines and facilities from the Northern Pipeline system outage was approximately $54 million in the first quarter. The other major variants quarter-over-quarter was in the marketing and new venture segment, where adjusted EBITDA declined by $98 million compared to the prior period. In the first quarter of last year, marketing and new ventures’ adjusted EBITDA saw record quarterly results due to sharp increases in commodity prices. Compared with the prior period, marketing and new ventures results this quarter reflected lower NGL margins as a result of lower propane and butane prices and lower margins on crude oil resulting from the lower prices across the crude oil complex, realized gains on commodity related derivatives for the quarter, compared to losses recognized during the first quarter of 2022 and a lower contribution from Aux Sable as a result of lower NGL prices and recontracting in the fourth quarter of 2022.

In addition to the aforementioned drivers, first quarter adjusted EBITDA was impacted by the net effect of higher crude and condensate volumes and higher recoverable project costs on the Peace pipeline system, higher revenues from coaching pipeline, vantage pipeline and AEGS, lower adjusted EBITDA contribution from Ruby, lower revenue related to recoverable costs on the Horizon Pipeline system in the first quarter of 2022, the PGI transaction and stronger performance from certain gas processing assets, including the former EPC plants and the Dawson Assets and lower corporate, general and administrative expense, primarily due to lower long-term incentive costs, partially offset by higher information technology related maintenance costs. Earnings in the first quarter were $369 million, representing a $112 million or 23% decrease over the same period in the prior year.

In addition to the factors impacting adjusted EBITDA, excluding the lower contribution from Ruby, earnings were impacted by lower unrealized gains on commodity related derivatives, positive impacts captured in adjusted EBITDA from PGI, offset by interest expense, income tax expense and depreciation, resulting from the PGI assets recorded at fair value, which are all included in the share of profits from PGI, additionally, lower acquisition fees and lower income tax expense. Total volumes of $3.188 million BOE per day for the first quarter, represent a decrease of approximately 5% over the same period in the prior year. Volume decreases were attributable to both the pipelines and facilities divisions, including most notably the net impact of the Northern Pipeline system outage, the Ruby Pipeline, the previously announced — the previously announced disposition of the Empress I and Empress VI assets, higher crude and condensate volumes on the Peace pipeline system resulting from increased upstream activity, higher volumes at the former ETC plants and at the Dawson Assets and higher volumes at AEGS and on the Vantage pipeline due to third party outages in the first quarter 2022.

If we adjust for the impact of the dispositions and the Northern Pipeline outage, volumes in the quarter would have grown by approximately 2% over the first quarter of 2022. Based on the first quarter results and the outlook for the remainder of the year, our 2023 adjusted EBITDA guidance range of $3.5 billion to $3.8 billion, remains unchanged and includes the impact of the Northern Pipeline system outage and positive effects of the widening frac spreads due to lower natural gas prices. Based on the 2023 guidance, cash flow from operating activities is as expected to exceed dividends and capital expenditures. We continue to plan for excess free cash flow in 2023 to be used to pay down debt, further strengthening the balance sheet and preparing the company to fund future capital projects.

At May 31, 2023, based on the trailing 12 months, the ratio of proportionally consolidated debt to adjusted EBITDA was 3.6 times or 3.5 times after adjusting for the closing of the sale of PGI’s interest in KAPS, caps which occurred subsequent to the quarter. Pembina expects to exit the year with a ratio of 3.3 times to 3.6 times, supporting a strong BBB credit rating. I’ll now turn things back to Scott for some closing remarks.

Scott Burrows: Thanks Cam. Coming off a record year in 2022, I’m very pleased with the strong start to the first quarter. I remain extremely optimistic about the state of our business and our ability to capitalize on growth in the WCSB, while pursuing transformational projects such as Cedar LNG. I want to remind you that Pembina will hold its Annual Meeting of Common Shareholders today at 2:00 PM Mountain Time, 4:00 PM Easter Time. It will be a virtual-only meeting conducted via live audio webcast. Participants are recommended to register for the virtual webcast at least 10 minutes before the presentation start time. For further information, please visit the Shareholder Information page under the investor center tab at www.pemena.com.

We’d once again like to thank all of our stakeholders for their support. Before we get to questions, I wanted to take a moment to address the wildfires in Alberta. Last night Brazos County Council declared a state of local emergency and an evacuation order has been issued for the town of Drayton Valley where our field office is located. This is a very difficult time for all the people in the area, including our employees, contractors and customers. Our focus is on the safety of everyone involved. We have activated our emergency response and incident management processes, and we are working to ensure all our staff and families are safe and receive the support they need. Please stay safe, everyone. With that, please go ahead and open the line-up for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. First question comes from Jeremy Tonet at JPMorgan. Please go ahead.

Jeremy Tonet: Just wanted to start off with the conventional pipe outlook if I could, and if I recall correctly, last quarter I believe commentary might have suggested 3% to 5% gross and in the release last night, I think there was a reference to 4% to 6% growth. And just wondering if you’re seeing kind of a little bit of incremental growth in the basin for you guys relative to where you were before or any color on that would be helpful?

Scott Burrows: Yeah I think you’re right Jeremy. I think there’s obviously a strong start to the year and volumes came in higher than we were initially anticipating. So, we are still pretty optimistic about volume growth through the back half of the year and like I said, signalling that kind of 4% to 6% volume growth,

Jeremy Tonet: That’s helpful there. Thanks. And just pivoting to the guidance, the northern system having more of an impact in the first quarter than expected and lingering in the second quarter here represents the headwind. But guidance being reaffirmed and just wondering if you see offsets, if it’s in the marketing business or pipes and facilities, just wondering how you see kind of these gives and takes and whether you see kind of a bias within the guidance range towards the high end or the low end at this point in time.

Jaret Sprott: Hey, Jeremy, I’ll take that. Yeah, I think you’re right; two probably tailwinds offsetting, obviously the impact of the northern headwind. You hit on the first one already. It would be in the marketing segment, obviously with natural gas prices having softened here as we’ve moved out of Q4 into Q1 and beyond. I think they’ve essentially halved from where they were sort of the middle of Q4 last year. And so that obviously in the short term is a tailwind for our marketing business and is contributing to making up a substantial amount and then some of the impact of the northern outage. As we referenced in the release and Scott was just speaking to him, obviously we are seeing strong volumes on the conventional side as well, particularly the crude and condensate side continues to show strength and that’s helping make it up.

The rest of the business, sort of chugging along and actually obviously as we said before, many of our assets are running at very high utilization. So we’re working to be able to find millions and tens of millions of dollars out of increasing utilization and increasing service that were possible.

Scott Burrows: Yeah, Jeremy, I think at the highest level, we’re seeing a lot of tailwinds on the infrastructure side of the business. I think the headwinds really is on the NGL side. Propane’s gone from $0.80 to $0.65 in the matter of a week to a week and a half. So, pick your day and pick your forecast. But right now, we’re pretty comfortable with the guidance range.