Pembina Pipeline Corp (PBA) 2011 Q4 法說會逐字稿

Good morning, my name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the Provident Energy 2011 fourth 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) I would now like to turn the call over to Raina Vitanov, Manager of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Leading our discussion this morning we have Doug Haughey, President and Chief Executive Officer, and Brent Heagy, Senior Vice President and Chief Financial Officer. Also with us today we have Murray Buchanan and Andy Gruszecki, who together run our midstream operations.

Please note that we will be discussing forward-looking information on the call today. This forward-looking information is based on a number of important factors and assumptions. Actual results could differ materially from those discussed during the call. Information concerning the underlying factors and assumptions is available in yesterday's news release and is also discussed in our annual information form under the heading risk factors, which is available on Provident's website or SEDAR.

Also be advised that comparative 2010 results exclude results from the Upstream business, which was sold in June 2010, as well as the buyout of financial derivative instruments and strategic review and restructuring costs. Further, please note that all dollar figures are given in Canadian dollars unless otherwise noted, and that our financial statements have been prepared under IFRS.

The following forward-looking information for 2012, including Provident's anticipated capital program, is provided by Provident only and does not reflect the completion of the proposed acquisition of Provident by Pembina. With that being said, I would like to turn the call over to Doug Haughey. Doug, go ahead.

Thanks, Raina. Good morning, everybody. Yesterday Provident announced record adjusted EBITDA for the fourth quarter and full year 2011. In addition we increased our capital, our growth capital spending by almost 80% compared to 2010, focused on fee-for-service organic growth opportunities in the Montney, the Alberta Oil Sands, our Redwater facility, the Bakken oil play and the Appalachian natural gas shale plays.

And as you all know, subsequent to year end -- on January 16 Provident and Pembina Pipeline Corp announced an agreement whereby Pembina will acquire all of the issued and outstanding common shares of Provident by way of a plan of arrangement. We continue to be very excited that the proposed transaction will create a leading player in the North American energy infrastructure sector, able to offer a broader suite of energy midstream services to its customers.

In terms of our key performance objectives for 2011, we generated year-over-year adjusted EBITDA growth of 25%. We exited 2011 with a total debt to adjusted EBITDA of approximately 1.8 to 1, comfortably less than our target of 2.5 to 1 and we paid out CAD146 million in dividends and achieved a payout ratio on distributable cash of 63%, well below our target of 80%.

Our strong 2011 results were largely driven by very favorable propane industry fundamentals. Natural gas liquids margins were robust, driven by strong demand for propane, butane, and condensate for the majority of 2011. Propane plus market frac spreads for 2011 averaged about CAD55 per barrel and that's at or near historic highs.

Warm weather at the end of the fourth quarter of 2011 reduced the demand for propane, which is primarily used to meet winter heating demand. The unseasonably warm trend has continued into the first quarter of 2012, potentially the warmest winter in over 40 years. This has resulted in lower propane sales and pricing so far in Q1 2012.

However, helping to offset lower propane prices, spot Alberta natural gas prices are currently about 40% lower than they were in the fourth quarter of 2011, which has led to significantly lower production costs for NGLs at both Empress and Younger. Empress extraction premiums are near the midpoint of a CAD6 to CAD9 per gigajoule range. Based on current market conditions, we expect that our Q1 2012 adjusted EBITDA will be near our Q1 2011 level.

Despite the short-term softness, NGL industry fundamentals for the future remain strong, with high propane exports from North America and strong petrochemical margins where propane is used as a feed stock. In addition, increasing heavy oil production in Alberta continues to increase the demand for condensate and butane as a diluent and butane as a solvent in SAGD operations. We also continued to see very strong demand for fractionation, storage, and ancillary services.

With respect to growth projects, first for 2011 we deployed CAD113 million of growth capital and CAD121 million of sustaining capital. Our 2011 growth capital spending increased by almost 80% over 2010 and reflects our success in developing new fee-for-service growth projects around our midstream assets.

We completed several key projects in the fourth quarter, including the Septimus to Younger pipeline, the Taylor to Boundary Lake Pipeline replacement project, and we're currently in the final stages of our NGL truck and loading terminal at Cromer, Manitoba. Second, Provident is developing a detailed cost estimate for the twinning of our Redwater fractionation facility. The increased production of ethane plus NGL mix in the Montney and other gas plays in the area would be the primary source of volumes for the 65,000 barrel-a-day fractionation expansion. If there's sufficient level of customer commitment, which we expect, and board of directors approval by mid-2012, the facility could be operational by mid-2014.

So I would like to turn the call over now to Brent who will discuss our fourth quarter financial results. Brent.

Thank you, Doug, and good morning, everyone. During the fourth quarter of 2011 we generated gross operating margin of approximately CAD122 million. This is an increase of 7% over 2010. For the full year we generated gross operating margin of CAD381 million, an increase of 22% over 2010.

The increases can be attributed to stronger NGL pricing for all of our products and higher frac spreads at Younger from the Redwater West system. Commercial services saw a slight reduction in operating margin of approximately 5% over the fourth quarter of 2010 due to lower condensate rail terminalling revenues, which resulted primarily from the Southern Lights Pipeline commencing operation by mid-2010.

Fourth quarter 2011 adjusted EBITDA increased to CAD100 million from CAD88 million in the fourth quarter of 2010. Adjusted EBITDA for the full year of 2011 increased by 25% to CAD282 million. The increase for the full year of 2011 was largely a reflection of significantly higher gross operating margin, partially offset by higher realized losses on financial derivative instruments which occurred as a result of a much more favorable pricing environment.

Adjusted funds flow for fourth quarter was approximately CAD93 million, 22% higher than the prior year. For the full year, adjusted funds flow was CAD253 million, an increase of 23% over 2010, largely tracking the increase in adjusted EBITDA. Cash dividends to shareholders in the fourth quarter were CAD0.14 per share, representing a payout ratio of 45% of adjusted funds flow net of sustaining capital. For 2011 dividends to shareholders were CAD0.54 per share, representing a payout ratio of 63%.

Provident exited the fourth quarter with approximately CAD510 million of total debt, representing a ratio of total debt to adjusted EBITDA of 1.8 to 1. We continue to maintain our strong financial position with significant capacity available under our credit facilities and leverage ratios which place us at the low end of our peer group.

As of December 31, 2011 Provident had approximately CAD900 million of tax pools and non-capital losses available to claim against future taxable income. With respect to hedging, yesterday we released updated hedging information which reflects our hedge positions and forward market indications as of February 29, 2012. For 2012 we have hedged approximately 66% of our estimated NGL frac spread volumes and approximately 68% of our estimated frac spread natural gas input volumes.

I would now like to turn the call back over to Doug, who will provide some closing comments.

Thanks, Brent. Overall we continue to be very excited about the long-term strength in NGL markets and our expanding portfolio of growth opportunities. We have approximately CAD1.4 billion in identified growth capital projects, have announced a growth capital program of CAD135 million for 2012, which positions us for substantial growth in our fee-for-service business going forward.

Before we turn the call over to the operator for questions, I would like to make a few comments about our pending transaction with Pembina. First of all, as a team we're very pleased with the value we've been able to deliver for Provident shareholders. The transaction contemplates about a 25% premium to our pre-announcement closing price, an increase of about 27.5% to the dividend for Provident shareholders. As I said at that time we announced the deal, in the 18.5 months between the time we closed the sale of Provident's Upstream business and the day we announced the Pembina deal, we generated total shareholder returns in excess of 100%.

In addition, as I said before, any investor who bought a Provident share at any time in the Company's history and have that share until the announcement date, would have enjoyed a materially positive total shareholder return.

Second, we're very excited about the outstanding prospect for the Pembina-Provident transaction going forward. I can say with confidence that Provident will be in very good hands. We anticipate a continuation of our core NGL strategy, clearly no 90-degree or perpendicular course change. The combined Company will be able to offer a broader suite of services to customers, will be on a very solid financial footing and we'll be very well positioned for long-term growth.

Third, we're very happy that substantially all of our Provident employees will be going forward with Pembina. Our team has been able to deliver an amazing transformation of Provident in a short period of time and for that as a management team we're very thankful.

And finally, on behalf of Provident's senior leadership team, many at the table here today, and our Provident board of directors, I would like to thank investors for the great support since we refocused Provident in 2010 and in particular, we would like to say thanks to the analyst community for your fair and balanced analysis and continued faith in the Provident team. It was very much appreciated.

So, I can say this with mixed feelings, as we wind up the prepared portion of what we expect to be our final Provident conference call, but we all agree it's great to end with record results, unparalleled growth prospects and a fantastic pending combination with Pembina.

So with that, everyone, I would like to turn the call over to the moderator to open the call for questions. Thanks.

(Operator Instructions) Robert Kwan from RBC Capital Markets.

Just on Redwater West you made a number of comments both on the call and in the MD&A about Q4. You had the strong NGL pricing, but you had some weaker volumes on the condensate and the propane and the methane was neutral. Just wondering if you can ballpark and quantify a little bit just how much you saw the strength and where you saw the offsets for both condensate and propane and what you see as you roll into Q1 here.

Well, I think certainly, Robert, in regards to condensate, that market is strengthening. We have a situation where demand for condensate is increasing and the premiums have been getting stronger. We ourselves are actually bringing more condensate in from the United States to meet that growing demand, so we certainly expect condensate to be very strong. On the propane side, we believe it is going to take some time, when you have the warmest winter in 40 years, a bit of time for inventories to get basically consumed. We're very thrilled to see that the petrochemical margin for cracking propane and using it as a feedstock has quadrupled since the fall and so that is a positive sign.

The petchems in the United States have upped their numbers by over 40,000 barrels a day in the last six weeks. And the exports for propane will be over 4 million barrels in March, which again is an extremely high number. But we do think it will take some time for the propane overhang to be dealt with. But the outlook for the fourth -- out to the fourth quarter, third and fourth quarter, we think is very strong, because this market is very efficient. They have the ability to consume as petchems and they also have the ability to export it. And unlike gas, you don't have that issue with the propane. We think the long-term fundamentals for this business is extremely strong with the propane.

Just when you look at what happened in Q4 2011, you noted some of the weakness in propane, although didn't really seem to be that big of an impact in the numbers. Are you signaling that maybe we are going to see a bigger impact in the first quarter, just based on how you've positioned your propane inventory?

I believe that what we've indicated in the outlook, Robert, is that we anticipate our first quarter this year to be very comparable with the first quarter last year on an overall basis.

Okay.

Remember to look at our hedging and you will see that we've hedged about 8500 barrels for Q1 at CAD1.54 and so I think that's important to factor in that hedging does provide us with protection for Q1. And that's versus a Belvieu this morning that is at CAD1.23, so our hedging is in at CAD0.31 above current market. Which will allow us to move through that quarter and be on solid footing going forward.

Hi, Robert, it is Doug. I've got to say I was very impressed with the job our team did positioning us for the fourth quarter of 2011 and the first quarter of 2012 given where we saw the markets go. They really did a superlative job and I think we're going skate through this softness reasonably well.

The numbers look good and just maybe one last granular question on the hedging. You mentioned that you have got the hedge scheduled, but just for me to be clear, the hedging that you are showing is the frac spread hedging. On top of that, though, you would just have general field purchases of NGL mix?

Yes, the hedging we provide is for the frac spread. Remember that our other products we've talked in the past, that Redwater West products that we buy in field, we have turned it 17 times a year. So if you had a constant down run in pricing, could have some impact on you. But to the extent that it's kind of flattened off, that impact isn't going to be there, because you are buying off a number perhaps in February, selling in March, but the markets have actually flattened out and started to recover for propane. We did get down in the CAD1.15 level. We're CAD1.23 this morning.

That's great. Thanks a lot, guys.

Carl Kirst from BMO Capital.

Actually Robert hit the primary question I wanted to hit, but maybe just sort of going off of that from a macro, because you said that March exports back 4 million barrels. We did see that fall off quite dramatically at the end of last year. And maybe just so I better understand, was that a macro environment just because of, say for instance, the warm winter that Europe was going through as well? I guess I'm trying to get a better understanding if this resumption of propane exports is something that basically we can count on or if it is going to stay quite volatile?

I guess what I would say to you, Carl, is what happened in the fourth quarter last year is that a number of parties who had paid their fees to -- for loading of ships backed away, because if you remember, when we met in Sarnia, the inventory levels were well below the previous year and therefore, parties expected with a normal winter that there would be quite a large spike in the pricing. It was fully anticipated that we could see the pricing moving up into the CAD1.80 range or higher. So what happened is, yes, those cargoes backed away simply because Mont Belvieu became higher than what it cost you to export. What has changed now is that northwest Europe and the Asian markets have moved up. They are strong. They're sitting around CAD2. And so you can export propane from Belvieu and have yourself a nice profit on the arbitrage trade of buying Belvieu, selling Japan, or buying Belvieu and selling northwest Europe.

And so what's happening, and that was my point earlier and I'm sorry if it didn't come through clearly, but what's happening is it's an efficient market and people are taking that opportunity to buy Belvieu, export the product and that's why the levels picked up, simply because there really wasn't any significant winter to speak of in North America. Northwest Europe was extremely cold and prices have been strong. Asia is always a strong market. Basically what you've had happen versus the fall is Belvieu view prices have come off and prices in Asia, northwest Europe are still quite strong and therefore the export demand is quite strong. So going forward, to the extent that arbitrage is there and it's efficient to buy Belvieu and sell Asia, that export levels will continue at high numbers. That's how it works. If we get to the point that --

Great. I'm sorry?

Sorry, I missed what you said.

No, I was just saying I appreciated the color.

Okay.

If there is a -- just one other question, maybe for Brent. As we looked at the fourth quarter, also noting that there seemed to be a pretty big tick-up in O&M and G&A and just didn't know if there was something specific behind that on a -- from a corporate line item.

Oh, Carl, part of that would be the incorporation of Three Star Trucking. We closed that and so the results for Three Star are included beginning October 1. So, that would be the primary reason for both the G&A and also like maintenance costs.

Great. Perfect. Thanks, guys. Congratulations again.

Thanks, Carl.

(Operator Instructions) Robert Catellier from Macquarie.

Thank you and congratulations, Doug, to you and your team for the transition you've executed over the last two years. My questions have to do with the storage opportunities. You allude to the opportunities in the report, characterizing them as being larger than your current capacity. So what's the bottleneck before you roll out new storage caverns.

I guess I would suggest, Robert, that the bottleneck is just the fact that it takes approximately two years to put them into service and we have a very active drilling program that is ongoing and we can't keep up with the demand for caverns. So it's a very pleasant dilemma to have and we continue to work with the oil sands producers, the likes of Novas and LPG producers to put additional storage in. And again it's the 18 to 24 months to get the caverns, to wash the caverns and have them come into play. That is the only holdup in the process.

My comment is more oriented to whether or not there's an opportunity to accelerate that as opposed to maybe work two of them at once as opposed to the time it takes you on an individual cavern.

Sorry, so from that perspective, we actually are drilling and washing multiple caverns right now. I guess the bottleneck I would suggest is probably the ability to dispose of the water in the system, but we've got a couple of caverns being washed as we speak. We've got caverns being drilled and it's a sequential process. So it's not that they're being done one at a time. There's always caverns being developed at Redwater and it's -- we can do up -- actually sorry, I'm being corrected, we can do up to three at a time. So it's -- again, it's a wonderful situation to be in.

And just following that further, one of your competitors is setting up a terminal in the oil sands region and there seems to be considerable demand for crude oil storage in addition to NGLs. Any thoughts to perhaps expanding your reach into other markets and in particular on the storage and terminalling side?

We currently are looking at crude oil storage. We're not looking at it, Robert. We actually are putting crude oil storage into play at Redwater. So that is -- there's actually a few caverns going in for use for crude oil storage over the next couple of years they will come into play. And the notion of -- I think that the opportunities that are looking like they're arising at the Bruderheim, they've got a great facility and we, in turn, have a wonderful facility and the connectivity to Fort McMurray so my, I guess, impression is that there's probably more than enough business for both of us.

Rob, I think you've hit the nail on the head. In fact, that was one of the major strategic drivers when we started talking about the Pembina deal and that was the ability to integrate our operations with some of the crude oil operations that Pembina currently has running, including terminal services. So you are right, we see huge opportunity and we think that the combined companies going forward will be extremely well positioned to execute.

My last question has to do with the Septimus pipeline and it has been constructed. Has that been placed into service and if so what are you seeing in terms of initial utilization?

It was put into service in December and it's -- I'm going to suggest that it's actually coming in as expected and we have a very active program up there to continue to work to fill it. So we're quite pleased with what is going on up there right now, Robert. So everything has gone, actually -- everything has gone as per schedule and it came in on schedule and on budget.

Terrific. Thank you.

(Operator Instructions) Steven Paget from First Energy.

If possible, could you please confirm which members of senior management have confirmed that they will join Pembina?

It's a little early for that. Where we are, just so everybody knows, we're currently awaiting competition bureau approval. That's expected to be sometime, hopefully, next week. In advance of that we are being very careful about how much we collaborate with Pembina on a number of these matters.

For example, there's a complete prohibition against collaborating on any marketing or business development efforts. It's not quite the same, in terms of organizational planning, but we will be in a position I think to make an announcement after that competition bureau approval. What I can tell you is that when we say substantially all employees, I think it's fair to say it would be, with the notable exception of Brent and I, substantially all of our senior leadership team will be joining Pembina in very key roles.

My second question is about water use at Redwater. How much water do you use versus the size of your water license?

Steve, that's one I'm going to have to get back to you on. Actually, the comment that I will make on that is that water is not a constraint. When we drill wells, it's the disposal capacity for the brine that is the constraint on drilling the wells fast -- drilling the caverns fast enough. In terms of the actual water licenses that we have, again that is not an issue because we have been looking at other facilities in the vicinity and working cooperatively to help them with their demand. So we are very well positioned in that regard. But if you want specifics, Steven, I can get back to you with those.

Thank you, Andy, that would be very helpful. Final question, if I might, is there somewhere else in Alberta or western Canada that could have the same potential for underground storage that we see in Fort Saskatchewan, Redwater?

I'm certainly not aware of one.

That whole formation, Steven, it goes and it extends through that whole Fort Saskatchewan area. It actually extends upwards toward -- not completely, but partially up towards McMurray, and then eastwards into and toward Regina. So the issue is the salt formation. Again, it's also the additional components are the water and the ability to dispose of the same and it's, I guess, the putting the entire package together is sometimes very costly and a constraint.

Thank you. Those are my questions.

David Nosworthy from CIBC.

Congratulations on a great quarter. Just a quick follow-up question on the cavern development. Is it fair to say that if you had more brine ponds then your ability to dispose with the brine water, you would be able to build out more caverns quicker? Is that essentially the flip side of it?

No, David, that's not exactly correct. We actually did put a brine pond into service, another brine pond into service just over a year ago. And we are always looking at adding brine pond capacity, which is essential for ongoing operation of the caverns, because you use the brine to displace the product in the cavern. But the issue that I was referring to earlier was actually a disposal well that you drill deep down into formation to dispose of the brine, the surplus brine that comes up when you are drilling and washing the caverns. So the disposal wells are required for drilling caverns, the brine ponds are required for using the caverns. And we always are evaluating what our brine pond capacity is and we put one into play a year and a half ago and we are looking at putting another one into play probably in the next couple of years.

Andy, I guess it's fair to say that's one of the advantages of the Redwater site. We have so much space, such a big footprint we can actually add brine ponds.

We're exceptionally well positioned. We've been very lucky in that over the last eight, nine years we've virtually doubled our footprint up at the Redwater site to give us a lot of room for growth, whether that be for caverns or for other facilities, that's correct, Doug.

And then second question, just building on the oil storage, in terms of connectivity into, say, Edmonton, Hardesty, what is currently there and what would -- how is the oil that's currently being stored getting to market?

So, again, the oil that we're talking about is -- it's not yet being stored. It is going to be put into -- oil will be put into storage over the course of the next couple of years. And that oil is going to be coming into our facility and there are connections and this is work that started with the producer requesting the service and ourselves, and actually Pembina, well back a couple of years ago. I don't know that I can go too much further, because if I do then you will be able to figure out who it is. (Laughter). I apologize.

Okay. Fair enough. Thank you very much. Those are my questions.

You're welcome.

I have no further questions in queue. I'll turn the call back over to the presenters for closing remarks.

Okay. Thank you, operator. And thanks, everyone, for some of the great questions today and the support over the last couple of years. Management has really enjoyed the interaction with the analyst community and we appreciate it very much. So that's it. Thank you, operator.

You're welcome. This concludes today's conference call. You may now disconnect.