Tidewater Midstream and Infrastructure Ltd. (TWMIF) Q3 2023 Earnings Call Transcript

Tidewater Midstream and Infrastructure Ltd. (OTCPK:TWMIF) Q3 2023 Earnings Call November 9, 2023 1:00 PM ET

Company Participants

Scott Bauman – Director, Capital Markets

Robert Colcleugh – Interim Chief Executive Officer and Director

Brian Newmarch – Chief Financial Officer

Conference Call Participants

Robert Hope – Scotiabank

Robert Kwan – RBC Capital Markets

Patrick Kenny – National Bank Financial

Operator

Good day, ladies and gentlemen, and welcome to the Tidewater Midstream Third Quarter Financial Results Conference Call.

At this time, all lines are in listen only mode. Following the presentation, we’ll conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Thursday, November 9th, 2023.

I would now like to turn the conference over to Scott Bauman, Director of Capital Markets. Please go ahead.

Scott Bauman

Thank you, operator, and welcome everyone to Tidewater Midstream’s third quarter 2023 results conference call. I’m Scott Bauman, Tidewater’s Director of Capital Markets. And joining me today are Rob Colcleugh, Tidewater’s recently appointed CEO, Brian Newmarch, Tidewater’s Chief Financial Officer, and other members of Tidewater’s management team.

Before I pass the call off to Rob to review some highlights, I want to remind everyone that some of the comments made today may be forward looking in nature and are based on Tidewater’s current expectations, estimates, judgments, and projections.

Forward looking statements, we express or implied today are subject to risks and uncertainties, which can cause actual results to differ from expectations. Further, some of the information provided refers to non-GAAP measures. To know more about these forward-looking statements and non-GAAP measures, please see the Tidewater Midstream financial reports, which are available at TidewaterMidstream.com and on SEDAR plus.

With that, I’ll pass it on to Rob to discuss some highlights from the quarter.

Robert Colcleugh

Thanks, Scott. Good morning and thank you for joining our Q3 conference call. I first joined Tidewater’s board member back in May of 2017 and subsequently took on the role of interim CEO about a year ago. Now taking on the role of permanent CEO and reflecting in the past year. I can say for one, I’m glad it’s over. It’s been a lot of work. But more importantly, I think we’ve largely done what we said we would do and to put Tidewater in a very strong footing as we look towards the future.

I’ve had enough of the opportunity to work closely with the team members across the organization and to take a deep dive into our assets, our operations and our commercial strategy. During this time, we’ve been impressed with our team’s creativity, hard work, and commitment to our business, along with the company’s safety first culture.

Further, I believe that we’ve got the right leadership team in place to get our core assets performing as they should be and to surface new accretive opportunities. My top priority over the last year has been, clear, it’s been creating and increasing shareholder value. I’ve been pretty candid in the last few calls, I think on our asset review process and we announced the outcome earlier in the quarter that results the sale of our Pipestone natural gas processing facility in Dimsdale natural gas storage facility assets to AltaGas.

There’s no doubt these are our first class assets, and business is located in the heart of the Montney. And we think that the transaction was truly a win-win transaction for both parties. From our perspective, we’re happy with the value that we received for the assets. The transaction proceeds will lead to a significant deleveraging for our business that’ll help to provide us with flexibility and the means to build out our business around our core assets. We continue to work, towards closing the transaction and having received the key regulatory approvals in recent weeks. We expect the transaction to close within the fourth quarter.

As you’re aware, this morning, we also announced the start of our commercial operations at our renewable diesel facility in Prince George. This has been a major focus for both Tidewater Midstream and Tidewater Renewables over the past year. We’re very excited to be waiving the Canadian flag as the first renewable diesel facility and anticipate that this project will provide material contribution to our consolidated cash flow profile.

We’ve also made considerable progress in the cost reduction and business controls front that’ll become more evident with future quarters. Over the course of the last year, we encountered and overcame two major challenges. The Alberta wildfire during the second quarter and Tidewater’s first turn turnaround at PGRs, acquiring the asset in 2019. Our current three throughput volumes at both Brazeau River plant and our Prince George Refinery speak to the strength of our team and the resiliency of these assets.

The team at Brazeau River Complex restored the assets to pre wildfire levels during the quarter, safely bring the facility throughput back up to the level seen in the first quarter of 2023. The BRC is uniquely positioned in the Deep Basin having multiple egress solutions, natural gas storage infrastructure, a fractionation facility, and liquids handling infrastructure to help enhance our customers’ netback and price realizations.

We’ve also seen an increase in upstream A&D activity in the area and that should lead to additional capital deployment and growing volumes in the region. Our downstream business saw record throughput at Prince George Refinery during the quarter following the second quarter turnaround.

PGR continues to generate significant cash flow for our business and consistently demonstrates industry leading operational metrics while operating in one of North America’s best frac spread markets. Tidewater Renewables co-processing assets co-located at the Prince George Refinery were also approved for credit generation under the Canadian clean fuels regulations during the quarter.

Continuing with Tidewater Renewables, as I mentioned the HDRD complex produced its first renewable diesel on October 22nd. And as of November 7th, has progressed commercial operations. The facility is currently producing around 1500 barrels a day of on spec cold weather diesel. And the corporation is actively working on safely increasing production rates towards the facility’s 3000 barrel a day to sign capacity. Despite the delays in commissioning the HDRD complex, project economics remain attractive with payback expected within two to three years. As production volumes ramp up during the fourth quarter of 2023, we expect that the HDRD project to generate run rate annual corporate — annualized corporate adjusted EBITDA in the range of $90 million to $150 million once fully operational.

This is a huge milestone for Tidewater and indeed for Canada. So we’ve made, significant changes and accomplished number of important goals over the last year, but held demonstrable value creation for shareholders. We’re not resting on our lows. This is a journey not a destination and we are constantly evaluating ways to unlock value. Eventually, this will get reflected in the stock.

I’ll now turn the call over to Tidewater Midstream’s Chief Financial Officer, Brian Newmarch, to walk through our financial results.

Brian Newmarch

Thanks, Rob. During the third quarter of 2023 record throughput from our downstream business drove a 10% increase in consolidated adjusted EBITDA of about $49 million. This includes $15 million of contribution from Tidewater Renewables that we report on a consolidated basis due to our 69% ownership stake.

The Prince George Refinery achieved record throughput during the quarter, averaging more than 12,700 barrels per day helping to drive the strong Q3 results.

Prince George 211 cracks increased slightly during the quarter averaging approximately $87 per barrel, which was primarily driven by higher diesel pricing.

Moving to our Midstream business, our Pipestone natural gas processing plant and Dimsdale storage facility continue to deliver strong financial returns. Volatile, AECO natural gas prices early in the year allowed us to contract most of our parking loan volumes at profitable levels that contributed to the quarter.

Additionally, we saw the Brazeau River gas plant throughput returned to a 155 million cubic feet per day. Rigs that are more consistent with what we saw during the first quarter.

The timing of working capital commitments surrounding the Q2 refinery turnaround and finishing construction at the HDRD complex led to an increase in our overall consolidated debt during the quarter. This is the reality with these large projects as we see maximum capital deployment in the final stages of commissioning and then as we start producing marketable product and generating meaningful hassle, these projects rapidly deliver. We are fortunate to have supportive capital providers who have been very helpful with our efforts to bring the HDRD facility online.

Our third quarter capital investments were focused on routine maintenance and optimization activities that support higher corporate throughput during the second half of the year. We continue to forecast our deconsolidated maintenance capital budget being within the previously guided range of $55 million to $65 million.

The timing of the HDRD complex ramp up and the close of the AltaGas transaction will impact Q4 EBITDA that led to a revised $180 million to $200 million full year consolidated EBITDA guide. These are two significant milestones that will materially help delever our business.

As we look ahead into 2024, we see enhanced financial flexibility that we’re committed to properly capitalizing growth opportunities that will support profitable future growth.

I’ll now pass things back to Rob for closing remarks.

Robert Colcleugh

Thanks, Brian. We’re excited for the events of our fourth quarter to unfold as we ramp up operations of the HDRD complex and move to close on the AltaGas transaction. Both of these events are transformative for Tidewater and are pivotal to the evolution of Tidewater. We will continue to evaluate the opportunity set that we have in front of us and take decisive action to create shareholder value.

I’ll now ask the operator to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Robert Hope from Scotiabank. Please go ahead.

Robert Hope

Hello, everyone. And congratulations Rob on the appointment. I want to go back to some of the comments you actually just made on taking decisive actions to maximize shareholder value, the asset review process with the AltaGas transactions behind you, what are you looking to or looking at for kind of further changes in the organization.

And I guess more broadly, how are you thinking about the LCFS stake just given that the stock is down quite a bit this year in relatively liquid.

Robert Colcleugh

Yep. No. I agree. I think part of it is we just got this up and running days ago. So we do want to take a patient look at how LCFS trades. We’re not going to make any — obviously we’re not making any announcements about anything, but I think that’s — I think it’s fair to actually let’s let the thing settle in. We’ll certainly — I expect people to be interested. We’ve had a bunch of questions already of just how quickly things can ramp up to capacity or design capacity and how quickly that translates into cash flow which I think is pretty quick.

So I think good — I would like to see how that materializes before we make any decisions. But as we’ve said before that process that we’ve gone through and the analysis that we’ve done and the parties that we’ve spoken to, it’s not complete.

We got a good transaction over the line, but we continue to evaluate everything that we’ve got, whether it’s the LCFS position or any of our other assets. So it’s an ongoing process of sort of unlocking that value or trying to.

Robert Hope

Thanks for that. And then maybe just moving over to the AltaGas transaction, regulatory approval has been received, but can you talk or can you walk us through where we are in terms of the other kind of, gating factors to get the transaction done?

Robert Colcleugh

Yeah. I mean, they’re just they’re sort of blocking tackling things, a few commercial pieces that are — think we’ve got good visibility on. So, when we say end of the quarter, I think we’re hoping that that’s conservative. But they’re in hand and moving forward.

Robert Hope

Maybe just to reframe, is it the EPC contracts or the commercial agreements that are kind of where most of work is being spent on right now?

Robert Colcleugh

Well, yeah, they’re both, but they’re well in hand. I think it’s an important piece.

Robert Hope

Alright. Thank you.

Operator

Thank you. Your next question comes from Robert Kwan from RBC Capital Markets. Please go ahead.

Robert Kwan

Great. Good morning. Just to kind of come back to the different options, you’ve been clear and you want to see how the HDRD facility kind of ramps up. Are there other kind of options or things that are on the table that you’re considering that maybe more timely, that you may either want or need to pursue in the nearer term or should we really be thinking about it as obviously close the hill to gas.

The pipe’s down, Dimsdale sale, HDRD facility ramp up, which you know, as you had talked about is kind of over the coming weeks and then kind of reevaluate the situation at that point. Is that — is it kind of more 2024 thing for any other alternatives then?

Robert Colcleugh

Well, given we’re almost in the middle of November, don’t expect a giant announcement for us in the next couple of weeks.

Robert Kwan

Okay. And then as you think about — can you talk about what some of the other things are on the table or without, that’s probably fairly exhaustive. Is there anything that would — you would be ruling out whether that’s the material share buybacks or are there certain assets that are largely untouchable in your mind from a sale perspective?

Robert Colcleugh

No. There’s not well, I’d say just in general, nothing is off the table. I mean, there’s, we will maximize value any way we can. Obviously, stock hasn’t moved. We’ve done transaction at multiples of our trading multiple. We’re coming out of this with near nothing in debt. And we’ve got HDRD online. So, I think, I’d like to let this settle and see the market doesn’t have the best or I shouldn’t say the market. The LCFS doesn’t have best liquidity. So, there’s definitely an impact on its valuation because of that. But we’d like to see where things trade, but there’s nothing that’s off the table. And like I said before, there are all sorts of different options for us to force shareholder value to improve and we will pursue them.

Robert Kwan

Okay. Understood. And just one last question then. If you think about potential — your potential to deploy capital into growth projects. You previously talked about anything that you’re going to do in midstream. It sounds like it’s smaller in nature, quick payback, that there isn’t an appetite for large projects at the midstream level. Is that still the case?

Robert Colcleugh

Yeah. That’s still the case.

Robert Kwan

That’s great. Thank you.

Operator

Thank you. [Operator Instructions]. Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.

Patrick Kenny

Thank you. Good morning, guys. Maybe for Brian, I know that at the time the Pipestone deal was announced, you were going to take a bit of time to consider rightsizing your senior credit facility. Just wondering if you could share any updates on where you’d like to see that capacity come down to from the current 600?

Brian Newmarch

Yeah. It will be lower. I think as Rob mentioned at the outset here, if you take a look at the gross proceeds from the transaction and that will pay back all of the debt we have outstanding that will put us in a pretty strong spot financially. You pay down my low fees on credit capacity that you’re not losing, that you’re not using. That is a drag on the business, although it is not a massive drag. So it will be lower. I think our intent here is just to make sure that we have the adequate capacity to maintain the working capital in the business.

As you know, running a refinery is pretty intensive from a capital — working capital perspective given the amount of feedstock. We buy having the inventory and then process before we kind of receive the proceeds from the refined product sales.

And then as we look to kind of add small kind of organic growth opportunities in around our asset base. We just want to make sure that we have the finance capacity to support that. So just maybe more straightly answer your question, lower significantly smaller than it has been right now. Any better commitment that we will be running this business with lower levels of debt. And I think that’s becoming more and more obvious given what we’ve seen in the industry market and the cost of capital and the cost of debt specifically.

Patrick Kenny

And maybe just on the proceeds to be received. I mean, I guess half of it’s in the form of AltaGas shares. So just given the shares are trading above where they were when you did the deal, is there any way to lock in your price to be received here before everything officially closes or how you think about maximizing your overall proceeds while minimizing market risk?

Robert Colcleugh

Well, frankly, we’re pretty happy with the AltaGas position and we think it’s going to get higher.

Patrick Kenny

Okay. Great. Last one for me. I guess just from a pro form business mix standpoint. Any updates on where you’d like to land from percent midstream versus percent refining? As well as maybe just your overall appetite for commodity based cash flows as a percentage of run rate EBITDA? Is it less than 50% less than a third? Just any thoughts around target cash flow quality profile would be great. Thanks.

Robert Colcleugh

I mean we can’t [dilate] (ph) per se. We’ve got opportunities in front of us on both businesses. I think it’s important to remember that this cap this business has been capital starved for a couple of years. Debt levels were too high and some fairly obvious investments have not been made. And so we look at it less in terms of what the ultimate mix ends up being and more with the exact opportunity set that’s in front of us right now. So we’ve got a few things on the downstream side, but they’re really not large, kind of tankage types of stuff that will help us on trading and things like that.

But it’s not that we’re directing capital because, we’d prefer to see more of it at midstream versus more of it at downstream. It’s just the opportunities that we’ve got in front of us, and the one on downstream is fairly fixed, there’s not a lot of growth that we can build in there without having major expansions and things like that.

So I don’t think anybody x goes out and well, I guess shouldn’t day that, but we’re comfortable with our commodity exposure and I would characterize it a little bit more as spread exposure rather than pure commodity exposure when you look at our both businesses, both downstream, with your crack spreads. And then we’ve got a number of opportunities that would be frac type spread opportunities on the midstream side. And we like those. They’ve got a ton of optionality. They tend to be unidirectional and that, we make money when those spreads widen and we like to lock those in. When it goes the other way, it doesn’t really cost us money. So it’s truly kind of call options on spreads.

So, we’re very comfortable with that business and the opportunities that we’ve got in front of us right now are frankly, the ones that we’re going to do in the near term are a mix of, there’s some added processing capacities, adding some customers under the long term, 10 year take or pays. That just happens to be in front of us. We’ll do that business all day long. And then the other ones are also more — a little more midstream focused right now. But, again, it’s cash flow generation. It’s our primary focus.

Patrick Kenny

Got it. Thank you for your comments, Rob. Thanks, Brian.

Robert Colcleugh

Thanks.

Operator

Thank you. There are no further questions at this time, I’ll turn the call over to Mr. Bauman for closing remarks. Please proceed.

Scott Bauman

Thank you everyone for joining the call today. The team is available to address any outstanding items with their contact information at the bottom of this morning’s press release. Thank you all and have a great day.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.