Pembina Pipeline Corporation (PBA) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Pembina Pipeline Corporation 2020 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Scott Burrows, Senior Vice President and Chief Financial Officer. Thank you. Please go ahead.

Thank you, Chris. Good morning, everyone, and welcome to Pembina's conference call and webcast to review highlights from the first quarter of 2020. I'm Scott Burrows, Senior Vice President and Chief Financial Officer. On the call with me today are Mick Dilger, President and Chief Executive Officer, Jason Wiun, Senior Vice President and Chief Operating Officer, Pipelines, Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities, and Stu Taylor, Senior Vice President, Marketing, New Ventures and Corporate Development Officer. 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 various financial reports, which are available at pembina.com, and on both SEDAR and EDGAR. Let me start by saying we hope everyone and their families are safe, healthy and finding a way to manage through these uniquely difficult times. In addition to those impacted by the pandemic, the residents of Fort McMurray are top of mind with the recent flooding in that city. Pembina is pleased to be supporting the community with donations to both the Wood Buffalo Food Bank and the Red Cross fund for flood relief efforts. It's a challenging time for everyone, both professionally and personally, yet each day, we are feeling a bit more optimistic. There is evidence here in Alberta that we have successfully flattened the curve of the COVID-19 pandemic, and we are perhaps past the peak. Parts of the economy are starting to open up, with various jurisdictions putting plans in place to do -- and cautiously do more. As well, both our share price and oil price are well off their lows. While the road to recovery could be long and bumpy, we can all be excited that progress is being made. Today, Pembina has delivered strong quarterly financial and operational results as we have completed our first full quarter with the benefit of the recent acquisition of Kinder Morgan Canada and the Cochin pipeline. Earnings of $314 million during the quarter were in line with the same period last year. While we benefited from the contribution of additional assets from the Kinder acquisition, this was offset by lower margins on crude oil and NGL sales in our oil -- in our marketing business despite higher unrealized gains on commodity-related derivatives. Also, net finance costs increased during the quarter. However, the increase was primarily attributable to unrealized foreign exchange losses associated with the decrease of the Canadian dollar relative to the US dollar to the tune of approximately $100 million or $0.18 per share. Adjusted EBITDA in the quarter was $830 million, a 7% increase compared to the same period last year. In addition to the contribution from new assets following the Kinder acquisition, Pembina saw increased revenue volumes on the Peace Pipeline system. These positive contributions were partially offset by lower margins on crude oil and NGL sales in the marketing business as a result of a sharp decline in commodity prices during the first quarter of 2020 and a lower contribution from Alliance due to narrower AECO-Chicago natural gas price differentials driving lower interruptible volumes. While the first quarter results are indeed strong and reflective of the hard work our teams have done in executing Pembina's strategy, we know the impact of COVID-19 pandemic and the result in decline in global energy prices will begin to materialize more fully in subsequent quarters. Pembina and its customers, employees, communities and investors are rightfully focused more on the future than in the past, and we have previously announced Pembina has taken decisive action to protect all of its stakeholders. Since early March, Pembina has taken significant action to respond to the current prices. We took the necessary steps to protect human health and support government and community efforts to slow down the spread of the COVID-19 virus. In line with recommendations from health authorities, Pembina restricted business travel, canceled large group meetings and required non-essential employees and contractors who can work from home to do so. Pembina was classified by the government as an essential service. We determine the essential staff and critical infrastructure required to ensure uninterrupted service to customers while maintaining the safety of our assets, employees and other stakeholders. Pembina has not experienced any operational disruptions to its assets as a result of COVID-19. And we announced the deferral of some of our capital projects to reflect current market realities and uncertainty over the duration of this downturn. Additional discretionary capital investment has also been removed from Pembina's 2020 capital budget. The result is a $900 million to $1.1 billion reduction to the company's 2020 capital investment plans. These reductions will be directed toward reducing Pembina's leverage and enhancing its financing position. The remaining CapEx program remains self-funded. Importantly, these cost reduction measures will have no impact on Pembina's existing asset base or its ability to continue to operate safely and reliably. The decision to continue spending on the remaining projects was informed by the fact that all were well advanced or nearing completion and therefore, expected to contribute incremental adjusted EBITDA in the near future. By contrast, the deferred projects were in the early stages of planning or construction. Planning, engineering and regulatory work done to date on the deferred projects will allow Pembina to resume these projects to meet customers' needs when global energy prices and the broader economic environment are supportive. This recent action complements our long-standing commitment to our financial guardrails, which have positioned Pembina well to address today's challenging business environment. To recap the key points underlying Pembina's resiliency, we are currently benefiting from the following. First, the underlying business remains highly contracted, with between 90% and 95% of 2020 adjusted EBITDA supported by long-term, fee-based contracts, including approximately 68% to 72% coming from cost-of-service or take-or-pay arrangements. This is coupled with a payout ratio and fee-based cash flows that more than cover its dividend. Second, direct commodity exposure in Pembina's business is limited to the Marketing & New Ventures division, and we have hedged approximately 50% of Pembina's frac spread exposure in 2020 and 35% in 2021, excluding Aux Sable. Third, approximately 80% of the company's credit exposure is with investment-grade and split-rated counterparties or with counterparties secured by letters of credit. And non-investment-grade and split-rated counterparty exposure is well diversified across industries. Fourth, the balance sheet is strong. Pembina is fully committed to protecting its BBB rating. We are currently rated BBB with stable outlook by both Standard & Poor's and BBB with stable trend by DBRS. Both agencies have publicly affirmed those ratings within the past two weeks. Finally, the company has ample liquidity, with $2.5 billion of available cash and borrowing capacity, including a new $800 million revolving credit facility Pembina recently announced and the proceeds from a 5-year $250 million nonrevolving term loan that we announced yesterday. With a recent May note repayment, we have no further maturities in 2020. Given the challenging circumstances facing us, we feel we have taken the steps necessary to protect Pembina's financial position, and we are demonstrating the strength and the resiliency of Pembina's diversified and integrated business during the most difficult period of Pembina's histories. In addition to our own actions, we are carefully monitoring our customers' responses. As energy prices have fallen, our producing customers have drastically reduced their capital spending plans, which will result in slower growth or declining volumes. While we expect some of the volume declines across our system, much of Pembina's business is protected by strong contracts. Overall, we expect the impact to 2020 adjusted EBITDA in the Pipelines and Facilities division to be modest. We do, however, expect the marketing business will be more negatively impacted by the rapid and significant decline in energy prices. In light of these headwinds to the business, we have implemented approximately $100 million of operating and administrative cost savings throughout the business. Overall, considering all these factors together, Pembina continues to expect 2020 adjusted EBITDA to remain within the previously disclosed guidance range, albeit, we expect to be near the low end of the range based on our current forecast. While we have factored in reduced volumes and lower commodity prices, as I've mentioned previously, the duration of the current situation and large-scale shut-ins could cause Pembina to fall below the low end of the guidance range. In closing, it is worth remembering that Pembina has faced adverse fee before and always emerged strong. We faced the 2008-2009 financial crisis and the 2015-16 energy price collapse and remain resilient throughout these cycles. Thanks to our financial guardrails and decisive actions to defer capital spending, Pembina has a balance sheet strength and liquidity to weather the current storm and ensure that upon a return to more normal economic conditions and higher energy prices, Pembina will be ready to be able to continue its long track record of delivering value to all stakeholders. Before we wrap things up, I want to inform you and in light of the current circumstances, Pembina will not be holding its Annual Investor Day, which we were looking forward to presenting in early June. We will continue to evaluate our options for rescheduling this event in the future. We do, however, look forward to providing an update at our AGM, which is held today at 2:00 p.m. Mountain time, 4:00 p.m. Eastern Time. This year, the AGM will be held as a virtual-only meeting which will be 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 on Pembina's virtual AGM, including a copy of the AGM presentation, please visit the Shareholder Information page under the Investor Center tab at www.pembina.com. We would once again like to thank all of our stakeholders for their support. With that, we'll wrap things up. Chris, please go ahead and open the line up for questions.

[Operator Instructions] Your first question comes from Jeremy Tonet of JP Morgan.

I just want to go into the assumptions in your guidance a little bit more, if that's possible. When we think about slowing activity, possibly curtailment, are you able to share kind of any more color as far as like the depth and duration that might be kind of baked into ranges in your guidance? And I guess, what levels would push you below that bottom end there?

Jeremy, we've studied what's going on in the market, and we've done quite a forensic analysis around where the shut-ins might happen, what the impact on diluent demand is, what the impact on gas demand is associated with reduced diluent. And so quite a comprehensive customer-by-customer analysis, including their liquidity and ability to execute through these difficult times. And so all that thinking went into our guidance. Clearly, we didn't take our guidance likely, but we do reaffirm where we are.

Fair enough. Got you. Just kind of curious on your conversations with producer customers there, the extent to -- could there be actions taken to help out -- are producers asking for blend and extend or change of contract terms or anything like that? Just trying to get a feeling for what you guys are seeing out there.

We do have some end balances, as you would expect, everything from reductions on subleases to blend and extends to lower fees. And of course, we're willing to consider all requests. But our view is they have to be a bargain. Pembina is not going to be the shock absorber for the whole industry. But we are open to making bargains, and it will depend on each customer, their creditworthiness, how large of a customer they are, where they are, what our capabilities are. So it is on a case-by-case basis. But we just can't transfer wealth from our stakeholders, to their stakeholders. That just can't happen. We need to defend ourselves.

That makes sense. And just one last one, if I could. Want to see -- you guys had talked about asset sales being a possibility, and I didn't know if you had any kind of broader thoughts about M&A that could happen in the industry here, or if that doesn't make sense given all the dislocation and back to your last purchase with KML. Is everything kind of proceeding to plan with regards to integration and synergy expectations, granted that everything has a bit changed now with COVID-19? But didn't know if you could say anything there?

Yes, absolutely. Starting in reverse order. Our team -- I mean I'm humbled and amazed what's been happening kind of during this remote operations, the fact that we've been safe. Our safety record is as good as it's ever been. Our reliability is as good as it's ever been. We've moved every MCF of gas, every barrel of oil tendered and so doing great. Our Kinder integration is completely on track. The synergies are tracking well. The last kind of thing on the list is training U.S.-based operators that were going to come up and do that base to base, doing that remotely now. So the Kinder integration has gone out without a hitch, or getting the quarter out was very well done. The projects continue in the field. So all are going very well. It's astonishing. And part of the topic of the AGM, what we've been able to accomplish to really stabilize our balance sheet, including the additional liquidity on the balance sheet. When it comes to now -- I kind of -- I wrote the guys a note yesterday after our board meeting saying the stabilization effort is now formally over with the board meeting, and now we can get back to doing what we love to do, which is making money, and so we are now looking forward. And I'm pretty sure shareholders and all stakeholders are glad with the actions we took, but now it's game on again. So we'll be looking at everything.

Got it. That’s very helpful. That’s it from me. Thanks.

Your next question comes from Matt Taylor of Tudor, Pickering, Holt. Your line is open.

Hey good morning guys. Thanks for taking my questions. Just following up there on Jeremy's question. If you mind, can you just give a bit more detail there, especially on the level of pricing weakness duration that you're assuming and then a bit more on what you mean by large-scale shut-ins? And the reason I'm asking is, one of your competitors was out saying Canadian shut-ins could be as high as $1 million to $1.5 million in the near term. So any further thoughts there would be most helpful.

Yeah. I mean what we've done is a customer-by-customer analysis. Our people are speaking with customers all the time. So we factor in what we -- what's in the market, what we know on a customer-by-customer basis. When we last spoke with you folks, we shocked our 2020 forecast and made some high-level assumptions on what could happen. Now we've since gone in and done a customer-by-customer analysis on diluent demand, on gas processing volumes and what order diluent supply will -- or demand disruptions will occur, for example. Will Southern Lights turn off before Cochin? Or will WCSB suffer diluent demand erosion? So we've come around this in great detail, and we're comfortable with what we said. Now the shut-in words, and I know some of -- it got attention from some of you, those are lawyer words. Please don't interpret that as that we don't really stand behind our guidance because we do. What that meant to address is, for a while, I think we all lived in what happens if Enbridge shuts down entirely and the whole system gets backed up. And I think you'd all acknowledge that it's possible but not that likely, and so we put those words in to reflect that kind of Armageddon scenario. But please don't interpret it as that we're not standing behind our guidance.

I would just add, in terms of the question around duration, the way we modeled it, I would say, extremely similar to what we're seeing as kind of all third-party analysis and what peers are generally looking at, which is Q2 is probably going to be the hardest hit with a recovery through Q3 and then through Q4. So we're not assuming Q2 is the worst, and it stays that way. We are assuming some recovery through Q3 and Q4.

But again, we're -- those are things we're guessing at. Those are based on what we know from our customers.

That's great. That's really helpful. And just to help clear the air a bit. Can you provide some thoughts just on what your expectation is on base level EBITDA? Because, I mean obviously, your assets are highly contracted. So even if there is some potential downside there, just framing that against the backdrop of highly contracted assets.

Yes, for sure. I mean if you just zoom out for a minute, we came into the year without a huge contribution from our marketing group, and now that contribution is less. And so we're 90% to 95%. I don't know the exact math, probably closer to 95% fee-for-service right now. And so we're at or around the level where we're protected by agreements. And so we will have a great resilience at those agreements subject to underlying creditworthiness and liquidity of customers, which seems to be holding up quite well. And so I think that -- I hope that's helpful that we should have -- we should start to get pretty sticky around these levels.

That's great. One more, if I may. Then on PDH/PP, the other major project in the province is looking for a partner. Can you just address that? Is there anything you'd be willing to combine there? Or is there any contractual provision that prevents your partner from moving over to that project, which is, as everyone knows, is currently under construction versus staying with your currently deferred project?

I mean. Yes, I mean in terms of our project, job 1 was to safely defer all of the projects Scott talked about. We proceeded with the ones that were well advanced, and we could safely execute in this market and which will, once in service, provide incremental EBITDA. So that was job 1. Job 2 is to safely defer the projects that were early innings, Phase 7, 8, 9 and then the petrochemical project. And we have hundreds of millions of dollars invested in those projects that we want to safeguard. So that when we take those projects up, if we've got x hundreds of millions of dollars invested that when we pick them up, that previous investment still has the same value and we don't suffer any destruction of capital. And we have a meeting of the minds with our Kuwaiti partners on -- directionally on how to do that. Our -- all of our teams are working to safeguard that value. So that was job one. As I said earlier, we have now I think, very successfully safeguarded Pembina. We are extremely resilient at this point. And your question would be something that we wouldn't dare to dream about until we got here. We're aware of the situation there. We have a great relationship with -- in our pipeline, but our current focus is bringing our project back at the right time.

Your next question comes from Linda Ezergailis of TD Securities.

Switching to your cost savings. I'm wondering, first of all, how much of that $100 million is already reflected in Q1. And if it's not fully reflected, which I'm assuming it's not, how might we think of the ramp over the year? How much might be deferred versus sustainable prospectively, i.e., temporary versus permanent? And can you just also confirm that it's all incremental to any sort of previously identified synergies relating to Kinder Morgan Canada and the Veresen integration?

Yes. Linda, the $100 million with an internal target that we set, and it is what we consider a permanent saving. But that saving was for the balance of this year, and that saving did not double dip any kind of Kinder Morgan synergies. I think that's what you're after. It's truly incremental. Most of it has to do with taking $1 billion out of our investment plan, and it takes a lot of talented people to invest $1 billion wisely. But we're not going to do that this year, most likely. So when we look forward to next year, your question might be, well, if the $100 million was for $712 million for the year, and by the way, none of it was prior to this reporting period, could that be more annualized next year? And as -- I don't want to get too much into forward-looking, but I think most of that can be maintained for the foreseeable future.

That's helpful. And recognizing that your reporting systems might be a little bit more challenging to access remotely while everyone's working safely, I'm wondering if you could give us a sense of what April looked like for your marketing business. Did you see any sort of reductions in volumes on the condensate side, whether it's in Cochin or on your local production? Can you talk about your NGL contracting year and how things might have shifted versus the attributes of the contracts that you established on April 1st this year versus last year?

That's a fair amount of detail. I don't know we can get into that. But Linda, what we're seeing on the ground week-by-week is more favorable than what I think people might expect. And so the -- I know there's obviously lots and lots of press on volumes going down. But if you would, as you zoom out and you think about the -- for example, the curtailment program that the Alberta government, the Notley government put in of 0.5 million barrels. That came and went, and Pembina had absolutely no impact from that. And so we have -- and again, we'll talk a little bit more about it at the AGM, but we are surprisingly resilient when you go into what our product mix is. So our oil sands pipelines, for example, are synthetic crude and cost of service, so they're not impacted. We don't have a lot of touch points with, say, the producers other than diluent supply. And Southern Light is looking like the initial shock absorber for that diluent demand disruption. And Cochin and our systems are, again, to the extent we start to cut into to that supply as a secondary, we are protected by agreements. And so if there -- when you get a bit forensic about it, and we are very, very resilient. In terms of the marketing business, again, I don't want to get too forward. April is looking kind of the same as March, and then it looks like it's getting a little bit better again. But it's highly volatile. See forward-looking information. We just don't really know. But consider it's only 5% or 7% of what we're now forecasting.

Okay. Just as a follow-up on your marketing. You're always finding different ways to make money under different market conditions. And I'm just wondering, one of the opportunistic aspects that might manifest itself, but might not, is around storage and maybe finding opportunities for the industry to potentially store product crude in unused pipelines in your system or anything like that. Are you seeing any opportunity to kind of bring back asset capacity to help the industry, or is that something that's not really a possibility?

Well, I mean, I commend Enbridge for their brainstorm to use a large in pipeline -- out-of-service pipeline for storage. I thought that was a terrific idea and a great example of how the infrastructure companies can work with the E&P companies. We've got 30 million barrels of storage, and so our teams are working very, very hard. Even storage that we use typically for NGLs, can we use it for crude? Can we use storage that's normally reserved for operations for the next number of months? So that is something we're certainly looking at. Do we have tanks that are fully leased out financially but aren't full? And is there a sublease possible? So that's -- you're bringing up a good point that -- those are some of the gems that may provide us additional resilience, and we're not factoring in a lot of good news right now into our guidance. But undoubtedly, there will be some good news in the event there's more bad news.

I'll just add, just really quickly. And again, I think it's -- we've taken an approach to term out our storage capacity in many cases. And it's not as if it's sitting there being unutilized. And the team is exploring every opportunity that we can to find -- as Mick described it, there is spare space not being utilized. We're looking at that. It's not -- we have contracts. That's our -- the model that we've gone forward with. So as contracts roll off, we'll look at what we're doing with that capacity. But right now we've turned most of that out and are looking at only the available capacity that isn't being utilized.

And Linda, just a little finer detail on your question about the savings. We -- Some amount of that savings, I guess, is in the first quarter when you consider our compensation plans and things like that. Obviously, it's not going to be the best year for our staff in terms of comp. Our plans are designed to be correcting for -- when we don't deploy all the capital that we hope to deploy, and we're at the low end of the range versus the middle of the high range, our comp plans reflect that. So some of that was present already in the first quarter based on those results, but not much.

Thank you. Appreciate the context. I'll jump back in the queue.

Your next question comes from Patrick Kenny of National Bank Financial. Your line is open.

Hey, guys. Hope everyone is keeping well. If we assume that quite a few of your Montney customers will be accessing the $100 million federal EDC loan program which obviously, they'll need to pay back in 12, 18, 24 months. Wondering if that relatively urgent need for them to raise cash and delever presents a unique opportunity for you guys to not go on the offense or anything but acquire some higher quality gas processing infrastructure from certain producers as part of any take-or-pay contract renegotiation while, as you say, making sure you don't transfer any wealth in the process.

Yes. I mean you wouldn't believe the number of ideas that we all have on what's possible in this market, but we've been focused mainly getting ourselves here and being able to stabilize the company. We've got tremendous balance sheet flexibility. I think, as I said, we're sticky on our ability to make money. But you make a fair point. Whenever you get in these situations, Pat, the difficult thing to know is what's the right amount to pay. I think the market right now for example, is wondering what multiple Pembina to have, what multiple Enbridge ought to have. And is there a new world, like on one hand, you've got conflicting signals. Stable dividends are worth more because interest rates are low, so that should push valuations up. But then you have a backdrop of how long is the demand destruction going to last offsetting that. You have generally lower growth. So those are things that the market's got to figure out, and we're trying to figure out. And so if there were a good gas plant opportunity, I don't know what to pay for that right now. So that's one of the things we've got to grind through here as we come out and transition from our always top-of-mind defense to offense. But certainly, that could be a capability.

Right. Yes. And kudos you guys for all the actions on the liquidity front and sustaining the BBB flat credit rating there as well with stable outlook. Just moving over to the marketing side. So 30%, 35% hedged, I guess, on the frac spread for '21. Not sure if there'll be an opportunity to move that up through the back half of the year. But at the same time, we're seeing the propane market has tightened up a little bit here. So just curious if your marketing team is able to take advantage of some seasonal arbitrage on the curve right now which could help support your marketing cash flows into next winter and into 2021.

Thanks, Pat. I'll start with that. I mean so we have a systematic hedging program that will show -- that will get us to 50% hedged in 2021 by roughly October time frame when we set our budget. And by that time, we'll be roughly 10% hedged for 2022 as well. So we will continue to be rolling in hedges as we move throughout the year. I mean you're bringing up a great point on propane. As we sit here today, we're adding inventory at a relatively cheap price. And as Mick pointed out, all this discussion today has been around what can go wrong and what the downside is. No one's looking across the valley and see what can go right. And with our marketing business, essentially reflecting about 5% of our EBITDA based on the current forecast, there's really not a lot left there. So any sort of price improvement, we could see some pretty big swings to the upside. And certainly, with propane inventories coming down significantly in the U.S. being pretty low in Canada, there is that opportunity for the upswing at propane. And I'll turn it over to Stu to see if he wants to add any incremental color.

Yes. No, we're tracking it, Pat. And again, right now the opportunity to secure the product at very low cost, we're undertaking, and we do believe there's some upside in the near future for that commodity and are tracking it closely. So we're looking and following that on a daily basis and planning for -- across the valley, as Scott has described, and think that -- are optimistic that we'll be -- we're seeing some increases in pricing.

Yes. We've got a lot of -- like our position in terms of how full we are, we've got a lot of capacity available right now to store through the summer and sell through the winter. So it's not like we're full here like the oil situation. It's a very different animal. And again, that would be something we talk about a little bit at the AGM. People may have forgotten that we're only 40% oil and condensate as a company. And some of our other businesses are based on just gas economics, ethane demand staying relatively strong. And so even propane and butane are not fantastic now but we're not selling them now. We're going to -- we're selling most of that. We generally store in the summer. So again, it's kind of an interesting mosaic of resilience when you get into the details of how Pembina makes money.

Okay. That's great color. And last cleanup question, if I could. Just on Alliance, if we can get an update on both the recontracting process to extend commitments beyond 2020. And then also the Bakken expansion, just given the pullback in North Dakota production, what's the status there and when we might see the need for incremental takeaway capacity?

So I'll start with -- this is Jason, Pat. The pullback in the development of crude oil within the Bakken has obviously impacted the associated gas. So it's definitely a bit trickier to keep that expansion moving forward. So for the time being, I'd say it's -- that project is a bit more challenged than I would say it was last year. But there still is a fairly big challenge with flaring gas in the Bakken, and so that's an area that Pembina was queuing up to have some discussions with some officials. But obviously, with the environment that we're in at the moment, we weren't able to have those. So we're open to start those discussions through the summer. In terms of recontracting, we -- a number of the contracts roll over annually, and some of those rolled over annually last year. We're also working through details with a number of our customers in terms of expansions. It's -- again, in the first quarter of the year, obviously, with what's been going on, the conversations on that front have been pretty quiet. I don't think, fundamentally, things have changed much. At the moment, the spreads between Alberta and Chicago aren’t great. The Alberta prices are looking good. But if you look forward into winter and 2021, those things start to widen out. So we think there's some strength on the Alliance in the long term in terms of recontracting.

Hey Pat, Jaret here. Also, any disruption that we have seen on the processing side in the Bakken through the Aux Sable assets hasn't been due to fundamentals. It's been -- that the customers haven't been able to access storage, so it's kind of a short term. So in the areas that we're processing, there still is light at the end of the tunnel, as Jason mentioned, through the flaring and the economic development of that resource to expand Alliance.

Okay. That’s great, thanks guys.

Your next question comes from Robert Kwan of RBC Capital Markets. Your line is open.

Good morning. So when you refresh guidance, it's been almost two months since then, so kind of since that time, what's come up that's made you more optimistic or is a little bit better than you had originally thought? And then what's [indiscernible] that is an incremental headwind to your thinking [indiscernible]?

Headwind is really the continued degradation of marketing earnings, and that's fully baked in. We don't have a lot of hope baked in there. I think as with the previous questioning, we think there could be upside there, but we're not -- we don't think it's prudent to forecast that. Robert, I think it's just really -- when you kind of get into the guts of how Pembina works and it would be easy and I think, when I see how our stock price has been correlated to oil and I’ve got a fantastic graph at the AGM to talk about that, it would be as if the general market said if a million barrels came out of the market of supply that out of, call it, 5 million barrels or 4 million barrels that call out a 20% or 25% reduction that ergo Pembina's EBITDA would drop by 20% or 25%. It's almost as if that's what the market assumed. But when you get into the guts of it, the Veresen acquisition was all gas, and so gas is doing pretty good. And when you look at condensate supply, it's the Montney that's producing a lot of that condensate and behind Peace. And the Montney is a gas play. It's not a condensate play. It gets talked about as a condensate play because condensate was making all the money. But right now gas is paying for people's costs. And so people are going to produce that to harvest the gas, maybe a little more than condensate. And then, you look at where does the condensate come from. Well, 100 to 150 if it comes up Southern Lights, and I think the industry generally knows that the largest customers on that line are marketers, and that's out of the money right now. So they're probably going to shut it off, whereas our customers are actual users of the product. And so the underlying economics of continuing to flow that product are pretty good. And then you kind of go in behind all of that into what protection do you have from the contracts. It's pretty good, and ethane demand is still pretty good. People forget Pembina is the ethane backbone of the whole country and demand because of all the packaging and medical supplies and things like that. Demand stays -- has stayed pretty good there. So it's really going from kind of the original view we took on guidance that a bunch of our interruptible volumes were going to go away, and that was obviously correct. But then taking the time between then and now to work it through based on what order oil output in the basin would drop. And so you -- obviously, the leased economic reservoirs will probably stop producing first. And then who are those people? And is it SAGD? Is it mining? If it's SAGD, where do they get their diluent? They don't get it for Pembina. Or yes, they do, but there's a contract. And then are they -- if they want to continue to buy a condensate, what's their creditworthiness? If they don't want to continue buying condensate, will they -- do they have the wherewithal to keep paying the contracts? So it's getting in behind kind of the banner numbers and working through how that actually works at Pembina. And again, a topic for this afternoon is we've taken amazing steps forward in diversification since the 2015 oil price crash, and including buying a $10 billion natural gas-based company and buying a $4.5 billion company that owns a major import pipeline and has all investment-grade credits in behind our Edmonton storage location. And so that diversity is serving us extremely well right now.

Got it. If I can just finish with kind of digging in a little bit more on the guidance. So between the commodity and the volumes, I'm just wondering if you can highlight within those two buckets where some of the specific fee exposures that you're monitoring. Or put differently, what needs to happen to go below the low end of the range? And if there is something on the commodity side, if you do go below on the commodity side, how much of that might just be shifting into 2021 if you think about what you talked about earlier of commodity in some this year and you just put it in storage, and that's, in theory, should you give you better spreads in '21?

Yes, that's -- with so many moving parts, I understand your desire to understand. Very, very difficult question to answer. The -- you alluded to it in your note this morning, the words, the lawyer words we put into our guidance. Those lawyer words reflect hitting tank tops, where the scenario where you have massive system-wide shut-ins. And it looks ever less likely that, that's going to happen, that the industry will continue to work curtailed rather than shut down. But what could take us below our guidance, for example, is if we had a major mid-cap failure, mid-cap customer failure, something like that but with a little bit of backstopping from the federal government and credit to our mid cap. I mean they're starting to announce. They're announcing stronger than I expected. They've got some support from the federal government. Hopefully, more to come. And they're making money on gas. Like they're supporting themselves on gas. Like all of our larger mid-cap customers, 7G, Avintiv. They're doing okay on the gas side, and so they're going to be quite resilience. But what could take us lower there would be an unexpected failure of one of those companies or a violent second wave of COVID in the U.S. and reversing the slowly improving gasoline demand picture. Things like that could take us lower. But we don't think those are on balance likely, but we thought it was prudent and responsible to point out that those are still possible. And I would say it a different way. Had we not put those words in, you would have qualified the guidance that way anyway yourselves. You would have said, "Yes, Pembina is still guiding. But man, if we hit storage tops, then their guidance is probably not going to hold." So you would have inferred those words anyway.

Okay. So just to maybe summarize, either commodity prices stay flat and don't recover or go down is one. Second will be much more significant shut-in than what we're seeing today. And then the third would be extremely major, perhaps for bankruptcy?

Yes. And I think your item one and two are the same. If prices are low, then your second condition happens. And then now you're asking yourself, can the people who pay Pembina keep paying them and for how long. And so, I would direct you to the -- our big, big mid-caps and their liquidity situation and financial help. Scott, do you have anything to say?

That’s all I’ve got. Thank you very much.

Your next question comes from Robert Catellier of CIBC Capital Markets. Your line is open.

Hey, good morning. You've answered most of my questions. Just a couple of follow-ups here. First of all, I want to thank you for your comments on the blend and extend and the importance of protecting your own stakeholders. But to follow that up, what is the force majeure claims activity been like?

I don't think we've had a single FM, and that doesn't surprise us because our legal teams don't believe that, that condition would be met in our current agreements.

Okay. And just a little bit of a detail here. I see there was a little bit of support payment for Ruby, and you've also guaranteed something for CKPC. So my question is how much support do you think Ruby would need for the rest of the way? And is that included in your CapEx guidance?

Yeah. I'll take that. I mean, CKPC, I mean that's really just -- it's more of an accounting. So remember back in February, we entered into a project finance agreement with our partners for CKPC with both Pembina and PIC guaranteeing that loan. So really, that guarantee is the discounted future difference between what the rate would have been had Pembina done it versus the rate on that facility. So it's really, I'd call it, almost accounting noise. We wouldn't expect that number to change as we proceed through that project. But of course, that's deferred right now. So I would almost call that accounting noise right now Rob. And then on Ruby, I mean Ruby, consistent with -- I mean, every quarter, that's been the same note in the financial statements. We're amortizing about $16 million a quarter for another 1 year. We just entered into a term loan for 1 more year for a note that was due a couple of years ago, and we're just slowly amortizing that note down.

Okay. And just the last question here. I think you've clearly indicated that -- where you stand with the guidance. And if things get worse in 2021, you might have to defer capital again for those projects that were deferred from '20. In that circumstance, it'll be in a, what I would call, a meaningful free cash flow positive situation. So I just want to know what your view is on dividends in that circumstance. You've clearly indicated that for 2020, it doesn't make sense to bump the dividend any more than you already have, which is perfectly understandable. What would your outlook be for 2021 in the circumstance where there's more project deferrals and very minimal capital?

Certainly, if that were to occur, I think right now the committed capital for 2021, that's about $300 million, $400 million. So you're right. If we maintained our current level of EBITDA, we got a bunch of projects that are coming into service that ought to supplement what we have now. So you could argue it ought to go up. But if we had offsetting weakness in the market, maybe, let's say, downside case would be that it would be flat with our current guidance, we still -- we'd be producing a lot of free cash flow. No question about it. And to the extent we can't bring back those projects that we defer because of market circumstances, isn't right. We could put that money towards our normal 5% kind of dividend increase, which would probably be top of mind, but it also would put us in a position where we could buy something. I mean if that circumstance happened, you could argue multiples ought to be dropping quite sharply to acquire things, and multiples ought to be established, I think, would be, to my earlier point, which I don't know what to pay for things right now. So certainly, we could rather than deploy capital on those projects, we could deploy capital into acquisitions and increased dividends. So I think it would be -- in that circumstance, I don't think our first use of capital would be further debt repayment. We're going to be -- we're extremely well positioned now. We'll be extremely well positioned and even in a position of weakness. So it would be probably, first, a dividend increase; and second, to take advantage of an ongoing weaker market.

That's very good color. Thank you.

Your next question comes from Ben Pham of BMO. Your line is open.

Okay. Thanks. I know a couple of questions on your guidance and puts and takes and then whatnot. But I guess we got to appreciate that you guys are working with some pretty tight ranges there on guidance. So really going down to the lower end is really not that big in terms of materiality. So I guess my question really is on your dividend payout and your yield and you mentioned sustainability and then also leverage. I mean even if you do move below the lower end of your range perhaps, I mean it has it be really dramatic for you to see a concern around your dividend and your balance sheet. Is that correct?

Correct. We have no concerns about the dividend.

Okay. And as you mentioned 2 times coverage, which is pretty conservative relative to peers. Is there -- you've been through several cycles, '15, '16 and financial crisis. Is there a right level or range that you're comfortable with and where you want to get to long term?

Are you referring to payout ratio?

Yes, exactly. The 55%, is that a good range just in up markets and down markets?

Yes. I would say, longer term, we'll probably be between 55% and 65%.

Okay. So you're at lower end. Okay. Can I ask -- and I know you had some good commentary around '15, '16 and how resilient you work during that time? And the facts are pretty clear, '15 and '16, you were quite resilient. Maybe 1 or 2 quarters, you saw pressure in high CapEx. You had a DRIP program on. So you're in much better position now. But I'm curious, the way that you're responding to this uncertainty or downturn is much more dramatic or quicker than '15, '16. So is this just really a function of this downturn? Is it so uncertain, or is it something to do with CapEx flexibility, or is there something else that's driving it?

I mean the first thing that drove it is safety. If we're early innings on a $4.5 billion project, and we have thousands of workers working in a relatively confined location, our first concern with deferring the petchem project was safety. And rewind eight weeks, nobody knew what mortality rates would be, things like that, no idea of what productivity might be like, trying to build a world-scale petrochemical facility. And so our initial reason to delay those projects was for safety, not putting people at risk that we didn't need to put at risk. So the secondary was preserving capital. And also not -- the third was our customers. I mean did our customers really need us to put another $1.5 billion of pipe in the ground for volumes that they don't have? And so when we -- I call most of the CEOs associated with those expansions, and they were quite grateful that we were going to defer a year because they were all under contract. We built those pipes, put them in service, they had to pay. So we're just exacerbating their own situation of liquidity. When their volumes are flat or going down, the last thing they need is a bunch of additional capacity to pay for. And so it was first, safety. Second, customers really. And then thirdly, just to stay well within in our guardrails and defend our credit ratings. But make no mistake, those projects, we are preserving our ability to bring them back when the signals are right. We've had some staff transitions, but we are preserving our core capability to snap back. And so we very much view those as deferral. We are investing more than we would need to in a scenario -- like we could pull back even more capital on those projects, but then we would destroy value. And so we're investing more than we need to, to ensure that we, for example with the petrochemical facility, that we complete long lead items rather than turn them into scrap metal because that would destroy value. So we're investing a bit extra to make sure that long lead items are the engineering finish, and those are completed modules so that we can bring them back. So it's much more than a financial exercise. It's an exercise that contemplates all of our stakeholders.

Your next question comes from Rob Hope of Scotiabank.

Just a follow-up question just on the nitty-gritty of how the systems work. I guess I just want to get a sense of whether -- what your view is of diluent storage in the basin and whether or not Southern Lights will move down enough of its volumes and potentially Cochin to offset the demand of -- offset the lower demand of the oil sands. And then the follow-up there would be, if there is no storage, would that be a force majeure claim for your customers?

So the answer to your second question is, we don't believe so. Answer to your first question is absolutely, as SAGDs go down, there is lower diluent demand. And what we see so far is that, that's not coming at our expense. I mean we're seeing slight reductions in Cochin, but still at or above contracted levels on Peace. We're at or around our contracted levels with physical barrels, and so we are not seeing that coming out of our systems. So there's only one other place that can come from so far. We've asserted that for years because our customers on Cochin are the users of that product. And on Peace, they have gas economics to help support them, whereas importers don't have that on Southern Lights. So we've asserted for some time that, that would be the initial shock absorber. And as it rolls past the entire imports there to Cochin and to Peace, we have the contractual backstopping.

All right, appreciate the color. Thank you.

There are no further questions at this time. I will now return the call to Mr. Mick Dilger for closing comments.

Yes. First, thanks, Scott, for doing all the reading for me. He's a voracious reader, so he's a lot better at it than I am. I don't read a lot. So thanks, Scott. I want to thank all the listeners, those who are supporting us through this tough time. I'm very proud of the actions we've undertaken. And I've got some great charts and graphs this afternoon for the AGM, which I'm looking forward to sharing with you. And I'm feeling cautiously optimistic where we are today. So, thank you, and we'll see you at the AGM.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.