Canada's oil sector is missing a significant opportunity to benefit from the global commodity price and finally receive fair market value for Canadian resources, according to the Canadian Association of Petroleum Producers' (CAPP) 2019 Crude Oil Forecast, Markets and Transportation report.
Pembina Pipeline Corporation has announced its financial and operating results for the fourth quarter and full year 2018. Pembina delivered strong 2018 financial and operational results leading to record full year earnings and Adjusted EBITDA. These results were largely driven by the full-year contribution from assets included in the acquisition of Veresen Inc. in October 2017 and assets placed into service following a large-scale capital program, driving growing revenue volumes. Highlights for the fourth quarter and full year 2018 include:
- Fourth quarter and full year earnings of $368 million and $1.3 billion, a 17 percent decrease and 45 percent increase, respectively, over the same periods in 2017;
- Cash flow from operating activities of $674 million for the fourth quarter and $2.3 billion in 2018, increases of 29 percent and 49 percent, respectively, over the same periods in 2017. Adjusted cash flow from operating activities increased by nine percent and 54 percent to $543 million and $2.2 billion in the fourth quarter and full year 2018, respectively, compared to the same periods in 2017;
- On a per share (basic) basis, cash flow from operating activities for the fourth quarter and full year 2018 increased by 28 percent and 26 percent, respectively, compared to the same periods in the prior year. On a per share (basic) basis, adjusted cash flow from operating activities for the fourth quarter increased eight percent and 31 percent for the full year compared to the same periods of the prior year;
- Fourth quarter and full year operating margin of $800 million and $3.2 billion, were seven percent and 64 percent higher, respectively, than the same periods of the prior year; and
- Fourth quarter and full year Adjusted EBITDA of $715 million and $2.8 billion, representing six percent and 67 percent increases, respectively, over the same periods in 2017.
- Total volumes of 3,453 mboe/d for the fourth quarter and 3,398 mboe/d for the full year in 2018, which represent six percent and 11 percent increases, respectively, over the prior year;
- Pipelines Division volumes during the fourth quarter of 2,529 mboe/d and full year of 2,521 mboe/d, representing three percent and nine percent increases, respectively, compared to the same periods of 2017. Higher volumes were predominately the result of increased utilization on the Peace and Drayton systems including assets placed into service in the prior year;
- Facilities Division volumes of 924 mboe/d in the fourth quarter and 877 mboe/d for the full year in 2018, representing increases of 16 percent and 18 percent, respectively, compared to the same periods of 2017. These increases were caused by new volumes arising from a full year of operations from Veresen Midstream's Sunrise, Tower and Saturn facilities in 2018; increased utilization at Duvernay I gas plant and the Redwater complex; and higher volumes at the majority of the other facilities as customers continued to increase production in the resource basins where Pembina operates; and
- Marketing & New Ventures Division increased marketed NGL sales volumes by two percent to 201 mboe/d in the fourth quarter over the comparable period in 2017 and generated quarterly operating margin of $121 million, a 27 percent decrease over the comparable period in 2017. The decrease in operating margin in the fourth quarter was due to the lower margins on commodity sales as a result of lower crude oil and NGL market prices compared to the same period in 2017, combined with increased market-based intercompany fees, offset by the swing to a realized gain on commodity-related derivative financial instruments, compared to the realized loss in the same period of 2017. On a full year basis, operating margin was $468 million in 2018 compared to $369 million in 2017. This increase was the result of the full year contribution from the equity accounted investment in Aux Sable.
2018 was truly remarkable for Pembina. We strengthened our financial and operational performance, driven by our diverse and strategically-located assets, strong customer contracts, and the dedication and creativity of our customers and employees. Over this past year, we continued to secure new business, pursued growth projects, operated safely and reliably and further enhanced our already strong relationships with the communities where we live, work and play.
In 2018, we announced the next evolution in Pembina's corporate strategy - the move towards accessing global markets. Pembina is committed to identifying additional opportunities to connect hydrocarbon production to new demand locations through the development of infrastructure that would extend our service offering further along the hydrocarbon value chain. These new developments will contribute to ensuring that hydrocarbons produced in the Western Canadian Sedimentary Basin and the other basins where Pembina operates can reach the highest value markets throughout the world. Our recently approved PDH/PP Facility, the Prince Rupert LPG Export Terminal, currently under construction, and our proposed Jordan Cove LNG project are examples of such developments.
The most notable financial achievement over the past year was exceeding the high end of our original 2018 guidance range with Adjusted EBITDA of $2,835 million, seven percent higher than the mid-point of the original range. Contributing to this record-breaking Adjusted EBITDA was the full-year contribution from the greater than $10 billionincrease in assets from the Veresen Acquisition and new assets placed into service following the execution of our large-scale capital program completed in 2017.
The Veresen Acquisition was transformational for Pembina and we are pleased with how well the integration of staff and systems went. Bringing together two large and different organizations comes with a wide range of risks and yet, through the diligent management of our integration team, we are realizing the strategic and financial benefits of the combination.
Along with record Adjusted EBITDA, our 2018 adjusted cash flow from operating activities per common share of $4.27also was an all-time high. Notably, when comparing where we are now, to where we were ten years ago, we have grown volumes by 180 percent, cash flow per share by 171 percent, and the dividend by 50 percent. Over the same 10-year period, shareholders have realized a total return of about 380 percent, or 17 percent per year, assuming reinvestment of their dividends.
Our steady and growing dividend is one of the strongest ways we demonstrate our ongoing commitment to shareholders. We have always worked hard to ensure our ability to pay a competitive dividend and the 5.6 percent dividend increase in 2018 represents our seventh consecutive annual increase. Since our inception, Pembina has returned over $6.9 billion to our shareholders and the dividend has never been reduced. Ensuring Pembina continues to deliver a sustainable and growing dividend to shareholders remains a top priority.
Continuing our dividend track record while growing the business requires a strong commitment to prudent financial management, something that has always been fundamental to Pembina. As the Company has grown we have also improved the risk profile of the business and strengthened our financial guardrails. We have increased the percentage of our Adjusted EBITDA that comes from fee-based business and our dividend is fully supported by these fee-based cash flows, meaning Pembina is not reliant on the commodity exposed part of our business to fund the dividend. In addition, Pembina has a very strong balance sheet, low payout ratio and expects to fund our near-term capital program without the need for external equity.
In 2018, we placed approximately $900 million of projects into service, including the Phase IV and V expansions of the Peace Pipeline system, Veresen Midstream's North Central Liquids Hub and Saturn II gas plant, cavern developments as well as several other value-added capital projects. We also secured over $1.8 billion of new capital projects including the Phase VI and VII Peace Pipeline expansions, Hythe Developments and Duvernay III. Consistent with Pembina'sguardrails, these projects are underpinned by long-term fee-based contracts that will generate incremental secure and predictable cash flow to support the stability and growth of the dividend. With new projects placed into service in 2018, we announced an Adjusted EBITDA guidance range of $2.8 to $3.0 billion and a $1.6 billion capital program for 2019.
We are entering the new year with positive momentum and already in 2019 Pembina has secured the $500 millionPhase VIII Peace Pipeline expansion and through our joint venture, Canada Kuwait Petrochemical Corporation, approved development of a $4.5 billion ($2.5 billion net to Pembina) integrated PDH/PP Facility. The prospects for future growth, both within the base business and further extensions of our value chain, remain robust. We are as rich in growth opportunities as we have ever been, which is a testament to both the resiliency and creativity of our customers and the underlying attractiveness of the Western Canadian Sedimentary Basin.
We look forward to the year ahead and are optimistic, confident and excited to continue 'Building Something Extraordinary'.
New Developments and Growth Projects Update
- Pembina's Phase IV and Phase V expansions of the Peace Pipeline system were both placed into service in December 2018, on-time and slightly over budget;
- Pembina continues to progress its Phase VI Peace Pipeline expansion, which includes: upgrades at Gordondale, Alberta; a new 16-inch pipeline from La Glace to Wapiti, Alberta and associated pump station and terminal upgrades; and a 20-inch pipeline from Kakwa to Lator, Alberta. This project is trending over budget and on schedule, with an anticipated in-service date in the second half of 2019, subject to environmental and regulatory approvals;
- Aligning with the Phase VI expansion, the Company is progressing the Wapiti Condensate Lateral, a 12-inch lateral, which will connect growing condensate volumes from a third-party owned facility in the Pipestone Montney region into Pembina's Peace Pipeline. Subject to regulatory and environmental approvals, this lateral is expected to be in service in the second half of 2019;
- As previously announced in the quarter, Pembina is proceeding with the Phase VII Peace Pipeline expansion, which will include: a new 20-inch, approximately 220-kilometer pipeline in the La Glace-Valleyview-Fox Creekcorridor, as well as six new pump stations or terminal upgrades, between La Glace and Edmonton, Alberta. This project has an estimated capital cost of $950 million and is anticipated to be in service in the first half of 2021, subject to environmental and regulatory approvals;
- Subsequent to the quarter, Pembina announced that it is proceeding with the Phase VIII Peace Pipeline expansion, which will include: new 10 and 16-inch pipelines in the Gordondale to La Glace corridor as well as six new pump stations or terminal upgrades located between Gordondale and Fox Creek, Alberta. This project has an estimated capital cost of $500 million and is anticipated to be placed into service in stages starting in 2020 through the first half of 2022, subject to regulatory and environmental approvals; and
- Development continues on the previously announced NEBC Montney Infrastructure in proximity to the Company's Birch Terminal. This new infrastructure is anticipated to be in service in Q3 2019.
- The Company's one million barrel Burstall Ethane Storage facility located near Burstall, Saskatchewan was placed into service in January 2019;
- Pembina continues with the construction of new fractionation and terminalling facilities at the Company's Empress, Alberta extraction plant for a total expected capital cost of approximately $120 million. Detailed engineering is on track and all major equipment purchases have been made. These facilities have an anticipated in-service date of late 2020;
- Development continues at Pembina's Prince Rupert LPG export terminal. Detailed engineering is ongoing and early construction work continues. This project is anticipated to have a total capital cost of $250 million and is anticipated to be in service in mid-2020, subject to regulatory and environmental approvals;
- Pembina continues to progress construction of Duvernay II, the 100 MMcf/d sweet gas, shallow cut processing facility, including 30,000 bpd of condensate stabilization and other associated infrastructure. The facilities have an expected total capital cost of $290 million. Construction has commenced and the project continues to track on budget and on schedule with an expected in-service date in Q4 2019;
- As announced during the quarter, Pembina will construct and operate additional infrastructure ("Duvernay III") at the Company's Duvernay Complex. Duvernay III will include a 100 MMcf/d sweet gas, shallow cut processing facility (a replica of Pembina's Duvernay I and II gas plants) and 20,000 bpd of condensate stabilization and water handing infrastructure. Pembina expects the total capital cost to be $165 million with an anticipated in-service date of mid-to-late 2020, subject to regulatory and environmental approvals;
- Also announced during the quarter, the Hythe Developments project will see Pembina and its 45 percent owned joint venture, Veresen Midstream construct natural gas gathering and processing infrastructure in the Pipestone Montney region. Collectively, the Hythe Developments have an estimated total capital cost of approximately $380 million ($185 million net to Pembina) and have an anticipated in-service date of late 2020, subject to regulatory and environmental approvals; and
- The previously announced Redwater co-generation facility is trending under budget and is expected to be placed into service in the first quarter of 2019.
Marketing & New Ventures Division
- Subsequent to the quarter, Pembina, along with Petrochemical Industries Company K.S.C. ("PIC") of Kuwait, announced a positive final investment decision to construct a 550,000 tonne per annum integrated propane dehydrogenation ("PDH") plant and polypropylene ("PP") upgrading facility ("PDH/PP Facility") through their equally-owned joint venture entity, Canada Kuwait Petrochemical Corporation. The PDH/PP Facility will be located adjacent to Pembina's Redwater fractionation complex and will convert approximately 23,000 bpd of locally supplied propane into polypropylene, a high value recyclable polymer used in a wide range of finished products including automobiles, medical devices, food packaging and home electronic appliances, among others. Pembina's net investment in this project is expected to be $2.5 billion with an expected contribution to annual Adjusted EBITDA of $275 to $350 million, net to Pembina. This project is expected to be in service mid-2023, subject to environmental and regulatory approvals; and
- Pembina continues to progress its proposed Jordan Cove LNG project that will transport natural gas from the Malin Hub in southern Oregon to an export terminal. The Company has received a Notice of Schedule that indicates FERC will provide a decision not later than November 2019. Pembina continues to work with various state and other agencies to progress the project on a similar time line. In addition, as previously disclosed, the Company executed non-binding off-take agreements, for a total of 11 million tonnes per annum ("Mtpa"), which exceeds the planned capacity of 7.5 Mtpa. Pembina is working to conclude off-take agreements in the first quarter of 2019. Pembina continues to anticipate first gas in 2024, pending the receipt of the necessary regulatory approvals, a positive final investment decision and other requirements.
- On December 31, 2018, Pembina's Series F Convertible Debentures matured. At maturity, the outstanding principal of $1.6 million plus accrued and unpaid interest was settled in cash.
- Declared and paid dividends of $0.19 per qualifying common share for the applicable record dates in October, November and December 2018; and
- Declared and paid quarterly dividends per qualifying preferred shares of: Series 1: $0.265625; Series 3: $0.29375; Series 5: $0.3125; Series 7: $0.28125; Series 9: $0.296875; Series 11: $0.359375; Series 13: $0.359375; and Series 21: $0.30625 to shareholders of record as of November 1, 2018. Declared and paid quarterly dividends per qualifying preferred shares of: Series 15: $0.279; Series 17: $0.3125; and Series 19: $0.3125 to shareholders of record on December 17, 2018.
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