Keyera Corp

TSX:KEY

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Keyera Corporation Third Quarter 2019 Results Conference Call. [Operator Instructions] Thank you. Ms. Lavonne Zdunich, you may begin your conference.

[Lavonne Zdunich, Director of Investor Relations]

Thank you, Simon, and good morning. It's my pleasure to welcome you all to Keyera's Third Quarter Conference Call for 2019. Joining me today is David Smith, our President and CEO; Steven Kroeker, Senior Vice President and CFO; Brad Lock, Senior Vice President and COO; and Dean Setoguchi, Senior Vice President and Chief Commercial Officer.As we released our financial results yesterday. The focus of our call this morning will be on our business strategy operations, business development opportunities and financing. After our prepared remarks, we will open the call to questions. I would like to remind listeners that some of the comments and answers that we will provide today speak of future events. These forward-looking statements are given as of today's date and reflect events or outcomes that management currently expects.In addition, we are also going to refer to some non-GAAP financial measures. For additional information on non-GAAP measures and forward-looking statements refer to Keyera's public filings available on SEDAR and on our website.With that, I'll turn it over to David.

[David G. Smith, President, CEO & Director]

Thank you, Lavonne, and good morning, everyone. Keyera delivered impressive financial results again in the third quarter of 2019 with each key financial metric well above our results from the same period last year. These results reflect the value of our integrated business and new capital projects completed over the last 12 months.Adjusted EBITDA increased 68% to a record $269 million for the quarter, while distributable cash flow per share increased 39% to $0.85 per share and net earnings per share increased by more than 4x to $0.71 per share.We are on track to deliver another year of record financial performance as our midstream services remain in high demand and our capital program is on schedule and on budget.Keyera currently has a significant capital program underway that extends secured growth out to 2022. To progress our growth program, we expect to invest between $800 million and $900 million in 2019 and between $700 and $800 million in 2020 excluding acquisitions. A significant portion of the investment in 2020 relates to the Pipestone gas plant and the KAPS liquid pipeline system.With the strong balance sheet and payout ratio of 67% year-to-date, Keyera expects to fund its current growth capital programs without issuing common equity aside from the existing DRIP program. Keyera has a history disciplined capital allocation and investment decision-making. We invest in projects that generate strong rates of return on our invested capital while maintaining a healthy balance sheet. We remain committed to this strategy as we continue to grow responsibly and generate long-term value for shareholders.I will now turn it over to Brad to discuss our operations.

[Bradley W. Lock, Senior VP & COO]

Thank you, David. During the third quarter, our facilities operated well and we continue to advance our capital program safely. We completed several capital projects, including the Simonette Acid Gas Injection System in July, second water disposal well at our Wapiti Gas Plant in August, followed by the Simonette Gas Plant expansion and the North Wapiti Pipeline System in September.With the North Wapiti Pipeline System operating, a second producer is now delivering significant volumes to the Wapiti Gas Plant. We completed turnarounds at our Cynthia and we're seeing these gas plants in the quarter and then October we began a 6-week planned maintenance outage at AEF. This maintenance work is progressing exactly as planned and we expect to be fully operational by mid-November.As a reminder this maintenance has allowed us to defer our next full turnaround at AEF until 2021. In October, we shut down one of our fractionators at the KFS facility for some unplanned maintenance. Our operations and commercial teams work closely together to ensure that there was no impact to our customers.The repairs are progressing well and we expect to be fully operational again by mid-November. We do not expect this outage to have a material impact on our fourth quarter results. Even with all of our activity to date here is on track to deliver yet another year of strong safety performance. To date, we have invested over $700 million in capital projects, completing four gas plant turnarounds and conducted repairs at both KFS and AEF without a significant recordable safety incident. At Keyera we recognize that providing a safe and healthy work environment is an integral part of being a responsible employer, operator and good corporate citizen.I'll now pass it over to Dean to talk about our business development opportunities.

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

Thanks, Brad. As David mentioned, Keyera has a significant capital program underway. It extends or secured growth in the 2022. A significant portion of this investment focus is on extending our infrastructure in the northwestern Alberta to support developments in the liquids-rich Montney and Duvernay. Wapiti Phase 1 was commissioned in the second quarter of this year, providing 150 million cubic feet per day of sour gas processing capacity and 25,000 barrels per day of condensate handling capacity.In the third quarter, we completed the Simonette Gas Plant expansion and the North Wapiti Pipeline System. We also advanced the second phase of the Wapiti Gas Plant and Pipestone Gas Plant. Once the Pipestone Gas Plant is completed in early 2021. Keyera will be one of the largest processing and condensate handling companies in this region.In the first half of 2022, we plan to connect our gas plants as well as other third-party facilities to KAPS. Our NGL and condensate pipeline system. KAPS enhances an integration of our business by connecting gathering processing assets to the northwestern Alberta to our liquids infrastructure assets in Fort Saskatchewan.With stronger integration, we can provide services more competitively to attract additional volumes to our gas plants, fractionators, storage caverns and condensate system. Our KAPS team has been diligently focused on land acquisitions and environmental consultations. As a result, we are on track to submit our regulatory application before the end of the year.We are committed to continuous improvement of our business to competitively position Keyera for both and extended low commodity price environment and a recovery. As a result, we are reviewing various alternatives to optimize our gathering processing operations, which may include consolidating throughput volumes at certain facilities.Our goal is to improve the utilization and profitability of these facilities leading to lower per unit operating costs, higher netbacks for producers and higher margins for Keyera.With that, I'll turn it over to Steven to talk about our financial position strategy.

[Steven B. Kroeker, Senior VP & CFO]

Thanks, Dean. For the first time on a trailing 12-month basis, Keyera generated realized margin of over $1 billion. This realized margin reflects continued strong growth in our fee-for-service realized margin, which grew 18% in the third quarter of 2019 compared with the third quarter of 2018.In addition, our marketing business continues to be a strong contributor to our cash flow, generating record realized margin this past quarter. Largely as a result of the strong market fundamentals underpinning the iso-octane business. Because we expect these attractive conditions for iso-octane to continue, we are increasing our 2019 marketing guidance to between $320 million and $350 million were realized margin compared to our previous estimate of $280 million to $320 million.Our new guidance reflects our belief that AEF will be fully operational by mid-November. As 2020 approaches, we expect to see a continued ramp up of volumes and associated cash flows from our infrastructure investments in the condensate rich Montney area. In addition, distributable cash flow in 2020 will benefit from lower maintenance capital and lower cash taxes.In 2020, we are expecting maintenance capital between $35 million and $45 million, which is less than half of 2019 expected maintenance capital. This decrease is due to less activity in 2020 as we have only two smaller gas plant turnarounds planned. We now expect to incur 0 current income tax expenses for 2020 as approximately $1 billion of announced capital projects primarily from the gathering and processing segment are available for use in 2019.For 2020 and 2021 a further $775 million of announced capital projects in the gathering and processing segment are expected to be available for use. As of September 30, we have now invested $1.5 billion of our $2.9 billion current capital program and we continue to expect to deliver a return on invested capital of 10% to 15%. In 2022 and 2024 for the original capital program and KAPS respectively.Keyera continues to be well positioned to fund the remaining portion of this current capital program without issuing common equity apart from the DRIP and Premium DRIP Program. This is partly because our net debt to EBITDA covenant ratio is only 2.1x at the end of September and partly because our 2020 cash flow available for reinvestment is expected to reflect the benefit of zero cash taxes and lower maintenance capital.With that, I'll turn it over to David for closing remarks.

[David G. Smith, President, CEO & Director]

Thanks, Steven. Even with the challenges our industry is currently facing. We are optimistic about the future of oil and gas development in Western Canada. The World needs Canadian oil and gas to responsibly meet growing demand and transition to cleaner sources of energy. Canada is one of the most responsible energy producing countries in the world with significant resources that are amongst the most economically attractive developments in North America.With Keyera's strong values and integrated network of midstream assets. We are well positioned to be an important part of this evolution. I am proud to lead a team that wants to be part of this important change and is dedicated to serving our customers, maintaining the highest standards of operational excellence, caring for people in the planet and creating long-term value for our shareholders.On behalf of Keyera's Board of Directors and management team. I would like to thank our employees, customers, shareholders and other stakeholders for their continued support.With that, I'll turn it back to the operator. Please go ahead with questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Matt Taylor with Tudor, Pickering, Holt & Co.

[Matthew Taylor;Tudor, Pickering, Holt & Co.;Equity Research Associate]

You mentioned a volume loss from a customer next year hitting out margin by about $10 million bucks or so. Is that enough to shut down the plant effected in consolidate those volumes to offset some of that impact, just curious to know the size of opportunity you're seeing from OpEx savings by shutting down more plants?

[Bradley W. Lock, Senior VP & COO]

This is Brad. So I think, I mean with that specific customer that itself doesn't drive a shutdown of a facility, there's sufficient volumes to make the facility of Brazeau continue to run. I think what we're trying to do is create an overall strategy to say how do we do -- you have the right amount of processing capacity available for the business that's out there today that provides operating cost savings to our producer customers and enhanced revenues for Keyera . So that work is still underway, but all these every plant is kind of under review from that context.

[Matthew Taylor;Tudor, Pickering, Holt & Co.;Equity Research Associate]

Can you provide some context of kind of type or quantity of OpEx savings you're seeing? Or is it still too early?

[Bradley W. Lock, Senior VP & COO]

I would suggest it's certainly too early to tell. I think again, our goal is really to try to create a more efficient processing network reflective of the volumes that we see over the next little while, but also position ourselves for the future when we anticipate that drilling activity will resume and volumes will come back. So there is a balance there that we're trying to achieve.

[Matthew Taylor;Tudor, Pickering, Holt & Co.;Equity Research Associate]

Great. And then moving over to marketing, it looks like you guys are storing the low cost, you tend to be consumed in 2020. Do you have enough space there to store the feedstock to use in the stronger summer demand month effectively making marketing margins better for longer?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

It’s Dean Setoguchi. Yes, it's a great thing about our assets is that we have a lot of storage capacity at our KFS sites. While our facility is down, we are storing all that butane into our caverns into one of our caverns, so we have a lot of space to accommodate that. And yes, we will be using that butane feedstock in 2020.

[Matthew Taylor;Tudor, Pickering, Holt & Co.;Equity Research Associate]

Yes. So effectively after, even after the contract resets in March?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

Yes, we'll have some residual inventory that will last beyond March for sure.

[Matthew Taylor;Tudor, Pickering, Holt & Co.;Equity Research Associate]

And one last one if I may, just can you provide more color on what happened there with the frac there and what needs to happen to bring it back online before butane contract discussions in Q1? I know you mentioned customers were impacted, but what's the financial impact to Keyera?

[Bradley W. Lock, Senior VP & COO]

So we just had -- we had an operating challenge with one of our fractionation trains that we had to take down by utilizing our network of infrastructure and our commercial teams, we were able to really mitigate the impact to all of our customers and the financial impact to Keyera will be minimal in 2019.

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

So again, it's one of the great things about our assets Matt is that we have two fractionators on. So the other fractionator is running full out and very well. And so we're continuing to fractionate the NGL mix and again they -- the NGL mix that is coming into Fort Saskatchewan that's beyond our one frac capacity we're putting in the storage and will frac it at a later date when it's back on.

[Operator]

Your next question comes from the line of Rob Hope with Scotiabank.

[Robert Hope, Analyst]

The first question is just it would seem the market's concerned about Keyera acquiring some high multiple assets that could be in the market or are in the market. Generally speaking without I guess talking specifically about opportunities, how would you look at M&A, and correct me if I'm wrong, historically you've really focused on assets with this kind of valuation. Could you go up the valuation spectrum?

[David G. Smith, President, CEO & Director]

It's Dave Smith. Thanks for that question. You know it's we've had feedback, particularly in the last couple of years from investors concerned that we might make an inappropriate investment, I guess I would point to all the investments we haven't made, I think as evidence of the discipline that we continue to exercise when we look at things.I think that we're very cognizant of making sure that we keep a strong balance sheet and we're very cognizant of making sure that the investments we make makes sense from both the strategic point of view and a return on capital point of view. We're always looking at organic growth opportunities and M&A opportunities, and we always look at it through that disciplined lines. I'm not sure there's much more I can say.

[Robert Hope, Analyst]

And then how are you thinking about funding you seem very comfortably below the three times leverage that you've targeted in the past as a new projects or M&A when could you look to shut off the DRIP or could you even sell some noncore, but high-value assets that could accelerate some delevering?

[Steven B. Kroeker, Senior VP & CFO]

Steven here. Again, as David pointed out, we do value having a strong balance sheet, the credit rating is -- also credit ratings are also very important to us as well. And again, as you know, BBB mid by both DBRS and S&P. And so again as we look at our capital program or opportunities that may come in front of us. We just want to continue to make sure that we are financing things appropriately and at this current stage of the capital program, $2.9 billion capital program and most of this a little bit over half spend. We do view the DRIP as a cost-efficient tool to put the right amount of equity into that capital program.That said we are cognizant that the market would like to see that DRIP program turned off or in general amongst peers. And so when we do see we're in a position where free cash flow is sufficient to handle our capital program. I'm happy to consider turning that off.And again I think the important thing is at the end of the day, we want to continue to grow shareholder value and so again always resin about making commitments ahead of time. But that being said, we understand their desire to live within cash flow in that respect.In terms of the leverage, it's important to note that 2.1 that we show in the balance sheet that reflects the benefit of the hybrid debt deal that we did in June, as you know, that's a subordinated piece of debt and so that comes into the ratios and obviously makes that lower for covenant test purposes etcetera that focus on senior debt.I'd just remind yourself and others that the credit rating point of view, they do look at total debt as a whole as well. And so we're just constantly just continuing to manage the balance sheet appropriately and get that right equity treatment as well, which is one of the reasons we looked at the hybrid for an appropriate financing tool.

[Operator]

Your next question comes from the line of Linda Ezergailis with TD Securities.

[Linda Ezergailis, Research Analyst]

I'm wondering if you could maybe help us understand a little bit better how you're approaching assessing result alternatives when in terms of facility and volume consolidation. At what point do you expect you'll be in a position to make a decision and will it be evolving over time or do you think it will be one big adjustment?And can you comment on how commercially flexible you are, my assumption would be that you are or would you require some sort of amendments here commercial agreements with your customers to affect all the changes that you are considering?

[Bradley W. Lock, Senior VP & COO]

This is Brad. So I think the changes that we're looking at our think are going to be strategically placed over the course of, I would suggest the next 9 to 12 months most likely, and they've actually started is as recently as Q4 where we've looked at consolidating our Gilby gas plant into Rimbey and have effectively been able to do that here in the fourth quarter.So that work is still underway, and there is still activities happening to make this happen effectively, but we actually see a scenario where Gilby will be -- the volumes from Gilby will be effectively consolidated into Rimbey. Now what that does is we have to rework some of the agreements with the producers, that are going through Gilby today, and make sure that their agreements cover going to Rimbey, but if they see value in what we're trying to achieve, they're all positive about what we're trying to accomplish. So we would see small activities like that continuing to evolve over the next little while.

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

And Linda, it's Dean. We really like the situation and I use Gilby as an example. It's a situation where we believe that we can offer better value or better netbacks for our producer out of this and Carol will benefit as well. It will take a little bit of time to realize those benefits over the next year, but certainly long-term we think it's valuable.The other thing is, is that if you look at Rimbey, it's one of our most efficient facilities and it's a start of our NGL value chain because all the liquids from that facility, and we have a fuel frac there, our all pipeline connected into our Edmonton and Fort Saskatchewan assets. So again, it's just a great example of what the benefits of this consolidation program that we're looking at.

[Linda Ezergailis, Research Analyst]

That's helpful context. Maybe just looking a little bit more bigger picture at your opportunities. Can you comment beyond acquisitions as to where you're seeing the most opportunities in the energy value chain and specifically with the closure of the Philadelphia Energy Solutions refinery in late June, has the business case improved to potentially expand AEF or are there other factors that still make you pause on that front?

[David G. Smith, President, CEO & Director]

Overall, we still see more opportunities associated with our KAPS pipeline. So again, that could lead to more frac and storage investment in the future as we bring more liquids into Fort Saskatchewan. We are looking at the possibilities of may be gathering and connecting to a pipeline into BC and collecting some of the volumes and BC and into KAPS and then into Fort Saskatchewan.With respect specifically to AEF, the idea of AEF twin is intriguing and again it's something that is a project that we continue to consider. And one of the reasons is if you look at octane is going forward, the gasoline blends are moving to a more environmentally friendly product, which is higher octane and lower RVP and that's advantage that our iso-octane has over [indiscernible] . And so what we have is a premium product that nobody else makes and again with the brownfield site that we have, we can add capacity more cost effectively than anybody else.

[Linda Ezergailis, Research Analyst]

Okay. And when do you think you might be in a position to make a decision on AEF?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

I think as we've said before, are the challenges ours is that we would want to make sure that we had enough of contractual underpinning with a third-party to make sure that we're not taking more exposing ourselves to more basis risk then we'd want to in that even though it's very profitable business.

[Linda Ezergailis, Research Analyst]

That's helpful. And maybe as we just kind of look at other opportunistic infrastructure in Western Canada related to addressing some of the bottlenecks and issues there. Have you assessed the merits of potentially getting involved in a deal you or is that something that not actively being looked at at this point?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

Linda, we look at a lot of different projects and the DRU is something that we've absolutely looked at. I think it's one of those investments where if you believe that another pipeline will never get built again, it makes a ton of sense. You believe that you're going to get capacity -- pipeline capacity in Alberta, then it's a much more difficult investment decision and especially to get someone to underpin it. Because it's going to take you two to three years to actually engineered and build it and then you need another 10 or 15-year window to get to return on your investment. So it's a tough investment it to move forward. And I'm not saying that it won't happen, but we've looked at it and that's sort of what we concluded.

[David G. Smith, President, CEO & Director]

Linda, it's Dave here. I might just add that. I think what you're hearing from Dean is a bit of a theme that we have a lot of opportunities in front of us that we're evaluating. But I think particularly in the current environment of uncertainty in our industry. We're not going to do anything on spec. We need to make sure that we've got the kinds of underpinnings from customers that make those investments makes sense.

[Operator]

Your next question comes from the line of Patrick Kenny with National Bank Financial.

[Patrick Kenny, Managing Director]

Looks like Wapiti Phase 1 made a strong contribution out of the gate. I was wondering if we can get an update on the drilling activity and volume growth that you're seeing around Wapiti as it relates to Phase II coming on mid next year. Do you see Phase II filling up as quickly as you had initially expected, or do we need to see a bit more of a sustained recovery in AECO prices before Wapiti Phase 2, can we expected to achieve the low end of your 10% to 15% hurdle rate?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

It's Dean. Good question. Generally, we are very confident that we'll get in the range in 2022 time-frame as Steven outlined earlier. The ramp-up is a bit slower than what we originally anticipated. And part of it is because one of our customers, the composition of the gas that they are producing from their pads is more liquids-heavy. So we're seeing less gas at our gas plant than we originally expected at this point in time. Having said that, we believe that the production will normalize and the composition of the gas will be more like the type curves that we would expect.So that's part of the reason for the slower ramp up and I think producers are just a little bit more cautious in terms of how fast to ramp up, but again we certainly see a line of sight to getting within that 10% to 15% return on capital range in 2022.

[Patrick Kenny, Managing Director]

Okay. Great. And then on Bellatrix. Thanks for confirming the letter of credit you have in place there. But just curious how we should be thinking about the sustainability of the take or pay cash flows you have there is volumes naturally decline at the plant. Do you see any risk at all that you take-or-pay contracts may not hold up in the courts or I guess conversely if and when there is a change of control. Do you expect you'll have to reset your fees to current market rates?

[Steven B. Kroeker, Senior VP & CFO]

Yes. Steven here. Those are good questions and obviously we would like to continue to see the -- our producer customers continue to be healthy and strong. But the Bellatrix was a situation that has come up as well as you mentioned, we do have the LC in place to protect bad debts. Again, our current view is right now from our understanding talking with Bellatrix that they want to continue to work with us in a healthy manner at the older flats plant, which is our main plan with them. We do have some operations at other volumes at other plants, but they are more less material or more minimal, and again there's any kind of current situation I think there's always a risk of take-or-pays potentially being removed. But the underlying desire to process volumes often is still there, and so a lot of times involve just renegotiation of current things, I think that's where we may -- we may look at for some of those smaller volumes, but again our current feedback to date is that they want to continue working with us at older flats and it's been a good relationship between us as which again is a testament to the value of putting effort into customer relationships and so it's been good to see.

[David G. Smith, President, CEO & Director]

Yes, I mean I would reiterate we do have a very good relationship with Bellatrix and we're working with them. I think the other positive factor is that with the compression of the of the equal Nimax basis spread being a lot tighter, right? I guess in other words, AECO prices firming up that certainly helps in terms of Bellatrix is position us well. So we certainly feel pretty good about our arrangement right now.

[Patrick Kenny, Managing Director]

Okay, thanks for that. And then on the other side of the customer spectrum, any thoughts on kind of moving to the US mainly as it relates to the returns you expect to generate from your Pipestone plant, should be expecting gas throughput at the plant to come in at the lower end of expectations and now it's a matter of back filling capacity with other producers in the area or is it still very much business as usual up there?

[David G. Smith, President, CEO & Director]

So, Patrick, we are still getting the same sort of communication from in Canada that there the plants haven't changed and specifically in the Pipestone -- at the Pipestone gas gathering facility -- processing facility. The other thing I'd mention is that that's a very attractive plants and part of it is because of the Montney liquids we can handle there and there are other producers in that area that are looking for capacity as well, so if for some reason and [ KANA ] we're not able to deliver the volume profile that they have laid out to us. But certainly other producers in the area that are looking for that capacity as well.

[Operator]

Your next question comes from the line of Ben Pham with BMO.

[Benjamin Pham, Analyst]

Just wanted to continue to gas volume conversation and it sounds like Wapiti is filling up maybe a little bit slower than expected, but I mean it's, you still should see some growth there. And I'm wondering, you switched to maybe Central Alberta per second, and when you kind of take a look at the past cycles of weak gas you guys done a pretty good job of working with customers, reducing costs, passing over and you've seen weak counter parties again taken up by stronger counter parties.So I guess when you speak with your customers today and you look at next year, I mean do you think the cycle will be different than the last couple that you've been through and do you have to look at the re-negotiations or these bankruptcies. I mean is this cycle do you think will be a bit different?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

Well Ben, we -- I mean, as I'm sure you follow the gas market is very closely. One hand, we feel very more optimistic at least about AECO gas prices moving forward. And in the basis blowouts that we've seen over the last 24 months. Hopefully that's improving going forward, because that's really hurts our producers in the Central Alberta in the southern capture area. So I think that's promising, but at the same time, we're not counting on higher prices. We have to continue to position ourselves so that we are as competitive as we possibly can be. And yes, sometimes we've had to renegotiate summer contracts in some areas, usually to extend term so we get something out of it at the same time.Recently, even as recent as November 1, one of our producer customers brought back on over $50 million a day of gas through our system. And that would be through the West Pembina, Nordic sort of facilities. So we're already seeing a better response, but we're cautiously optimistic about what that looks like going forward, at least in 2020.Longer term, we certainly are positioned for a rebound, just like we saw in 2014.

[David G. Smith, President, CEO & Director]

Ben, it's Dave here. I might add, I think you know this cycle is different in how sustained the decline in drilling activity has been. I mean we're now into the sixth year of very low commodity prices. And I think I would look at our track record over that five year period and say we've -- our volumes of hung in quite well considering the environment that we're in and I think we've done, we've continued to look at how we can be more efficient reduce costs enhance netbacks for our customers.But with the sustained lower drilling activity. We just think it's our responsibility to continue to look at those opportunities and that's really what's kind of brought us to this point. The advantage of course that we have in this area is we have very, a very efficient network that's connected together with spare capacity that allows producers when we do see a recovery, it allows producers to bring their gas on quickly without a lot of capital.

[Benjamin Pham, Analyst]

All right. That's great to hear. And then my next questions for Steven. The debt. EBITDA of 2.1x putting really strong position and I think a few quarters ago, you mentioned you didn't want to be about 3x. So my question is do you just take the 2.1 at – just, I guess, face value and you don't make adjustments to the hybrids and the marketing and any compared to the three in terms of how you think what the financing outlook?

[Steven B. Kroeker, Senior VP & CFO]

Good question there, Ben. I think from our point of view. Whenever we talk about debt ranges etcetera, It's meant to be more of a long-term sustainable view given the portfolio that's in place and to the extent that you put more and more assets in that are fee for service and take-or-pay that obviously gives you the flexibility to change your views. My earlier comment about the 2.1 was just to help investors and research as to realize that just because you're a 2.1 on a ratio like that where subordinated debt brings that senior debt ratio down considerably.Just remember, there's various stakeholders there. There is our own internal view but always having flexibility on our balance sheet to take advantage of opportunities, there are credit rating agencies who, a lot of them look at, but more total debt kind of situation. And so we try and factor all those kinds of different factors in when we look at an appropriate range in terms of debt there. I hope that helps you.

[Benjamin Pham, Analyst]

Okay. No, no, that's good and that's very helpful. And then just a close up on the marketing. I know up the guidance this year, and it looks like your run rate this pricing upside next year, we'll wait to see some color on that. But I just saw something I think you're saying your market -- the iso-octane I think is more than 50% of your cash flows and marketing.I'm just wondering is that like your last 5-year average. That's driving that calculation or is that I was just something else that?

[Steven B. Kroeker, Senior VP & CFO]

I would say if you looked at our marketing over the last few years, we've had a very strong contribution from that whole butane to iso-octane value chain. Again, we get to buy butane end market. And so if the market is lower as we saw in 2019, then we get the benefit, which provide that diversification on the other side, when commodity price is a little bit lower in effecting drilling, we do actually see the diversification on the other side in terms of our iso-octane value chain. But I would say in the past, even a more normalized levels, iso-octane is the majority of the contribution. So it would be fair to say that would be higher as we went into 2019 as a fair observation.

[Benjamin Pham, Analyst]

Okay. So that's more of a data, you are saying more like $200 million run rate and when you have outside…

[Steven B. Kroeker, Senior VP & CFO]

Yes. If you look at that base rate that we put out there in terms of that 180 to 220. It's probably a fair assumption that it's close to the majority being from the iso-octane business. And again when we look at the marketing business, we view it as our whole goal is do we enjoy the cash flow from that, but we also try and take very conscious steps of mitigating any risk with that and so whenever we have inventory in place we hedge it. We're making our margin on the way through on the NGL products, on the iso-octane value chain when we see opportunities to lock in the margin then we along that whole value chain we try and lock it in. So our whole goal really is to derisk that marketing cash flow while receiving the benefits of that whole system.

[Operator]

Your next question comes from the line of Robert Catellier with CIBC Capital.

[Robert Catellier]

I'd like to start with the Nevis shut down, I think the plan there is to decommission. So can you give us some type of guidepost in terms of how much of my cost and how long it will take and whether that's in the capital budget?

[David G. Smith, President, CEO & Director]

So Nevis deconstruction and cleanup will be a multiyear program. So it's going to take a period of the process is you have to get approval from the regulator on what your deconstruction plan and then you need to implement that plan. So we're basically setting up the facility today to prepare for future deconstruction then will be a very targeted low level of investment kind of over a longer period of time to get it to that final resting state. So in the end on a total capital basis it's not really that material in the overall scheme of things.

[Robert Catellier]

And as you look to consolidate some of your other plans. Do you see any opportunity for others to be decommissioned or will they turn them in the compressor stations or what's the plan?

[David G. Smith, President, CEO & Director]

I think, and certainly in the West Central region, the interconnected nature and the gathering system that feed into them. Really probably sets them up more along the line of the compressor station type scenario as opposed to a complete shutdown scenario. Nevis was unique and that it was stand-alone and didn't have connected facilities to it. So when there wasn't enough gas to keep it viable, you really have no choice but to shut it in. I think we have more flexibility in our other facilities in terms of how we can structure their operations and make them sustainable in the long-term.

[Robert Catellier]

Okay. And just turning to the marketing specifically the butane market prices recently have shot up, but if you look at inventory levels, they are very high in North America, so just if you could provide a little bit of color what your expectations are for the butane market in 2020 and how much of your current requirements are hedged or already in inventory?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

Robert, it's Dean. Certainly we will disclose, I guess, how much we have an inventory, but we are inventorying all the butane supply that we're purchasing now that being consumed at AEF well it's down. So again we'll have that inventory that will be using throughout 2020 is our feedstock and then it'll certainly help the balances. Prices are higher to a bit higher today than where they were throughout the rest of 2019. But there certainly still very constructive to that iso-octane business and where they ultimately land when we head into our re-contracting season, which starts in April 1 of next year. That's undetermined, but it's certainly within an attractive range.

[Robert Catellier]

Okay. On the other side of [indiscernible] iso-octane. So those prices look stronger some decent premium. So do you think the risk between view butane and iso-octane a relatively balanced? Or how do you really see the -- or the outlook from here?

[David G. Smith, President, CEO & Director]

We feel, as I said earlier, we feel pretty good about the demand for octane and particularly our iso-octane again it's the high octane count in lower RVP that really makes it attractive and again, that's the direction of where fuels are going. So we feel pretty good about the about where octane balances and demand is and our ability to satisfy that at that are pretty good premium.

[Robert Catellier]

Okay. You've answered my other question, so I'll leave it there.

[Operator]

(Operator Instructions). Your next question comes from the line of Robert Kwan with RBC Capital Markets. Your line is open.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Good morning. And maybe starting on the G&P business. I'm just wondering can the work that can be done to streamline things into certain other plants can that be done within the existing plant connections, or if that's not the case, how much KAP [ ] do you think might be needed to interconnect and expand that you need?

[Bradley W. Lock, Senior VP & COO]

Robert, this is Brad. So I think that's part of the valuation is going on right now, there is certainly a lot of connections that exist right now that would allow us to move volumes around. But in order to make the most significant impact in terms of enhanced operating cost for reductions, improve producer net-backs and improve returns for Keyera. There may be some capital investment and in pipelines and additional connections compression, those types of things to get those volumes landing in the right spot. But all at all they fit very well within our program in each individual opportunity will be justified on its own merits, so.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Got it. And there was a statement kind of as you were describing this earlier in the call around your expectation for higher margins for the company. I'm just wondering is that on an absolute basis or is it higher margins at specific plans.

[Bradley W. Lock, Senior VP & COO]

Well, I think there is – again it's -- it will be unique to each individual opportunity that we pursue. Ultimately, our goal is to not only to create efficiencies that reduce our cost to our producers that allow them to be more efficient and then potentially drill more wells behind our plants. But we also have to keep in mind that our goal is to enhance shareholder value.So ultimately, making sure that the things we're doing benefit the shareholders of Keyera and which could be improved netbacks on a per unit basis is probably what we're trying to focus on is where we're going to be looking.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Okay. And then from a Keyera perspective though in terms of higher margins, are you talking about dollar margins or percentage margins or both?

[Steven B. Kroeker, Senior VP & CFO]

I would suggest. I mean what we're trying to get is improved margins on a per unit volume perspective is what we're trying to achieve. For both ourselves and our producer customers.

[David G. Smith, President, CEO & Director]

Yes, Robert, it's Dave here. I'll just chime in. I think the way it's too -- it's probably too early to provide any guidance, but certainly from our expectation. Ideally what we'd like to do is try and more or less maintain the volumes at a lower per-unit cost, which would benefit the producer in terms of higher netback but also benefit us in terms of the per-unit margin that we're running at those plants, but it's a bit difficult to generalize because as Brad said each situation is going to be a little different.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Got it. Just -- I don't know if it's kind of GMP or just value chain. But with frac space and being tight and getting tighter. I'm just wondering if you can talk about the ability or the discussions you're having to prioritize producer volumes that are going through your gas plants and how that might help retain those volumes.

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

Robert, can you maybe rephrase the question? We're not sure we understand what you're asking.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Yes, I'm just wondering, I just -- with the frac space being tight. And if you think about Brazeau River producer trying to pulling volumes away from your plans. Are you having discussions with producers about prioritizing the volumes that are going through your gas plant as you head into the next NGL year to go through KSS versus processing people who want to do it all a cart?

[David G. Smith, President, CEO & Director]

I think you know our business, we try to look at it from both sides. So you know where we can offer an integrated suite of services to a customer that allows them to process through our plants and move liquids through our infrastructure and provide us marketing opportunity is certainly a desire that we have. That being said we currently got a lot of volumes into our liquids infrastructure business that come from places outside of our plan. So I don't think well we prefer the full value chain opportunity where we can provide that full suite of services. We're open to a variety of models in terms of where those volumes would hit our value chain.

[Bradley W. Lock, Senior VP & COO]

Yes, I mean I would add, Robert. I would add, I think your premise is correct that. I mean our ability to be able to provide the full value chain of services gives us an advantage at the gathering and processing facilities. And I think certainly the customers that we, the gathering and processing customers that we have at our plans, you can expect that that will take care of their NGL volumes on a priority basis.As you know, we invested in the KeyLink pipeline three or four years ago, which allows us to more efficiently gather the liquids from those plants in that West Central Alberta area, we do have a couple of third-party plants are connected to that system, but it certainly gives the Keyera operated plants in that area and advantage.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

And maybe just finishing with the U.S. side and the Oklahoma liquids terminal in WildHorse but just on Oklahoma. It sounds like in the MD&A that performance is pretty good. I'm just wondering if you can see more details performance versus plan and then as you think about WildHorse. Has there been any change in your investment thesis for expectations given the Oklahoma liquids terminal performance and just what you've seen more recently with the start-up of some of the new pipes in the area.

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

Robert, it's Dean. With respect to loyalty, it is performed better than our expectations this year, so very strongly and we have a pretty good outlook for 2020 as well. With respect to WildHorse, we still believe that's going to be a very good business and generate strong returns and our views haven't changed, so it will be up and running till late next year. So it won't have much impact on our results in 2020 but certainly going forward beyond that, we feel pretty good about it.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

But did you see the OLT performance has being transitory? or do you see that kind of carrying forward? And as you bring WildHorse and maybe makes WildHorse better?

[C. Dean Setoguchi, Senior VP & Chief Commercial Officer]

We think it's going to be a strong business. I mean there is a lot of things that happen from year-to-year that could affect results. But generally, we think that it's going to be a strong business going forward and we think that also applies to WildHorse as well.We're just a little bit cautious. We have a very, very strong outlook for WildHorse, but we have to get it up and running and prove we can make money there. So we have to get it up running first.

[Operator]

There are no further questions at this time. I turn the call back over to our presenters.

[Lavonne Zdunich, Director of Investor Relations]

Thank you, everyone, for listening to our conference call. That brings to conclusion. If you're in Calgary, stay warm as it is minus 14 here. And if you're in Toronto, enjoy the sunshine. Thank you.

[Operator]

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