Canexus's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Canexus Corp (CXUSF)

Canexus Corporation (OTCPK:CXUSF) Q2 2013 Earnings Conference Call August 8, 2013 10:00 AM ET

Executives

Gary L. Kubera – President and Chief Executive Officer

Richard T. McLellan – Senior Vice President, Finance and Chief Financial Officer

Analysts

Jacob Bout – CIBC World Markets, Inc.

Alexandra M. Syrnyk – BMO Capital Markets

Operator

[Call starts abruptly]

Gary L. Kubera

Okay, I’m sorry everybody we had a drop line that wasn’t obvious. At the risk of redoing the whole thing I think we are going to start from the beginning and try and be quick, so we can get to questions.

Again on Page 2, our second quarter was impacted in large part by our Chlor-alkali business. We continue to see weak caustic soda prices and adverse product mix on acid and we did have 8 days of unplanned downtime coming out of our plant shutdown in April.

We also continue to finalize projects in our NATO manifest business those projects will be completed in Q3 and we’ll begin to see the full benefits of those projects in Q4.

Moving on to page 3, an important announcement that we made a couple of weeks ago was our tie-in to the Cold Lake pipeline system owned by Inter Pipeline Fund, that will give us 100,000 barrels per day of capacity to the terminal. This has been in the works for a while and we really think the dual pipeline connectivity is an important part of the value at Bruderheim and really paves the way for us to finalize many of the commercial agreements that have been under discussion.

Page 4 starts to show you some of the progress at our Unit Train facility in Bruderheim. In addition to the Cold Lake agreement, we did announce at the same time our agreement with Cenovus Energy that has made a strategic commitment to crude by rails. So we’re very excited about that relationship.

The pipeline into the plant is complete and going through final testing now. the actual terminal is in its late stages of construction, will go through mechanical completion in late September, early October, and go through its commissioning startups. So we’ll start to see commercial volumes flow in the fourth quarter.

We have also confirmed our commitment to an expanded terminal, which will give us up to 13 unit trains per week, and I’ll remind everybody that a lot of the infrastructure we’re putting in also prepares us for condensate’s handling while those commercial agreements are behind time wise the oil. We do think late this year, early next year we will start to get some of those commitments that could be running through the terminal in late 2014.

On Page 5, we continue to ramp up our Manifest business and with the projects completed later this month we will exit the quarter with about 30,000 barrels of capacity. Differentials have widened back out and we’re seeing continued strong demand for those services. So the fourth quarter will really start to demonstrate the potential, running potential of that side of business.

On Page 6, this has been a theme we’ve talked about for several quarters now. The widening differential between Asian caustic prices and U.S. Gulf Coast, we had expected early in the year that this gap would close pretty rapidly and in fact so far it has not. We’ve seen some modest closing in the differential with some improvement of pricing in Western Canada in the third quarter, we’ll see a little bit in the third quarter and we expect modest improvement again in the fourth quarter, but this is persisted longer than we have expected, and given that it’s hard to project when we will see more of a closing in improvements in pricing.

The reason we think pricing will improve is shown on Page 7, it’s the persistent low to no margin even negative margin by many Asian producers. We think that has to correct itself on the caustic side because the pressure is being put on the PVC side, by low cost U.S. Gulf Coast PVC being shift into Asia. That should also margin should also be affected by higher oil prices in Asia, because ethylene is mostly derived from naphtha in the Asian region, and the easiest way to get overall margins up for those producers is to sell caustic at higher prices. So we continue to expect that but have difficulty doing projecting the timing.

On Page 8, I will make a few comments about the dynamics we are seeing in the acid market. The first half of 2013, our volumes were about a third higher than 2012, that growth was enabled by the completion of our new acid plants in Vancouver, which started up in May, so we did get some impact in the second quarter of the year, but we’ll see more of that impact in the third quarter.

So volume was rather as expected, the difference we saw was that prices and margins were lower, mostly due to mix. The volume we expected to materialize in Western Canada has been slower to materialize. It’s a combination of drilling activity as well as the types of formations that are being drilled, some of the formations being drilled right now are not as asset cachet intensive as others and so that will continue to improve, but not at the rate we have been expecting it.

We have seen some pressure on asset prices, which we have expected coming of the highs of early 2012. We still see a very strong value ingredient going from chlorine to acid and so that will continue to positively contribute to our business in the future.

On slide 9, we expect to see improved operating cash flow performance in Q3 in the range of $30 million and then it’s also expect to see slight improvements over and above that in Q4.

In the chlor-alkali business we expect to see higher asset volumes and more assets into the Western Canadian oil and gas segment following spring break up. As Gary has spoken about, we are seeing modest caustic price improvements in Q3 and expect further improvements into Q4. We won’t be impacted by the maintenance shutdown, we took in the second quarter going forward and with our manifest business expected to ramp up starting in later August. We expect to see significant contribution from that in the fourth quarter in particular.

And then in our chlorate business seasonally we or expect annually to see better second half performance and first half performance primarily because of (inaudible) shutdowns when tender occur later in the first half of the year. Also the pricing environments in the sodium chlorate business has been a little bit more challenging than we anticipated given that operating rates in the industry are still in the 92%, 93% range.

That concludes our formal comments. Operator, we’re now happy to answer any questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question comes from the line of Jacob Bout of CIBC. Please go ahead.

Jacob Bout – CIBC World Markets, Inc.

Hi, good morning.

Gary L. Kubera

Hi, Jacob.

Jacob Bout – CIBC World Markets, Inc.

Just some questions on the contracts. When you take a look at your manifest and the pipeline-to-rail or some of that unit train business, how much of that is under contracts and of those how many would or what would the percentage be that will be under a long-term take-or-pay type contract?

Gary L. Kubera

Let’s talk kind of term first. The contracts that we have written and expect to write will generally range in three year to five year terms and be evergreen. Some are expressing interest in longer terms, but three year to five year seems to be the norm right now. Current contracts are 30%, 40% of initial expanded capacity. We expect maybe another 30 plus percent that could finalize in the third quarter and then there’s quite a wide range of interest that could materialize beyond that. So, I don’t know if that exactly answers your question, but that’s the type of structure we see right now.

Jacob Bout – CIBC World Markets, Inc.

And so just to understand this, the 30% to 40%, is this of the unit train pipeline type business?

Gary L. Kubera

I’m sorry. That’s referencing unit train. The manifest is more a combination of long-term commitments, again, some three to five years with some spot business in there. We wouldn’t expect long-term much spot capacity in the unit train side, but we may leave spot capacity or have spot capacity on the manifest side.

Jacob Bout – CIBC World Markets, Inc.

So the 30% to 40%, so that would be of 12 unit trains per week. Is that the way we should…

Gary L. Kubera

That’s correct.

Jacob Bout – CIBC World Markets, Inc.

And is that a take-or-pay like contract?

Gary L. Kubera

All the contracts have – each one is different, but all have some take-or-pay elements to them.

Jacob Bout – CIBC World Markets, Inc.

Okay. And will you be announcing in the third quarter if there are additional contracts signed?

Gary L. Kubera

We would expect that we would.

Jacob Bout – CIBC World Markets, Inc.

Just the CapEx estimates for Bruderheim, the $225 million, has that changed?

Gary L. Kubera

Yes, it’s changed. The last guidance we provided on CapEx was $190 million, but again because of the nature of the projects we’re installing a number of elements for products able to handle large volumes of condensate movements, Jacob. So that is primarily the reason for the movement from $190 million to $225 million.

Richard T. McLellan

Yeah, I think there is a couple of things. Probably when we did the $190 million at the end of the first quarter. That was probably a little lower than expected. As Rick said, there is some elements that tie into the (inaudible) preparedness and with some delays in the startup and whether those have all contributed to the current capital number.

Jacob Bout – CIBC World Markets, Inc.

So physically what is that incremental $35 million?

Richard T. McLellan

It’s a combination of labor, it’s a combination of some capital modifications, site preparation. I mean it’s hard to discretely bridge exactly every component of that.

Jacob Bout – CIBC World Markets, Inc.

Okay. And then just lastly, in the last call, I think we’ve talked a bit about structurally something has changed here and the west coast markets, and I think at the time you said, you thought it was going to bounce back further quickly, yet it persists and logically I don’t think it makes sense. What are chances this can persist for another 12 to 18 months?

Richard T. McLellan

That’s really hard to answer Jacob. Like you said, we were quite confident and it should be relatively short-lived. I can’t sit here and tell you we know when it’s going to stop. It tends to happen I think in more commodity oriented market. When it changes, it could change quickly. But I think it depends on how long producers are willing to operate at a loss if the analysis we’re using to make that point is correct. And I think typically the IHS data has been pretty good. It’s okay. I mean, it’s really a hard question to answer.

Jacob Bout – CIBC World Markets, Inc.

But as we stand in the beginning of August your things will be ever changed…

Gary L. Kubera

As we sit here today things have modestly improved, but I can’t tell you any more than that.

Jacob Bout – CIBC World Markets, Inc.

All right, thank you very much.

Gary L. Kubera

Thanks Jacob.

Operator

Your next question comes from the line of Alexandra Syrnyk of BMO. Please go ahead.

Alexandra M. Syrnyk – BMO Capital Markets

Yeah, hi. Just a kind of following up on the CapEx question related to the condensate or I guess still have for the support largely moving the condensate, Gary you mentioned I think in your comments earlier that you could see movements of that condensate going into the back half of 2014. Could you give us a little bit more color or detail there or potentially some kind of guidepost of what kind of cash flow contribution you could be targeting for that?

Gary L. Kubera

I can start to maybe more directionally Alex than anything else. When I talked about readiness for condensate, let me just expand on that for a couple of minutes. The pipeline system that we have installed has separate pipes for both the diluted bitumen and condensate, so we built out that part of it. The header systems on our loading racks has been built to allow for condensate usage, so there will be some pipes and pumps and things to install that are outside this current capital scope, but those should be relatively modest.

The fees for condensate transloading should be similar to the fees for oil diluted bitumen movements. So if we anticipate the possibility of let’s say, exiting 2014 at even 10,000 to 20,000 barrels per day of condensate movement, that could represent, I have to do the math in my head, but that would be about 20% of the expected movement of diluted bitumen, and them a similar margin contribution per barrel.

Alexandra M. Syrnyk – BMO Capital Markets

Okay, that’s helpful. Thanks. And then I guess in terms of the manifest or remaining CapEx to expand the manifest, get that manifest business up to about 30,000 barrels a day, how much do you anticipate you have remaining to spend on that?

Gary L. Kubera

Most of that spending should be completely concluded Alex in the third quarter and in fact most of it’s been incurred now, and it’s in the neighborhood of about $10 million.

Alexandra M. Syrnyk – BMO Capital Markets

Okay, great. And then just lastly over the past few weeks, you have seen a few other kind of unit train announcements or potential unit train terminal announcements comes through in the Northern Alberta regions, how do you guys think about the build out of loading capacity in your area, with three unit train terminals potentially including, you guys potentially around this all the same size, if we see expansion or additional announcements beyond these terminals, do you start worrying about over capacity or how do you think about that?

Gary L. Kubera

Well, I think we have always said, we expected these two, and we felt plenty of room for two, three probably, you can’t control what others decided to do, but we think getting out first, getting many of the relationships that we have established in getting started are important. We also think long-term there is a balance between bitumen and diluent and the infrastructure we are building plays to that. So, we’re going to be operating before the end of this year and we think that gives us an advantage.

Richard T. McLellan

And I think the other dynamic that you may see evolve is that with the unit train operations commencing you may see some the manifest business, some of the smaller sites be less attractive or rail movement.

Alexandra M. Syrnyk – BMO Capital Markets

Okay. Great. Thanks. I’ll turn it over.

Gary L. Kubera

Okay.

Operator

(Operator Instructions) Gentlemen, there are no further questions at this time. Please continue.

Gary L. Kubera

Okay. Well, thank you everybody. We will continue to report to you as developments evolve in our business.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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