Pembina Pipeline Corp (PBA) CEO Michael Dilger on Q2 2018 Results - Earnings Call Transcript

Pembina Pipeline Corp (NYSE:PBA) Q2 2018 Earnings Conference Call August 2, 2018 6:00 PM ET

Executives

Scott Burrows - SVP & CFO

Michael Dilger - President, CEO & Director

Jaret Sprott - SVP & COO of Facilities

Jason Wiun - SVP & COO of Pipelines

Analysts

Jeremy Tonet - JPMorgan Chase & Co.

Linda Ezergailis - TD Securities

Robert Hope - Scotiabank

Robert Catellier - CIBC Capital Markets

Patrick Kenny - National Bank Financial

Andrew Kuske - Crédit Suisse

Robert Kwan - RBC Capital Markets

Operator

Good evening, my name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation 2018 Second Quarter Results Conference Call. [Operator Instructions]. Thank you.

Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer, you may begin your conference.

Scott Burrows

Thank you, Chris. Good afternoon, everyone, and welcome to Pembina's conference call and webcast to review highlights on the second quarter and first six months of 2018. I'm Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer. On the call with me today are Mick Dilger, Pembina's President and Chief Executive Officer; Jason Wiun, Senior Vice President and Chief Operating Officer of Pipelines; and Jaret Sprott, Senior Vice President and Chief Operating Officer of Facilities.

Before passing the call over to Mick, I would 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 www.pembina.com and on both SEDAR and EDGAR. Over to you, Mick.

Michael Dilger

Well, good afternoon or good evening, depending on where you are everybody. Thanks for joining our call to review our second quarter results. Now we're at the midpoint of what continues to be a record-setting year. Second quarter has once again seen strong financial and operating results as we continue to realize the benefit of last year's acquisition. You approximately $5 billion saw suite of new assets placed into service last year, and the constructive commodity price environment.

On a quarterly basis, we set new financial records for operating margin, adjusted EBITDA, adjusted cash flow from operation and adjusted cash flow from operations per share. We've also set new revenue volume record, all while continuing to operate both safely and reliably. We continue to see strong customer demand for our services, which has led to increased utilization across both our Pipeline and Facilities division, as well as strong facts spreads continue to drive the out performance from our marketing and new ventures division. Based on a strong year-to-date performance and positive outlook, we see for the remainder of the year - we reiterate our 2018 adjusted EBITDA guidance range of $2.65 billion up to $2.75 billion.

Scott will now discuss the few financial highlights from our second quarter 2018 results.

Jaret Sprott

Thanks Mick. As Mick mentioned, Pembina achieved operational and financial records in the second quarter and first half of 2018. Adjusted EBITDA was $700 million for the second quarter, a 136% increase compared to the same period last year and an all-time quarterly high. A period-over-period increase was driven by two factors, first, a larger asset base drove increase sales and revenue volumes in the Pipeline and Facilities division; and second, improvement in crude and NGL market pricings in the Marketing and New Ventures division.

Earnings were $246 million during the second quarter of 2018, having more than double from the same period in 2017. On a year-to-date basis, earnings of $576 million were 76% higher than the comparable period in 2017.

In addition to the factors previously discussed, which contributed to higher revenue, earnings were partially offset by increased tax expense, net finance cost and higher G&A expenses incurred as a result of increased staffing to support the growth on the company's asset base.

We achieved a new quarterly revenue volume record in our Pipelines division, averaging approximately $2.5 million BOE per day, a 52% increase compared to the same period last year. On a year-to-date basis, in 2018, revenue volumes increased 49% to an average of approximately 2.5 million BOE per day compared to approximately 1.7 million BOE in the first half of 2017.

Higher revenue volumes are realized due to system expansions on Pembina's Peace Pipeline system, as well as the acquisition of AEGS, Alliance and Ruby. Revenue volumes were also positively impacted by the recognition of volumes related to take-or-pay revenue that previously in deferred under IFRS 15.

Operating margin in our Pipelines division was $451 million for the second quarter of 2018, an increase of 158% compared to the second quarter of 2017. Year-to-date operating margin of $867 million was a 155% higher than the comparable period in 2017. These increases were a result of higher revenue due to increased revenue volumes from new assets into service, as well as the inclusion of revenue generated by acquired assets, partially offset by higher operating and power costs, and increased labor expenses releasing from increased staffing levels.

In our Facilities division, revenue volumes were 849,000 BOE per day in the second quarter of 2018, 37% higher than the second quarter of 2017. Year-to-date revenue volumes were 854,000 BOE per day, 29% higher than the comparable period in 2017. The increased revenue volumes were a result of new volumes from the startup of our Duvernay I gas plant during Q4 2017, the acquisition of Veresen Midstream in the fourth quarter of 2017, and higher realized revenue volumes at Saturn, Enbridge, Kakwa River and Resthaven.

Second quarter revenue volumes were partially offset decreased volumes at the plant and the Cutbank Complex. Our Marketing and New Ventures division realized strong second quarter performance, increasing market NGL volumes by 38% to 151,000 barrels per day over the comparable period in 2017, and generating quarterly operating margin of $118 million, a 146% increase over the comparable period in 2017. Strong results in the marketing business were driven by higher product prices and margins as well as Aux Sable, which was acquired in the fourth quarter of 2017.

With respect to financing activities, during the second quarter, Veresen Midstream successfully amended expecting and increased the capacity of its senior secured credit facilities. As a reflection of the de-risking of that business, the amendment enabled a reduction in cost, modifications of the covenant and package and increased permitted distributions to the owners.

Pembina remains well positioned with one of the strongest financial positions amongst our peers. Based on our 2018 guidance range, Pembina's proportionally consolidated debt-to-adjusted EBITDA ratio by the end of the year is expected to range from 3.7x to 3.9x. Additionally, in the first six months of 2018, Pembina's payout ratio with adjusted cash was approximately 50%. But our strong balance sheet and liquidity position, we continue to remain well positioned to fund the growing dividend and $1 billion to $2 billion of capital projects per year without accessing equity markets.

I will now pass the call over to Jason, who will provide an update on growth projects within our Pipelines division.

Jason Wiun

Thanks, Scott. Good afternoon, everyone. We continue to see strong customer demand for our transportation services, which is driving and ongoing buildout of our pipeline systems in the key basins in Western Canada. Our Phase IV and V pipeline expansions continues to track on-time and on-budget and are expected to be placed into service in late 2018. Our Phase VI expansion continues to progress on time with an in-service date of early 2020, subject to environmental and regulatory approvals. During the quarter, Alliance Pipeline announced binding commitments for the opening session then ended May 30, 2018, did not reach the target of 400 cubic million - 400 million cubic feet per day. Based on the open season results and the feedback from producers, we're currently assessing potential alternatives and next steps for associated with the potential expansion.

On June 25, Pembina, together with other the 50% owner Enbridge, converted the operation and administration of the Alliance Pipeline into operated model. We expect that the new operating model will have a number of benefits, including and creating strategic alignment, that will result in improved efficiencies by Alliance begin managed as part of the owner's larger organization.

Finally, effective October 1, 2018, Pembina will assume control of the operation and administration of the Alberta Ethane Gathering System.

I will now pass the call on to Jared, to provide an update on ongoing growth projects within the Facilities division.

Jaret Sprott

Thanks, Jason. Good afternoon, everyone. We're continuing to progress the construction of Duvernay II facilities. These facilities are underpinned by a 20-year take-or-pay contracts with a combination of fee-for-service and fixed return arrangements. Duvernay II attracted on-budget and on-schedule with the majority of long-lead items having already been purchased. The project has received regulatory approval, and construction will begin in the third quarter of 2018 with expected in-service date of mid to late 2019.

Our 25,000-barrel a day LPG export terminal at Prince Rupert continues to progress by preparation acquired facility construction has been undertaken by the City of Prince Rupert and is nearing completion. Given this progress, we can trigger a key milestone that allows us to proceed with the aboveground facility construction. We continue to anticipate that terminal we placed into service mid-2020.

As previously announced, Pembina will construct a new fractionation and terminating facility at the company's Empress, Alberta facility for approximately $120 million. Detailed engineering continue to progress and major equipment contracts were awarded during the second quarter. These facilities have been anticipated in-service date of late 2020, subject to environmental and regulatory approvals.

Construction is advancing on our Burstall ethane storage facility, which will have 1 million barrels of storage capacity. The facility is underpinned by a 20-year agreement, and is expected to be in place in-service in late 2018.

Late in the second quarter, the North Central Liquids Hub was placed into service, ahead of schedule and below budget. This project provides separation and stabilization of condensate volumes supporting the Cutbank Ridge partnership within the Montney formation.

On April 1, Pembina exercises its option to assume an additional interest in the Younger extraction and fractionation facility. On the same day, Pembina took over operatorship of Younger, which was previously operated by its joint interest partner. Given the expense of integration between Younger and our NGL infrastructure, we believe efficiencies are available from common operations.

Lastly, in conjunction with our partners, Enbridge and Williams, we're currently developing a new operating model for the future operation and administration of Aux Sable. The new model will have a number of benefits, including creator's strategic alignment, and will result in increased efficiencies, and is expected to complete in the third quarter of 2018.

I'll now pass the call back to Mick.

Michael Dilger

Thanks, Jaret. At our 2018 Investor Day, we formally unveiled the next evolution of Pembina's strategy, being the move towards accessing global markets. Pembina has committed to commencing long life hydrocarbon reserves to new demand location. By levering it's infrastructure and our service offering along the hydrocarbon value chain, Pembina will contribute to ensuring that hydrocarbons produced in Western Canadian sedimentary basin and the other basins where Pembina operates, can reach the highest volume markets in the world. This evolution in our strategy underpins the projects under development in our Marketing and New Ventures division.

In terms of specific projects, let me first search based on our PDH/PP project. Canada, Kuwait, petrochemical company, of which Pembina owns the 50% interest, continues to progress front-end engineering design. We continue to expect this WorkStream will be completed by late 2018 and will be followed by a final investment decision.

With respect to Jordan Cove, we continue to advance both commercial and regulatory activity. In September 2017, applications with FERC were filed for the construction and operation of Jordan Cove.

Based on the most recent information available to us, the project is positioned to receive a FERC decision during the second half of 2019, and we continue to anticipate First Gas in 2024. We look forward to providing further updates on these important projects later this year.

In closing, we're extremely pleased with our strong financial performance through the first six months of 2018. Our strong first half results once again demonstrate the strength of our underlying business. And looking ahead, we're focused on completing our secured growth projects on-time and on-budget, and converting our unsecured opportunities into secured projects, all while continuing to create value from all of our stakeholders.

I would like to thank all stakeholders for their continued support. We're proud of what we have accomplished and are excited to continue realizing the benefits of our hard work.

With that, we'll wrap things up. Operator, please go ahead and open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Jeremy Tonet from JPMorgan.

Jeremy Tonet

I wish I was just curious turning to the guidance here. the guidance. And I was - as looking at the top end of the guide, in relative to the first half of 2018, the top end of the guide would imply a decrease in EBITDA. And I was just wondering what factors would need to materialize make the second half of '18 EBITDA lower than the first half?

Michael Dilger

I think there is two things going on, Jeremy. One is, obviously, conservatism around the commodity curve. We benefited through the first half of the year with both very strong NGL prices, as well as some opportunities within the crude oil marketing business, with some volatility and some storage opportunities that we've seen. In addition to that, as you may recall, we tend to have our OpEx especially within our conventional business unit, a little more back end waited with some of the winter access only OpEx. So we would expect OpEx in the back half of the year to be higher than the front half of the year.

Jeremy Tonet

That's helpful. And building on the marketing margins there, it looks like the second quarter was pretty close to the first quarter as far as the results there. And we're kind of thinking there might be a dip down in seasonality. And so I was wondering if you can just expand a bit as far as the drivers there, is it more on the crude oil side? Or on the NGL side that allowed kind of another a strong quarter in a seasonally softer time period?

Michael Dilger

Jeremy, that's a very fair comment when you think about our traditional NGL business. That is historically how that businesses has worked. I think there is a couple of things that are unique to this quarter one. We continue to see NGL prices rise throughout the quarter as well as lower prices. So frac spread were - if you do the math, I think, it's actually a little higher in Q2 than they were in Q1, which offset typically what the lower-volume sales profile. Secondly, we did have very strong crude oil storage results as well as mother opportunities we saw on the crude oil marketing side in Q2. That business is a little more ratable across the quarters, but Q2 was quite strong. And then lastly, one of the main differences, obviously, Aux Sable and the way the contracts underlie that business, we started to recognize pretty significant EBITDA in the second quarter. If you recall, in the first quarter, there was a turn of EBITDA recognized in Aux Sable, and we're through some thresholds within that contract that allow us to recognize the EBITDA. So you saw that big pickup in Q2.

Jeremy Tonet

That's helpful. Then and then, I guess, with the favorable marketing conditions or the environment you're seeing in Q2 favorable here, one month into the third quarter, have you seen those conditions Or is there any reason to indicate kind of deterioration of big magnitude versus 2Q?

Michael Dilger

Well, we haven't seen the July results, so I can't comment on that, obviously. But I would say, overall, the pricing environment is trending in the right direction.

Jeremy Tonet

Great. And then just, I guess, for the other segments, real quick, is there any reason to think that they would decline from these levels? Or could they - would - should we expect them to just kind of ramp at these projects experience greater utilization over the back half of year?

Jason Wiun

This is Jason. With respect the Pipelines division, Jeremy, I think we already talked about the fact that we'll have the ramp up in OpEx in the second half of the year. But we're also building towards the in-service state of our Phase IV and V expansion. So we would expect to see volumes begin to materialize towards that expansion as we get ready to bring it online in the start of 2019.

Scott Burrows

And, Jeremy, with respect to the Facilities division, we're continuing to see, as Jason mentioned, seeing volumes come down the pipe and, obviously, there is processing and NGL that require fractionation with respect to that. The only asset we will bring into service will be Burstall in Q4. And then also one of the larger growth areas is - as the Veresen Midstream asset coming into service, and that ramp up from CRP, that continues to go as planned. So

Operator

Next question comes from the line of Linda Ezergailis from TD Securities.

Linda Ezergailis

I just wanted to follow-up with the back half of the year - to some of Jeremy's questions. Looking at beyond just your conventional, your NGL services business in Q2, I think, with your proportionate operating margin was down versus Q1. And I think there was mention of decreased volumes in Younger and Cutbank. How might we think of Q3 and Q4 volumes and contributions from NGL services? And maybe you can comment on any other factors that play in Q3 versus Q2?

Jaret Sprott

Linda, Jaret here. Actually, in the second quarter, we - our Empress facility and it's routine four-year maintenance, where we actually had that facility down for about 30 days to execute preventative maintenance that's required on a four-year basis. So that went extremely well. It was ahead of schedule, and that facility is back up and running. So that was one of the major outages, I guess, we had planned in that quarter. With respect to the comment around Cutbank and Resthaven, that's just from IT volumes that we've seen as has been depressed, as Scott mentioned, that are getting shut in, but they're not very material, to be honest.

Linda Ezergailis

And what about Younger? What caused the lower volumes there?

Jaret Sprott

I don't think we've referenced any lower volumes at Younger. Minor throughput, I guess, with respect to it being a little bit under, but we did take over operatorship of that facility on April 1. And we are now incorporating that into our processing and fractionation operational world, and you know, and now we've also taken over the rail logistics portion of that facility. And we're seeing the benefits of allowing that to be within our larger Facilities division organization.

Jaret Sprott

There is nothing systematic in Younger at all. That's been a - if it was down a bit, I'm not aware that it was. But if it is, it's nothing systemic.

Scott Burrows

I would leave you with an overall comment. Without, obviously, commenting on specific quarters, the back half of the year, given the fee-for-service nature of that business in the contracts that are in place, the back half of that year looks generally in line with the first half of the year.

Linda Ezergailis

That's helpful. And there is no other major outages that we should be mindful of, either in Q3 or Q4?

Michael Dilger

No. I don't know we can think of.

Jaret Sprott

No. Nothing material.

Linda Ezergailis

Moving on to your major projects. Just a quick question on your LNG development activities. You mentioned, you're continuing the commercial and engineering work streams. I'm wondering - are you kind of bottlenecked on the commercial side until you get your FERC decision in the second half of 2019? And how we might think of your run rate of development cost until you get to an FID, which I assume could potentially come shortly after your FERC decision, and maybe comment on...

Scott Burrows

Yes. We're talking about that at the board meeting today. We don't feel bottlenecked at all. If you think about all of our - Pembina project, we FID at subject to regulatory approvals. In fact, I can't think of a single project as we waited until we had regulatory approvals to FID. Obviously, Geordie call is pretty involved. But there's no - we don't have that feedback from customers that they're going to wait to see what happens with FERC. Obviously, if we do strike commercial arrangements, there will be an if we don't have get those approvals. So we're ahead with the commercial, lot of interest at World Gas Conference. It is a unique project because of its location. And so - that is progressing well. We've got, as you know, Class II engineering for these facilities, lump-sum turnkey engineering, we're into great detail there, and we're comfortable with those contracts. But what we don't have is that - is the similar quality of work done on the pipe. We expect to have our Class III engineering down on the pipeline by the end of the year. And so there is really nothing moving us back there from taking FID where we to confirm our threshold volume there, is a 6 million tons. So that's kind of give or take what we're hoping to sign up. But the FERC and the commerce are not really linked right now.

Linda Ezergailis

That's helpful context. And how might we think of your expense spend rate on the front...

Scott Burrows

Oh yes, sorry, that was your second question. We talked about spending $10 million a month, we're well under that year-to-date. So I don't think we've given guidance specifically but we are - there is not a chance we're going to be higher than that.

Operator

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

Robert Hope

First I wanted to touch on Alliance. Can you add some additional color on what the potential next steps there could be regarding the expansion whether it scale back? And then secondly, we've seen your refi and now. Any thoughts on further refinancing at Alliance?

Jason Wiun

This is Jason. I will take the first part, Rob. With respect to Alliance, really is - reevaluating the project, and looking if there is any opportunities for cost savings or alternative options for expansion of that pipeline system. We're sort of cycling back with all our customers and talking to them about their perception of the terms and trying to get an understanding of what would be successful. So it's little early to say exactly what that might look like, but we're looking at several options.

Michael Dilger

There is great utility in that assets. The opening came rather quickly, may be too quickly. We didn't necessarily have all the work done that we wanted to. But we're still really confident in the utility of that asset, and that it can be exploited in a material way.

Jaret Sprott

And on your question around financing. AEGS and the MLP, we were able to refinance without any associated So we were able to get a lot of the upside and the advantages with no real cost to Pembina. The difference, obviously, with Alliance is the associated with refinancing, those instruments is still punitive. But it's certainly something that we continue to investigate, and we monitor on a monthly basis. As we continue to progress towards expiry of those nodes, of course, they're amortizing every six months, and interest rates are changing, it's moved a little bit more into favor. But at this time, it's still relatively punitive, but it's certainly on our radar, and something that we actively monitor.

Robert Hope

All right. That's helpful. Just moving over to some more Veresen assets. We're seeing AEGS, Alliance and Aux Sable transition to a new operating model. Can you provide some estimate on the potential savings here. And I guess, more broadly, are you seeing greater synergies with the Veresen assets than you previously done?

Michael Dilger

I would say, to your second question, I don't know if we're seeing greater synergies than we thought. There's some of the buckets are moving around in terms of the specific buckets how we modeled them, but the overall trend is definitely in the same direction. When it comes to the second question, we're not going to be specific in regards to the synergies associated with those. But I think you've seen it with the tightening of our guidance range, and the overall outlook for the business. So we'll just leave it at that.

Scott Burrows

Yes. I'll just follow that. We've described how we had a base acquisition case in a development case. And we're pretty comfortable with And we announced the base synergies, and we're pretty comfortable those will be achieved. When we talk about Alliance and Aux Sable, owner operated model that, any savings we drop from that is in the development case bucket. So assuming we can achieve our base case synergies, we're starting to exceed those not quite ready to quantify those, but we're into the second bucket of development case synergies.

Operator

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

Robert Catellier

Just wanted to follow-up on the Aux Sable restructuring. Are there any commercial benefits in addition to just ease of operating in the administrative benefits to go along with that?

Jason Wiun

I mean, from a - yes, absolutely. I mean, as we think about the integrated value chain, and both Enbridge's other businesses and our other businesses. And particularly, the NGL space, we think that other synergies are going to become evident. I mean, it's a lot of product, 130,000 barrels a day of product. And added to kind of similar volumes that we have on in the NGL space, you're going to get some economies of scale. We referred to that out exactly, I would say, no. But we spend a lot of time talking about possibilities. We think there's a lot of possibilities, not just with the volume, but what happens downstream of Aux Sable. So I would - reiterate same comment for Alliance. We think that asset has utility, and we're early innings in capturing that utility.

Michael Dilger

And, Robert, with respect to the actual operation, the folks at Aux Sable has been running the facility extremely well. So we're going to bring it under And very similarly, the Younger has opportunities to have roll it into our preventative maintenance, rail logistics, et cetera, that's - we feel that's just going to benefit the overall performance of the facility.

Robert Catellier

Okay. And I'm curious about Alliance and how much Pembina or its affiliates might be shipping on Alliance? And if what contribution might have to the strong marketing volumes and margins, if any?

Michael Dilger

I don't think we disclose that, specifically, who's got what capacity, and what the fees are from that capacity.

Robert Catellier

Maybe you can address it this way. Is there been any change since the change in ownership?

Michael Dilger

No. No. No, there hasn't. And - we have to get consent even just close up from our partners, but we probably would choose not to.

Robert Catellier

And then finally, just on Jordan Cove. There is, obviously, been a change was taking the leadership role. I'm wondering, what's changed - now the circumstances around departure, just a mutual departure? Can you just provide more color there? What it implies from the project going forward?

Michael Dilger

Yes. You know what, we're - in a nutshell, we're very intrusive owners, and that wasn't a bit for And we fully integrate everything we buy into our systems and our processes. And we think this project could be better managed with that approach. And so - we - decided to pursue other endeavors.

Operator

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

Patrick Kenny

Guys, just taking with Jordan Cove here. I guess the pacific connector pipeline, specifically. have an update on what percentage of private land along the pipeline road has been locked up with these many agreements at this point? And maybe you can remind us what level you believe is needed in order to achieve a positive decision by the FERC?

Jason Wiun

There is a continuum there, clearly. You can - the more you have and the less eminent domain - everybody is pleased. We'll be pleased, landowners are pleased. Regulators and politicians would be pleased. I'm not aware exactly where we are, but we're camping to get 75% to 80% figured out this year.

Patrick Kenny

All right. That's great. And then with respect to Veresen Midstream LP, I believe, you have the opportunities to throw up your ownership level back to 50% this spring. But just wondering, what your appetite might be at this point to consolidate your ownership, maybe sooner than later? And I'm thinking especially, the North Montney pipeline ship is where you're able to connect into NGPL. Maybe you can comment on what sort of gas processes opportunities you might see up there for Pembina? And if that region is a good fit for LP? Or better to go it alone 100%?

Jason Wiun

We decide that on a case-by-case basis. Clearly, if - we're looking at some projects that use spares, capacity and certain of those facilities, or surplus, some of those plants have been running well over nameplate, and so that's something to certainly think about. We don't feel it's urgent for us to do true up or to buy out our partner. We like our partner there. Things are working out well. There is an opportunity for true up under, I think, it's under an arbitration is--

Unidentified Company Representative

Well, could be negotiated.

Jason Wiun

Negotiated or arbitration. So we'll take a look at that. But we don't feel any urgency to do that. Everything is working out rather well right now.

Operator

Your next question comes from the line of Andrew Kuske with Crédit Suisse.

Andrew Kuske

It's probably question are for Mick or for Scott. And just given we're seeing a few asset transactions in the marketplace. How do you think about your relative valuation at this stage in time? And the context of those transactions?

Michael Dilger

We're clearly way undervalued.

Andrew Kuske

Well, that's what [indiscernible] with that.

Michael Dilger

I mean it. I mean it.

Unidentified Company Representative

Compared to those, we're way undervalued.

Scott Burrows

We're thinking 1 or 2 ways.

Andrew Kuske

So then the next question was it being, then what is the market missing? Or did the other fundamentally pay too much in your view?

Scott Burrows

It's one of those two things. Probably - to be honest, M&A processes are like driving your car, only you know the real speed. People who are passing - you're driving too fast, and people who are slowing you down, don't know how to drive. So it's kind of like that. But we couldn't get to those prices. We - so wish them luck. It's been, I think, the sector is regaining some traction. I think we're seeing going right. Positive commodity price environment. I think it's being reproven why you might want to invest in Western Canada. We're certainly not back to the multiples. We enjoyed a little while ago, but we're creeping back. So I think we have a way to go in terms of regaining the multiples our former days. Scott, anything to add?

Scott Burrows

Yes. I mean, I think there's been a lot of, I'll call, headwinds over the first six - and noise over the first six months, whether it's low echo price, it's rising interest rate. You can pick one of many things. And I think what our results year-to-date as well as our outlook will show you is that, with the integrated value chain that we have and the balance sheet positioning, we're very well positioned to whether many of those factors. And in fact some of them we actually spend the benefit from a low echo driving strong frac spreads, now, of course, in the long-term health of the basin, we'd like to see gas price a little higher for our producers. But the way this system has been set up, we're pretty insulated from a lot of the headwinds. But - and we've been trying to tell that story. We told it at our Investor Day, but sometimes people sell first and ask questions later.

Michael Dilger

Yes. I mean, you look at - announcement that the Duvernay, the confidence with kind of $60 to $70 a barrel product is changing, you can feel it. The industry is waking up again. I know there's hardship on the gas side. But industry on the liquid side, and we're predominantly a liquids company. Things are waking up. And with higher propane, butane prices, as well, I think, people are going to be looking at capturing more of those products out of the gas stream. So again, that could position us well for - some of the activities that we're doing in 2012, '13, '14, which is taking deeper cut on the gas we process. It's a whole new opportunity set for us.

Andrew Kuske

That's helpful. And maybe just an extension on some of those comments. You had a lot of time to think about the strategic interests of things like Alliance when you're doing the Veresen process. And how that matchup with Enbridge's interests. And now that they've more than the process - selling their GMP portfolio. Do you - have you really wrapped your head around, your Brookfields in Western Canada, given the fact they've got nothing on the GMP sort of buying at, but they have storage assets scatter across North America largely, Western Canada - the interest in NGPL. Does that open up any new possibilities? Or is it too early to really get into that?

Michael Dilger

No. I mean, I would say that Enbridge and Pembina, if we work, we look at something like Alliance or excluding Alliance or other opportunities. We're much - we're quite complementary. We're really not in each other's businesses at all right now. We know the overlap really was midstream, and there are long haul export lines. And we share, obviously, Alliance. But we're the hydrocarbon liquids gathering space primarily, open to get into petrochemicals and LNG, and there are more casings long-haul utilities like pipeline. So I think we're quite complementary. And I think that's framed a really positive relationship. In terms of Brookfield - Brookfield's move, we think that's neutral for us. That isn't - those aren't really high liquid assets. So - the ownership there of is kind of neutral to us, I would say. Jarrett, anything else to add?

Jaret Sprott

No. No comments on that.

Operator

[Operator Instructions]. Your next question comes from the line of Robert Kwan with RBC Capital Markets.

Robert Kwan

Just on - staring on the pipe side, revenue volumes for conventional were quite a pickup in the second quarter versus the first quarter. Is that just the ramp that you directionally talked about in terms of the contracts are how they phase in? Or was there something unusual with the second quarter that might moderate?

Michael Dilger

Yes. So, Rob, remember, the definition of our volume is revenue volumes, which is more than just medical volumes it also includes volumes that we recognize under our take-or-pay arrangement. And under our IFRS 15, if you recall, in the first quarter, we deferred a certain amount of revenue associated with volumes that were below take-or-pay. And then starting in Q2, we've started to recognize those volumes. So a portion of the volumes that we're recognized in Q2 were revenue volumes associated with take-or-pay shortfall, so they weren't physical volume. So that's what amplified the ramp up. So the increase in volumes was twofold. One is underlying physical volumes. But the second part of that is also the recognition of some take-or-pay short fall volumes.

Robert Kwan

Got it. So if we make the adjustment for IFRS 15 on for Q2 pipes, that should still form a pretty good basis? There was nothing else kind of unusual going on volume wise in the quarter?

Scott Burrows

Correct.

Robert Kwan

Okay. And then in terms of this - the OpEx pickup that you talked about for the pipe side, how material is that? Are you able to quantify with that, with the kind of second half versus first half?

Jason Wiun

It's not material. I don't think to the - it's just a shifting of - on a second quarter, it's - they're not getting the work done, so they're rescheduling it for later in the year. $30 million or something like that?

Scott Burrows

Yes.

Jason Wiun

It's not huge.

Michael Dilger

Robert, if you looked at 2015 and 2016, as guidepost, 2017 was obviously bit of a with the transaction. But if you looked at the first half versus the second half, it should give you a good guidepost as to what the second half might look like.

Robert Kwan

Okay. And then if - since your expansion maintenance with the Empress major turnaround, how much was that a hit in the quarter?

Jaret Sprott

With respect to volumes?

Robert Kwan

Sorry, in terms of the actual OpEx?

Scott Burrows

Well, OpEx. I don't think we disclosed the OpEx with respect to that turnaround.

Robert Kwan

Okay. I guess, I'm - to the earlier questions surround guidance, the rest of the business looks like it should be pretty similar going into the second half absent, the OpEx on the pipe, which doesn't sound like it's a huge number. Q2 was heard by Empress being out, and what was a good commodity quarter. If commodity prices stay even close to where you were in the first half, is it fair that you're probably going blow through the high-end of the range?

Michael Dilger

Well, let's remember though that we're adding inventory at the current price. So a lot of the NGL uplift is having low. It's not just the overall price we're selling it at, it's price versus our COGS, which were at lower. if we maintain a relatively stable price, we're still going to make margin on NGLs, but the inventory cost on the product margin side isn't going to be as wide as it was in the first half. So you kind of just that absolute price. You can from the frac spread part of the business. But on the product margin, where we are buying C2+ and C3+ battles, we're buying those t market's prices. So that's going to in - having higher COGS, and therefore, less EBITDA.

Scott Burrows

Yes. But there is - everybody's alluding to it. We are being conservative in the second half with the marketing business, and we think that's prudent.

Robert Kwan

Got it. And then just in terms of, like you said building the inventory, is it fair to say assume that you are at least heading it forward into the winter

Scott Burrows

We have hedged a decent amount of our inventory through the end of '18. We don't have a significant amount hedged in 2019.

Robert Kwan

Okay. But you already know that margin that you're locking in presumably is narrower than what we realized in the first half?

Scott Burrows

Yes. I think we've - as we publicly disclose, we're hedged closed to 75% through 2018. So to the extent frac spread continue to rally. We're not a 100% participating in that because, we've hedged back in mainly December and January of late '17, early '18.

Operator

There are no further questions at this time. I turn the call back over to Mick Dellinger, Pembina's President and Chief Executive Officer.

Michael Dilger

Well, thanks, everyone, on the phone for your support. Thanks to the employees for their hard work. Really rewarding for us to see our financial statement process, and we're started to feel normal here, again. So we're through the toughest part. We've added literally hundreds of employees through the owner-operated model. We should hit, I think, about 2,200 employees by the end of the year, which is about 1,000 from a year earlier. There's pretty's transformational stuff going on. We think we're on the right track with our value-added strategy and getting hydrocarbons to world market. So we're feeling pretty good around here. And thank you all very much for your support. And have a great summer. And I know you guys are all working hard with the quarterly releases, so hope we all get some vacation after this. Enjoy.

Operator

This concludes today's conference call. You may now disconnect.