RBC hosted Rene Amirault (President & CEO), Chad Magus (CFO) and Allen Gransch (COO Midstream) for a desk presentation, highlights below:
With de-leveraging targets in hand, an updated capital allocation framework likely on the way. Through organic deleveraging, Secure recently reached the top end of its 2.0-2.5x net debt/EBITDA leverage target and expects to realize the full effect of its $75MM annualized merger cost savings in 2H22 (89% at 2Q22). As such, we believe Secure is well-positioned to lay out a defined capital allocation and returns framework alongside 3Q22 results. We expect Secure to generate $276MM of pre-dividend FCF in FY23 after $115MM capital spending.
Solid growth through increased facility volumes and drilling & completion activity. Secure reiterated it earns approximately 80% of its Midstream Infrastructure revenue from production volumes, which tend to be more recurring and stable in nature than drilling & completion weighted services. The company's fixed base of infrastructure should also benefit from increased produced water volumes which have grown much faster than production volumes in the past five years. Notwithstanding areas of strong activity levels (e.g., Kakwa Montney), Secure noted its facilities are currently about 60% utilized in aggregate, leaving room for substantial volume growth before expansion capital spending is required. The company sees approximately $100MM annual capital spending ($50MM mtce, $50MM growth) as a reasonable proxy going forward, broadly in-line with our estimates.
Pricing keeping pace with inflation. Secure remains focused on passing higher input costs to customers and has raised prices alongside inflation. Secure strives to find the equilibrium where pricing is high enough to meet its hurdle returns, but below levels where E&P producers would be compelled to in-source volumes. In 2023, the company sees room for pricing to move further toward equilibrium levels. Said another way, Secure may also benefit from producer capital discipline as E&Ps prioritize share buybacks at apparent trough share price valuations, as opposed to investing capital to in-source facility volumes.
Secure remains confident there will not be a material impact to the business on Competition bureau's final decision. Competition bureau hearings commenced in 2Q22, Secure expects a final decision to be made in 1Q23.