Pembina Pipeline Corporation
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Good morning. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation 2017 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer, you may begin your conference.

[Scott Burrows:]

Thank you, Megan. Good morning, everyone, and welcome to Pembina's conference call and webcast to review highlights from the second quarter and first six months of 2017. 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; Stu Taylor, Senior Vice President, NGL and Natural Gas Facilities; and Paul Murphy, Senior Vice President, Pipelines and Crude Oil Facilities. Before passing the call over to Mick, I'd like to remind you that some of the comments made today maybe forward-looking in nature and are based on Pembina's current expectations, estimates, judgments, projections and risks. 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 pembina.com and on both SEDAR and EDGAR. Actual results could differ materially from the forward-looking statements we may express or imply today. Over to you, Mick.

[Michael Dilger:]

Thanks, Scott. Good morning, everyone. On a year-to-date basis Pembina set new financial records from all metrics including adjusted EBITDA, adjusted cash flow from operations and adjusted cash flow from operations per share. We have also set new volume records in conventional pipelines, and Gas Services businesses, all the while continuing to operate safely and reliably. Furthermore we placed $2.8 billion of projects into service at the end of the quarter, in safely, under budget and year on or ahead of schedule. I'm sure you can appreciate the sense of accomplishment we feel having reached this major milestone in delivering on the promises we made several years ago. None of these projects were conceived during our 2013, 2014 timeframe. So it took a lot of dedication and diligent work to get to this point, where the assets are now in service and operating as expected. I'm extremely proud of the work our people have done to bring these projects to fruition and commend everyone has done [ph], on a great job. We are also very pleased that subsequent to quarter end we achieved two milestones related to the combination with Veresen. On July 11th, Veresen common and preferred shareholders overwhelmingly voted in favor of the transaction and on July 12th the transaction was approved by the Court of Queen's Bench. The transaction is transformational for both companies and we are excited about the progress we have made to work closely. The combined company will feature an integrated asset base supported by long life economic hydrocarbon reserves, a high proportion of these will service as cash flow and an impressive suite of both secured and unsecured growth opportunities. Upon closing of the transaction we continue to expect -- we continue to expect to incur late in the third quarter or early fourth quarter of this year, we plan to increase our monthly dividend by 5.9% to $0.18 per common share supporting our view of the strength of the combined company. I'll now pass this back to Scott.

[Scott Burrows:]

Thanks, Mick. As Mick mentioned, Pembina achieved operational and financial results in the -- strong financial results in the first six months of 2017. I'll summarize the results briefly as is detailed in the report. In our Conventional Pipelines and Gas Services businesses we reached records for revenue volume. Average revenue volume on our Conventional Pipelines were a record 692,000 barrels a day, 5% higher than in the first six months of last year and our Gas Services business had average revenue volumes of over a Bcf a day, 40% higher compared to the same period last year. Higher volumes along with improved operational performance in new assets and services within certain business units resulted in strong operating margin in the second quarter and first of the year compared to the same period last year. Conventional Pipelines' operation margin increased by 16% to $147 million in the second quarter, and 10% or 281 million over the first six months; Gas Services' operating margin increased 43% to $66 million in the second quarter, and 64% or $136 million over the first six months. Midstream operating margin increased 16% to $169 million over the first six months, however, Q2 was down 12% to $108 million on a quarter-over-quarter basis, with the second quarter operating margin being negatively impacted by market dynamics and restricted opportunities. The crude oil midstream specifically, although crude oil prices have strengthened year-over-year and while marketed and stored volumes are relatively unchanged, the underlying margins were tighter which resulted in reduced operating margin. Further market prices were more volatile in 2016, than in 2017. Within this business increased market volatility typically creates more opportunities for storage, which is what we saw happened in the 2016 period versus past quarter. In addition to the increased domestic condensate production the real import of condensate was not economic during the first six months of 2017, where it was during the same period in 2016. In addition our NGL business was impacted by third party facility outages, both upstream and downstream of our facilities. Our Oil Sands business continued to perform in line with previous periods as expected. Now to touch on some of our key financial metrics; adjusted EBITDA was $303 million for the second quarter, and $666 million for the first six months of the year; increases of 4% and 19% versus the same period last year. These increases were largely due to new assets in place in the service and strong performance particularly in our Conventional Pipelines and Gas Services businesses. Our strong business performance combined with higher payments received, non cash working capital and lower net finance costs resulted in adjusted cash flow of $275 million for the quarter, and $583 million year-to-date, which are increases of 17% and 31% compared to the same period last year. On a per share basis, adjusted cash flow was $0.68 for the quarter and a $1.46 for the first six months; a 13.26% [ph] jump versus the prior period. Our earnings came in at $124 million or $0.26 on a per share basis for the quarter, representing a 10% and 4% increase relative to the second quarter of 2016. On a year-to-date basis earnings were 58% and 56% higher at $339 million or $0.75 per share compared to last year. Turning to our financial position, Pembina maintains one of the strongest balance sheets among our peers and is further supported by ample liquidity and financing flexibility. At June 30, 2017, Pembina's debt to trailing 12 months adjusted EBITDA ratio was 3.7 times. Strong cash flow generation from our legacy assets enhanced by immediate contribution from our newly in-service assets along with nearly $2 billion of undrawn credit facility capacity positions us well to fund our remaining 2017 capital program and future growth opportunities. I will now pass the call over to Paul, who will provide an update on growth projects within our condensate and crude oil value chain.

[Paul Murphy:]

Thanks, Scott. Good morning, everyone. As Mick mentioned earlier, the real highlight for the quarter was placing our Phase III expansion into service on time and under budget. This matched [ph] the completion of the largest capital project in Pembina's history. Initial work for the Phase III expansion included the model -- debottlenecking segments of existing pipeline systems from Taylor, British Columbia to Gordondale, Alberta and adding a new pipeline from Wapiti to Fox Creek and the construction of 11 new or expanded pumps stations to accommodate increased volumes up stream of our Fox Creek terminal. To support increased volumes we added an additional 420,000 barrels a day of capacity between Fox Creek and Namao through the construction of two pipelines. We now have four pipelines in the corridor and are able to ship ethane-plus, propane-plus condensate and crude oil separately. We also now have sufficient upstream capacity to handle forecast volumes driven by the development of Montney, Duvernay and Deep Basin resource plays. Expansion is operating as expected and volumes continue to ramp up. We also said and have announced in early April our Phase IV and Phase V pipeline expansions on the back of continued customer demand for transportation services. We expect to put both of these projects into service in late 2018. More imminently our North East British Columbia Expansion and Altares Lateral remain on schedule for targeted and service dates in the fourth quarter of this year. We're also very pleased to have brought our Canadian Diluent Hub into service at the end of the quarter in alignment with the Phase III setup. Remaining work at the facility includes the completion of the storage tanks later this year and some additional condensate activity. Over to you, Stu.

[Stuart Taylor:]

Thanks, Paul, and good morning, everyone. To echo Paul, the highlight of the NGL business unit this quarter was placing our third fractionator at our Redwater site into service on time and under budget. Pembina now have 210,000 barrels per day of fractionation capacity making ours the largest fractionation facility in Western Canada. We're also very happy to announce during the quarter that we've moved into the FEED space for our proposed PDH and PP facility and we executed joint venture agreements that include buying commercial terms that supported the project and the formation of the Canada Kuwait Petroleum Corporation or CKPC. Subsequent to the quarter end, CKPC entered into both the PDH and PP process technology license agreements with commercially proven technologies that have a strong track record of efficient and safe operations. We're very pleased that we've executed these agreements. With these decisions in hand we're working on other key FEED [ph] deliverables including regulatory applications and updated cost estimates and a project execution plan among other items. In April we were pleased to announce that we signed a non-binding letter of intent with City of Prince Rupert for us to access developing a west coast propane export terminal on Watson Island, B.C. The terminal would have an approximate capacity of 20,000 barrels per day of export capability and access premium markets for our customers. The terminal is contingent on completion of design and engineering requirements, entering into the appropriate definitive agreements and receipt of necessary environmental and regulatory permits. Through this project and our polypropylene production facility we remained focused on working to provide market access solutions to our customers helping to add value to Western Canadian incremental barrels and increased producer net back. At the Company's Redwater site, the infrastructure in support of the North West Redwater partnership refinery is nearing completion. And we are on schedule to have the project in service late 2017. Turning briefly to the Gas Services project, Duvernay I plant in the field hub are on target to be brought into service in the fourth quarter of 2017. We continue to advance preliminary engineering of a replica Duvernay II facility as well as the development of substantial liquids handling and stabilization equipment. Back to you Scott.

[Scott Burrows:]

Thanks, Stu. As we pass the midpoint of the year we feel 2017 is truly shaping up to be as transformational as we expected it to be. The $2.8 billion of projects recently placed into service along with our other growth projects slated to come into service this year, combined with the associated incremental cash flows, we remain on track to delivering adjusted EBITDA between $1.8 billion and $1.9 billion in 2018 as a standalone company. With the Veresen transaction, these numbers increased to $2.55 billion to $2.75 billion. We believe the last half of the year will be as exciting as the first half giving clear visibility to near term high quality cash flow growth and the potential close of the transaction. With that we'll wrap things up. Megan, please go ahead and open the line up for questions.

[Operator:]

[Operator Instructions] Our first question is from David Galison with Canaccord. Your line is open.

[David Galison:]

Good morning everyone. So I guess my first question is for Scott. Just to touch on your guidance kind of considering the change in the US dollar recently. Are you -- can you talk about maybe how comfortable you are with how the Canadian is with the level than the US dollar where you start to push up against the range?

[Scott Burrows:]

David I'm still comfortable with the range, when we set our budget back in late 2015 the dollar was roughly at this timeframe. So as we started to move through 2017 certainly our guidance was moving up with that. And now that the dollar has fallen back down to roughly the $0.80 mark, we are kind of back to where we originally set our budget. So I'm comfortable with where we sit today.

[David Galison:]

And then just on the polypropylene PDH facility. The contracts that you have mentioned could you talk about the type and maybe how much of the capacity is contracted?

[Stuart Taylor:]

Right now the agreements that we have executed -- the joint venture being in particular -- it is a joint venture agreement is the governance for the facility. How the two partners will work together, the roles that the two partners will play on a go forward basis for the next 50 years. As we get closer and look through the FEED obviously you are going to appreciate there are additional agreements to be worked through. We have an understanding from a market perspective, we have an understanding from a supply perspective as well, and how those will go forward. But at this point those are still to be executed as we move into the -- through the FEED phase.

[David Galison:]

And do you have a preferred contract level that you are looking for the projects, when you taking at making these negotiations?

[Stuart Taylor:]

We continue to look to -- and we have referred to Pembanaising the project and we are looking to work with the Kuwaitis, with our partners and derisk the project as best as possible. We would like to with Pembina's model ensure that some of our revenues are come from a fee for service type of perspective, and we are looking at what level that should be on a go forward basis.

[David Galison:]

Okay. Thank you very much.

[Operator:]

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

[Linda Ezergailis:]

Thank you. I have some questions with respect to your crude oil midstream business. Can you comment on the factors that contributed to some margin compression in your crude oil mid stream operations, was it may be a pre-serve [ph] mainly syn crude or some other factors and how might we think of them continuing in Q3 and beyond? Is this just kind of a blip or is there may be some sort of a secular shift in the local industry et cetera?

[Scott Burrows:]

So Linda, I think there was a couple of different things that impacted it. Number one as we talked about, it wasn't an overly volatile quarter in terms of commodity prices with more volatility leads to more up trading opportunities as well storage opportunities. That was a major driver of the quarter. We also saw compressed condensate pricing which limited the ability to import condensate by rail and the product slate on the pipeline, we have seen domestic condensate increase while crude oil has been flat to down which leads to less opportunities as well. So there was a multitude of factors that happened to the quarter. As we look forward we're bringing on our Canadian Diluent Hub in Q3. We have our ENT expansion. Those opportunities should more than offset some of the structural changes like the rail imports of condensate into the basin.

[Linda Ezergailis:]

Thank you that's helpful. With respect to your NGL mid stream operations, there was some decline in volumes but that was offset by margins, is there some sort of product mix shift happening or can you comment on some of the dynamics there and whether it might be either temporary or some new trends emerging?

[Scott Burrows:]

No. We view it as temporary. I mean, the McMahon Gas plant was out for a month or six weeks or something like that which of course restricted volumes through our younger facilities. So as I mentioned on the call, we had the third party substraints [ph] both upstream as well as downstream of our facility third party substraints which limited our ability to receive products as well as market certain amounts of products.

[Linda Ezergailis:]

And the margins can you comment on that, is that a product mix aspect or?

[Scott Burrows:]

With the overall sales volumes being down slightly you're also amortizing your fixed costs over a less amount of barrels. So there is no real margin compression. But what you did see was propane prices obviously rallied through the first quarter. They were down on the second quarter. So your inventory was a little higher compared to your sales price just because you had rising prices through winter and then a falling price dynamic in the second quarter. As we look forward today we have seen propane prices go from low 60s on value to, I think they are $0.70 to $0.71 today, so we have seen quite a rally in the last three to three and half weeks in this commodity price outlook.

[Linda Ezergailis:]

Okay. Thank you. And just may be a more detailed question, your cash flows from operations. You have benefited from a prepayment from some sort of project. Can you comment on the nature of that and how that might be amortized and whether we might expect additional payments like that going forward?

[Scott Burrows:]

This quarter there was a certain number of projects that we essentially built on behalf of the producer funded and then were repaid the capital, so again it goes into differed revenue. We received the payments on our cash flow and then we will amortize that over the life of the contracts. So you would expect that amortization of differed revenue and a couple of millions of dollars a quarter for the foreseeable future.

[Linda Ezergailis:]

Thank you.

[Operator:]

Your next question comes from the line of Jeremy Tonet with JPMorgan. Your line is open.

[Jeremy Tonet:]

Good morning. Just want to go back to the crude oil midstream there for bit and I think during the Analyst Day you had referenced kind of a run rate for that business could be something in the 160 to 180 profit range. And is that something that you still expect just kind of normalized before projects enter service or do you think anything has kind of structurally changed the market where you wouldn't expect that? How do you think of overall in '17 here?

[Michael Dilger:]

Longer term we are comfortable with that run rate. As Scott said the contango came out of the market in the second quarter, some other little things going on there. But we are not ready for this, this year to say we are not going to hit that run rate but certainly over a multiyear timeframe we think that's still a good number.

[Jeremy Tonet:]

And then just from a high level point of view you have a lot of projects entering service in the back half of the year. And just wondering if there is any guidance you can provide us on a modeling level as far as what type of ramp to expect, is the kind of some of these contracts like day one flip to switch in the cash flowing or is there a ramp there? Do you expect more of an increase going into 3Q or going into 4Q is there any kind of core proceeds you can provide there?

[Scott Burrows:]

Sure, and I think if you dig through the details we have tried to be explicit, so for example our North East B.C. and our North West upgraded projects those are two of our larger projects entering service in the back of this year roughly $400 million combined, those are fixed return or cost to service deals. Those are the type of deals that on day one you flip the switch and you start getting paid on run rate. When it comes to more of our fee for service/take or pay, those projects do have ramps. So for example in our Phase III pipeline there is a ramp in '17, '18 and '19. And then of course our Canadian Diluent Hub is a fee for service aspect, so that business is going to depend on volume built on our conventional pipelines. So there are some assets that will have a bill profile through the next couple of years and then there is another mix of assets that day one start off right away.

[Jeremy Tonet:]

And then just one last one on the Veresen side, if there is any incremental color you could provide at this point with regards to how the process is progressing? Have you [indiscernible] the competition bureau anything else that you are able to share with us at this point?

[Michael Dilger:]

We are spending a lot of time on integration. We have set up integration teams. Real credit to the Veresen staff really and our staff are really digging into it. There is a lot of detail. We talk about the assets in our current state and the future state combined to -- in light of our economic projections and so far we are not finding anything surprising and we think we can deliver all the promises we have given to our Board and the guidance range that 2.55 billion to 2.75 billion that we have provided you. So far so good. And I think Jeremy we are not going to give specific commentary but our guidance from day one has always been consistent which is we expect to close this in late Q3 to early Q4, nothing's changed.

[Operator:]

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

[Ben Pham:]

My question is on your commodity exposure and may looking at perhaps first half of this year and are you guys able to quantify the percent of your EBITDA exposed to the commodity prices. Was it in line with your long-term outlook above or below?

[Scott Burrows:]

I mean when you look at both the combined product margin and the frac spread, we expect that to be somewhere in the neighborhood of 17% to 15% overall and we're roughly in line with that yes.

[Ben Pham:]

Thanks for that. Maybe moving to the Duvernay, and more specifically the long-term agreement with Chevron and I wonder, if there has been any change in your confidence or conviction in terms of perhaps seeing some first way there as you have through 2018?

[Michael Dilger:]

I think as we stated Ben that we continue to advance our engineering on the D2 facility where we remain very excited about the opportunity, we remain -- we have a lot of confidence about the growth and the potential growth that that contract will deliver for ourselves and for our customer Chevron and -- in that deal. So we are -- confidence remains very high.

[Scott Burrows:]

And if you look at what some of the key top players in that area are saying in the press in terms of amount of money they expect to invest that it's meeting or exceeding our expectations of their investment. So we're remaining confident in that area.

[Ben Pham:]

Okay. May be just lastly touch up, in the conventional and on integrity spending and you commented a bit on Q1 and Q2, just wondered how the pace is looking and are we to levels that's normalized in the second half and how do you think about maintenance CapEx as you [indiscernible] projects over the next 18 months?

[Scott Burrows:]

Let's just start with maintenance. Maintenance CapEx for us is rounding here [ph], so we generally, we maintain all assets in as new condition and most of the checks we write go into operating costs and are fully recoverable. In terms of overall corporate integrity spend, we I think are in 2016 and 2017 at peak and then we expect it to drop. Any quarter, I would encourage you guys to think of it annually. Quarter by quarter, I mean if you get a wet spring, then you don't do integrity, you roll it into the fall. So its weather dependent; it's depended on getting the permits, things like that, so it will move around, certainly from quarter to quarter and even rollover. I mean we have seen a lot of times heavy plant spends in the fourth quarter that just can't get done for whatever Mother Nature reasons rollover into the next year. But at a macro level, we're through -- well through peak spend on integrity and expected to drop quite a bit into '18 and '19 and then stabilize after that.

[Operator:]

Your next question comes from the line of David Noseworthy with Macquarie. Your line is open.

[David Noseworthy:]

So perhaps I could just start a follow up question on the propane. In terms of what you are seeing right now in demand how much of this anticipation of kind of a large crop dying and how much of this -- what else is driving the propane price in your mind in what you are seeing today?

[Stuart Taylor:]

I think the overall North American inventory levels are pretty substantially below where they were last year, and at or slightly below the five year average. So we have seen a slowdown in US in production, and exports continue to pull a lot of barrels out of the Gulf Coast. So I think it's really the inventory levels that we are guarding [ph] at this stage. Crops dying is like having a tailwind when you are bike riding, it's just nice -- it doesn't really make too much difference anymore. It's about exports I think that are going to be the difference maker and of course winter weather. Those are the two things that are happening, and we are super pleased David, we would rather be exporting ourselves and working hard towards that but when others do it, it's still great demand and that's a fundamental difference from say five years ago.

[David Noseworthy:]

And you mentioned the positive side of some of the stuff you are seeing on news recently. Perhaps you could highlight in the last 12 months you have seen fairly large exhibits from the WCSB and the Oil Sands in particular from the international oil companies. How do you think about that actually is? What does it mean for capital investment in WCSB and where does Terminal want to be investing its capital going forward?

[Michael Dilger:]

Like running any business there is a combination of skill and luck and we feel lucky that most of our investment is in the areas where shale and conventional drilling are occurring and last of our investment is in oil sands. We view oil sands as very stable but maybe not rapidly growing business unit over the next number of years. So we of course believe very strongly in the Montney and the Duvernay and those assets. Some of that is luck for sure. I mean there is oil sands pipelines that we bid on and would have liked to own a few years ago and the luck part is, is that we didn't win all of those in our opinion. So we like our commodity mix, you will know from our investor day post Veresen we expect to be a third gas, a third NGL and a third crude oil and condensate and today's market that feels just really, really good and again some of that's skill and some of that's luck.

[David Noseworthy:]

And I might also in this we saw Braskem announce an FID on a polypropylene facility in June. In terms of competitive dynamics that you have done for the polypropylene and PDH facilities how does that play? Was that sort of part of what you expected as incremental demand to come into -- or supply to come into the market? Or is that incremental to your expectation?

[Stuart Taylor:]

David its Stu. We have that always modeled as a facility that would likely be moving forward. And so it was always in our plans, it was always in our market analysis. As we look at the growth there is some closures but with some of the growth there will be other plants that are added as we go forward but at the same time the demand is growing and we see opportunity to be very competitive and to serve that growing demand on North America and as needed into other markets around the world.

[Scott Burrows:]

David Braskem actually announced they are closing a facility at the same time. Back to Stu's comment, we observe particularly in propylene not necessarily polypropylene that more projects are getting canceled or delayed deferred, indefinitely deferred than we had predicted a year ago. So if anything the supply side of the curve looks in this five minutes tighter than what we've thought before.

[David Noseworthy:]

Okay perfect. And one last question on your CapEx, the 2.4 billion budgeted for Phase III and [indiscernible] both of those projects coming under budget. Can you provide any sort of color as to kind of the extent to which you're able to be budget?

[Scott Burrows:]

I think in our press release we talked about the aggregate portfolio coming in roughly 8% under budget.

[Operator:]

Your next question comes from the line of Andrew Hughes with Credit Suisse. Your line is open.

[Andrew Hughes:]

I think my first question is for Scott and it's just on the mid stream NGL sales volumes, and so if we look at year-over-year relatively positive story but on the sequential basis it declines quite steeply. You mentioned some of the factors in the market that that really affected that but just from a parameter stand point to what degree where you effectively derisking activities that you just viewed the market environment as being poor and you weren't willing to put on that risk in the market versus effectively losing market share?

[Scott Burrows:]

Well I think there is a couple of dynamics going on, like obviously Q2 is going to be lower than Q1 just because our winter sales, we sell about 56% to 70% of our volumes in Q4 and Q1 with the rest in Q2 and Q3, just the nature of the propane business. So that's one impact sequentially. But that business over time we have sequentially derisked, so despite the fact that sales volumes are going to move around that business is much more stable because of course RFS II is a fee for service business, almost 100% contracted. So while volumes may move around and margin in that business would remain relatively stable as we put on the more fee for service business.

[Andrew Hughes:]

Okay that's helpful and then just may be a bigger broader question. When you look at the closing of the Veresen deal coming up later on in the year, how do you think about just the overall portfolio and what pieces are you effectively missing?

[Michael Dilger:]

We love the portfolio. Honestly the ability to offer our customers gas service I think was a big missing piece, we can do that indirectly through alliance having the alternative NGL market hub down in our stable [ph] is tremendous, integrating various midstream assets, they are physically connected to our asset base and they have got a just a ton of capacity turning on which is going to ramp up our NGL and condensate volumes on our system. Thinking about Jordan Cove -- Western Canadian producers can readily get their physical gas to where Jordan Cove is going to be and I think they want to look at export. So it's fantastic, I mean in my dream of dreams of course [indiscernible] which connects all of our assets -- in my dream of dreams we would be get physical gas on Pembina owned infrastructure down to Jordan Cove but I don't think that dream is going to come true any time soon so. But we couldn't be any more pleased the way that the asset base has a potential to work together.

[Andrew Hughes:]

So then maybe just a follow up on that and putting aside the dream of dreams and then the physical connectivity issue there but with the existing assets that you are about to piece together, do you anticipate how then even a bigger multiplier in some of the businesses that affectively are the glue that binds a lot of things together and really moving the molecule from well head in the effectively terminals and marketing efforts. Do you anticipate a bigger multiple and is it already in the numbers now?

[Scott Burrows:]

Even internally we have not modeled that bigger multiplier, we have counted on certain G&A synergies, certain operating synergies, certain revenue synergies. My instinct though as we build our gas marketing capability similar to that we have with NGL and crude oil marketing capability that there is significant -- that multiplier you talked about there is multiplier possibilities on the gas side and on the Redwater NGL hub versus our stable NGL hub. So we are early days and that's again those but it's going to be really exciting to see what's possible there once we get all the combined organization in a room.

[Operator:]

Our final question comes from the line of Robert Kwan with RBC Capital Markets. Your line is open.

[Robert Kwan:]

If I can go back to -- there was an answer earlier around are you reviewing the contracting structure for the proposed PDH/PP facility? And if so why the difference from the half of your half?

[Michael Dilger:]

We are still working towards half -- half of the half. The discussion we -- I thought was more around the contracts that we are trying and as Stu mentioned their joint venture contracts, they are what kind of technology we are going to use contracts and then coming out of FEED if there is going to be who is building this for us contracts. We have not embarked on the entire commercial because we don't have a rock solid capital cost assessment [ph]. So Robert you can imagine if we go to a producer and say how would you like to turn your natural gas into gas plus NGLs transport it, frac it, turn it in -- your propane into propylene and then polypropylene we need to know what the fee is for that service. And without the capital cost assessment we can't quote that fee. So we are having hypothetical discussions with people, strategic discussions around, hey would you [indiscernible] polypropylene or propylene, and there is significant interest in that. But we can't quote fees until the cost estimate is done but our target remains -- our straw dot [ph] remains half of our half will be fee for service.

[Robert Kwan:]

And I guess as part of those higher level discussions that you are having I presume is it mostly with producers versus interest from petchems and...

[Michael Dilger:]

It's both.

[Robert Kwan:]

And from the producer perspective is it largely customers that are already customers of yours, i.e., kind of accessing this is part of your permanent value chain or are you seeing a lot of one off interest as well?

[Michael Dilger:]

We're getting interest from those, we might expect to get interest from but there is other people that we hadn't considered coming forward as well. People who have -- are developing large asset bases in the basin that are also in polypropylene business, so it's interesting. We had calls actually in the last number of days from some companies we didn't expect to show interest but I think that Stu and the team have made very solid progress and the world is watching us move towards a sensible measured development process and are gaining confidence that this thing is unfolding in a sensible way.

[Robert Kwan:]

Got it, if I can shift to crude oil midstream, Scott when you answered the question earlier I think you were really citing kind of all the factors you had in the MD&A around the year-over-year commentary. Just wondering do you have any sequential commentary, i.e., versus Q1 '17 as to some of the dynamics have changed between Q1 and Q2 for the crude oil side?

[Scott Burrows:]

A lot of it again was the volatility. So and we did see some incremental volatility in Q1 which we didn't see in the Q2 time frame. It was also on the sequential basis quarter over quarter. There was some small 13 month adjustments that flowed into Q2, that weren't in our Q1 results; so nothing materially different than the quarter over quarter results.

[Robert Kwan:]

Okay got it. And if I can just maybe finish with the new infrastructure you have noted is operating well. I'm just wondering if it's possible to be a little bit more granular in terms of where the volumes you're seeing flowing versus the minimum take or pay levels?

[Paul Murphy:]

Well I mean I guess its Paul, Robert. Volumes are basically in line with were expected to happen and what really the producers were telling us were going to happen. Obviously, we will have a lot more information at the end of Q2, it's only been on for a month here so. The ramp up and the volumes there are sort of a combination of production that was already flowing in IT, lot of it was going to other pipeline systems and terminals and some that were shut in. So we expect it to keep ramping up frankly, [indiscernible] a little bit too for the next couple of years as we get some of them to drilling seasons but they are basically in line with what we though and the producers were telling.

[Robert Kwan:]

Okay. That's great. Thank you very much.

[Operator:]

I will now like to turn the call back to Mick Dilger, Pembina's President and Chief Executive Officer for closing remarks.

[Michael Dilger:]

Thanks everybody for the time on the call today and for your ongoing support. Again I just want to reiterate how proud I'm of Pembina's team, imagine turning $3 billion worth of stuff on and having it work on the first day and the safety record people maintain, so hats off to the staff. Thanks and have a safe and enjoyable summer.

[Operator:]

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