Earnings Call Transcript - PBA Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for being here, and welcome to the Pembina Pipeline Corporation's Third Quarter 2020 Results Conference Call. I would now like to turn the call over to your speaker today, Scott Burrows, Senior Vice President and Chief Financial Officer. Thank you. Please proceed, sir.

Scott Burrows, CFO

Thank you. Good morning, everyone, and welcome to Pembina's conference call and webcast to review highlights from the third quarter of 2020. I'm Scott Burrows, Senior Vice President and Chief Financial Officer. On the call with me today are Mick Dilger, President and Chief Executive Officer; Jason Wiun; Senior Vice President and Chief Operating Officer, Pipelines; Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities; and Stu Taylor, Senior Vice President, Marketing & New Ventures and Corporate Development Officer. I'd 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 management's discussion and analysis dated November 5, 2020, for the period ended September 30, 2020, which is available online at pembina.com and on both SEDAR and EDGAR. Before we discuss the third quarter results, I'd like to first turn things over to Mick to make some opening remarks. Mick, over to you.

Mick Dilger, CEO

Thanks, Scott. Good morning, everyone, and I hope you and your families are doing well. Once again, I'm really pleased with the quarter, particularly in our assets, asset-based businesses, the pipelines and facilities, which, once again, displayed the resilience of Pembina's business and the underlying strategy we've been executing for more than a decade. Our focus on integration across the value chain began over ten years ago and has been extended many times through both construction and acquisition. Along with the integration came greater diversification of customers, commodities, and currencies, and we have become a stronger and more diversified company. We're proud of our resilience and the fact that Pembina expects 2020 adjusted EBITDA to remain within the company's original guidance range, albeit near the lower end of that range. While this guidance was provided almost a year ago, and despite all that has happened in the world to both the energy sector and our business, we still expect to be about 95% of the midpoint of that original range. That's a strong testament, not only to our business model, but to the strength of our customers and the commitment of our employees who are tasked with delivering over $100 million of cost savings. And we've operated these assets safely and reliably through this challenging year. Looking ahead, we see positive signs. Consolidation amongst Canadian energy companies is beginning to occur, and it will strengthen our customer base. We are hopeful that an effective COVID-19 vaccine will be broadly available in 2021, and we expect the balancing of oil supply and demand by 2022, and all of which those statements entail. Pembina remains well positioned to deliver tremendous shareholder value by sticking to the same basic principle we have used in the past, meaning, we will focus on our four stakeholders: customers, investors, communities, and employees. We'll continue to prudently allocate capital to the projects that provide competitive returns, improve our customers' profitability, and make Pembina better. We'll also continue to fund stable and growing dividends in the future. With that, I'll pass it back to Scott.

Scott Burrows, CFO

Thanks, Mick. Similar to the last quarter, the major factors impacting the third quarter relative to the same period in the prior year were the positive impact of the Kinder acquisition, offset by the impact of COVID-19 and the decline in commodity prices. Adjusted EBITDA in the quarter was $796 million, an 8% increase compared to the same period last year. The increase was due to the contribution from new assets following the Kinder acquisition. These positive contributions were partially offset by lower margins on crude oil and NGL sales in the marketing business as well as lower contributions from Alliance due to lower interruptible volumes and a lower contribution from Aux Sable, both largely due to lower NGL margins and a narrow AECO-Chicago price spread, which reduced revenue. Third quarter earnings of $318 million were down 14% over the same period last year, largely due to lower contribution from marketing. These declines were somewhat offset by the contribution of additional assets from the Kinder acquisition and lower G&A and other expenses. Total revenue volumes during the third quarter were over 3.4 million BOE per day, consistent with the same period in 2019 and up slightly compared to the second quarter of 2020. On a physical basis, activity levels have stabilized and are beginning to improve. Pembina's Conventional Pipelines business physical volumes in July and August were consistent with levels seen at the end of the second quarter of this year or roughly 8% below first-quarter levels and well above the lows experienced in April and early May. We saw physical volumes decline in September due to operators electing to perform routine maintenance and turnaround activities, which is typical in the third quarter, as well as extended, unplanned outages at third-party facilities. October physical volumes recovered and increased to levels slightly above those seen in July and August. Subsequent to the quarter, we were pleased to bring into service new fractionation and terminaling facilities at our Empress facility. This project was placed into service on time and on budget and adds approximately 30,000 barrels per day of propane-plus fractionation capacity, enabling Pembina to optimize propane marketing from the facility between Eastern and Western markets. This project, along with Duvernay II and the Phase VI Peace pipeline expansion, brought into service earlier this year are part of the roughly $1.5 billion capital program that we continue to deliver in 2020. The company is advancing the construction of Duvernay III, which is scheduled to come into service before year-end; and the Prince Rupert propane export terminal, our first project to provide global market access, which we expect to complete in the first quarter of next year. We continue to evaluate our portfolio of deferred projects, and with the Phase VII Peace pipeline expansion in particular, engineering work is ongoing and focused on optimizing the scope of the project to meet customers' needs and future transportation requirements in the basin. As a result of this work, estimated project costs are trending materially lower. Phase VII and other deferred projects, including CKPC's PDH/PP facility, and the conditions under which they may be restarted continue to be evaluated within the context of our customers' future plans and ongoing COVID-19 pandemic and resulting global economic outlook. Finally, we continue to assemble a multiyear inventory of development opportunities. The scale, breadth, and diversification of our business inherently afford us a strong suite of greenfield, brownfield optimization, and new market development opportunities. These opportunities range in size from $100 million to several billion dollars and have risk-adjusted rates of returns consistent with Pembina's track record. While the timeline is not certain, we are diligently advancing a number of opportunities. Turning to the outlook for the full year. With three quarters of results behind us, the company has narrowed its guidance range and expects to generate adjusted EBITDA of $3.25 billion to $3.3 billion in 2020. The primary drivers of the range include the results of the crude oil and NGL marketing business, the level of interruptible volumes, timing and completion of typical fourth-quarter integrity and maintenance expense spending as well as the company's share price specifically relating to the impact on share-based incentive compensation. Assumed in this guidance are the previously discussed reductions in operating and general and administration expenses, which we now expect to be in the range of $150 million, exceeding our original target by approximately 50%. A significant portion of these savings is expected to be sustainable. In his opening comments, Mick spoke about the resilience of Pembina's business, which was achieved by building an integrated value chain, diversifying across commodities, customers, and currencies, and developing reliable and predictable asset revenue streams. Equally important has been our unwavering commitment to Pembina's financial guardrails. Pembina's underlying business is highly contracted with approximately 95% of 2020 adjusted EBITDA supported by long-term fee-based contracts, including approximately 72% coming from cost of service for take-or-pay contracts with no volume or price risk. Approximately 75% of our credit exposure is with investment-grade and split-rated counterparties or with counterparties secured by letters of credit. Direct commodity exposure in Pembina's business is limited to our marketing business, and we are not reliant on this to fund our dividend. As we have maintained a strong balance sheet and have been recently affirmed as BBB by both S&P and DBRS with the outlook or trend maintained as stable. It is worth noting that Pembina is among a select group within the energy infrastructure sector that has not suffered a negative ratings action over the past five years. In addition, at the end of the third quarter, available liquidity totaled $2.5 billion. We will exit 2020 in a strong financial position with the ability to fund the next wave of future growth, pay down debt or return capital to shareholders. With that, I'll turn things over to Mick for some closing comments.

Mick Dilger, CEO

Thanks, Scott. Good job. With so much political and economic uncertainty amidst the ongoing pandemic, the overall industry sentiment remains understandably cautious. Yet as we approach the end of 2020 and prepare for 2021, we remain optimistic. Roughly half of our Calgary staff have now returned to the office. As we refocus our efforts on the growing business, the in-person collaboration amongst our teams, which has been the key ingredient to our success, has returned. In early December, we are looking forward to providing a fulsome business update, including the latest status of each of the company's currently deferred capital projects as well as our 2021 outlook, capital budget, and funding plans. Finally, with growing attention on ESG issues, we are looking forward to the release of our next sustainability report in the coming weeks. The 2020 version of this report will again provide a comprehensive perspective on our commitment to all of our stakeholders. And in this report, we'll also be significantly enhancing our disclosure, particularly in the areas of environment and employee diversity. As always, we thank all of you shareholders who have literally stuck with us through this difficult time. With that, we'll wrap things up. Operator, please go ahead and open the line for questions.

Operator, Operator

Your first question comes from Jeremy Tonet from JPMorgan.

Jeremy Tonet, Analyst

I just want to start off with consolidation in general here. I'm wondering if you could talk a bit more as far as producer consolidation, what that means for Pembina, what you've learned now versus what you knew before. And also, I guess, in the midstream sector as well, what do you think happens with regards to consolidation? And how does that impact Pembina there?

Mick Dilger, CEO

I'll start and then I'll turn it over to Scott or others. Generally, in the past, let's take a longer time frame, say, the last ten years, consolidation has helped Pembina. In the depths of March and April, I think investors were worried about some of the weaker players out there, and they're starting to be consolidated and become stronger players. The recent terminaling example, I think, is an excellent one where two of our less strong customers will be consolidated into an industry leader, which helps not just with credit, but also capability in tougher times. So we welcome it. We think it's good for the areas in which we operate, and it's good for credit. In terms of your second question, midstream consolidation, Pembina has been a consolidator over the years. But in Canada, it's a rare thing. It happens very slowly. I expect in the U.S. to see much more consolidation than in Canada. I think Canada has, on average, much greater balance sheet strength than what we see in the U.S. And indeed, I think, just scanning some of our sector competitors, they're all around their guidance range. So they're, on average, doing better than what we see in the U.S.

Scott Burrows, CFO

No.

Operator, Operator

Your next question comes from Linda Ezergailis from TD Securities.

Linda Ezergailis, Analyst

Just building on Jeremy's question with respect to how, I guess, North America might consolidate. Might there be an opportunity for Pembina to extend into the U.S. and maybe find some opportunities to either do more with the hydrocarbons you have, as has been your successful strategy so far, or actually extend into other markets and basins given some of the weakness that your U.S. peers have?

Mick Dilger, CEO

That's a great question. I will do my best to answer it, but please keep in mind that circumstances can change. Looking back to 2015, we recognized some advantages in the U.S. and aimed to expand our value chain there. This led to the Veresen acquisition, which helped us diversify into natural gas beyond just liquids and increase our exposure in the U.S. As we look ahead, especially in light of a potential Biden win, we believe Canada holds an advantage, particularly as we develop export capabilities. Projects like Shell LNG, Trans Mountain, and our export terminal position us well. We foresee the most promising markets in the future being outside of North America, particularly in Asia and India, and we are strategically close to those markets. We produce some of the cleanest and most ethical hydrocarbons globally. Therefore, we currently view Canada as an advantageous location. However, that doesn’t mean we will stop considering opportunities in the U.S.—we still have assets there. Nevertheless, we feel more confident with our capital allocation in Canada for the coming years.

Linda Ezergailis, Analyst

And maybe just as a follow-on. Recognizing that the Alberta government is promoting petrochemical investments in the province, I'm wondering how that might influence the relative attractiveness of that opportunity versus others? And maybe we can also hear your updated views on whether there might be some emerging hydrogen opportunities for Pembina as well.

Mick Dilger, CEO

Obviously, that kind of support at all levels of government is helpful. And we hope people step into that space. And it's certainly helpful when we think about CKPC, which we'll be providing an update for in early December. In terms of hydrogen, it's early days for us. I mean, clearly, we have infrastructure that can be used in that development. But it really is early days for us. We think it's a number of years away. And we are studying it. And in fact, we have a presentation to our senior management, I think, next week, on hydrogen and how we can participate. But Stu, any additional thoughts?

Stu Taylor, Chief Development Officer

No. I mean, we're watching it closely, Linda, and are excited about what that opportunity may develop into with respect to Pembina itself and the industry in general. We're quite positive. And I think our efforts in some of our work on the petrochemical side and export, we're getting lots of contact and are excited to be recognized and have conversations with future opportunities that may present itself.

Operator, Operator

Your next question is from Matt Taylor from Tudor, Pickering, Holt.

Matthew Taylor, Analyst

Can you speak to conversations you're having with customers? It seems physical volumes seem to be slowly recovering here, but more importantly, on new projects, more to come in December, obviously. But is there some caution here that you're seeing with customers? I mean, is it fair to say that you'll be prudent about adding new projects that match customers' willingness to backstop that CapEx with contracts?

Mick Dilger, CEO

I'm going to start, and then Jason, I'm sure you're eager to respond to that. We're unwavering, really, on how we do projects, and because of that, we slowed down in the pandemic. And when the market is supporting us and we have adequate financial backstopping from the right kind of customers, then we will restart. And we'll talk more about that in December. But we are literally following the Pembina playbook, all the guardrails, decent rates of return, good counterparty credits, good geology, all those things. And we'd love to grow fast as we have over the last ten years, but that has just not been in the cards since we had this kind of double pandemic. But as things resume, we'll be ready. We'll actually be more ready for what I perceive will be a return to normal than we've ever been because for the first time in a decade, we've been able to measure twice and cut once in project readiness. So Jason, maybe a bit of color on what you're seeing on the ground.

Jason Wiun, CFO

Thank you, Mick. Matt, we've reached out to all our customers, especially regarding the Peace pipeline in the corridor, to understand their needs. I've had several discussions with customers who want to make adjustments to their contracts. In line with what Mick mentioned, we're ensuring that we aren't building assets that our customers don't need while going through this process. We've received positive feedback from our customers about their ongoing need for capacity on our assets. Certain areas continue to show growth, which we are actively pursuing, and this brings some optimism. Additionally, as Mick noted, we have taken this time to evaluate the project and determine how to adjust it properly. Since 2013, we've been rapidly building to keep pace with producer expansion, but now we can thoroughly assess our requirements and plan effectively. The market for services is also strong, so our capital situation looks promising at this point. We believe we can align the timing with customer needs while being cost-effective.

Mick Dilger, CEO

Jason, do you want to talk a little bit about what you're seeing on the ground with volumes?

Jason Wiun, CFO

Oh, sure. Yes. Scott mentioned it earlier in the call that we have seen volumes recovering. September and August are typically turnaround seasons, and the summer is generally a breakup and slow drilling season. We're starting to see, albeit very slow, recovery in drilling in the basin. We are seeing volume ramp-up. Facilities came back from turnaround very strong, and we've seen consistent volume growth on both the LVP and the HVP side of the system. The HVP has been performing very strong across the board, actually staying relatively close to what our expectations were when we set our budget. We're seeing things going back closer to what we expected to see at this time of year. We're about level with what we were at this time last year. So with every week and every day going by, seeing the volumes continue to grow. The counter to that, I would say, is the Drayton area. I think we've seen some of our other midstream peers talking about that area is a bit slow. It's a little behind the curve in terms of recovery. But we're starting to have discussions down there as well.

Matthew Taylor, Analyst

That's great. Could you please prioritize the items mentioned in the press release regarding growth, debt repayments, and increased shareholder returns? Additionally, given the current stock price, how are you approaching buybacks and the increased returns for shareholders?

Michael Dilger, CEO

Scott, do you want to start that one? Or are we going to defer back to the press release?

Scott Burrows, CFO

Sure. Well, Matt, we're still working through our budget and the project backlog. Your question is a valid one. As we sit here today, if none of the projects come back, we will have significant free cash flow available. If we bring some projects back, we'll have a bit less free cash flow. If we bring all the projects back, we will need all that free cash flow for them. Those are the general parameters we are considering. In scenarios where we generate free cash flow, we have typically funded the business 50-50 between debt and equity over the last decade. Therefore, when we consider redeployment of capital, our starting point is to think about distributing it back in a 50-50 manner. So, potentially, 50% of the free cash flow will go towards debt repayment and 50% will go towards share buybacks. This all depends on various factors, such as how our leverage trends. If we reach a leverage level that is slightly higher than what we are comfortable with, we will likely allocate more capital towards debt repayment. Conversely, depending on the current share value, that might also influence our share buyback decisions. At this moment, with a yield a little over 9%, we certainly see value in our own shares as we believe they are being underappreciated.

Operator, Operator

Your next question comes from Ben Pham from BMO.

Benjamin Pham, Analyst

On asset sales, anything to update us? I didn't see much in the package on that.

Mick Dilger, CEO

Scott, you want to address that?

Scott Burrows, CFO

Yes. Yes. So we continue to work through two asset packages, and that's about all we can say there, Ben. We'll probably provide a little more color and should have a little more clarity with our December update.

Benjamin Pham, Analyst

No problem. And maybe just more of a detailed question on your exhibits on deferred revenues and makeup rights and recognized revenue. Is the expectation heading to Q4 that you're going to see that balance get closer to zero, similar to last year?

Scott Burrows, CFO

Yes. For the most part, those are 12-month makeup rights, Ben. So that's a fair assumption, yes.

Benjamin Pham, Analyst

Okay. When you mention 12 months, are you referring to a calendar year basis, meaning there isn't any portion from Q3 that carries over into next year?

Scott Burrows, CFO

There's a small amount. But for the most part, it's on the calendar year.

Operator, Operator

Your next question comes from Rob Hope from Scotiabank.

Robert Hope, Analyst

Just wanted to get a sense of how you're thinking about contract roles at Alliance given the dynamics in the basin, including potentially a little bit of a delay in LNG Canada as well as any update on Ruby.

Mick Dilger, CEO

Maybe, Jason, you can talk about Alliance role. And then, Scott, over to you after.

Jason Wiun, CFO

Sure. Rob, so I think the basis between Alberta and Chicago is going to be challenged, as we're all aware, in 2020. And so I think we have seen some of the interruptible volumes a little bit lower than we had seen in the past. But we're starting to see a strengthening in that basis between Alberta and Chicago at the moment, especially in the winter. So a lot of our capacity that came available this year, we've been able to do seasonal sales to keep the pipeline at high utilization. So optimistic there. We have a view towards the end of 2021 that the pipeline is still highly contracted. And we're currently working with customers, both in Alberta and the Bakken, to determine their needs for egress. We do think it's been a challenging environment at the moment, but we do think things are looking positive. And there are some certain areas where we do think there's opportunity to be able to bring gas onto that pipeline on a term basis. We've had some smaller successes recently in Alberta, terming up some volume there. And then on Ruby, similar story in terms of recontracting. The basis between Opal and Malin is very narrow. It's making it quite difficult for Ruby to attract volumes. We still have the PG&E contract there that goes on for a number of years. So we're working with our partner, Kinder Morgan, on assessing some options there. The California market for gas is a bit challenged with a lot of renewables and things like that coming on in California. So we're looking at opportunities to use some of the advantages that Ruby has as a low-carbon pipeline to be able to access some of the California market there.

Scott Burrows, CFO

No, Jason. I think you covered it.

Operator, Operator

Your next question comes from Patrick Kenny from National Bank Financial.

Patrick Kenny, Analyst

Thank you for the update on the frac spread hedges for next year. Regarding the propane inventory from the summer that you plan to clear out this winter, could you please confirm what percentage of your anticipated propane sales for the winter, assuming average weather, is secured through forward sales? Also, while I know more details will be available in December, could you provide some insight into how you are approaching marketing for 2021 in comparison to 2020 based on current market conditions?

Jaret Sprott, Chief Operating Officer, Facilities

We're going to take that one.

Michael Dilger, CEO

Go ahead, Jaret.

Jaret Sprott, Chief Operating Officer, Facilities

Yes. So in terms of our propane sales, we're largely sold on a forward basis. So we still expect, based on our current sales program, to exit March as we typically do with little to no propane in storage. I'm not going to disclose the specific amount path, but what I can say is a high percent, 75% or higher, is already sold on a forward basis. So we feel confident about our forward sales profile. As it relates to 2021, based on the current forward strip that we typically use to run our budget, we are seeing slightly higher NGL prices compared to 2020, offset, obviously, by the higher natural gas prices. So on an all-in frac spread, I think we're a little higher on a Younger basis and a little lower on a Mont Belvieu basis. So net-net on a frac spread, we're looking to be roughly the same as we are in 2020. And then crude oil, again, the strip is slightly higher than where 2020 is tracked. But the key to us is the differentials, and the differentials largely are the same as what we saw in 2020.

Patrick Kenny, Analyst

Okay. That's very helpful. And I just wanted to clarify too on the customer contract renegotiations that were publicly announced in the quarter. I know some of the fee reductions are tied to the highest development still coming on. But can you just confirm from a same-store sales perspective how much, if any, you expect your conventional tolls and processing fees to be down in 2021 versus 2020?

Michael Dilger, CEO

I think from a Conventional Pipeline basis and a Gas Services and a fractionation, I don't think we see any degradation in tolls.

Operator, Operator

Your next question comes from Robert Catellier from CIBC Capital Markets.

Robert Catellier, Analyst

I want to follow up on the questions regarding capital allocation to clarify your previous statements. I understand the reasoning behind the 50-50 funding approach for deploying cash flow, allocating some for debt repayment and some for returning to shareholders. However, I want to note that in 2020, we didn't see a dividend increase apart from the one related to the Kinder Morgan closure, and the current dividend yields are quite high. Does this imply there's a possibility of not increasing the dividend for another year? Or is there still a chance to implement an increase in 2021 despite the high yield, considering our long-term perspective?

Michael Dilger, CEO

We're studying that, obviously. We would love to keep the streak going, but at some point, it doesn’t make sense when you're yielding 9%. When I attend conferences, I always ask the audience for their thoughts, and I'd like to ask you what you would do in this situation because it's a tough question. On one hand, you want to maintain the streak, but on the other hand, no one is valuing what they're currently receiving. So, why would you increase it? You could allocate that capital to other projects. What would you do?

Robert Catellier, Analyst

Well, it's a good question. That's why I'm asking. But obviously, it's a pretty circular discussion. But I would say capital, next to your people, is the most precious thing you have. So 9% is just a lot, not just in isolation, but relative to the spreads in fixed income and other options you have in front of you. And if timing is really a matter of trivia, I guess, you could always raise the dividend more later when that's a more attractive choice. So that's kind of where I see it.

Michael Dilger, CEO

Yes, you've raised a valid point. It’s a bit of a balancing act, and I can understand the challenge we face. I assure you that Pembina plans to maintain its dividend and aims to increase it over time. However, this is a tough decision during these challenging times. I believe the situation will become clearer as things stabilize. Currently, our payout ratio is around 60% or below, which suggests that we could maintain it. However, I'm uncertain if that’s what our shareholders would prefer. It’s a complex situation, but the positive side is that we have several months to consider this before we need to make a decision. Thank you for your question.

Robert Catellier, Analyst

Yes. And on that last point, I mean, there's no doubt you have the money. But just because you have it, it doesn't mean you want to...

Michael Dilger, CEO

Yes. We understand that perspective. However, it doesn't change our viewpoint. We are quite confident that the world will require the services we offer for many decades, likely outliving the physical lifespan of our assets. Our perspective on terminal value aligns with the duration of these assets, and we do not anticipate reducing any of our infrastructure due to insufficient demand for the products. We consider the analyses from OPEC, the EIA, and others who indicate that we have not reached peak hydrocarbon production yet. Even if we were to approach that milestone in the next decade, the demand will still be sustained over a lengthy period. Moreover, Western Canada has made significant progress in securing access to the West Coast, and we expect to enhance that access significantly in the next few years, further extending the demand horizon, even if the North American market remains stagnant.

Operator, Operator

Your next question comes from Robert Kwan from RBC Capital Markets.

Robert Kwan, Analyst

Just to start, on the last call, you alluded to evaluating some of your growth projects and making some decisions over the coming weeks post that call and then potentially restarting some of that growth. So I'm just wondering, what changed in the environment that you were expecting but didn't unfold such that everything is still remaining on hold right now?

Mick Dilger, CEO

I believe it was COVID, Robert. At that time, we thought we understood what was happening, and we noticed oil starting to recover while natural gas remained strong. We had hoped to discuss our deferred projects during this period, which we plan to do in December. There was some second-guessing regarding timing, and as Rob mentioned, it’s crucial to be cautious and careful with our capital. Thus, we decided to keep evaluating different options out of an abundance of caution.

Robert Kwan, Analyst

So is it fair to say then that if nothing materially changes here in the next month, what we should expect in December is really more of the framework for how you'd move forward versus a sanctioning, or I guess, a restart of those projects? Is that the intention in December?

Mick Dilger, CEO

Not really, no. Jason mentioned earlier, we have consulted now with all of our customers and stakeholders on all of our deferred projects. So we expect to give a detailed update on those, and we'll do so with more confidence than we would have had compared to the time you're referencing.

Operator, Operator

Your next question comes from Shneur Gershuni from UBS.

Shneur Gershuni, Analyst

I'm glad to hear everyone is safe. I apologize for what might be my 11th inquiry regarding buybacks. It was an intriguing final question. I'm curious if I can approach it from a different angle. Considering the current environment, hydrocarbon demand appears quite uncertain for a while, at least until a vaccine is available. Have you examined a similar free cash flow yield analysis but over a timeline? The net present value of a project typically remains unchanged. However, if you were to postpone capital expenditures for a year and focus on buying back shares instead, could that be a viable optimization strategy? This way, you could repurchase your shares while they yield as they are now, all while keeping the option open to allocate capital 12 to 18 months later. At that future point, your share price might differ, and you might not have the same opportunities.

Michael Dilger, CEO

Yes, that's an interesting idea, and I'll need to think about the math involved, but it seems logical. However, what's missing from that question is your customers. The products we're selling are what they want to buy, and we have contracts in place. Therefore, customers dictate when we have the option for that project. You can't just postpone projects for a year when customers are eager for them. In theory, I believe you're right, but in practice, the project may not be available if you delay for a year, or a competitor could take over that project. So, it’s not that simple. Some projects, like our Empress co-gen, can be viewed in that context. However, for projects like CKPC or the Peace pipeline, which are contractually obligated, we must proceed when the customer wants them too.

Shneur Gershuni, Analyst

That makes perfect sense. It was more of a thought. Your results this quarter and your guidance regarding cost reductions have been quite impressive. As you've gone through this entire process and transitioned from a high-growth phase to a more stable position, do you see additional opportunities for optimization and potential cost reductions? Or should we expect the $150 million to be the standard going forward?

Michael Dilger, CEO

The $150 million that was realized included some incentive-based compensation due to lower share prices. As a result, we are all going to earn less money, and that's appropriate. While we don't particularly like it, it's fair that when shareholders aren't doing well, neither should employees. We accept this reality. However, I would describe our situation as exiting 2020 having achieved notable cost savings, which we are proud of. These are strategies we are familiar with, but next year, we plan to seek third-party assistance to explore areas we are less experienced in, which we anticipate will lead to additional opportunities. It’s difficult to predict if we will exceed the $150 million total, especially since we have to account for hopefully getting our incentive compensation back to target levels, which will impact that total. However, it is our objective for 2021 and 2022 to replace any deficits in incentive compensation.

Operator, Operator

Your next question comes from Andrew Kuske from Crédit Suisse.

Andrew Kuske, Analyst

I promise not to ask a share buyback question. But in relation to the negative sentiment that exists in the sector and just with the producers in general, do you see an opportunity to really surface value within your existing asset base? Or even extend your asset base by partnering up with either private capitals, private equity, or pension funds and either targeting existing assets that you have in surfacing value to the market? Or engaging in M&A with a partner that has deep pockets?

Michael Dilger, CEO

I'm going to respond in two parts. I've never experienced a time at Pembina where we have such significant embedded value in our asset base. We're currently operating at about 75% of capacity, and our marketing business is at its lowest in a decade. The embedded value we possess is extraordinary. If we increase throughput by just 10%, that represents a considerable amount of money. Additionally, even if our marketing business returns to average levels, that's also a substantial financial gain without incurring any costs. Looking ahead to future projects, the efficiency in our pipeline systems regarding the separation of products significantly boosts our throughput. As mentioned by the previous caller, we're still in the process of finding efficiencies after years of expansion. We have the opportunity to carefully assess our next steps. We believe we have immense inherent value, and we're eager to return to normal operations, as that will clearly highlight the quality of our assets, customers, and geology. Regarding M&A or what we refer to as OPM—other people's money—we've observed initiatives like Coastal GasLink and how partnerships or partial sales can unlock value. We have a robust asset base that allows us to explore these opportunities, and we are considering them. We're cautious about issuing equity at current prices, but if we can make investments that align with our share value, it's still possible to pursue beneficial options, although it’s certainly more challenging. Does this answer your question?

Andrew Kuske, Analyst

That does. And I guess it strikes at the heart of it. Does the OPM, as you called it, if you had OPM, does that allow you to grow buyback and possibly do M&A that tick all the boxes at once and be massively accretive?

Michael Dilger, CEO

Yes. And as I said, we're looking at that and have been for some time, and we're intrigued by some of the things others have done.

Operator, Operator

Our last question comes from Jeremy Tonet from JPMorgan.

Jeremy Tonet, Analyst

I just want to come back, pick up a bit more on how you see activity trending across basins in your footprint. And could the improvements that you talked about in producer activity, the volume is picking up, as you said, lead to an uptick in EBITDA overall next year? I know it's a pretty early look, but it seems like you benefit also from a full year of cost reductions at that point. So just wondering how you feel about that at this point.

Mick Dilger, CEO

I understand your curiosity, but we will discuss that in detail in three weeks. If you could just be patient, you'll get a comprehensive update. I can say that volumes are improving in some areas, but in others, we expect to start the year with a significant decline compared to last year. There are many factors to consider. I apologize for not being able to provide a definitive answer now, but we are putting our full effort into giving you a complete response in early December.

Jeremy Tonet, Analyst

Got it. I appreciate that. And then maybe just separately, I hate to touch on this, I feel like it's been kind of beaten into the ground, but when it comes to the topic of share repurchases, within the context, I guess, of just returning capital to shareholders, has your thinking changed at all over time just given how high the yield is right now and how the market is not rewarding it? And would it ever make sense to kind of be flexible on your return of capital strategy? Will you take some of that dividend cash flow and buy back shares at what could be kind of historically cheap levels?

Scott Burrows, CFO

Yes. Jeremy, understand the math you're talking about. But I think at this point, we have no plans whatsoever to cut the dividend and buy back shares.

Operator, Operator

We have no further questions. I would now like to turn the call back over to Mick Dilger, President and Chief Executive Officer, for closing remarks.

Mick Dilger, CEO

Thank you, operator. I'd like to share an interesting statistic we've analyzed. Given that this is a shareholder call, our top 20 shareholders from a year ago are still holding approximately the same number of shares now. I'm thrilled to see that they remain committed to us and recognize the potential within the company, its capacity to operate safely and reliably, and its ability to generate income and maintain dividends. I truly appreciate their support, and we aim to meet their expectations. Thank you for your continued support. With that, we'll conclude the call.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.