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Pembina Pipeline Corp (NYSE:PBA)
Q3 2020 Earnings Call
Nov 6, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Pembina Pipeline Corporation's Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers presentations, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Scott Burrows, Senior Vice President and Chief Financial Officer. Thank you. Please go ahead, sir.

Scott Burrows -- Senior Vice President And Chief Financial Officer

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 Pipeline; Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities; and Stu Taylor, Senior Vice President, Marketing and 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 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.

Michael Dilger -- President, Chief Executive Officer & Director

Thanks, Scott. Good morning, everyone. 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 Pembinas business, and the underlying strategy we've been executing for more than a decade.

Our focus on integration across the value chain began over 10 years ago, as 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 one full 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 in cost savings. And we've operated these assets safely and reliably through this challenging year.

Looking ahead, we see positive signs. Consolidation among Canadian energy companies is beginning to occur and 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 which those statements entail.

Pembina remains well-positioned to deliver tremendous shareholder value by sticking to the same basic principle that we have used in the past. We will focus on our four stakeholders; customers, investors, communities, and employees will continue to prudently allocate capital to the projects that provide competitive returns, improve our customer's profitability, and make Pembina better, we will also continue to fund stable and growing dividend in the future.

With that I'll pass it back to Scott.

Scott Burrows -- Senior Vice President And Chief Financial Officer

Thanks, Mick. Similar to 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 up stable, 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, DC clients are somewhat offset by the contribution of additional assets from the Kinder acquisition and lower G&A and other expense. 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 when compared to the second quarter of 2020.

On a physical basis, activity levels have stabilized and are beginning to improve. Pembina's conventional pipeline 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 level slightly above those seen in July and August.

Subsequent to the quarter, we were pleased to bring into service new fractionation on terminaling facilities at our emphasis facility. This project was placed into service on time and on budget and as approximately 30,000 barrels per day of propane plus fractionation capacity, enabling Pembina's to optimize propane marketing from the facility between Eastern and Western markets. This project along with Duvernay two 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 3, which is scheduled to come into service before year end and the Prince Rupert proclean 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 focus 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 PDH/PP facility and the conditions under which they may be restarted continue to be evaluated within the context of our customers features clients and ongoing COVID-19 pandemic and resulting global economic outlook. Finally, we continue to assemble a multi-year inventory of development opportunities to scale, breadth and diversification of our business inherently affords 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. But 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 his guidance are the previously discussed reductions in operating in general 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 the savings are 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 or 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 to stable. It is worth noting that Pembina's on a select group within the energy infrastructure sector 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.

Michael Dilger -- President, Chief Executive Officer & Director

Thanks. Good job. With so much political and economic uncertainty amid 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 among our teams, which has been the key ingredient to our success, has returned.

In early December, we're 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 plan. And finally, with growing attention to on ESG issues, we're 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 commitment to all of our stakeholders. And in this report, we will also be significantly enhancing our disclosure, particularly in the areas of environment, and employee diversity. As always, we thank all of you, 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Jeremy Tonet from JPMorgan. Please go ahead. Your line is open.

Jeremy Tonet -- JPMorgan Chase & Co. -- Analyst

Hi, good morning.

Michael Dilger -- President, Chief Executive Officer & Director

Hi, Jeremy.

Jeremy Tonet -- JPMorgan Chase & Co. -- Analyst

Hi. I just want to start off with consolidation in general here and wondering, if you could talk a bit more as far as producer consolidation, what that means pretend to know 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 regard to consolidation? And how does that impact Pembina there?

Michael Dilger -- President, Chief Executive Officer & Director

Yeah. I'll start and then I'll turn it over to Scott or others. Generally, in the past, you know, let's take a longer timeframe, say the last 10 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 Tourmaline example, I think is, 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 time. So, we welcome it, we think it's, it's good for the areas in which we operate, and it's good for credit.

In terms of your second question is midstream consolidation. Pembina has been a consolidator over the years. But in Canada, that'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, much greater, on average, much greater balance sheet strength than what we see in the U.S. And indeed, I think, you know, 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 US. Scott, you want to add anything?

Scott Burrows -- Senior Vice President And Chief Financial Officer

No.

Operator

Your next question comes from Linda Ezergailis from TD securities. Please go ahead, your line is open.

Linda Ezergailis -- TD Securities -- Analyst

Thank you. 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, and maybe find some opportunities to either do more with the hydrocarbon do 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?

Michael Dilger -- President, Chief Executive Officer & Director

Linda, that's a that's a great question. And, I'm going to answer it as best I can right now, but realize, you know, things, things change. Again, taking a longer term perspective, let's go back to 2015, we kind of sense, you know, advantage U.S. in that timeframe. And we, we wanted to start to march the value chain into the U.S.. And the result was the Veresen acquisition, which was done to diversify into Nat gas away from gas liquids, but also to up our U.S. exposure, as we look forward, and I'm not trying to predict the election. But as we look forward to,

You know, the relative environment of Canada and the U.S., assuming Biden win, we think it's Advantage Canada, particularly as we develop egress, so whether it's the shell LNG, Trans Mountain, you know, our export terminal, alpha gas is actually export terminal.

You know, we get egress, we take the best markets in the world will be non North American markets in the future. And I don't mean, the next five years, I do think we'll have a robust and North American market. But beyond that, you know, if you're looking 20 years, we think the Asian, Indian market is going to be the place to be.

And we're the closest to that. And, you know, we have and produce some, you know, the cleanest hydrocarbon most ethical hydrocarbons in the world as a base. And, and so we now think it's advantage Canada. And that doesn't mean we're never going to look in the U.S., of course, we will we have assets there. But we're, we're most comfortable, I think, with our capital allocation in Canada in the next number of years.

Linda Ezergailis -- TD Securities -- Analyst

Thank you, and maybe just as a follow on, recognizing that the Alberta Government is, is promoting petrochemical investments in the province, I'm wondering how that might influence your, 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 feminine as well, as

Michael Dilger -- President, Chief Executive Officer & Director

I'm, you know, obviously, that that kind of support at all levels of government is helpful. And, you know, we hope people stepped into that, that space. And it's, it's certainly helpful when we think about CKPC, which will 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 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 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?

Stuart Taylor -- Corporate Development Officer

No, I mean, we're, we're watching it closely with them and are excited about what that opportunity may develop into with respect to commit itself and, 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, we're getting lots of contact and are excited to be recognized and have conversations with, you know, future opportunities that may present itself.

Linda Ezergailis -- TD Securities -- Analyst

Thank you, I'll jump back in the queue.

Operator

Your next question comes from Matt Taylor from Tudor, Pickering, Holt. Please go ahead. Your line is open.

Matthew Taylor -- Tudor, Pickering -- Analyst

No, thanks for taking my questions here guys. 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 December, obviously, but if there's some caution here that you're seeing with customers? And is it fair to say that you'll be prudent about adding new projects that match customers willingness to backstop that capex contracts?

Michael Dilger -- President, Chief Executive Officer & Director

I'm going to start and then Jason, I'm sure you're eager to respond to that. You know, we were unwavering really on how we do projects. And because of that, we slow 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, follow the guardrails, decent rates of return, good counterparty credit, good geology, all those things, and we'd love to grow fast as we have over the last 10 years, but that is just has not been in the cards. And so 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, we've been able to, you know, 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 -- Chief Operating Officer

Sure. Thanks, Mick. And so Matt, we've actually canvass all of our customers, particularly on piece pipeline in the corridor. And determine what their needs were and had a number of discussions with customers who need to make changes around their contracts and things like that. So, relative to what Mick was saying, we were trying to make sure that we weren't building assets that the customers didn't need, as we were going through that process. And so we've gotten a lot of positive indications from our customers in terms of their continued need for capacity on our assets.

There's continued growth in certain areas that we're continuing to pursue. So there's more optimism around those things. And I would say, it also gave us time, as Nick pointed out to, to look at the project, and determine how to how to right size it for, you know, since you know, 2013, we've been building pretty rapidly just trying to keep up with our producer expansion, this time, we actually get to go through and do a lot of assessments on exactly what we need and planet very effectively. And, you know, the market is good for services as well. So our capital is, is looking really good at this stage. So, so we think we can match, you know, the timing with the customer needs, and then also do that on a very economic basis.

Michael Dilger -- President, Chief Executive Officer & Director

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

Jason Wiun -- Chief Operating Officer

Sure. Yeah, Scott mentioned it earlier in the in the call that we have seen volume recovering in August are, are typically turnaround season, and the summer is generally you know, break up and slow drilling season, we're starting to see, albeit very slow recovery and drilling in the base. And we are seeing volume, ramp up, facilities came back from term, very strong. And we've seen consistent volume growth on both the LVP and the HPP side of the system, the HPP 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 growing back, closer to new, you know, what we expected to see at this time of year, we're about level with what we were at, 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 trade area. I think in some of our other midstream peers talking about that area is a bit 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 -- Tudor, Pickering -- Analyst

That's great. Thanks for that color there. And then if you could then can you just slot? Obviously, you're being prudent about the backlog here. Can you slot down, you put some items in a press release on gross debt repayments and increase shareholder returns? Do you mind prioritizing those items? And then when the stock sits today, how are you thinking about buybacks in that increase shareholder return box?

Michael Dilger -- President, Chief Executive Officer & Director

Scott, do you want to start that one are we going to defer last year in a press release?

Scott Burrows -- Senior Vice President And Chief Financial Officer

But Well, Matt, obviously, we were not. We're still working through our budget and the project backlog. But your question is a valid one as we sit here today, and I think we've said this a couple times, if none of the projects come back, we're obviously going to have significant free cash flow available. If we bring some of the projects back, we'll have a little bit less obviously. And then if we bring them all back, we'll need all that free cash flow for the project. So those are kind of the goalposts about where what we're thinking about but in the scenarios, where we are generating free cash flow, certainly, when we think about how we funded the business, we've funded it typically 50-50 debt equity over the last decade or so. And so when we think about redeployment of capital, our starting point really is to think about redeploying it back 50-50 so potentially, 50% of the free cash flow to debt repayment. 50% will go to share buybacks.

Now, that all depends, obviously, on a couple of factors, where we see the leverage trending, if we if we get to a level that's slightly higher than where we're comfortable, that I think we'll skew a little bit more of that capital toward debt repayment. And likewise, depending on where the share value is, that could also skew something to the upside of the downside on share buybacks, where we sit today? Yielding 9 -- little over 9%. Certainly, we see value in our own shares as we feel they're, they're being under appreciated.

Matthew Taylor -- Tudor, Pickering -- Analyst

Great. Thanks for the call. That's it for me.

Operator

Your next question comes from Ben Pham from BMO. Please go ahead. Your line is open.

Benjamin Pham -- BMO Capital Markets -- Analyst

Hi, thanks. Good morning. On asset sales any think upgraders didn't see much in the

Package?

Michael Dilger -- President, Chief Executive Officer & Director

Scott, do you want to be address?

Scott Burrows -- Senior Vice President And Chief Financial Officer

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

Benjamin Pham -- BMO Capital Markets -- Analyst

Okay. And maybe this is just more of a detailed question, on your exhibit, on the third to revenues on makeup rights and recognize revenue. Is expectation head into Q4 that

You're going to see that that balance get posted as zero similar to last year?

Scott Burrows -- Senior Vice President And Chief Financial Officer

Yeah, for the most part, those are 12 months make up right then. So that's a fair assumption. Yes.

Benjamin Pham -- BMO Capital Markets -- Analyst

Okay, so when you when you say when you say 12 months, I seem like as you go to 12 months, that's on a calendar year basis. Like there's not a there's not some portion in Q3 you book, and it pushes into next year.

Scott Burrows -- Senior Vice President And Chief Financial Officer

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

Benjamin Pham -- BMO Capital Markets -- Analyst

Okay. All right. Thank you.

Operator

Your next question comes from Rob Hope from Scotiabank. Please go ahead. Your line is open.

Rob Hope -- Scotiabank -- Analyst

Morning, everyone. I'm just want to get a sense of how you're thinking about contract roll that 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?

Michael Dilger -- President, Chief Executive Officer & Director

Maybe Jason, you can talk about Alliance roll and then Scott's over to you after.

Jason Wiun -- Chief Operating Officer

Sure. Hi, Rob. So, I think the base is 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 few words, the end of 2021, the pipeline is still highly contracted. And we're currently working with customers both in Alberta and the Bakken to determine their needs for a graph.

We do think it's in a challenge arm at the moment, but we do think things are looking positive and there's some certain areas where we do think there's opportunity to be able to bring gas onto that pipeline on a 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 re contracting. The basis between opal and Milan is very narrow. It's making it quite difficult for Ruby to attract. 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 gases 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 we have a low carbon pipeline to be able to access some of the some of the California market there. Scott did your want to add anything to that?

Scott Burrows -- Senior Vice President And Chief Financial Officer

No, Jason, I think you've covered it.

Rob Hope -- Scotiabank -- Analyst

Alright, thank you.

Operator

Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead, your line is open.

Patrick Kenny -- National Bank Financial -- Analyst

Hey, guys, appreciate the update on the frack spread hedges into next year, but just looking more specifically at the propane inventory from the summer that you'll be looking to flush out this winter. Can you just confirm what percentage of your expected propane sales through the winter?

Assuming average weather, of course that that you've locked in with Ford sales? And then maybe perhaps you could just comment? No More to come in December, but just directionally for marketing into 2021, relative to 2020? How you're seeing things play out here based on current market dynamics.

Jason Wiun -- Chief Operating Officer

You want to add anything?

Scott Burrows -- Senior Vice President And Chief Financial Officer

Yeah. So in terms of our propane sales, were largely sold on a forward basis. So, you know, 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 this specific amount path. But what I can say is, but a high percent 75% or higher is already sold on a on a forward basis. So we feel confident about our forward sales profile as it relates to 2021. You know, 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 frack spread I think we're a little higher on a younger basis, and a little lower on a mon belleview basis. So net-net on a frack 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 then where 2020s track. But you know, the key to us is the differentials. And the differentials largely are the same as what we saw in 2020. So as we sit here today, you know, absent volatility or movement in prices, we see kind of margins forecasted to be roughly the same in 2021, as we see in 2020.

Patrick Kenny -- National Bank Financial -- Analyst

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

Scott Burrows -- Senior Vice President And Chief Financial Officer

I think from a convention. I'll take that me from a conventional pipeline basis and gas services in a fractionation. I don't think we see any degradation in tools.

Patrick Kenny -- National Bank Financial -- Analyst

Okay, perfect. Last one for me, Scott, just going back to your comments around share buybacks and, you know, the uses of potentially some excess cash here until your growth is secured. I know you've taken a look at the math before behind trying to, you know, go out and buy back some of the preferred shares. Obviously, that would be at a big discount to par. I think that math was pre-COVID. But you know, now with further pressure on the market value of the preps and the Canadian hybrid debt market opening up this summer, just wondering if you've refreshed, that look at what a meaningful refinancing of your preps might do to open up some room on the balance sheet.

Scott Burrows -- Senior Vice President And Chief Financial Officer

Yeah, Pat I think, we're always looking at what those options are. From a common perspective, if you look at if you look at the yield of buying out of breath, compared to yield of buying out our common Plus, you know, assuming that, we're going to get back to grow into dividend at some point, it still makes sense. We believe from a cost of capital if you have a spare dollar to buy back, a share versus buy back, preferred. Now, that being said, we are looking at all options around the preferred and certainly assessing the hybrid debt market, especially given where rates are today. We see that to be an attractive market. So it's certainly in the toolkit as we as we formulate our 2021 financing plan.

Patrick Kenny -- National Bank Financial -- Analyst

Excellent. Thanks, Scott.

Operator

Your next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead. Your line is open.

Robert Catellier -- CIBC -- Analyst

Hey, good morning guys. I just want to follow-up the capital allocation questions a little bit here. And just to clarify what you said previously, appreciate the logic and the 50-50 funding leading to how you might deploy cash flow, free cash flow or something repayment of debt and some to returning to shareholders. I just want to clarify in 2020, we haven't seen a dividend increase other than the one related to Kendra Morgan closing and then pointed to a very high yield right now in the current dividend. So does that suggest that there's a chance it will go another year without a dividend increase? Or can you still that one even though the yield is high in 2021 with a view more toward long-term?

Michael Dilger -- President, Chief Executive Officer & Director

We're studying that, obviously, that's, we'd love to keep the street going. But at some point, Rob, it doesn't make sense either when you're yielding 9%. And when I do conferences, I always ask I'm talking to what they would do. And so I'm going to ask you, what you would do here it's a difficult question to answer. On the one hand, you want to keep the streak alive. On the other hand, no one's appreciating what you're paying them now. So why would you pay more. You can redeploy that capital into project. So, what would you do?

Robert Catellier -- CIBC -- Analyst

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

The other part of it, though, of course, is your dividend yield now is not really anomalous, versus the U.S. peer group. But at the same time, they're not raising. So it's a challenging one, I mean, steady, consistent dividend growth, probably gives the best value over time. But there's a line in the sand for everyone and maybe you've crossed it.

Michael Dilger -- President, Chief Executive Officer & Director

Yeah. And there you have it, you're arguing both sides of it. And you can see our dilemma as well. I mean, there's no doubt I can, I can give you assurance that, Pembina is going to maintain its dividend and we do want to grow over time. It's a hard question right now in this unusual trough. It becomes clear, I think, as the world returns to normal.

And certainly I mean, our payout ratio is I think it's, 60 or sub 60%. We certainly could do it. I just don't know if that's really what the shareholders would want us to do. So very challenging question. And the good news is we have many months to noodle on it, before we get to that time of the year where we have to make that decision. So thanks for the question.

Robert Catellier -- CIBC -- Analyst

Yeah. On that last point, I mean, there's no doubt the money but just because they have it doesn't mean you want to you still want to do the best you can with it. So just on that -- just to blow that up. As you're well aware, there's been a lot of conversation, the market recently about terminal values. So I'm wondering how that's filtering into how you look at capital allocation. So specifically, obviously the return thresholds and knowing that those compete with share buybacks, but also is it having any impact on screening out certain asset classes, or otherwise accelerating sales in other asset classes just to tighten up the history profile?

Michael Dilger -- President, Chief Executive Officer & Director

We hear that argument, honestly it doesn't impact our thinking. But we are pretty confident the world's going to need the services we provide for decades to come, for longer than many of our assets will physically last. So, our view of terminal value is the light of these assets. We don't see laying down any of our infrastructure because there's no demand for the products. We look at the OPEC and EIA and others who, suggest that we're not at peak hydrocarbon yet. Even if we were to get there the next decade it's a long, long, long tail. And particularly Western Canada, has fought hard to get West Coast egress and we'll have that in enhanced form here in the next two or three years. And that'll make that tail much, much longer even if North America is a demand flat environment.

Robert Catellier -- CIBC -- Analyst

Okay. Thanks a lot for those answers.

Operator

Your next question comes from Robert Kwan from RBC Capital Markets. Please go ahead. Your line is open.

Robert Kwan -- RBC Capital Markets -- Analyst

Hey, good morning. Just to start on, 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?

Michael Dilger -- President, Chief Executive Officer & Director

I think really it was COVID. Robert, I mean, we believe it's the time I think the world did that we understood what was happening. And we saw as a result, oil starting to come back and nat gas is pretty strong. And so, we'd hopefully, could speak into the mic on our deferred projects, which is what we're going to do in December. So it was just a little bit of second guessing going on timing. Rob was saying you just have to be very cautious. You have to really be careful with your capital. And so it was just out of an abundance of caution that we decided to continue to evaluate different options.

Robert Kwan -- RBC Capital Markets -- Analyst

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

Michael Dilger -- President, Chief Executive Officer & Director

Not, not, really no. Jason mentioned earlier, we have consulted now with all of our customers and stakeholders on all of our different 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.

Robert Kwan -- RBC Capital Markets -- Analyst

If I can just finish with coming back to the share buybacks. Thanks Scott, you mentioned earlier on the call that it sounds like the decision to go forward with buybacks is going to be a function of how many of these projects come back, like how much cash is leftover. And so I'm just kind of wondering, though, if you turn that around, is it fair when you look at your yield and really, that's just the payout that you're probably more like in the mid-teens on a free cash flow or an FFO yield? That all of these projects, their returns are beating that number?

Michael Dilger -- President, Chief Executive Officer & Director

Maybe you taking that or do you want me to?

Scott Burrows -- Senior Vice President And Chief Financial Officer

I'll start. Generally, yes, Robert, like we were aware of the marker of our cost of money and it's a fair question. And we do look at that as a marker. I mean, we can buy our own stock. And we love our upside and very -- not every project can give you a risk adjusted rate of return the same way as buying back our shares. So the problem with just buying back your shares it doesn't increase you company's capability. So let's just say to answer your question, there was a tie. We would always expand our business in a tie, because we increase our capability, we increase our customer service, and we increase the leverage and the platform for when things return. And so in a tie, we would choose to deploy capital to project because it'll create additional leverage, whereas redeem your shares won't. But it is -- you can assume that we on a risk adjusted return basis the things we say go to will have equal to or favorable returns to buying back our shares. Scott, you want to add something? No, I think that was well said. It's certainly a marker that we love.

Robert Kwan -- RBC Capital Markets -- Analyst

That's great. Thank you.

Operator

Your next question comes from Shneur Gershuni from UBS. Please go ahead. Your line is open.

Shneur Gershuni -- UBS Investment Bank -- Analyst

Hi, good morning, everyone. Glad to hear you're all safe. Sorry, for the probably 11th question on on buybacks. It was an interesting last question. I was wondering if I can flip it the other way. Have you looked at, when you sort of consider the environment that, hydrocarbon demand is clearly uncertain right now for at least a period of time until a vaccine arrives and so forth. Have you sort of looked at the same free cash flow yield type of analysis, but looked at it more on a time continuum, the NPV of a project usually remains the same NPV, but if you were to delay capital for a year and buy back instead, would that not be a potential optimization strategy that you can buy back your shares, where they're yielding where they are today, yet still retain the optionality of being able to deploy the capex 12 to 18 months from now, and who knows where your share price would be at that point, you may not have the same opportunity?

Michael Dilger -- President, Chief Executive Officer & Director

Yeah. That's, an interesting idea. And I got to think about the math of it, but it seems logical. The part that's missing, though, from that question is, is your customersyour customers -- the things we're selling, they want to buy, and we have contracts. And so they get to say when you have that option for that project, you can't unilaterally delay projects, a year when customers want them. And so in theory, I think you're right, but in practice that project may not be there, if you delay a year or competitor may step into that project. And so it's not quite as easy some of our projects to be fair like our Empress cogen we can think about that way. But when we think about CKPC or Peace pipeline and things that are contractually back, we have to do them when the customer wants them as well.

Shneur Gershuni -- UBS Investment Bank -- Analyst

So, that makes perfect sense. Just, it was more of a thought. Your results this quarter, in your guidance with respect to cost reductions have frankly been pretty impressive. As you sort of gone through this entire process you've been kind of on a growth plane sprinting, in your morning standing still mode right now, do you see further optimization opportunities, and in potential cost reductions as well, on the opportunity front? Or it's kind of $150 million, kind of what we should expect going forward? Or do you see Do you think you're in the second or third inning of this exercise?

Michael Dilger -- President, Chief Executive Officer & Director

The $150 realize some of that was incentive based comp because share prices are much lower. So, on this side of the phone, we're all going to make less money. And, as it should be we don't love that, but it is as it should be when the shareholders aren't doing quite so well, either should the employee so we accept that. But we are like I -- the way I would characterize it is, is we are exiting 2020 having achieved things cost savings we're proud of but I would characterize those as the things that we know how to do. And in the next year, we're going to get some third party help to take us beyond what we know how to do into a realm of the things we don't know how to do and we expect there to be Further opportunities. Would I say they go over 150 in total? It's hard to say, because we got to make-up for -- hopefully, incentive comp getting back to target, getting back to normal, which will eat into that 150. But what, I guess, that we could replace that, that you know that that incentive comp deficit? That would be an objective we would have for 2021 and 2022.

Shneur Gershuni -- UBS Investment Bank -- Analyst

Perfect. Really appreciate the color today, guys. Have yourself a safe day and a great weekend.

Michael Dilger -- President, Chief Executive Officer & Director

Thanks for your question.

Operator

Your next question comes from Andrew Kuske from Credit Suisse. Please go ahead. Your line is open.

Andrew Kuske -- Credit Suisse -- Analyst

Thanks. Good morning. I promised not to ask a share buyback question. But in relation to the negative sentiment that exists in the sector, and just for the predictions 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 capital, so 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 -- President, Chief Executive Officer & Director

Yeah, I'm going answer that in the two parts, I have never been at Pembina where we have greater embedded value in our asset base. Just consider that we're -- only operating at about three quarters of capacity. And our market -- marketing business is at decade lows right now. So the embedded value that we have is unbelievable. I mean, if we add, you know, 10% throughput, it's a lot of money. You know, and if our -- even if our marketing business reverts to the mean, that's a lot of money without spending a dime.

You know, as we think about, you know, future projects and the leverage in our pipeline systems of -- complete segregation of products in different lines, the impact of non-batching to throughput is massive. And as a previous caller mentioned, you know, we're, we're still mid stride in terms of finding efficiencies, after years of years of growing, we actually have a time, as I said earlier, to measure twice, and cut once and assess. So we have tremendous inherent value, and we're really excited about, you know, getting back to normal, because we think that that'll really shine through in quality of what we have and the underlying quality of our customers and the geology.

In terms of M&A and other we call what you're talking about OPM-Other People's Money. Certainly, we've watched Coastal GasLink, and some of those deals and the leverage that can be liberated with partnerships or partial sell downs, and that -- those are certainly available to us. We have the quality of asset base to do those in different places. And that's on our mind.

We know we're not too excited about issuing equity at these prices. But you know, it is, as long as you can buy in a way that's reflective of your share value, you can still do things that make -- that makes sense, you know, for sure it's much harder, though. Does that help at all?

Andrew Kuske -- Credit Suisse -- Analyst

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

Michael Dilger -- President, Chief Executive Officer & Director

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

Andrew Kuske -- Credit Suisse -- Analyst

Okay, great. Thank you.

Operator

Your last question comes from Jeremy Tonet from JPMorgan. Please go ahead. Your line is open.

Jeremy Tonet -- JPMorgan Chase & Co. -- Analyst

Hi. Thanks for letting me back here. Just want to come back. Pick up a bit more and how you see activity trending across basins in your footprint and could the improvements that you talked about, and 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 seems like you'd benefit also from a full year of cost reductions at that point. So just wondering how you feel about that at this point.

Michael Dilger -- President, Chief Executive Officer & Director

Jeremy, I hate to be evasive, but thats really what we are going to talk about in our in three weeks. So if you kindly just hang on, we'll get the full the full picture. Suffice to say, you volumes are improving on some systems, but on other systems, we're going to enter the year significantly declined from the year earlier. So, there's lots of lots of gives and gives and takes so sorry, I can't answer that, but really putting our full effort into giving you a fulsome answer in early December.

Jeremy Tonet -- JPMorgan Chase & Co. -- 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 as your as you're thinking, change it 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? We take some of that dividend cash flow and buy back shares at what could be kind of historically cheap level.

Stuart Taylor -- Corporate Development Officer

Do you want to take a crack at that?

Michael Dilger -- President, Chief Executive Officer & Director

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

Jeremy Tonet -- JPMorgan Chase & Co. -- Analyst

Got it? Fair enough. I'll stop there. Thank you.

Operator

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

Nick Delgado -- Chief Executive Officer

Thank you, operator. I'm going to leave you with an interesting stat here that we did a bit of work. And given that this is a shareholder call -- shareholder stakeholder call. Our top 20 shareholders from a year ago still own roughly the same number of shares that they do now. And so I was just delighted to learn that that people are sticking with us and they see the potential that remains in the company and its ability to operate safely and reliably and maintain its ability to earn money and its dividend, so I really do appreciate that and we won't let you down. So thanks for the support. With that we'll close the line.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Scott Burrows -- Senior Vice President And Chief Financial Officer

Michael Dilger -- President, Chief Executive Officer & Director

Stuart Taylor -- Corporate Development Officer

Jason Wiun -- Chief Operating Officer

Nick Delgado -- Chief Executive Officer

Jeremy Tonet -- JPMorgan Chase & Co. -- Analyst

Linda Ezergailis -- TD Securities -- Analyst

Matthew Taylor -- Tudor, Pickering -- Analyst

Benjamin Pham -- BMO Capital Markets -- Analyst

Rob Hope -- Scotiabank -- Analyst

Patrick Kenny -- National Bank Financial -- Analyst

Robert Catellier -- CIBC -- Analyst

Robert Kwan -- RBC Capital Markets -- Analyst

Shneur Gershuni -- UBS Investment Bank -- Analyst

Andrew Kuske -- Credit Suisse -- Analyst

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