Keyera Corp. (OTCPK:KEYUF) Q2 2022 Earnings Conference Call August 4, 2022 10:00 AM ET
Company Participants
Calvin Locke – Manager, IR
Dean Setoguchi – President &CEO
Eileen Marikar – SVP & CFO
Jamie Urquhart – SVP & CCO
Jarrod Beztilny – SVP, Operations & Engineering
Conference Call Participants
Rob Hope – Scotiabank
Robert Kwan – RBC Capital Markets
Robert Catellier – CIBC Capital Markets
Andrew Kuske – Credit Suisse
Ben Pham – BMO
Linda Ezergailis – TD Securities
Matt Taylor – Tudor, Pickering, Holt Incorporated
Patrick Kenny – National Bank
Operator
Good morning. My name is Grant and I will be the conference operator today. At this time, I would like to welcome everyone to Keyera Corporation’s Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions].
Thank you. I would like to turn the call over to Calvin Locke, Manager of Investor Relations. You may begin.
Calvin Locke
Thank you, and good morning.
Joining me today will be Dean Setoguchi, President and CEO, Eileen Marikar, Senior Vice President and CFO; Jamie Urquhart, Senior Vice President and Chief Commercial Officer; and Jarrod Beztilny, Senior Vice President, Operations & Engineering. We will begin with some prepared remarks from Dean and Eileen after which we will open the call to questions.
I would like to remind listeners that some of the comments and answers that we will give you today relate to future events. These forward-looking statements are given as of today’s date and reflect events or outcomes that management currently expects. In addition, we will refer to some non-GAAP financial measures. For additional information on non-GAAP measures and forward-looking statements, refer to Keyera’s public filing available on SEDAR and on our website.
With that, I’ll turn it over to Dean.
Dean Setoguchi
Thanks, Calvin, and good morning everyone.
We continue to operate in an environment of sustained high energy prices driven by tightening supply and continued strong demand. This has become even more pronounced with the global drive towards energy security. Keyera is well-positioned to benefit from these tailwinds.
Our fully integrated assets and logistics expertise allow us to efficiently connect customer’s NGL production to the highest value and markets. This unique advantage allows us to maximize value for our customers and deliver strong stable returns for shareholders.
This quarter saw strong performance from all three of our operating segments. As a result of record iso-octane margins, today we increased our marketing segment guidance. We now expect to deliver realized margin of between $380 million and $410 million for the year. This is up from the previous guidance of $300 million to $340 million, and puts us ahead of the record margin of $373 million achieved in 2019.
The gathering processing segment set a new quarterly record for realized margin as our customers continue to steadily grow production. Contributing to these results were record throughput volumes at our Pipestone and Wapiti gas plants and strong performance across our south region assets. As we continue to see increased demand from producers in the northern region, we’re evaluating opportunities to expand the capacity of our Pipestone gas plant.
At Wapiti, we recently began utilizing the second processing train to combat increasing depth — demand for our services.
Moving to our liquids infrastructure segment, this business delivered another steady quarter backed by continued strong performance from our fractionation storage and condensate transportation services. We continue to engage with customers to gather support for an expansion for fractionation business. We’re competitively advantaged to efficiently add fractionation capacity given our existing footprints, including extensive storage and connectivity to high-value NGL markets.
Our seem to be completed KAPS project provides the next layer of contracted fee-for-service cash flow growth. The project is now over 70% complete and is expected to be operational at the end of the first quarter of 2023. Costs for the projects are now estimated to be approximately $900 million, that’s in Keyera. The increase in costs is mainly driven by weather-related impacts.
KAPS is a game changer for Keyera, as it is the missing link in our value chain. It will connect NGLs from Montney G&P business and other third-party facilities to our core liquids infrastructure business in Edmonton and Fort Saskatchewan. It also provides meaningful future growth opportunities, like our zone for expansion, which would extend the pipeline to the BC border.
Recently, we’re pleased to see the Competition Bureau take decisive action to protect competition in our industry and the interests of customers as it relates to our KAPS pipeline project. This decision reinforces the competitive value of KAPS and a strong desire from industry for an alternative NGL transportation solution.
I’ll turn it over to Eileen to provide more information on our second quarter and updated 2022 guidance.
Eileen Marikar
Thank you, Dane.
In the second quarter adjusted EBITDA was $316 million, compared with $224 million for the second quarter of 2021. The year-over-year increase was largely driven by strong contributions from the marketing segments. Our iso-octane margins achieved a new quarterly record. We continue to preserve balance sheet strength, ending the quarter with a net debt to adjusted EBITDA ratio of 2.3x, which is below our target range of 2.5x to 3x. This calculation is consistent with our debt covenants, which exclude our outstanding hybrid debt.
Moving on to our guidance for the remainder of the year. As Dean mentioned, for 2020 realized margin for the marketing segment is now expected to range between $380 million and $410 million, up from the previous range of $300 million to $340 million. The increase takes into account the six-week plan turnaround of AEF beginning in mid-September, and the return of motor gasoline and iso-octane premiums to more normalized levels compared to the record pricing achieved in the second quarter.
The strong cash flow being generated in the marketing segments enables us to fund infrastructure projects, like our KAPS pipeline projects, and enhances our ability to consistently deliver superior return on invested capital. As a result of higher marketing segment margins, the cash tax expense for 2022 is now expected to range between $55 million and $65 million, up from the previous forecast of $30 million to $40 million.
Maintenance capital expenditures remain unchanged with a range of $100 million to $120 million. Growth capital expenditures for 2022 are now expected to be between $680 million to $720 million, previously $620 million to $660 million, excluding capitalized interest. The increased growth capital guidance is mainly due to the higher estimated cost to complete the KAPS project. The majority of KAPS-related costs are forecast to be incurred in 2022. Given strong performance from our business, we now expect to exit the year with net debt to EBITDA within our target range, up 2.5x to 3x.
I’ll now turn it back to Dean for closing remarks.
Dean Setoguchi
Thanks, Eileen.
Grounded in financial discipline, and with several strategic growth opportunities underway, Keyera is well-positioned to continue to generate strong shareholder value for decades to come. On behalf of Keyera’s Board of Directors and the management team, I’d like to thank our employees, customers, shareholders and other stakeholders for the continued support.
With that, I’ll turn it back to the operator for Q&A.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions].
Your first question comes from Rob Hope from Scotiabank. Please go ahead.
Rob Hope
Thanks. Good morning, everyone. First question is on G&P business and the record results that you had there, despite the fact that you did have some outages. Can you help us better understand where the strength was in Q2? How much of a drag the outages were and kind of what I would characterize as a run rate number there would be? And, I guess, secondly, they’re — like, are you seeing the ability to move up fees either kind of in the quarter or longer term?
Dean Setoguchi
Eileen, do you want to just speak to the outages?
Eileen Marikar
Yes. Thanks, Rob. With regard to the outages, it was approximately 15 days. We estimated around $5 million for Wapiti from EBITDA impact in the second quarter. And then we have the turnaround at Simonette as well, which did go on a little bit longer than expected. I think it was 14 days plan, but it went on for about 23 days.
Jamie Urquhart
So Rob, to first question with respect to where we’re seeing the uplift in volumes? Frankly, it’s across our entire asset base. You know, Wapiti and Simonette, we — you mentioned the second train at Wapiti, having clear line of sight that we’re seeing some positive growth from the producers behind that facility. At Pipestone, we’re full and so obviously we referenced that we’re looking at a potential expansion there and having some constructive conversations with producers that would support that. But really, more importantly in — well, not just as important, I think, in my mind is in the south, starting to see the fact that with our integrated facilities getting close to getting to capacity on those facilities as well, looking at some minor capital costs to bottleneck those facilities that we believe will be required in the near-term.
And to your point on fees, yes, definitely as we are filling up and the demand for our services and contracts roll-off, which some do early in 2023, there’s an opportunity to garner higher fees. When we negotiated those deals, there was ample capacity in our facilities and competitor’s facilities that drove us to probably offer fees that, at this point, we would see some opportunity to have those fees go up going forward.
Rob Hope
I appreciate that. And a shorter question. Dean, in your message to shareholders you had noted that with the conclusion of the KAPS sales process, you would love to continue your strong track record of collaborating with partners. Does this infer or imply that you’re not interested in the second half, and you’d prefer just to maintain your ownership and yield the benefits downstream of the volumes?
Dean Setoguchi
I guess you get paid to ask questions like that. I mean, we’re not going to comment on anything related to M&A. But generally, we just want to remind everyone that we are the operator of that project from a construction and operation and the commercial perspective. And we do have a very strong track record of working with partners. So should we have a different partner on our KAPS project, we would love to work with them as well.
Operator
Your next question comes from Robert Kwan from RBC Capital Markets. Please go ahead.
Robert Kwan
Great. Thank you. If I can start with some questions here on KAPS. Just in terms of the new cost, can you kind of just — I know you broke down some of the reasons, but there was contingency in the old numbers, and there are contingency in the new numbers. And just at a high-level, how would you portray this new cost estimate versus the old one is it? Or kind of just realistically where you think you are? Do you view this now as a conservative estimate to complete?
Dean Setoguchi
Yes. I’ll let Jarrod respond to that. Jarrod?
Jarrod Beztilny
Yes, Robert. Hello. Yes, there’s contingency in the estimate that would be difficult. Any project like that, I’d say I would characterize it as, you know, what we’ve learned throughout the project and what we think we have left to go. So, when we last spoke to you, we’ve learned to watch them whether it’s been a challenge for us, and continues to be our largest risk. And we’ve been doing everything we can to manage that.
Robert Kwan
Got it. And then I don’t know if this is for Eileen. And it may be related to KAPS and a bit of the last question. Just a statement you made that you now expect net debt to EBITDA to exit the year in the 2.5x to 3x range, is that just based on the growth capital plan that you’ve put forward and no M&A or is that a more absolute statement that you fully intend to exit in that range based on everything that you’re planning on executing to the year — end of the year?
Eileen Marikar
Yes, I’d say that is an absolute statement. I’m quite confident that we will exit the year with our leverage within our target range, just based on the very strong marketing results, again, which help us to fund projects like KAPS and given everything that we’ve sanctioned to-date.
Robert Kwan
Got it. And I might just finish here in marketing. How much of the remaining margin in the second half has been hedged out? And then just on your statement, that mo gas pricing and iso-octane prices are back to historical levels. By historical levels, is that kind of the levels that you would see is been consistent with the prior $180 million to $220 million range or is that something different?
Eileen Marikar
Hasn’t yet. So we really don’t disclose the percentage that we’re hedged. I would say we are well hedged in the second half of the year. So one thing I’ll remind you of is we do have the AEF turnaround, so that starts mid-September, and so that’ll impact both the third and fourth quarter.
As it relates to the motor gasoline, I would say, we had updated our base guidance, right, from to the $250 million to $280 million. I’d say the motor gasoline pricing is still relatively strong, but certainly not the peak high that we saw in May and June.
Jamie Urquhart
Sorry. It’s at the higher end of the historical range right now, Robert.
Robert Kwan
Okay. So it’s consistent with the revised long-term, not the original long-term in it. As you mentioned, it’s the high-end of the revised long-term is kind of where we’re sitting right now?
Jamie Urquhart
Correct.
Operator
Your next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.
Robert Catellier
Yes. And thanks. I’m just going to go back to KAPS again and, I guess, reiterate the question. What is your level of confidence in your revised cost figures given they’re still about $260 million to Keyera left to spend? And is there anything that we should take away from the fact that the estimate has moved from a range to now a point estimate, does that imply a higher level of certainty?
Jarrod Beztilny
Jared — Robert, it’s Jared, again. What I suggest with one of the things we’re trying to characterize here really is that, the range that we previously put out there given the experience we’ve had here through the winter, the spring and the summer, is that we don’t think that the bottom end of that range is achievable anymore. So it’s really guiding folks to the number that we put out now.
Robert Catellier
Okay. And then —
Dean Setoguchi
The other thing, Rob —
Robert Catellier
Go ahead.
Dean Setoguchi
The other thing, Rob, is literally by every week and every month that goes by, our confidence increases because there’s just less and less of the project execute on, right. So, anybody who lives in Alberta knows that there’s just wild weather swings and we had a really wet sort of spring and early summer here. So thankfully, as conditions are a lot drier now so we’ll — hopefully those conditions will continue.
Robert Catellier
Yes. And then just how far along are you in your discussions for a Pipestone expansion? And do you view that as direct competition to the other expansion that’s being discussed in the industry or because your customer composition you feel it’s a distinct and different project?
Dean Setoguchi
At our facility is very, very well-located. And, we have lots of interest in capacity of that facility. So we are, again, advancing opportunities to add capacity in that facility, which we think we can add capacity at a very competitive cost. So we feel very confident on that opportunity.
Robert Catellier
Okay. And last one for me then just with the high commodity prices and the backwardation, how’s that impacting your ability to hedge or is it causing you to tweak the hedging strategy at all?
Eileen Marikar
We continue to hedge our inventory; I think that’s something that, again, month-to-month is typically how we have been managing it, largely because of the backwardation. The other pieces are, we’ll try and lock in the margin, especially when we see very strong, the RBOB cracks or the WTI pricing. So just think that our risk management policy allows us to go out 24 months and the liquidity certainly is there. So we have been layering in hedges that at pretty strong value.
Dean Setoguchi
Yes, I would say just add on to what Eileen said. It’s that we’ve hedged out — at this point, being mid-year, we’ve hedged down to 2023 at higher levels than we would have historically and we’ve taken advantage of some very strong pricing.
The other thing that we’ve also modified some of our hedging strategies to use some collars, where we’re — again, we’re protecting our floors, but we’re giving us some upside room as well. Yes, we’ve adjusted a bit, but we do still protect our margins.
Operator
Your next question comes from Andrew Kuske from Credit Suisse. Please go ahead.
Andrew Kuske
Thank you. Good morning. I guess it’s question for Dean to start off with, and just how do you think about the frac capacity positioning and perspective developments on a go-forward basis in really by yourself and just competitors in the next few years as sort of the chess match gets underway on, who builds first, how do you think all that starts to play out?
Dean Setoguchi
Yes, I mean, well, first of all frac capacity is very, very tight. We’re using every barrel of capacity that we have in the entire system, and — which is obviously great for our business. So, yes, we definitely see demand for frac capacity to be built. We certainly have, as I said in my earlier remarks, that we have a very competitive footprints because we have a brownfield site, we have all the storage already there, all the connectivity’s are on that site. We have the people to run it. So we are as advantaged as anybody in the industry to add more capacity. Obviously, we have to work with our customers; continue to work with our customers, to get the contracting to back that kind of investment. And we certainly have a high-level of interest already. So it’s something that we continue to work towards. And again, I think it’s a great opportunity for us.
Andrew Kuske
And — and I appreciate that, and then may be just on a bigger broader basis, when you think about the recent agreement between LNG Canada and Coastal GasLink, and then just sort of the outlook on a longer term basis for LNG movements off the coast, I mean, obviously we’ve been sort of talking about this for a decade plus at this stage, but when you think about the near-term and then the maybe medium and longer-term, what sort of the outlook for a key, do you wind up with a view of maybe prices get sloppy for a little bit or they tighten up and then there’s a more robust supply, meaning a more robust opportunity set for processing in frac. I guess, color on the short-term, medium-term and longer term would be appreciated?
Dean Setoguchi
Well near-term, as you heard from Jamie, we’re seeing a lot of activity. It’s in near-to-midterm we’re seeing a lot of activity in our basin. That’s funny, over the last year, when everyone kept them telling that there’s going to be no growth in our basin, but that’s not what our customers are telling us. And when I’m reading all of our customer’s quarter reports, everybody’s projecting some growth and they keep on increasing their targets.
So you look at dry gas in Western Canada it’s increased from about 16 bcf last year to over 17 bcf a day today. And with expansions on the NGTL system that are going to be in play later this year, which is about a bcf in a half a day. Canada LNG is licensed to 4 bcf a day. So I think there’s a very strong potential for them to expand and sanction that second — the third and fourth train at that site.
And when you look at what’s happening in the world, the demand for LNG obviously is very strong and it’s all — a lot of its tied as well to the security of supply. So what I think there’s an unbelievable opportunity for our responsibly produced gas that’s from Western Canada to supply the world with some of that gas.
And whether it goes up the West Coast or whether we displace more gas that gets exported from the U.S. Gulf Coast or East Coast, it’s all part of our North American system that will export more LNG over time. So what does that translate to? I think in the short and long-term, I think it translates to a lot of great opportunities for infrastructure. And again, we’re already seeing it already. We are seeing record volumes than a lot of parts of our business, on our liquids business and also our G&P business and we think that’s going to continue.
There might be a slight loss as the producers try to gear up for Canada LNG coming into service and to bring on all that gas ahead of that project being online, but I think that would be very short and obviously very temporary in nature, but that’d be my sort of view. So again, I think that we have a very robust outlook for natural gas.
Operator
Your next question comes from Ben Pham from BMO. Please go ahead.
Ben Pham
Hi, thanks. To first off with Simonette comments around a potential increase in utilization and maybe even on expansion, can you talk about really consider maybe a bit more of a large expansion similar what you did a couple of years ago or is this more potentially a debottleneck?
Dean Setoguchi
No. Just to maybe, correct the information, I’m not sure where you’re getting that from, Ben, but we have ample capacity at Simonette. We have over 200 million a day of unutilized capacity there and that will be a very well-connected plant including with our KAPS pipeline system. So we think it’s a great opportunity that Whitecap is purchased or is purchasing and closing the purchase of the XTO production reserves and lands in that area which are in very close proximity to Simonette and we want to work very closely with Grant Fagerheim and his team to provide a integrated service offering for them to maximize the returns for them and also benefit us as well.
Ben Pham
Okay. And then — so thanks for clarifying that. So the reference to the Simonette produces is Whitecap?
Dean Setoguchi
Yes. Yes. I mean, if you look at the land map and you look at where the XTO lands are, they are in that vicinity and Whitecap has published that in their slide deck.
Ben Pham
Okay. Got it. I was thinking about somebody else then. Okay. Maybe going back to KAPS, are you able to comment on progress on contracting efforts over the last quarter?
Dean Setoguchi
Yes. I mean our practice is not to provide quarterly updates on our contracting, but I can say that we feel very optimistic with the engagement, the level engagement interest that we have in our pipeline and we get a lot of questions about some of the announcements that have been made relating to the competing pipeline.
And I just say that, in general, customers typically want to diversify their service. They do not want to put all their eggs in one basket, and so they want to have some redundancy. And I think that is also attractive that we’re going to have a brand new pipeline for, and I think that obviously has some value from integrity perspective. So, anyway, we feel very confident in terms of our ability to contract KAPS and we’re making some good progress on that side.
Ben Pham
And related to that, you mentioned comments on the Competition Act and limiting Pembina from not sustain ownership. Do you think that’s going to limit any other folks out there in Western Canada any more broadly? And at least they can look at KAPS?
Dean Setoguchi
Well, I mean, first of all, I really commend what the Competition Bureau has done. But I think it really speaks loudly for how all of the customers, a lot of the customers in our basin really spoke up for the need for this critical piece of infrastructure because it is a basin asset, and in terms of the billions of dollars of development that are going to occur in the decades to come, this is a key piece of that equation. And again, I think the Competition Bureau spoke up in a big way, but it’s because of the feedback that they received from industry.
Ben Pham
Okay. And maybe lastly, I mean, it looks like your marketing upside and delevering down at the lower or 2.3x or below that is basically watching the KAPS increase. I mean, how do you — like what are your thought about share buybacks into early 2023?
Eileen Marikar
Yes. I mean, share buy backs are certainly a tool or an option that we consider, probably more so than in the past. I think at the end of the day it’ll always compete with growth projects. The way we look at it is if we have a great infrastructure project with the return and the contract profile that we’re looking for, that’s where we would likely allocate to first.
Operator
Your next question comes from Linda Ezergailis from TD Securities. Please go ahead.
Linda Ezergailis
Thank you. As a follow-up to capital allocation, can you provide us a sense of how you’re now recently thinking about a dividend increase and dividend policy, given your confidence and line-of-sight to completing KAPS?
Eileen Marikar
Thanks for the question. Yes, I think I’ll just keep it pretty general, that one of our core financial priorities is to generate cash returns for our shareholders, and we’re really proud of that long history of growing the dividend over the long-term. As we think about it, the things we try to balance, or of course, maintaining the balance sheet strength and reinvesting in our business and growth and then returning cash to shareholders. So what we’re really focused on is growing that DCF on a per share basis in projects like KAPS as well as continuing to fill the white space in our gathering and processing facilities are going to help us do that, and maintaining that conservative payout ratio, so that it’s sustainable.
So again, I think just given the strength of our marketing cash flow, when we’re setup well from our balance sheet perspective going into next year, that that will be the balance between, again, those other priorities of reinvesting in the business and returning cash, but at the end of the day, the increase in the dividend remains a board decision.
Linda Ezergailis
Thank you. And just maybe on a separate note there’s systemic inflation everywhere. Can you give us an update on what you’re seeing in the business and your operations? How — what proportion of your EBITDA or revenues in your G&P and liquids infrastructure business has have some existing contractual ability to pass-through whatever cost to customers and maybe the nature of where inflation is greatest, including any sort of views on labor availability and productivity contributing to any sort of inflationary pressures?
Dean Setoguchi
Maybe just speak to just general inflation first and operations, I’ll turn that over to Jarrod.
Jarrod Beztilny
Yes, Linda, I think we’re seeing like everyone else’s, literally across all aspects of our core business. I’d say, in general operating costs, it’s not really material to us yet. When you speak to labor availability and productivity, again, another issue that that we’re seeing the same as everyone else, so it is a challenge to find people and keep people, but we’re able to manage through it and haven’t seen any significant impact outside of a — that’s certainly been a contributing factor in the KAPS cost increase.
Dean Setoguchi
Yes. And just maybe to add to what Jarrod said, as you know we undertook some significant measures to reduce our cost profile through 2020, 2021. So we feel very happy today that we did that and it’s obviously offsetting some of the effects of inflation that we’re seeing today. In terms of business and contracting, maybe I’ll just turn it over to Jamie.
Jamie Urquhart
Yes. So Linda, we do have some fixed fee deals but we do identify where we would be at risk with respect to some inflationary pressures, particularly on the power side, and so therefore we hedge our exposure on that regard. But we just do that as risk management across our entire business. Sometimes we focus a lot on risk management on marketing, but we also look at risk management with respect to other parts of our business when we do fixed fees.
We talked a little bit about as the market changes and as we go-forward we certainly are focused on having our customer have exposure to inflationary pressures along with us, so that that we’re not entirely exposed to those pressures. So hopefully that helps, give you some flavor on our future, as we look at inflationary pressures.
Linda Ezergailis
Yes. Thank you. And maybe a bigger picture, another question around value chain full service offering. Clearly, KAPS expands the scope of what you can offer along the value chain. What’s your latest thinking about further extensions either getting invested in LPG or potentially expanding AEF or other initiatives to do more along the value chain than you are currently?
Dean Setoguchi
Yes. I mean, strategically, Linda, we are always looking for opportunities to expand our value chain and also on the downstream side of it. Doesn’t mean that we have to own all the downstream facilities, but we want to make sure that we have the most efficient means of connecting to that downstream market. So, could there be more opportunities in refined products and as we look longer term, low-carbon refined products or low-carbon fuels? Absolutely. And, we have a lot of logistics expertise and marketing expertise and operating expertise outside of the business. So we want to leverage those skills and the advantages and we think there’s opportunities there long-term.
Operator
Your next question comes from Matt Taylor from Tudor, Pickering, Holt Incorporated. Please go ahead.
Matt Taylor
Hey, thanks for taking my questions here. I want to go back to KAPS. You have the project entering the service at the end of Q1 2023 there. Can give some guidance on the EBITDA ramp in 2023 and 2024 as it pertains to that slide you have in your deck on the 6% to 7% EBITDA growth through 2025?
Eileen Marikar
Thanks, Matt. Yes, certainly there is a ramp, so which start out smaller in 2023. 2025 we would see more of that cash flow ramp and that’s what’s embedded in our 6% to 7% EBITDA growth profile. But not just KAPS, so there is filling more whitespace at Wapiti, et cetera, included in that group.
Matt Taylor
Thanks, Eileen. And maybe just to dig in little bit deeper there. You had guided to invested capital returns of 10% to 15% or just using multiples of around 10x. So in the first couple of years, are you expecting below that range and then you ramp into that that 10% to 15% range over time?
Eileen Marikar
Yes, that’s correct. It would be something that ramps up into that range. You got it.
Matt Taylor
Okay. And then on that returns, now that you have an updated standalone CapEx estimate, have you given some thought on updating that 10% to 15% invested capital return? I guess, what I’m asking is, what’s the return profile looking like is that base system with that new standalone estimate? And then where could it trend with other expansions like zone 4?
Eileen Marikar
I think maybe just generally speaking, as we look to invest in new investments, we’re looking to target towards the higher end of that investment. Again, it’s more on that infrastructure. We’re looking for that the longer term contracts in take-or-pay. Again, just for newer investments, as we’re looking down the road, whatever, whether it’s frac 3 or zone 4, whatever it may be, I think that’s how we’re thinking about it going forward.
Dean Setoguchi
Yes, Matt, as it relates to KAPS, we’ve been very clear that with the contracting that we’ve had in — we have in place today, we aren’t in the threshold, and — but as I mentioned earlier we feel very confident in terms of the outlook for the basin and the discussions that we’re having with our customers that we believe that we’re going to be in that range.
Matt Taylor
Okay. Thanks for that, Dean. And then the last one for me, I think it was mid last year you’re talking about South Region G&P capacity getting up to about 70% by mid this year. Are you still on track to see that? I mean, you’ve seen some pretty robust volume in the South Region, and are you still tracking to the 70% or can we see that getting higher?
Jamie Urquhart
Yes. Matt, it’s Jamie. Yes, certainly we’re on track, and as you allude to I think we’re optimistic that we’ll be able to by end of the year be trending ahead of what we would have envisioned a year ago.
Dean Setoguchi
That’s a very robust area. You think about where gas prices — nat gas prices are today and I know it’s been moving around a bit here, but call it $5 plus over the past while, and you look forward as well on the forward strip. Those are very strong economics and the advantages for the producers in that area is that there’s very established infrastructure and obviously we own a lot of it. So it’s not just gas processing and ability to get deeper cuts for your NGL liquid extraction, but we also have our Keylink pipeline system, which is tied to our fractionation at Rimby, which is pipeline connected to our Fort Saskatchewan complex. So producers there can drill wells and get them on stream in a very short period of time and generate a return on their investments in the matter of a couple of months.
Matt Taylor
And then just to be clear that tailwind would be incremental, right, to your guidance through 2025, if you’re starting to see capacity utilization above 70%?
Eileen Marikar
That’s correct.
Operator
Your next question comes from Patrick Kenny from the National Bank. Please go ahead.
Patrick Kenny
Thanks. Good morning. Just to come back to your commentary around the refining market dynamics out there right now, I guess, both in Europe and North America. Can we get an update just on how Galena Park is performing in this environment, may be relative to your initial expectations? And then, also even though your top priority is executing KAPS, just any thoughts around bolting on additional infrastructure say over the near to medium-term that might be more directly tied to this increase in global demand for North American exports?
Jamie Urquhart
So Pat, I’ll take the first question on the refining market. So Galena Park is –obviously we move our iC8 out of that that facility but we also did the butane, in-line butane blending, to gasoline project a couple years ago. And that project came out of the gates a little slow because of COVID and gasoline demand. We’ve seen obviously as customers understand what our offering is and how sophisticated our blending system is in relation to other options, we started to see an increased demand.
Right now it’s summer. So the RVP limits on gasoline, limits our ability to or anybody else’s ability to blend butane in the gasolines. But certainly our expectation, as we come out of Summer and RVP limits increase on gasoline that we’re going to see an increase in demand and get basically to our expectations with respect that when we sanction that project.
Dean Setoguchi
In terms of bolt-on investments, I — sorry.
Patrick Kenny
Thanks, Jamie. Go ahead [ph], Dean.
Dean Setoguchi
Thanks. With respect to bolt-on opportunities to KAPS, yes, we still think that zone 4 is still a very good opportunity and that zone 4 would connect to the BC border and connect to independent gathering system there, NGL gathering system there. Obviously, developments in BC have been moderated over the last year-and-a-half, as we await the Blueberry decision.
My understanding is that they’re continuing to make progress on that front. And so, I think some of the developments there have been shelved a little bit or maybe not as aggressive, but we certainly believe that’s going to happen in the future. And when that does happen, we’re really well-positioned for it.
We also talked about the downstream part of our business in terms of the whole frac storage, rail logistics side of it; we think that there’s going to be continued supply through — of NGL supply coming through Fort Saskatchewan. And again, we’re very well-positioned to capture the incremental infrastructure demand associated with those volumes.
Patrick Kenny
Okay, great. Thanks for that guys. And then just on your carbon hub opportunity with Shell, any update on, say, near-term milestones that we should be keeping an eye on here through the back half of the year with respect to your role in the project?
Dean Setoguchi
I can say that our teams actively work together very regularly, I mean, they’re collaborating on a weekly basis. So know we don’t have any specific updates at this point. [Indiscernible] is tied to all the companies that receive floor space in the Industrial Heartland, yes, there’s incredible process to work through all the details associated out on how that’s going to work. So Shell is working with the government on that and also working with us. So we’re trying to sort through all these details as they come, but I can tell you that we’re both very actively engaged in terms of working together on an opportunities in that area.
I would say that our scope of what we envision for our Heartland lands in and around Fort Saskatchewan near our — adjacent to a Josephburg terminal is that we’re also talking to other potential partners, again, to create the industry solution to, in terms of industrial park in that area for low-carbon developments. So the opportunity with Shell is phenomenal. We continue to work with it, but we’re also working with others in terms of opportunities as well.
Jamie Urquhart
The thing I’d add too, Dean, is it’s not limited just to low-carbon. We’re working on lots of things with industry with respect to conventional hydrocarbons. We see that that potentially can also create a bridge for then having facilities and infrastructure built that then will transition into a low-carbon offering as well.
Operator
[Operator Instructions].
There are no further questions at this time. Please proceed.
Dean Setoguchi
Thank you all once again for joining us today. Please feel free to reach out to our Investor Relation’s team for any additional questions. Thank you.
Operator
Ladies and gentlemen, this concludes our conference call for today. We thank you for participating, and ask that you, please, disconnect your lines.
Be the first to comment