Gibson Energy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 13 speakers on the call.

Operator

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gibson Energy Q4 2023 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

Thank you. I would now like to turn the meeting over to Ms. Beth Pollock, Vice President, Capital Markets and Risk. Ms. Pollock, please go ahead.

Speaker 1

Thank you, Laura. Good morning and thank you for joining us on this conference call discussing our Q4 full year 2023 operational and financial results. Joining me on the call today from Gibson Energy are Steve Spalding, President and Chief Executive Officer and Sean Brown, Senior Vice President and Chief Financial Officer. We also have the rest of the senior management team in the room to help with questions and answers as required. Listeners are reminded that today's call refers to non GAAP measures, forward looking information and pro form a financial information.

Speaker 1

Pro form a financial information is derived in part from historical financial information of South Texas Gateway Terminal LLC and is subject to certain assumptions and adjustments and may not be indicative of actual results. Descriptions and qualifications of such measures and information are set out in our investor presentation available on our website and our continuous disclosure documents available on SEDAR Plus. Now, I would like to turn the call over to Steve.

Speaker 2

Thanks, Beth. Good morning, everyone, and thank you for joining us today. First, I'd like to touch on highlights from our last year. As is customary, Sean will speak in more detail regarding our financial results and financial position. And before we conclude the call, I'll provide some brief remarks regarding the announcement of my retirement.

Speaker 2

In 2023, we advanced our infrastructure growth strategy through the acquisition of the Gateway Terminal and continue to deliver strong and consistent financial results. In our Infrastructure segment, with the benefit of a full quarter of contribution from the Gateway Terminal, which closed August 1, we set a record for the company with segment EBITDA of $494,000,000 This breaks the previous record of 442,000,000 dollars which was set the previous year and speaks to the growth and stability of our infrastructure business. We are proud of the rate at which our infrastructure segment continues to grow, which equates to a compounded annual growth rate of 16% since 2017, pro form a the Gateway acquisition. On a consolidated basis, adjusted EBITDA and distributable cash flow of $594,000,000 $386,000,000 respectively, are also high watermarks. Both were driven by the addition of Gateway in August.

Speaker 2

Consistent growth performance from our legacy infrastructure business and our marketing segment's ability to generate cash flow in an operating environment and really any operating environment. For the year, our marketing segment achieved adjusted EBITDA of $145,000,000 well above our long term run rate of 80 to 120. In terms of the balance sheet, Gibson remains a solid financial position. Pro form a the Gateway acquisition, we exited 2023 with a leverage ratio of 3.1x, at the low end of our 3x to 3.5x target range. We also had a sustainable payout ratio of 61%, below the low end of our target range of 70% to 80%.

Speaker 2

Given our financial performance and increased contribution from our Infrastructure segment, we increased our quarterly dividend by $0.02 or 5% or $0.41 per share, which equates to an annual amount of $1.64 per share. As always, we continue to see significant value in offering our shareholders consistent dividend growth and believe this increase reflects the continued growth of our long term stable infrastructure business. Speaking to a few of our milestones, construction on the 2 new tanks at Edmonton Terminal are on schedule, and they are expected to be placed in service in late 2024. These tanks, which are underpinned by a 15 year take or pay agreement with Cenovus, represent 870,000 barrels of new tankage. And when combined with the previously announced tank, which was placed in service in the Q4 of last year, result in a total of 1,300,000 barrels constructed to support TMX shippers.

Speaker 2

These tanks will further increase our high quality, long term infrastructure revenues and support our customer shipments on the TMX pipeline. With respect to Gateway, we are very pleased with our performance so far, which is ahead of our initial expectations and tracking well in line of that 9 times forward looking multiple we disclosed at announcement. As we look forward, our focus is on optimizing the facility with the goal of increasing contracted loading windows, increasing the throughput and minimum volume commitments and extending existing contracts. Discussions with customers are ongoing and we remain very constructive around our ability to enter into new contracts and extend existing contracts atorabovethecurrentrates by the end of the second quarter. Looking ahead, we announced our 2024 capital budget, which includes a target growth expenditure of $150,000,000 Of that amount, dollars 125,000,000 is focused primarily on Edmonton, Hardisty and Moose Jaw, with incremental $25,000,000 of capital expenditure to be deployed at Gateway.

Speaker 2

From an ESG perspective, last year we released our 2022 sustainability report, which outlines some notable milestones, which take us a step closer to achieving our 2025 and 2,030 targets. This included maintaining top quartile safety performance among our North American peers, announcing a 15 year renewable power purchase agreement with Capstone Infrastructure and Saltridge First Nation and maintaining a 1st in class position in employee participation in our community giving program with a rate of 95%. Gibson was also acknowledged by the key global recognized ESG rating agencies for its performance, transparency and management of ESG issues, reaffirming its position as a global leader in sustainability. This included a 4th consecutive A- in a row from CDP, the Carbon Disclosure Project, and a AAA rating from MSCI. As a forward thinking industrial leader, Gibson will remain resolute in a sustainability journey and further leverage its world class asset base and growth opportunities to contribute to a more secure and resilient energy future.

Speaker 2

In summary, the business delivered another solid quarter, which marked the end of another solid year. Infrastructure reached a new high, partially attributable to the benefit of the Gateway acquisition, but also driven by that continued strong and stable performance of our legacy infrastructure assets. The Gateway acquisition is ahead of initial expectations, and we are optimistic about our ability to optimize the facility by increasing contracted loading windows and extending existing contracts at similar or higher rates. The Marketing segment outperformed our long term run rate for the full year. And as a result of our consent, continued solid financial results and the strength and stability of our business.

Speaker 2

We are pleased to announce the increase of our dividend by 5%. I will now pass the

Speaker 3

call over to Sean, who will walk us through our financial results in detail. Sean? Thank you, Steve. As Steve mentioned, 2023 was truly a significant year for our company. Infrastructure adjusted EBITDA of 150 $3,000,000 in the 4th quarter was $13,000,000 higher than the 3rd quarter and also ahead of the 1st 2 quarters of the year.

Speaker 3

This was driven in part by a full quarter of contribution from Gateway as well as continued strong financial performance from our legacy infrastructure businesses, which reflected a full quarter with the new tank in Edmonton. These same factors ultra contributed to a $42,000,000 quarter over quarter increase when comparing this quarter to the Q4 of 2022. Turning to the Marketing segment. Adjusted EBITDA of $28,000,000 was $4,000,000 higher than the 3rd quarter and ahead of the outlook we provided on our last quarterly call of approximately $25,000,000 This difference is attributable to incremental storage and location based opportunities during the quarter, which allowed our crude marketing group to realize higher than expected earnings. Looking forward from marketing, the environment for crude marketing remains positive and we expect to realize storage and location based opportunities within the quarter.

Speaker 3

Additionally, Refined Products continues to see strength in our Drilling Fluids business. Based on market conditions at this time, we'd expect adjusted EBITDA of over $30,000,000 in the Q1. To complete the discussion around our 4th quarter results, I would like to quickly work down to distributable cash flow. For the Q4, we reported distributable cash flow of $103,000,000 which was a $10,000,000 increase in the Q3 of this year and a $14,000,000 increase in the Q4 of 2022. Consistent with previous commentary, the majority of the increase is attributable to a full quarter of cash flow from the Gateway Terminal, but smaller drivers contributing to the increase include lower taxes in the 4th quarter, which was partially offset by the impact of marginally higher replacement capital and interest expense.

Speaker 3

As the Q4 concluded 2023, I would also like to compare year over year results. As previously mentioned, on an annual basis, the Infrastructure segment set another record. Adjusted EBITDA was a $52,000,000 increase from 2022 before adjusting for the impact of the one time environmental provision in Q2 of this year. Excluding that provision, adjusted EBITDA increased by approximately $69,000,000 At the same time, marketing adjusted EBITDA increased from CAD118 1,000,000 in 2022 to CAD145 1,000,000 in 2023, a $27,000,000 increase. The largest driver of this increase was an improvement in our crude marketing business, which was partially offset by a year over year reduction from refined products.

Speaker 3

As such, on a consolidated basis, 2023 adjusted EBITDA increased by $69,000,000 to $589,000,000 setting a new high watermark for the company for the 2nd consecutive year. These results contributed $386,000,000 in 2023, an increase of $30,000,000 relative to 2022, a new record for Gibson. Our strong financial performance allowed us to maintain our conservative financial position. Exiting the year, our payout ratio of 61% is well below the bottom end of our 70% to 80% target range. Our debt to adjusted EBITDA, pro form a the Gateway acquisition is 3.1 times, at the low end of our 3 times to 3.5 times target and flat to last quarter.

Speaker 3

Looking at our ratios on an infrastructure only basis, our payout ratio is approximately 77%, while our pro form a leverage is 3.6 times, both well below our targets of 100% and 4.0 times respectively. From a financial flexibility perspective, following the Gateway acquisition, we continue to be well positioned with a staggered debt maturity profile with no maturities until 2025 and ample liquidity with the benefit of our upsized sustainably linked revolving credit facility, which was increased from $750,000,000 to $1,000,000,000 following the Gateway acquisition and which does not mature until 2028. Certainly, a very strong financial position. In summary, we are very pleased with both our Q4 and full year results in 2023. Infrastructure results in the Q4 and for the full year represented new high watermarks for the company, largely driven by the successful acquisition of the Gateway Terminal as well as continued consistent results from the legacy infrastructure assets.

Speaker 3

Marketing ended the year well above our long term run rate of $80,000,000 to $120,000,000 with a constructive environment providing some momentum as we move into 2024. With the Gateway acquisition, we now have exposure to all key North American oil producing basins with a portfolio of assets that generate stable cash flows, all with a competitive advantage that would be prohibitive to replicate. And with this portfolio of assets and our strong and conservative financial position, we continue to present investors with an attractive value proposition, which includes being well positioned to continue to return capital to shareholders through a safe growing dividend and the potential for share buybacks in the future. Before we turn the call back to Steve for some remarks regarding the announcement of his retirement today, I did want to thank him on behalf of not only myself, but also all Gibson employees for 7 years of great leadership. Over to

Speaker 2

you, Steve. Thanks, Sean. I'd like to provide some brief remarks regarding my intention to retire this year. It has been a true privilege to lead Gibson's talented employees over these last 7 years. Together, we built a strong operational and financial foundation, extended our infrastructure platform and created peer leading value for our shareholders and positioned the company for future growth.

Speaker 2

With the company operating from a position of strength, now is the right time for me to retire and for the next phase of leadership to commence. I am confident in the team's ability to build off this momentum and drive further long term growth and value creation. I look forward to remaining on as President and CEO until my successor is named. Over to you, operator, for any question.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer Our first question comes from the line of Rob Hope from Scotiabank. Please go ahead.

Speaker 4

Good morning, everyone, and congratulations on the upcoming retirement, Steve.

Speaker 2

Thank you, Rob. Two questions

Speaker 4

Two questions on South Texas. So specifically in Q4 and I guess through 2023, it appears that the contribution from South Texas exceeded expectations. Can you maybe give a little bit more color on the key drivers there? Was it largely more VLCCs? Was it incremental spot barrels?

Speaker 4

And as we look into 2024, is there an expectation that we could see some continued outperformance versus the base plant?

Speaker 2

Yes. It was kind of driven by 2 things, Rob. The first one was, it was incremental throughput or spot barrels from existing customers and that happened 2 different ways. First is several of our customers used additional windows in their loading, which drove additional volumes. And the second is, is the percent of VLCCs loaded greatly increased, where I think in the Q4, I believe 80% of the vessels we loaded were VLCCs.

Speaker 2

And so how that actually increases versus our projections, where most of our projections were done on Aframax in the loading window, which is at 750,000 barrels versus the 1.2000000 to 1,250,000 barrels we can put on a VLCC. So you get that incremental volume and additional throughput fee, Rob, and that's kind of what's driven that. And so when you look into the Q1, it looks like it's going to be kind of a record quarter for the asset. Both in January February looked really good. And we think March when we look forward into March, March right now is setting up to be a record month ever for the terminal as far as throughput goes.

Speaker 4

All right. Good to hear. And then maybe just turning over to the recontracting efforts at South Texas, appreciate the updated language there. However, when you're in discussions with customers, what are the key sticking points? Is it term, the level of the toll, an understanding of where the barrels are and or is it kind of being done on the VLCC versus Aframax basis?

Speaker 2

Yes, it's really none of that actually, Rob. I think we've been pretty aligned really with our customers around that. It's really with them setting up their upstream and downstream contracts, Rob. So setting up, making sure that they got firm volumes and transport coming into the facility and making sure that they have a really good view in contracting portfolio for the vessels that they do sell. As far as actually our discussions with the existing customers, talks have been really at or above existing rates and extending the contracts back out to new 5 7 year agreements, probably leaning towards those 7 year agreements and additional loading windows.

Speaker 2

And so probably what the hang up has been is probably just getting the line up existing capacity to get that volume into the terminal.

Speaker 4

Appreciate the color. Thank you.

Operator

Our next question comes from the line of Linda Ezergailis from TD Securities. Please go ahead.

Speaker 5

Thank you. And I have to add my sincere congratulations, Steve, on a very successful career and all the best in your retirement.

Speaker 2

Thank you very much Linda.

Speaker 5

So I don't know if you or Sean are aware of whether the CEO search has started and where the process is and if the Board has outlined any expectations as to what the bookends of duration might be in any other context?

Speaker 2

Yes, I'll take that. I mean, obviously, there's a lot of unknowns still, but the Board is currently engaging an international search firm. They will look internally and externally. And I believe their kind of number one focus would be Canadian candidate, but they also want to look into the states too because at the end

Speaker 4

of the day, they want to pick the best candidate, whether or

Speaker 2

not that's internal or external. As far as timing, these things take more time than anyone really expects. But probably 4 to 6 months, Linda, if I was to guess. But that is just an estimate.

Speaker 5

Thank you. Now maybe we could just get some update on some of the crude flow and pricing dynamics that you're starting to see evolving potentially as Trans Mountain expansion is coming into service? Are you starting to see any impact maybe of crude going into storage in anticipation or anything shifting in terms of pricing inflows? And also I'm just wondering in your infrastructure business, are you starting to see any sort of customer higher demand or lower demand for tank capacity given that egress side of the basin will be debottlenecked, but there's not much storage at the terminus of Trans Mountain by the dock. So that might shift kind of how tanks get used in the basin as well?

Speaker 2

Yes. There was a lot of questions there, Linda. I'm going to turn it over to Kyle, then I'll kind of finish it off. Kyle is our Chief of Commercial.

Speaker 6

Hi, Linda. Yes, I mean on your pricing question first, I would say yes, that the market is anticipating an impact on WCS differentials when TMX comes in service. That is creating some storage opportunities. That's part of what our marketing group has been able to capitalize on in Q4 and also Q1.

Speaker 2

And we

Speaker 6

see that as constructive going forward as well. The other piece on sort of the flows, I think that what customers are looking at right now or what the market is looking at is really a construction timing. TMX is saying Q2 still. We'll see. From there, you'd look at line fill and operational ramp up.

Speaker 6

And then from there, really the development of the pricing at the dock and where the market is going to be for the barrel. So that's a lot there. And so I think our view is that it's going to be volatile throughout the year. And that will lend its hand to opportunities in our marketing business, but also for our customers. I think our customers want to get comfortable with the in service date of PMX and they want to assess their long term needs.

Speaker 6

I mean, we're still commercially talking to them about supporting their infrastructure needs from a tanker standpoint. And I just think at this point, they're looking for some certainty on the pipe being in service and how it's going to operate from the get go. So, hopefully that answers everything. But to your question, yes, the pricing is appreciated on anticipation of it, but there's a lot of variables to get through and our customers are sort of watching that closely, as well as ourselves.

Speaker 2

Yes. And so at the end of the day, with the potential of it coming online, WCS has priced stronger into the future. And with that, it's given us some time based opportunities in our storage at Hardisty, which lead to that $30 plus 1,000,000 opportunity that we've talked in marketing. Then you look at actually what's going on with TMX. We heard in December, we had customers starting to line up for line and fill going into January.

Speaker 2

That got pushed back on that got pushed back. And then they were going to push it back to March. And then just recently on the last kind of announcement that got pushed back further. They're saying April, but I think this is kind of indefinite right now until they are able to solve the bore issue and the pullback.

Operator

Thank you. We have our next question coming from the line of Jeremy Tonet from JPMorgan. Please go ahead.

Speaker 7

Hi, good morning.

Speaker 2

Good morning, Jeremy.

Speaker 7

Steve, just want to offer congratulations as well on the success at Gibson and we'll miss you going forward. And just building off, I guess, the transition process and questions here, Just wondering if does this introduce any kind of broader questions on Gibson strategic outlook going forward at this point? Does it change Gibson's role? I guess thoughts in industry consolidation going forward?

Speaker 2

Yes. I think it's business as usual, right? We had a meeting with the Board. We're going to continue to develop and execute our strategy and start to develop 5 10 year type strategies as we go forward. I think it's business as usual.

Speaker 2

I'll be here for the next 4 or whatever, however long it would take to actually bring in a Chairman and then I'll be here as a consultant to work with the Board as they need for the several months after that. But I think it's very much business as usual on a go forward basis when we look at strategy. And I wouldn't read anything into my retirement at all.

Speaker 7

Got it. Thank you for that. And maybe just kind of shifting gears towards capital allocation here. Just curious, I guess, is there a point with dividend growth where the stock price where it is, where it doesn't feel like necessarily the market is rewarding a level of a certain level of dividend growth going forward? Or does that impact the rate of what dividend growth makes sense?

Speaker 7

And does pivoting towards buybacks a little bit more makes sense in any scenario if the market doesn't respond to certain level of dividend growth?

Speaker 3

Yes. Thanks for that, Jeremy. I mean, as we've always said, we think steady annual modest dividend increases are important. It's a big part of the value proposition for our investors. I think you've heard me say it before, If you respond simply to market reaction to things, I think it can become a bit self fulfilling at some point.

Speaker 3

You don't increase your dividend because the market at that point in time is saying maybe you're not valued appropriately, then you're probably going to get valued even worse. Our focus really here is on executing our plan, which we think is a long term winner. We think we're going to see steady growth in our business, which is going to result in steady growth in our dividend. We are 100% acutely aware of where our multiple is right now in our current valuation. We think we are undervalued, certainly relative to peers and that's something we are looking to close the gap on.

Speaker 3

If you speak to the dividend increase in particular, we exited the year at a 61% payout ratio. We executed a transaction that was close to 15% accretive to Chituel cash flow per share. We made no dividend announcement at that time. We're very clear we do that with our year end results every year and we continue to do so. So we felt that this dividend increase was very much appropriate and reflective of our financial profile, and we'll keep that capital allocation moving forward.

Speaker 7

Got it. Thank you for that. And just a quick last one for me. Just wanted to know, with regards to gateway expansion opportunities, if you could talk a bit more about what capital opportunity you see there, particularly as it relates to Cactus interconnectivity?

Speaker 2

Yes. I mean, first off, I mean, I think there's when we looked at this asset and we look forward and the more VLCCs that we said, we see quite a bit of growth opportunities without any capital. Right. So we're seeing that we believe we can grow this asset by 15% or maybe even more percent without any capital. When it comes to capital projects, Cactus is a very important one for us.

Speaker 2

And it's mostly important for our customers because remember what I talked about earlier was access to supply is very critical to our customers. And so that's why the Cactus connection is important to us and really to our customers who are actually pushing this Cactus connection. And one of the customers that we're driving forward with right now is the big supporter of this Cactus Connection as they have quite a bit of production on that pipeline. And so the other one is probably the deepening project, which will which might occur later in the year. It takes a while to actually get all the permits in place to do the deepening project.

Speaker 2

But we're out right now getting bids on what does it take to deepen our dock to allow us to load vessels up to 1,400,000 barrels, which makes it which ensures that any kind of reverse lightering even with loaded Aframax, they can fully load a VLCC with 1 lightering offshore. And really there's several ways that pays out. One is we're negotiating with our existing customers on increasing the MVC to help pay that out. But really where we see it is we actually load more volume on each vessel. We're seeing that today because we were able to raise the depth of one foot just through normal dredging that happened in December.

Speaker 2

And we're seeing us load more volume on the ships today. So we're very optimistic about that opportunity. The other opportunity is adding more storage, specifically around as existing customers or even potentially some of our new customers that we're chasing want to bring in other grades of crude into the terminal. Right now, we have a very fungible system. We have WTL and WTI on a fungible basis for our storage, which is a big advantage that we think in the for our customers.

Speaker 2

But additional storage will be driven by additional windows and additional grades of crude that may come into the terminal. We believe we can build out additional 3 tanks there and maybe add almost 2,000,000 barrels of additional storage with those 3 tanks.

Speaker 7

That's very helpful. Thank you.

Operator

Our next question comes from the line of Patrick Kenny from National Bank. Please go ahead.

Speaker 8

Thank you. Good morning. Just on the early termination of the O and M agreement with Buckeye, Just wondering if you had a bit more color on what gave you confidence to take over operatorship of the terminal? And I'm also just wondering if proving your operating capability of the terminal was a bit of a precursor to some of the contracting negotiations you're having right now.

Speaker 2

I don't think it was early termination of the O and M agreement. I think that was just normal transition of the O and M agreement. That was January 1. But as far as confidence, I'll hand that over to Omar Saif, who is our COO. Omar?

Speaker 9

Hi, good morning. Thanks, Steve. And thanks for the question. I think on the onset of the deal, we put a migration team together, commensurate with Buckeye, who were very helpful. And we mapped out a plan and set that timeline accordingly.

Speaker 9

Didn't do it too early, didn't do it too late, just set what was the appropriate time and when could we actively do that transition. Completed it seamlessly. Arguably, there was very, very minor hiccups and was superbly handled by the team. We've been operating for well over 1.5 months and no issue. We put a lot of again, we put a lot of process, a lot of focus on the people and then systems and manage that across the board.

Speaker 3

Yes. And Pat just to the comment about the early cutover, I would say the intent always was to cut over as soon as we could. Like not to get into the details of the M and A process. But as we got into the nitty gritty, what was pretty clear is that a transition services agreement would take a bit of time to negotiate. So what we felt was best when we executed the deal was to execute the O and M agreement instead of transition services agreement.

Speaker 3

Our intent always was to cut over as soon as we could. And quite frankly, we would have had confidence in a transition services agreement as well. So I think our messaging was conservative when we announced the deal that it was an operating agreement for, I believe, up to 12 months, which was cancelable upon 30 days. But our intent always was to cut over really as soon as we could. And so this would have been more in line with our expectations certainly.

Speaker 8

Got it. That makes sense. And then maybe Sean, just on the leverage ratio here. So pro form a LTM debt to EBITDA 3.1 times kind of low end of your target range. Any update on when you might consider reinstating the NCIB?

Speaker 8

Or I guess what leverage ratio should we be watching out for before we might see you restart the buybacks? Yes.

Speaker 3

I mean from a pure leverage ratio, Pat, we're probably right about there. But the one thing I'd remind you is that we had a really strong Q1 in marketing last year. Even with our $30,000,000 guide, we'll see some measure of reduction. So consistent with the messaging we had around our budget, we think that certainly a buyback is a consideration near the tail end of the year. The two factors that really are going to influence that is, what's the actual level of capital we spend.

Speaker 3

We've got a $150,000,000 growth capital target, dollars 100 and and $25,000,000 of that is sanctioned, and is largely in Canada. The other $25,000,000 would be predominantly gateway, and we fully expect to spend that. To the extent that that moves up or down, that would certainly be an influencing factor. And then the second one is, how does the marketing business perform as we move through the year. So certainly something that we would see potential around.

Speaker 3

But even at that 3.1 times, let's see how marketing performs relative to last year, because we could see a slight increase in our leverage ratio even with what we would consider a very strong Q1 at 30 or greater. And so that's also something that influences it. But I mean, on an absolute basis, if you normalize marketing, I mean, at the low end of our leverage range is certainly where we consider restarting buybacks, depending on our view on capital spend.

Speaker 8

Okay, that's great. I'll leave it there. Thanks guys.

Speaker 2

Thanks, Matt.

Operator

Our next question comes from the line of Robert Catellier from CIBC. Please go ahead.

Speaker 10

Hey, good morning and congratulations Steve on your retirement announcement and in particular your safety track record during your time at the company. I just had a follow-up question here on just how you're ensuring volumes at the terminal to give your customers the confidence they need to recontract. Is there anything other than the Cactus pipeline that you're currently looking at to help develop the terminal and give the customers that level of comfort to recontract?

Speaker 2

We're connected to all the other pipelines really the Epic, the Gray Oak, also another pipeline that goes into the Eagle Ford there. So I think the Cactus pipeline is kind of that one missing link. We can get it through some exchanges through some of the other pipelines, but we need kind of a direct terminal. And as far as us facilitating, it's just our customers need to go find the transport and bring that volume in, and they're doing that actively. But we believe the Cactus pipeline will really help them develop a secure supply of volume, right?

Speaker 2

Those pipelines coming out of the Permian Basin into Eagle Ford are full or close to full. And that's being driven by our terminal and the terminal next door to us. They're in Eagleside. Those two terminals are provide the best netback for as far as anybody trying to export barrels out of the U. S.

Speaker 2

And so that's what's driven those 2 pipelines full. We do believe as the inter harbor contracts start to expire in 2025 that a lot of volume will free up for our customers that's going out of those terminals today.

Speaker 10

Okay. That's helpful. And then I wondered if you've given any more thought to opportunities to enhance returns at gateway through marketing expertise and what needs to be done there to initiate that?

Speaker 2

We don't really have that U. S. Expertise right now. And right now, we have several of our customers are really large international traders. So we definitely don't want to step on any of our customers' feet with marketing.

Speaker 2

And if we ever did trading in the terminal, it'd just be to help facilitate volumes coming into the terminal to facilitate their export activities, not really in the type of optimization around that we do currently at Hardisty or Edmonton.

Speaker 10

Yes, that makes a lot of sense. And just the last one for me, I'm kind of spitballing here, but recently we've had a pause in LNG export authorizations. What's your sense of stability in liquids exports? And there's or stated another way, do you think there's you're hearing anything about any restrictions on liquids exports?

Speaker 2

Yes, I don't think any existing terminals are at any real threat, Rob, but it may threaten some of these offshore terminals that are under the units that are under discussion, right, or initial development, because they're still going into federal waters there. So that makes it quite a bit riskier for them as far as to get all their final permits.

Speaker 10

Okay. That's helpful. Thank you.

Operator

We have our next question comes from the line of Robert Kwan from RBC Capital Markets. Please go ahead.

Speaker 11

Great. Thank you. Good morning. I just wanted to circle back with a couple of questions here on Gateway. And Steve, you talked about largely speaking, it sounds like the negotiations in terms of what you're controlling the customers is pretty well defined and you pointed to the upstream logistics and supply.

Speaker 11

So you mentioned Cactus. I guess just what other things can we look for in terms of 3rd party announcements or expansions? And just overall, what gives you confidence that these kind of things that are outside of your control will come together such that you can execute the contracts by the end of the second quarter?

Speaker 2

Well, I think we can execute the contracts now. I think that's just but we'll just have to we need to embed some options in there to allow them to increase their loading windows. And so that's probably where we'll push over the next month or 2. But one of them, I mean, there's 2 pipelines that are looking to expand. 1 is Epic.

Speaker 2

They're looking to expand, and they have pretty significant expansion opportunity, Epic does. I've heard up to 400,000 barrels. And then the other one that can expand is obviously Red Oak and Red Oak is out there right now with an open season. And so that's probably coming to conclusion very soon. And I think that has layers of expansion across it.

Speaker 2

So those are really the opportunities.

Speaker 8

That's okay. I think we all

Speaker 2

The other P66 projects.

Speaker 3

I'm sorry about that.

Speaker 11

All good. And then just on the gateway contracts themselves, you've talked about thinking that you can either keep the rates the same or potentially increase them, but there's a lot of moving pieces here as you think about the extra loading windows, you think about that you're moving spot right now. I guess just as you distill it down to what you think the EBITDA coming out of Gateway will be, when everything is extended, Is it are you still thinking it will be very similar? Do you think that there's a potential for an uptick? Or how should we just think about the total impact to EBITDA?

Speaker 2

I mean, there's so many unknowns there as far as increasing. I said even without any expansion, there's an opportunity without any real capital besides maybe the Cactus connection, which is pretty minimal capital. I think we can grow that 15% to 20% without any 15% to 20% if we're successful. And I think there's even upside on top of that. But I would be I wouldn't want to be too optimistic this early on anything above 15% to 20%.

Speaker 11

Okay. And on the deepening project, should we think about that as a growth project or are you just going to be looking at as a capital recovery rider?

Speaker 3

I think it's a growth project, right?

Speaker 2

We're going to look to increase MVCs, which help backstop it. But we know they're going to load more volume on those ships and because that's a restraint right now. And so there's definitely a payoff for that project. It's probably in the 3 to 4 times type of payout. Okay.

Speaker 11

That's great. I appreciate the commentary. And Steve, all the best in retirement.

Speaker 2

Thank you, Robert.

Operator

We have our next question coming from the line of Ben Pham from BMO. Please go ahead.

Speaker 12

A couple of follow-up questions on that last topic of gateway and every contracting. You mentioned the potential 15% to 20% increase in EBITDA, and I think that's what I heard. Do you expect that to happen starting Q2 'twenty four? Is that your outlook in 3 years' time? And do you expect that from a starting point of your record volumes in March?

Speaker 12

Or should we normalize for the strength in the spot volume side of things?

Speaker 2

I think it will be a gradual thing. I think we'll see some of it hopefully just through this increased volume throughput that I talked about in March and hopefully that will carry on through really the Q2. And then I think we'll see an I believe we'll see an uptick in the second half. And then I think it's really on a quarterly basis, I believe we'll see growth in that EBITDA business, Ben. I think I fly out Sunday to go down there and talk to some customers.

Speaker 2

So we're continuing to press forward with this opportunity.

Speaker 12

Okay. So it's mainly it looks like it's a mix of replacing existing contracts and it's not a situation where you get the

Speaker 2

It's adding additional throughput through by adding additional load windows. So loading more ships in a month on a contracted basis. And then this one of the big surprises is that we're loading far more VLCCs, which gives us an incremental throughput volume on every ship that we do load. So I believe we had a record in December where we loaded, I believe, how many VLCCs, Omar, in December? Was it 17?

Speaker 2

Yes. 16 or 17 VLCCs, which is we didn't have that in our forecast at all. So that's one of the things that's really kind of pressing us forward and being optimistic that we'll be able to meet that 9 times or better as we move forward.

Speaker 12

Okay. Got it. And maybe switching to the search process now and your announced retirement. You've mentioned in earlier comments the board maybe preference for a Canadian candidate. Well, I guess we'll wait and see.

Speaker 12

I mean is that suggesting post gateway recontracting that there's maybe a suggestion of the Canadian business reinvigorating with growth? And to that, can you remind us that the U. S. Side of things, how staffing has been involved and your lieutenants down there since you started in the Permian region again?

Speaker 2

I wouldn't read a lot into the lean other than 75% to 80% of our business is here in Canada. And so that's and those relationships with our existing customers here, very important. And I think that's probably the leaning force why they would look for a Canadian first. And then as far as my staff down in the U. S, we were able to recruit a very good commercial person that had been the commercial person for the terminal.

Speaker 2

And then we've added some existing commercial support to really beat that up. And so that commercial team is very focused on continuing to drive and develop opportunities around gateway.

Speaker 12

Okay. And then maybe just a last one, DRU Phase 2, how do you think about that project now of record volumes in Western Canada, rail picking up quite a bit as well?

Speaker 2

That's a tough one, Ben. I would say that is cooled. Our discussions around that is cool, especially with TMX coming on and our customers really want to understand how TMX impacts the market on a long term basis. Also, as upstream continues to develop these brownfielded projects and as the Clearwater play continues to enlarge and develop, I do think long term that 3 years out, 2026 is probably the opportunity where we may be able to actually re contract or not re contract, but add a DRU as the TMX pipeline fills up and potentially even add storage down 4 or 5 years down the road too. So they're at Hardisty again.

Speaker 2

Yes, we are optimistic in Canadian crude oil production.

Speaker 12

Okay. That's great color, Steve. Thank you.

Speaker 2

Thanks, Ben.

Operator

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Ms. Pollock for final closing comments.

Speaker 1

Thank you, Lara. Thank you for joining us for 2023 Q4 and full year conference call. I'd like to remind you that there is supplementary information available on our website, gibsonenergy.com. And if you have any further questions, please reach out

Operator

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Key Takeaways

  • Infrastructure segment EBITDA reached a company record of $494 million in 2023, reflecting a 16% compounded annual growth rate since 2017 pro forma the Gateway acquisition.
  • Consolidated adjusted EBITDA of $594 million and distributable cash flow of $386 million set all-time highs, driven by Gateway contributions and strong legacy performance.
  • Leverage ratio exited at 3.1x and payout ratio of 61% remained below target ranges, supporting a 5% dividend increase to $0.41 per share per quarter.
  • Gateway Terminal is performing ahead of initial expectations, with ongoing negotiations to extend and secure new contracts at current or higher rates by the end of Q2 2024.
  • Gibson’s 2024 growth capital budget totals $150 million, focused on new tank construction at Edmonton, Hardisty and Moose Jaw, plus $25 million in Gateway enhancements.
AI Generated. May Contain Errors.
Earnings Conference Call
Gibson Energy Q4 2023
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