Gibson Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the 2024 Second Quarter Gibson Energy Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Beth Pollack, Vice President of Capital Market and Risk. Please go ahead.

Speaker 1

Thank you, Marvin. Good morning, and thank you for joining us to discuss our Q2 2024 operational and financial results. Joining me on the call this morning 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 and pro form a financial information, which 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.

Speaker 1

Descriptions and qualifications of such measures and information are set out in our investor presentation available on our website and on our continuous disclosure documents available on SEDAR Plus. Now I would like to turn the call over to Steve.

Speaker 2

Thank you, Beth. Now before I begin, I want to take a moment to talk to thank really all the Gibson employees, both present and past, the Board and all our stakeholders for the opportunity to have led this organization for the past 7 years. I'm proud of what we've accomplished and know I'm leaving the organization in a great spot and in good hands with Curtis. I've known Curtis personally for a number of years and have seen firsthand his ability to grow a business and create shareholder value. I look forward to the next chapter for Gibson, this time as just as a shareholder as Curtis continues to execute, enhance and grow our successful infrastructure strategy.

Speaker 2

This quarter, Sean will speak to the financial results, and I will focus my remarks on the commercial developments around our assets. On July 15, we announced the extension of a long term contract at our Gateway Terminal underpinned by high quality investment grade counterparty. This development is the 1st step in demonstrating the value Gateway brings to our customers and aligning a high quality of cash flow at our Gateway terminal with those of our Canadian infrastructure assets. In addition, we also announced the sanctioning of the Cactus II connection, which we expect to be in service in Q3 2025. This project will provide our customers with access to approximately 700,000 barrels a day of incremental Permian supply.

Speaker 2

As the company looks forward, during the second half of twenty twenty four, we still expect to deploy approximately $150,000,000 in growth capital, with the majority directed towards our Canadian infrastructure assets, predominantly Edmonton, and the rest at Gateway. Construction of the 2 tanks at our Edmonton terminal continues to progress as planned with completion expected to be in late 2024. These tanks will support Cenovus with their shipments on the TMX pipeline by providing them with 870,000 barrels of storage capacity. Construction is supported by a 15 year take or pay agreement. With TMX now operational, we remain in discussions with other customers on ways we can effectively support them during this pivotable period moving forward.

Speaker 2

With respect to Gateway, we continue to perform ahead of our expectations. Volumes remain near all time highs, consistent with that Q1. Further, our contracting discussions all made in the extension of our long term contract with a valued partner at our facility, which met our previously communicated commercial objectives related to rate and tenure. We still expect to be in a position to provide additional news on the second contract on a 5 to 7 year term atoraboveexisting rates in a relatively near term. On the ESG front, yesterday we released our 2023 Sustainability Report, which highlights the progress we have made thus far towards our sustainability goals.

Speaker 2

Other achievements during the quarter that we are proud of include being recognized as one of Alberta's top 80 employers and Canada's best diversity employers for the 3rd year in a row. To conclude, Gibson has delivered another strong quarter. I will now pass the call over to Sean, who will walk us through our financial results in more detail. Sean?

Speaker 3

Thank you, Steve. Before I jump into this quarter's financial results, I wanted to take a moment to thank you on behalf of the organization for your contributions to Gibson. I'm proud of what we've accomplished together and as a company as we established and delivered on our infrastructure strategy. I'm also very excited about what is to come for Gibson. I recently had the pleasure of meeting Curtis and I'm looking forward to working together as we continue to deliver on our infrastructure strategy, enhance and grow our business, and most importantly, create shareholder value.

Speaker 3

Now turning to our results. We delivered another strong quarter to finish off the first half of twenty twenty four with adjusted EBITDA of $159,000,000 and distributable cash flow of $101,000,000 In our Infrastructure segment, we reported $153,000,000 of adjusted EBITDA in the second quarter of 2024, above our previous record set in Q4 of last year and $43,000,000 higher than the Q2 of 2023 after normalizing for the impact of last year's $17,000,000 environmental remediation provision. This infrastructure growth was driven primarily by the addition of our Gateway terminal, which reported another strong quarter. Q2222024 Infrastructure segment results were also consistent with Q1 2024, demonstrating the strength and stability of our high quality infrastructure cash flows. Turning to the Marketing segment, adjusted EBITDA of approximately $20,000,000 was in line with previous guidance.

Speaker 3

Though it represents a $15,000,000 decrease relative to Q2 2023 and a $14,000,000 decrease relative to the Q1 of this year. These results were largely driven by fewer storage based opportunities and tighter heavy differentials impacting Moose Jaw feedstock pricing. Looking forward, as we sit here today, our expectation is that the environment for our marketing business will remain very similar to what was experienced in the Q2. As such, we'd expect Q3 adjusted EBITDA to be at or slightly below $20,000,000 but are hopeful additional opportunities present themselves within the quarter and we will be positioned to take advantage of them to the extent they do. With this guidance, we would also reiterate our long term annual guidance of $80,000,000 to $120,000,000 for 2024.

Speaker 3

To complete the discussion of results for the quarter, let me briefly walk through a couple of items impacting distributable cash flow. The Q2 2024 distributable cash flow result of approximately $100,000,000 was a $19,000,000 increase from the Q2 of 2023, with the majority of the difference attributable to higher infrastructure EBITDA is the Gateway acquisition, which was only partially offset by higher finance costs. We also maintained our commitment to our financial governing principles with leverage of 3.5 times within our target range of 3 times to 3.5 times when adjusting for a full year of gateway. Our payout ratio of 63% was well below our 70% to 80% target range, demonstrating the sustainable nature of our dividend. Looking at our ratios on an infrastructure only basis, our payout ratio is approximately 71%, well below our target of 100% and leverage of 3.8 times is also below our target of 4 times when accounting for a full year of Gateway adjusted EBITDA contribution.

Speaker 3

Our low leverage, ample liquidity and staggered debt maturity profile continue to provide us with significant financial flexibility. In summary, Gibson delivered solid results in the Q2 of the year. Record infrastructure results ahead of the previous high watermark achieved in Q4 of 2023, which demonstrate the strength and stability of our business. Marketing adjusted EBITDA of approximately $20,000,000 was in line with our previous guidance and support full year contributions within our $120,000,000 run rate. And subsequent to the quarter, we announced a long term contract extension at Gateway with a high quality investment grade counterparty, which further enhances the quality of our infrastructure cash flows as well as the sanctioning of the Cactus II pipeline connection, which will expand supply available to our customers at the facility.

Speaker 3

I will now turn the call over to the operator to open it up for questions.

Operator

Thank you. At this time, we'll conduct a question and answer session. Our first question comes from the line of Benjamin Pham of BMO. Your line is now open.

Speaker 4

Hi, thanks. Good morning. Maybe first to start off on gateway recontracting. Can you comment on potential timing of the second renegotiation? And then can you confirm your I know you mentioned the weighted average went up about half a year.

Speaker 4

Can you confirm the where things are right now on an overall basis at 3.5% now?

Speaker 2

So I'll start just on recontracting. We remain extremely positive with recontracting additional party. Now timing is always going to in the customer's hands and in our hands. So exact timings, we're not going to provide that now. But we've remained very positive that in the near term, we will execute this agreement to extend and add potentially add additional volume in the future at the same rates.

Speaker 3

Yes. And Bam, with respect to weighted average contract life at the facility, if you recall when we purchased it, which was almost a year ago, exactly that it closed, we had about a 3.5 year average term. With the passage of a year, we would be naturally at about 2.5 years and in conjunction with the release that contract extension that we announced moved it up by about half year. So as we sit here today, we're about 3 years.

Speaker 4

Okay, got it. And the Cactus II sanction and CapEx, does that in any way change your view on the share repurchases opportunity towards the end of the year?

Speaker 3

No, it doesn't at all. I mean we if you recall, our capital guide for the year for growth capital was 150,000,000 dollars Of that at the time, we talked about approximately 125,000,000 of that being in Canada and sanctioned and the other 25 expected to occur south of the border predominantly at Gateway and that other 25 was really Cactus. So I mean from a capital allocation messaging, this has been in the plan and budget for the entire year.

Speaker 4

Okay, got it. Okay, thank you and then all the best, Steve.

Speaker 2

Thank you.

Operator

Thank you. One moment for your next question. Our next question comes from the line of Robert Kwan of RBC Capital Markets. Your line is now open.

Speaker 5

Great. Thanks. If I can just start back with Gateway again. In terms of the recently extended contract, was there anything unique to that deal such that it wouldn't really just form the basis for all of your future contract extensions?

Speaker 2

I wouldn't say there was anything unique. It was kind of if you look back over the beginning of

Operator

time, I

Speaker 2

mean, bringing forward these contracts and extending these contracts 2 years prior at the same prior to the contracts expiring is really unusual in the commercial world. Generally, it's within a year. So to actually execute that contract probably a year and a half earlier than we anticipate than is normal is just shows the strength of the terminal and executing and at really the same exact terms, just adding term existing term length. All of our contracts have a little bit different fees. Robert, all of our contracts have a little bit different fees.

Speaker 2

They're all not a cookie cutter. They're all not the exact same contract. They're kind of tailored to our customers.

Speaker 5

Got it. You previously talked about some of the carrots of just getting people to extend the contracts early. Can you also just are there other things that maybe create a bit of tension or just the sticks to get deals over the goal line? Like for example, do you need to get Cactus that connection done so that there is at least the, I don't know, for lack of better term threat of additional supply trying to get into the terminal? And then do you have the ability to layer in a contract with a different customer after an existing one expires?

Speaker 5

And does that create tension for somebody just to extend term?

Speaker 2

So when it comes to Cactus, I think strategically that's a very important connection to the terminal, especially for our customers. We have, I think, currently 6 or 7 customers at the terminal. We continue to look for additional customers at the terminal, just to add liquidity and drive, that competitive tension that I think you were talking about there, Robert. The Cactus providing that extra supply to those customers is critical as we go forward.

Speaker 5

Got it. If I can just finish with a quick one. Do you have any interest in owning additional rail exposure at Hardisty?

Speaker 3

Go on. I mean, we

Speaker 4

this is

Speaker 3

a fairly specific question, but I mean at the end of the day we're actually really happy with the rail exposure we have. So we're very comfortable with that. We think the facility is a fantastic facility. It's a necessary part of the DRU value chain, which we continue to think is incredibly positive for the company. So we are very fine in a status quo environment.

Speaker 3

At the same time, we do see the option value through a rail facility. So anything like that would have to make absolute sense from an economic perspective and create real value for our shareholders. So I mean we are very comfortable with our existing position. We're comfortable as we move forward with that existing position and would have to consider options as they present themselves.

Speaker 5

Okay, that's great. Thank you very much. And Steve, all the best in retirement.

Speaker 2

Thank you, Robert.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Robert Catellier of CIBC Capital Markets. Your line is now open.

Speaker 6

Hey, good morning. I just wanted to dig into the marketing business a little bit here. Has there been any appreciable change to your long term marketing outlook? I know you just reiterated those numbers for 2024, but I'm just wondering if TMX being placed into service has any impact on that long term outlook?

Speaker 2

Robert, I mean, we've always been at 80 to 120. And I think that's still a good number going forward. We haven't had anything really drive major upsets in the market over the last Q2 or even in the Q3 going forward. So when there's not a disruption in the market and a lot of opportunities for the traders, we can be in that $8,000,000 that $20,000,000 mark through a quarter. But as opportunities do develop, we can pop into a $30,000,000 or $35,000,000 or $40,000,000 in a quarter.

Speaker 2

And we see those opportunities moving forward, Robert.

Speaker 6

Okay. Can you just spend a minute on the it is a rather minor variance to your previous $20,000,000 guidance and certainly within the range of a normal forecast there for this type of business. But you were a little shy of the $20,000,000 guidance for the quarter and you're carrying a little bit higher NGL and crude inventory at quarter end. Can you explain what's going on with those two dynamics?

Speaker 2

Yes. I would when you look at the market, right at 20%, we said 20% or above, we came in at 19.7% in our S20%. I would say, we had expected most of the inventory to actually have sold off through the quarter. But what happened is the second is the Q3 actually weakened the price and as it weakened the prices gave us an opportunity to do some tank rolls into the Q3, not at really large margins, but it did give us some opportunity to do tank rolls into the quarter, which did which even though our inventory was down quarter on quarter, it did we did come in above on our inventory, Robert.

Speaker 6

Okay. So it sounds like a question of timing. Just on the waste to energy feed study, is there anything you can update us on there? Has that what have you learned? And what are your expectations in terms of finalizing the feed?

Speaker 6

And is FID still expected early 2025?

Speaker 3

Yes, Rob. Sean here, Robert. Really no update on where we stand on that. We continue to progress the FEED.

Speaker 5

As I think we've talked

Speaker 3

a bit before backstop by long term contracts, we like the stability of cash flows we have from that. But from a timing or update perspective really, still relatively early stage. As we sit here today, we're going to progress through the feed, progress through the year, make sure that it gets 100% commercially secured. We're about 80% right now. And then certainly hope that we'll have more of an update on next quarter's call.

Speaker 3

But as we sit here today, really we continue to work on it, not much of an update from previous.

Speaker 6

Okay. Last question for me. I just wonder in light of the solid financial position post gateway and some of the re contracting starting to be finalized. Is there any thought to being given to a higher payout ratio as opposed to share repurchases or pursuing projects that might be viewed as a bit of a step out?

Speaker 2

No, no, I don't think so.

Speaker 3

I mean we're comfortable. Our payout ratio range is our target range is 70%, 80%. We've actually as you know lived probably closer to that 60% for a while. As we think about generating excess cash flow to support growth capital and not necessarily step out growth capital. I think we have been very disciplined as we've deployed growth capital certainly through our history.

Speaker 3

So I mean our focus continues to deploy growth capital on long term contracted assets backstopped by investment grade counterparties. Really nothing has changed there and we'll continue to do that. At that sort of 60 ish percent to 70 ish percent payout ratio, I think, creates the appropriate balance as we look at our cash flow waterfall, as we also balance the fact that we very much and I think the Board does as well believe in steady annual dividend growth. So, no real plan or intent at this time to flex the payout ratio up. We think it's appropriate for our business and as we look at our overall cash flow waterfall and capital allocation priorities.

Speaker 6

Okay. Thanks very much and enjoy your retirement, Steve.

Speaker 2

Thank you, Robert. I hope to.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Robert Hope of Scotiabank. Your line is now open.

Speaker 7

Good morning, everyone. Steve, on the Q4 call, you mentioned that you could grow EBITDA at South Texas by 15% without any capital. Can you just update us on where we are there just given what you're seeing with the contracting environment as well as some of the other initiatives at the terminal?

Speaker 2

Yes. So most of that growth is by adding additional windows. I think we right now adding those additional windows, we expect to add some of that to this next contract that's in current negotiations. We've also brought on some month to month type contracts just to provide some additional income coming into the terminal and also bring in new customers in the terminal. Probably a couple of the new customers that we're targeting currently or buying FOB FOB loaded on that loaded out of our asset over the last several years and they want to actually be involved in the terminal now.

Speaker 2

So we are starting to work with them to develop opportunities for long term contracts in the future.

Speaker 7

All right. That's helpful. And then can you provide an update on the deepening project where you are in the engineering and potential capital costs and when that could happen?

Speaker 2

That's a very I mean, that's an exciting project. It's a project that very much are doing the engineering work on right now. We do we're getting close to understanding the cost there. And we believe that will be that will really have 2 income streams. The first income stream really is some contracts actually adding additional MVC to those contracts.

Speaker 2

But as Beth I was talking to Beth yesterday and she came up with a really great analogy on deepening the terminal. So what happens here is currently we can load a little over 1,200,000 barrels onto a ship. And when we deepen the terminal, we'll be able to load over 1,400,000 barrels on a VLCC. So the way Beth explained it and I loved it was when you go to a gas station, do you just fill it up to 3 quarters or do you fill it up, right? So what we've seen, we did do a small deep theme project, additional foot and what we've seen is they use that foot every time they load.

Speaker 2

So that incremental 50,000 barrels they use every time they load. And so we believe that the terminal as far as loading VLCCs will go from 1.2 to 1.4. And VLCCs are over 65% of our loading. So that's one of those ways that we really see income moving forward.

Speaker 7

All right. Thank you and all the best. Thank you, sir.

Speaker 2

Thank you. Thank you, Robert.

Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to Beth Paula for closing remarks.

Speaker 1

Thank you, Marvin, and thanks everybody for joining us for our 2024 Q2 conference call. Again, I'd like to note that we have made available certain supplementary information on our website, gibsonenergy.com. If you have any further questions, please reach out to investor. Relationsgibsonenergy.com. Thank you, and have a great day.

Speaker 4

Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Powered by Quartr

Key Takeaways

  • Long‐time CEO Steve Spalding announced his retirement after seven years, handing over leadership to Curtis, whom he praised for his track record in growing businesses and creating shareholder value.
  • Gibson extended a long‐term contract at its Gateway Terminal with an investment‐grade counterparty and expects to finalize a second extension at above existing rates in the near term, as volumes remain near all‐time highs.
  • The sanctioning of the Cactus II pipeline connection—expected in service by Q3 2025—will provide customers access to ~700,000 barrels per day of incremental Permian supply.
  • In Q2 2024, the Infrastructure segment delivered a record EBITDA of $153 million, Marketing EBITDA was $20 million, distributable cash flow reached $101 million, leverage stood at 3.5×, and the payout ratio was 63%.
  • Gibson plans to deploy approximately $150 million of growth capital in H2 2024, primarily on two Edmonton tanks under a 15-year take-or-pay TMX agreement and the remainder on Gateway projects.
AI Generated. May Contain Errors.
Earnings Conference Call
Gibson Energy Q2 2024
00:00 / 00:00