Gibson Energy Inc

TSX:GEI

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Gibson Energy's First Quarter 2020 Conference Call. Please be advised that this call is being recorded.I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President, Strategy, Planning and Investor Relations. Mr. Chyc-Cies, please go ahead.

[Mark Chyc-Cies]

Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our first quarter 2020 operational and financial results.On the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive Officer; and Sean Brown, Chief Financial Officer.Listeners are reminded that today's call refers to non-GAAP measures and forward-looking information. Descriptions and qualifications of such measures and information are set out in our continuous disclosure documents available on SEDAR.Now I'd like to turn the call over to Steve.

[Steven R. Spaulding, President, CEO & Director]

Thanks, Mark. Good morning, everyone, and thank you for joining us today. I hope everyone on the call and their families are healthy and doing well. It would have been very difficult to predict the changes across the world at our last earnings call in February, COVID turning into a global pandemic and largely shutting down major parts of the world economy. This has created, undoubtedly, the most challenging environment in my 30 years in the industry.Our first concern is protecting our employees and contractors, their families and the communities we're part of. At peak, we had 32 employees in self isolation, primarily due to travel. Currently that number is 5. I'm pleased to say we have no confirmed COVID-19 cases within our organization today and we continue to safely operate all our assets.We began the transition of operating the business remotely in the second week of March, and all office work was moved to people's homes on March 17. At our terminals, we split our control room staff into 2 separate groups and are operating from both our backup control room and primary control room to reduce interaction between staff. We put social distancing and other practices in place to ensure we can safely continue construction of the tankage at the Top of the Hill at Hardisty as well as begin civil work for the DRU.At Moose Jaw, we plan to begin our annual turnaround next week, which we delayed 1 month and extended the time to ensure a safer environment for our employees and contractors on site.With the steps we've taken, we're confident in our ability to continue to operate our assets and our business.As a leadership team, our focus is not just business. As always, we are focused on the well-being of our employees. We have put an emphasis on communication and encouraging our employees to take care of themselves and their families. Overall, I believe the morale at Gibson remains very positive given the circumstances, and we're working well as a team. One example of just that was our U.S. team. They started a head-shaving challenge for charity. It caught on through our internal chat. And within a couple of days, we were able to raise over $150,000 for charity focused on COVID-relief, including both our CFO, Mr. Sean Brown, and our Chief Administrative Officer, Mr. Sean Wilson, both shaved their heads. This is a great reflection of our Gibson culture.From our business standpoint, Gibson today is a very resilient company. Through the changes we have made over the last 3 years, we've gone from being the most exposed to what I believe to be the best-positioned within our peer group to weather this business environment. With our strategic shift to focus on crude oil infrastructure, we disposed of all of our commodity-sensitive businesses by transforming into an infrastructure company. Heading into this downturn, our terminals were about 70% of our business and 80% of our cash flows were take-or-pay and stable fee-based. Only about 5% were those more sensitive midstream gathering assets. These are our pipelines and our small terminals in Canada and the Pyote system in the U.S.We're also very strong financial position. Coming into the downturn, we had the lowest leverage and payout in the peer group. Our capital program is fully funded with a cushion. We have access to ample liquidity. And as I said before, this is a challenging time for our industry and our customers. But I have no doubt we have transformed this company to weather this storm.Though it might get lost in the focus on the present, the strength of our underlying business was visible in the first quarter. We set a new high for distributable cash flow on a continuing basis. More importantly, it was driven by infrastructure, which has grown over 30% in the last year. Sean will provide more color on the first quarter, our financial outlook and our financial position.I would like to go into more detail than normal about what we are seeing in our business through this downturn.At Hardisty, we're seeing a reduction in throughput volume. This includes volumes coming in from the oil sands as well as conventional volume from our pipelines and our truck rack. We continue to monitor our customers' plans around shut-ins.Hardisty and Edmonton outperformed our expectations in the last quarter. However, we do expect the producer shut-ins to impact margins across the next 2 quarters. When you combine the outperformance with the weakness, we expect to be right around what we budgeted for, for the full year. We've done some sensitivity analysis around the impact of a reduction in third-party volume and believe the impact will be modest. We estimate a 20% -- a 25% decrease in oil sands receipts would equate to a $1.5 million to $2 million reduction in segment profits per quarter.I would note today that our terminals, we've not had any customers approach us regarding a force majeure. Given how valuable storage is right now, I would be very surprised if the customer wanted to go that route. We have had a lot of short-term interest in storage. However, we are 100% leased. Based on our customers at our pipelines and small terminals, we do expect to see meaningful reductions in this part of the business. For context, this is about 5% of our EBITDA.Our Viking pipeline is underpinned by a percentage of take-or-pay contracts. Also, we see the Viking well is among the most economical in the basin. Hence, we currently expect shut-ins to be limited on the Viking Pipeline. That said, we don't expect to see much drilling activity and volumes will continue to decline from current levels until activities recover.On the small terminals, which really help us drive conventional volumes to our main Hardisty and Edmonton terminals, we've seen a decrease in volumes and expect further decrease based on nomination. There is a potential for volumes on these small terminals and pipelines in Canada to be down as much as 50%.In the U.S., contributions from Pyote was limited in the first quarter and we expect volumes will increase over the balance of the year as several well and battery tie-ins are completed. We currently don't expect major shut-ins from our shippers. We do believe there will be weakness to the gathering business. However, it is expected that that will be offset by the upside in the marketing business around our asset.At Moose Jaw, the current environment is challenging. [ Sell ] volumes have decreased and margins are compressed. And as I've mentioned earlier, we will be having the extended turnaround this year to reduce COVID-related risk. As a result, we expect Refined Products to be especially weak in the second quarter and look for a recovery at some point in the second half. Given all the variables at play, it's very difficult to predict how and when market for our products will normalize.Speaking to some of what we're seeing, many of our roofing flux customers have slowed down production under COVID-19 mitigation. Typically, roofing flux is driven by weather in the U.S. We would expect demand to normalize in the second half of the year. We still expect we will see paving season this year.One upside to our view would be if we saw stimulus through infrastructure spending. We expect demand for our light end will be tied to distillate crack spread.In all this, this is a part of our business where we need to remain agile for what we see in the product market. Right now we are running the facility all out ahead of the turnaround to take advantage of inexpensive crude and filling our tanks and tank car fleet with products.Looking out through the rest of 2020, we continue to expect Refined Products to remain profitable after all payments on its fixed cost. But the contribution to the marketing will be muted versus recent years. However, despite the expected contribution from Refined Products, we still anticipate the Marketing segment to contribute over $100 million in segment profit this year or the midpoint of our long-term run rate.We had a strong start in the first quarter. Importantly, because we run a flat book, we did not get caught by the substantial shift downward in WTI. With the compression of spreads most of the location and quality-based opportunities we saw in Q1 are no longer available. Instead, we're seeing opportunities created by significant volatility as well as steep contango in futures curve.With the tankage that Marketing has available at Hardisty, Edmonton and Moose Jaw, we will be looking for opportunities in this environment.We believe there still needs to be more shut-ins in North America to better align supply and demand as storage fills up. Our basis will be to remain conservative even in the context of our strong position today.On OpEx and G&A, we've taken a hard look at our costs across the organization. Activity will decrease because of the shut-ins on some of our assets and we will delay certain work. In our review of G&A, we've identified certain cost savings as a result of working from home. Certainly business travel has been impacted. We have identified around $10 million to $15 million in cost savings from OpEx and G&A.We also need to maintain the integrity and safety of our assets. We thoroughly reviewed maintenance capital and were able to reprioritize or defer a number of projects. Unfortunately, we had an unbudgeted project to replace a river crossing costing us $10 million. With these actions and the unbudgeted projects, we still expect to be within our $20 million to $25 million target for the year.On the growth capital front, we remain fully funded with a cushion on top of that. We have the liquidity to spend that capital within our governing financial principals. Still, we've sought to remove or delay effectively all discretionary spending. Given the highly contracted nature of our capital program, there was limited room to cut within the $300 million budget. Most of the spend this year is on the DRU and the 3 tanks at Hardisty. As these projects are backstopped by high quality counterparties under long-term contract terms at very attractive rates of return, and given the demand for tankage right now, that's the type of capital you would choose to cut only if you did not have the means to spend it, and we certainly did.In the U.S., our growth capital program was weighted in the front end of the year. Capital spend from this point forward will strictly be to complete late-stage projects and fulfill contractual commitments. In all, we expect growth capital to be around or slightly below that $300 million figure.As far as the potential for sanctioning additional capital through the balance of the year, a number of commercial decisions and discussions have been really paused. The exception would be at our terminals. We continue to be in discussions for additional tankage and supporting infrastructure and are opportunistic to announce those this year. These are longstanding negotiations on detailed contract language. We're also getting interest in tankage at Wink, though these conversations are far more preliminary. In all, we still expect to be within that 2 to 4 tankage range.At the DRU, we are full-go on the first 50,000 barrels a day with ConocoPhillips. The binding commercial agreements were finalized at the start of the year. We have all the regulatory approvals from the Province and we started preconstruction work at the site. Discussions to expand the initial phase to 100,000 barrels has paused in the current environment. Our expectation is those conversations will resume once we have visibility on how the recovery will look. That likely pushes the sanctioning of future phases into 2021. We are very comfortable with the returns on the initial phase. That capital is being deployed within our 5x to 7x EBITDA build multiple target and also locked in long-term for both our HURC Unit Train Facility and our tankage.Given our conservative approach, it's going to be very hard to deploy capital unless it's backstopped by investment grade counterparties under a long-term take-or-pay contract. Perhaps we will find some high return projects. But overall, we expect very limited spend outside of our terminals unless activity recovers.One last thing I want to mention in my prepared remarks is our focus on ESG has not changed despite the downturn. ESG is a journey. And if you stop moving forward, we’re not going to keep up with the shifting social and market expectations. For this reason, we are very excited to issue our inaugural Sustainability Report. I would encourage everyone on this call to review the report to see the progress we've made. On this call, we're focusing on the operational and financial aspects of our business. But I hope you will join us in our virtual AGM later today, where I will address sustainability in more detail.In summary, our first priority is to keep our people and their families safe and to ensure the continued operation of our assets and our business. I'm very pleased with our response to COVID, especially the positive attitude and engagement we are seeing from our employees and contractors in this very difficult time. Our business is resilient. We certainly did not see this downturn coming. But as a result of the changes we made to our business over the last 3 years, we are very well positioned. 70% of our EBITDA is from our Hardisty and Edmonton terminals. These are primarily long-term take-or-pay agreements with high quality investment grade counterparties. We remain confident that Marketing will be over $100 million for 2020. Moose Jaw is expected to be weak, but we have multiple strategies that drive profitability in our marketing business. Our financial position is very strong. We are fully funded and leverage and payout both remain below our long-term targets.I will now pass the call over to Sean. Sean?

[Sean M. Brown, Senior VP & CFO]

Thanks, Steve. Similar to Steve, I would like to focus my comments on where we are today and what we are seeing. But I think reviewing the quarter briefly will help ground expectations for the business over the next few quarters.As Steve mentioned, we had a very strong first quarter, setting new high-water marks from both the Infrastructure segment profit and distributable cash flow from continuing operations. Looking into Infrastructure in a bit more detail, segment profits of $98 million was a bit ahead of our expectations. A small part of that was at Hardisty where we typically don't see a lot of variance in earnings due to volumes, but this quarter we saw at least 1 customer move volumes well above normal levels, incurring additional throughput fees. We also saw some spot trains loaded at the HURC Unit Train Facility. I would add that at our HURC Unit Train Facility, we will continue to collect on our take-or-pay agreements in any environment, though we will likely see very minimal use of the facility until shut-in volumes are back online.While a minor impact to the quarter, we certainly saw contribution from our pipelines and other terminals decline into March, and, as Steve mentioned, that will likely become more pronounced next quarter. We also had a positive non-cash adjustment related to the accounting of 1 of our equity investments resulting in a benefit of approximately $4 million. Though I would note, that could reverse in the future.Turning to our expectations for the second question, when you take into account the items I just mentioned as well as the extended turnaround at Moose Jaw that Steve spoke to, our expectation is for Infrastructure to come in between $80 million and $85 million. If you think sequentially from the first quarter results of $98 million and adjusted the $4 million non-cash adjustment, include a roughly $5 million decrease at Moose Jaw due to the turnaround, up to a $5 million decline at our pipelines and small terminals, and potentially small reduction at our terminals, that gets you to the $80 million to $85 million figure.I would note, though, that the second quarter will likely be the low point for Infrastructure and we would expect a somewhat steady recovery through the balance of the year. Overall, we expect Infrastructure will be at or around $360 million or modestly below that for the year. For context, that would put us at the low end of original range of $360 million to $380 million in Infrastructure segment profit for the year. With the 3 tanks coming into service at the Top of the Hill in the fourth quarter and assuming a recovery in volumes, we continue to expect Infrastructure would reach a quarterly run rate of approximately $100 million exiting 2020, or $400 million on an annual basis.The Marketing segment's first quarter results of $36 million, was very much in line with our expectation of the upper end of a $30 million to $40 million outlook. Most of the contribution was from the crude oil business, as that group was able to take advantage of various opportunities both before and after the turn in crude prices. At Moose Jaw, we had a reasonable start to the year, but, as Steve spoke to, we saw a meaningful impact from decreased refined product demand in March. In terms of our outlook for Marketing, right now, based on April results and expectations for May and June, we would expect to be at the upper end of our $20 million to $30 million range for the second quarter, or potentially higher. To the extent that we move below the upper end of our range, it would be driven by timing where the benefit of some of our positions would not be reflected in segment profit until the third or fourth quarter. From a full year perspective, as we sit here today, we would estimate that we will be at or above $100 million of the year, which would put us in the top half of our $80 million to $120 million long-term run rate.We are witnessing some unprecedented events in the market. And with that kind of volatility, there's a much greater probability that something we didn't factor into our outlook pushes us out of our range within a quarter. That said, we still want to provide as much visibility into our business as we can.When taking into account first quarter performance and combining both the updated Infrastructure and Marketing outlooks provided, you will see that we expect little to no impact to key metrics as a result of COVID-19 and the market downturn. This includes combined segment profit, adjusted EBITDA, distributable cash flow and, implicitly, our payouts and leverage ratios. Infrastructure is expected to be at the bottom end of original range or modestly below, and Marketing should come in at the upper end, resulting in little to no impact on a net basis.Returning to our results. G&A in the quarter was $9 million, which is effectively in line with our targeted $10 million a quarter run rate. As Steve mentioned, we are looking at all costs, but it's too early to assume a lower rate as, while there are clearly savings on items like travel, there are also additional costs in the COVID environment to facilitate working from home.Quickly working down to distributable cash flow on a sequential basis, the first quarter was $10 million above the fourth quarter of 2019. Replacement capital of $6 million in the first quarter was $4 million lower. This was offset by current taxes being $5 million higher. We also had $7 million of net non-cash changes related to adjustments for our equity investment and for foreign exchange included within segment profit.Given our distributable cash flow this quarter was $3 million above the first quarter of last year, the payout ratio remains flat to year-end at 62%, which is also well below our 70% to 80% target range. Similarly, our debt to adjusted EBITDA remained at 2.7x, well below our 3x to 3.5x target.Based on our current outlook and consistent with our expectation of a minimal impact from the downturn, we anticipate that both payout and leverage will remain below or within our target ranges. Recall that as part of our financial governing principles, we want to keep our leverage on an infrastructure-only basis at or below 4x and we target the dividend payout being less than 100% on an infrastructure-only basis. We expect to remain compliant with both of these governing financial principals through 2020. And based on sanction projects currently under construction, we'll add additional headroom in the fourth quarter when we place the 3 Phase 4 tanks into service at the Top of the Hill as well as in mid-2021 when the DRU enters service.We also have access to significant liquidity that provides additional comfort in case the environment remains challenging much longer than currently expected. As the company continues to grow and given management's conservative nature, in February, we completed an upsizing of the capacity of our credit facility to $750 million and extended the term into 2025. I would note that this increase was completed pre-pandemic and, as such, was done at normal course terms and conditions and does not reflect the premium necessary for some of the liquidity facilities being completed in this market. At the end of the quarter, we're only $50 million drawn on the facility, with $55 million in cash on the balance sheet. Effectively, we have the full $750 million credit facility available to make sure we have ample liquidity and flexibility to fund our capital program without having to unduly rely on external capital at times that might not be optimal.In addition to our $750 million credit facility, we have 2 bilateral demand letter of credit facilities totaling $150 million. At the end of the quarter, we had issued letters of credit totaling $35 million, implying that our total available liquidity, inclusive of these facilities, was closer to $900 million.Speaking to another one of our financial governing principles, you've often heard me say that remaining fully funded is paramount to us. We came into 2020 with the ability to fund over $400 million in growth capital, assuming the $80 million to $120 million long-term marketing run rate. Given our outlook for capital in 2020 of about $300 million or lower, we will likely carry out some funding capacity into 2021.While it may appear conservative only a few months ago, our focus on our balance sheet, our adherence to our governing financial principles and our discipline around capital allocation has positioned us very defensively coming into this downturn. We are very pleased to be in such a position, but it was a lot of hard work to get here. For that reason, we're going to be very prudent through this downturn.We often get the question of whether we'll be looking for an opportunistic acquisition or to buy back stock. We believe that liquidity and financial flexibility are very valuable in this environment, and we will remain cautious.Another major benefit resulting from disposing of the noncore businesses and with the terminals now being the vast majority of our cash flow is that we have dramatically improved our counterparty profile. Just 3 to 4 years ago, given our business mix at the time, we had much higher exposure to smaller, noninvestment grade counterparties who, in general, are much more impacted to changes in commodity prices.With Gibson's focus on crude oil infrastructure and, more specifically, our core terminals business, this counterparty profile has dramatically improved with fully 90% of our terminals counterparties being investment grade. Even with that in mind, given the height and risk environment, it's very important to be as proactive as possible to identify potential risks before they become a problem, and address them, whether that's by securing AR insurance, requesting LCs, requiring payment upfront or, absent an alternative, making the decision to not do business with the counterparty.Given our consistent focus on our balance sheet, we are also very pleased that DBRS confirmed our investment grade rating and stable outlook last week. As you would have read in the report, they pointed to their rating being supported by our stable contracted cash flows from our infrastructure assets and our strong competitive position.In summary, we remain in a very solid financial position and are very well positioned to weather this market downturn. While many folks likely won't look into the first quarter results in detail, they do illustrate the strength of our underlying business. As we look into the second quarter, we do expect weakness in some smaller parts of our business, but overall we expect that the impact will be relatively modest. We expect that on a full year basis, there will be little to no impact to key metrics, including adjusted EBITDA, distributable cash flow, leverage and payout.We continue to check all the boxes on our governing financial principles and we expect that to continue through 2020. Payout and leverage will remain below target levels, including our infrastructure-only targets, and we remain fully funded for all our sanction capital.These are certainly difficult times for our industry and our customers and there remains a lot of uncertainty on how the next few months will play out. There are many unknowns we are still looking to better understand around parts of our business. But know that our focus will be continuing to be as transparent as we can with our investors. And above all that, know that Gibson is on very solid footing.At this point, I will turn the call over to the operator to open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Jeremy Tonet with JP Morgan.

[Jeremy Bryan Tonet, Senior Analyst]

I just wanted to touch on the contango element to the market and wanted to see what benefits that could provide for Gibson. And I think you noted that all of your storage is contracted. But I believe historically a certain amount was kept -- it was contracted internally with the Marketing arm to be used for operational purposes when there's turnaround. So just want to get a sense for what that can look like, if there's opportunity there or other opportunities in this market around these types of volatility.

[Steven R. Spaulding, President, CEO & Director]

Good morning, Jeremy. This is Steve. Yes, when it comes to the contango opportunity, you got to look at Moose Jaw. I mean Moose Jaw has product tanks and it actually has crude feed tanks. So there's probably 600,000 to 700,000 barrels of just product storage at Moose Jaw itself. And then we do have storage at Hardisty that is contracted to our Marketing organization, but it is fairly minimal. But there certainly is and has been opportunities to collect some of that contango and we expect that contango to kind of last really across the next couple of quarters.

[Jeremy Bryan Tonet, Senior Analyst]

Got it. That's helpful. And then just wanted to kind of turn towards the broader marketplace right now. And Steve, as you well know, in the recent past here, Buckeye was acquired by private equity at about 11.5x EV to EBITDA. And on Street numbers it appears Gibson is trading well below that. And then if I think about Williams, who is concerned with regards to being approached and being acquired at what they viewed as depressed levels, and so that drove them to issue certain protective measures at that point, I was just wondering if you could comment on the dynamics that you see in the market right now and especially with regards to those 2 data points.

[Steven R. Spaulding, President, CEO & Director]

Jeremy, I'll comment at first, then I'll turn it over to Sean. But I mean our job is to maximize our shareholder return. And in the end, you know, right now, we think we're doing that with our stable cash flow, with our quality of customers. How the actual market looks at us, I mean, whether or not we're undervalued or valued, we're valued at where we are today. Sean?

[Sean M. Brown, Senior VP & CFO]

Yes. Thanks for that, Steve. I think I wouldn't really add all that much to that answer. I think if you think of both those data points. I mean it's a question -- we get asked that question on both sides. Are we worried about somebody being opportunistic regarding us or would we potentially be opportunistic given relative share price performance? I think as Steve said, the management team, our job is try and maximize value for shareholders, and that's through actually keyed in on a strategy that we think that works. Right now we don't have an intent to put in place a poison pill or anything like that, if that's what you're referring to. But certainly would view at share prices as we sit today, that we are undervalued. But at the end of the day, our job is to maximize value to shareholders and that's through delivering our strategy.

[Operator]

Our next question comes from Rob Hope with Scotiabank.

[Robert Hope, Analyst]

First question's on the DRU. Just want to get a sense of how you're thinking about the longer term competitiveness on the DRU in Alberta, which could be having 3 new egress pipelines being Line 3, Keystone and TransMountain.

[Steven R. Spaulding, President, CEO & Director]

So Rob, this is Steve. We've looked at the economics. And in a normal market when condensate's trading at or above WTI, the competitiveness as far as to price is head to head with the pipeline transport fees. So it can be competitive. It is an alternative. And it's a way to actually get neat bitumen to refineries, which is more valuable than the dilbit.And then you've got to think that if those lines do go forward, that's positive for us too, because then we build tankage. We'll build tankage at Edmonton if TransMountain moves forward and we'll build tankage at Hardisty if KXL moves forward.

[Robert Hope, Analyst]

All right. And then maybe just a clarification on the Q2 other infrastructure outlook. If I understand correctly and if we're going to kind of walk from Q1 into Q2, you did $12 million in Q1, then less a $5 million outage at Moose Jaw, less the $4 million one-time item and then less $5 million of other infrastructure, that would bring you into negative EBITDA, though. So could we see, I guess the cost of Moose Jaw outweigh the revenues there? And I guess, to a lesser extent, does that bring you to almost breakeven on those smaller pipes?

[Steven R. Spaulding, President, CEO & Director]

Although we'll make money on the smaller pipes when it looks at Moose Jaw. I mean it's going to be down 6 weeks in the quarter. And when we looked at it with the producer services and Moose Jaw itself, it is going to be positive for the quarter.Maybe, Sean, you can go through kind of the walking down on the EBITDA a little bit more detail?

[Sean M. Brown, Senior VP & CFO]

Yes. So, Rob, can you walk through, I think it was just sequentially on the Infrastructure guides, is that essentially your question?

[Robert Hope, Analyst]

Yes, on the other Infrastructure. It seemed like most the weakness in Q2 will be in other.

[Sean M. Brown, Senior VP & CFO]

Yes. I mean if you look at it, I mean, Steve talked about it in his prepared remarks. If you walk down from the $98 million we had in the first quarter, you take out the $4 million equity adjustment, which we highlighted, it gets you to $94 million. Given the extended turnaround at Moose Jaw, the OpEx and around that will be elevated this quarter. So take out roughly $5 million for Moose Jaw, and so that would take you down to $89 million. And then Steve talked about on our pure terminals business probably $1.5 million to $2 million impact. That takes you down to the circa, call it $87 million, $88 million. And then the impact in the small terminal terminals business would get you into that sort of $80 million to $85 million number. So if you assume, call it a $3 million impact there, you're in $83 million, $84 million, that sort of range.

[Operator]

Our next question comes from Robert Kwan with RBC Capital Markets.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Maybe I can just roll down into Marketing to start. So you had the $36 million in Q1. And then if you just look at the guide for Q2, that kind of puts you somewhere in around the $65 million, $66 million range the first half. And then based on the annual guidance, I guess the lower end of that $100 million would be in the mid-$30s. So that would put the second half quarterly run rate, call it south of $20 million, somewhere $15 million to $20 million.And I'm just wondering, can you talk about that range versus the low end of that $80 million to $120 million kind of long term? What are some of the movements why the second half would kind of put you in that or below end?

[Steven R. Spaulding, President, CEO & Director]

Yes, Robert. This is Steve. We said $100-plus million. And that means that you would have the $20 million in the following quarters or a little less than $20 million in the following third and fourth quarters. I think we're being conservative there. We haven't had a $20 million quarter in a while, but this is a very volatile market. So we're trying to be conservative in our approach, which I believe we always have really in the out month quarters of our Marketing business.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

I guess maybe just, Steve, with that conservatism, I know this was before your time. But I'm just wondering, can you maybe just frame what you're seeing in the current environment and your current business or your current marketing kind of organizational setup versus what we would have seen in 2016 and 2017 when those years on that IFRS-adjusted basis was the lower end of the range?

[Steven R. Spaulding, President, CEO & Director]

Yes. I mean, Robert, I really don't know exactly what we did in '16 and before I showed up in '17. Their marketing strategies were considerably different than ours today and the team was considerably different than where we are today. When you look at those strategies today, we've been able to make money as the market falls, as the market goes up, as spreads widen. And I talked about it in my prepared remarks is that really we use a multiple of strategies, marketing strategies every quarter sometimes. And I think we do a very good job of running a flat book, which means that we gave you kind of the estimate of $35 million in the quarter in December. Market fell from $55 to the low teens, and we still made that $35 million. So as you can see, we have a lot of discipline in what we do.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

So I guess maybe just to finish on Marketing. If there isn't a material improvement in kind of the environment, you still have that confidence, say, if we looked at just, say, 2021 or some sort of indicative 12-month period, that the low end of that range there's some confidence that that's very much an achievable number in the current environment.

[Steven R. Spaulding, President, CEO & Director]

I mean absolute price has an impact and it does do some compression in your spreads. But we believe refined products will respond first with demand and we believe there will be government stimulus on infrastructure, which will drive demand for asphalt. And then, if you do keep weak, there is always the internal optimist which means that you do have the opportunity for contango plays.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Got it. And then if I can just finish with Moose Jaw, just making sure I'm understanding all the different pieces. So you highlighted the $5 million that's going to be booked into infrastructure in the second quarter. I think that's just the intercorporate transfer. But when you think about the extension of the outage, I'm not sure, are you able to quantify what extending that outage is going to cost, whether it's hard dollars or lost revenues? And just how do you see that playing out in terms of the actual impact on marketing versus say budgets?

[Steven R. Spaulding, President, CEO & Director]

Well, I think we're running it full out right now and we're actually filling up all of our storage right now at the facility. A lot of the product, we're actually filling it up is extremely inexpensive crude oil. And that may have been -- that's because of some of the hedging that we did on the WCS, the WTI spread and also just locking in kind of the absolute price on the purchase. So we really like the price of the barrel that we're putting in storage right now. And so we actually think we'll have a pretty strong third quarter as we start to move that product into the market.

[Robert Michael Kwan, MD & Energy Infrastructure Analyst]

Got it. And if there's not a resumption or pickup in demand on the refined product side, basically you're just holding the cheap inventory and the sell-through will happen. If it spills into Q4, it spills into Q4. Is that kind of the way to think about it?

[Steven R. Spaulding, President, CEO & Director]

Yes. And we don't have to run it all out. So we can pull it back some if we don't find the market for our products. We have very specialty products. So we have roofing flux, which is not really impacted by COVID. That's a weather-driven. And then the asphalt, which is, we believe, will be driven by stimulus bills. And then our other is really kind of a distillate that we sell. The distillate probably will be weak, the weaker of those 3 products.

[Operator]

Our next question comes from Linda Ezergailis with TD Securities.

[Linda Ezergailis, Research Analyst]

I'm wondering if you can help us understand some of the cost savings, Steve, that you have identified, the $10 million to $15 million. I'm wondering how much of that might be permanent versus temporary. For example, I guess the travel costs could be quite significant and those would presumably come back next year. But can you comment on the nature of those cost savings and, again, how much is temporary versus a permanent reduction in costs?

[Steven R. Spaulding, President, CEO & Director]

Yes, Linda. I would say almost all of it is on a temporal basis. Some of it is volume-driven. So as volume reduces at our terminals or small pipelines, we have reduced power demand. The other would be, we did talk about expenses and travel expenses. We were actually -- we looked at our April bill, and it was down 80% versus the March bill. So the travel is obviously, but that is temporal. And many of the activities, many of the cost savings that our ops group put together were bottom up from the field. But eventually you need to spend these dollars down the road at some time. But it is somewhat temporal during the event, Linda.

[Linda Ezergailis, Research Analyst]

Okay. And you mentioned ESG, the process is a journey. Congratulations on your first report. I'm wondering how you might use your findings in launching this first report to evolve the business. Are there any opportunities to leverage your learnings to identify ways to do business differently or to save cost further? Or were there any surprises, positive and negative, that you found as you prepared this first report?

[Steven R. Spaulding, President, CEO & Director]

So it was a journey. But we're starting to see ESG throughout the organization. We're starting to see when we're doing capital projects, questions come from the board concerning ESG. We're very excited about our diversity program. We hired 25 summer students this year. Those 25 summer students, I believe 70% of the summer students were female. And that includes a real focus on operations and engineering, where we're trying to increase our diversity. On our new hires in ops and engineering, over 70% have been diverse candidates. So on the diversity side, we're really seeing a step change. And you can kind of see those in the numbers over the last 3 years.Then when you look at Moose Jaw, last year we put on the expansion at Moose Jaw where we expanded the facility 30%. And in that 30% expansion, we did that without any additional heat. And we will continue to look at Moose Jaw and how do we improve really our carbon footprint at Moose Jaw. And we think there's significant opportunities to continue to improve our per barrel carbon footprint there at Moose Jaw.And then on governance, we put a diversity policy in place with the board, and we currently have 2 diversity representatives there on the board. So, and hopefully we'll have more as we move forward both in our assets and operations and across our organization.So we're excited about what's going on at Gibson Energy as far as ESG.

[Operator]

Our next question comes from Patrick Kenny with National Bank Financial.

[Patrick Kenny, Managing Director]

Just starting on the Marketing here. Looks like there was a $25.7 million write-down of inventories in Q1. Can you just confirm that that expense was included in your Q1 adjusted EBITDA number and maybe how that inventory write-down might be locking in your Marketing guidance for Q2?

[Steven R. Spaulding, President, CEO & Director]

Yes. I'm going to let Sean do that one, because it has to do with accounting. But it definitely was taken into account. So go ahead, Sean.

[Sean M. Brown, Senior VP & CFO]

Yes. Thanks, Steve, and thanks, Pat. Yes. No, absolutely that was in our number. I mean it was -- given the volatility in the market, it was a bit of a higher write-down than we have seen in other quarters. But I think the one thing I would note on the write-down that Steve talked in his prepared remarks about us running a flat book. That was fully hedged inventory. So you have actually seen the offsetting financial hedges show up in segment profit within the Marketing business in the quarter.And so I wouldn't really think about that. So we wrote down inventory. We had offsetting hedges for that inventory. And we'll move that forward. But that would have been -- any sort of mark-to-market we had would be incorporated in sort of our guidance that we provided that upper end of the $20 million to $30 million or higher for Q2.

[Patrick Kenny, Managing Director]

Okay. Great. And then on the terminals business, I appreciate the sensitivity to oil sands volumes. Also wondering, there was an article out yesterday just surrounding Enbridge looking to offer up more than, I think 2 million barrels of storage capacity on the main line. Any thoughts on how this temporary form of storage on the main line might further impact your terminals, your marketing business, if at all?

[Steven R. Spaulding, President, CEO & Director]

Yes, I'll address that. We see really no impact. I mean this is a great thing that Enbridge is doing to provide the storage to customers. When you look at our storage, it's really not built for the contango play. Most of our storage for our customers is operational storage. So these are those 10-year contracts with 3 turns per month. They may have a little bit of additional storage. If they cut 20%, they'll have a little bit more contango opportunity. But overall, our storage is not in that commodity-based market. We don't have any storage to lease out. So we can't benefit additional from this opportunity other than extending contracts or building more tankage down the road.

[Patrick Kenny, Managing Director]

Okay. And then, Sean, just on the debentures, I know it's still over 1 year out. But should the debentures not convert to equity when they mature next July, would you look to refi the debentures or just put the $100 million on your bank lines? And then maybe just an update on how the math is looking around potentially calling the 2024s anytime soon.

[Sean M. Brown, Senior VP & CFO]

Yes. Thanks for that, Pat. I think 2 questions there. I think, as you know, the conversion price in our debentures is, call it $21, I think $21.65 or $21 and change. And so I think certainly by the time that conversion comes up, our sincere hope is that we've come through some of this pandemic and those are in the money and so it makes the actual conversion decision relatively easy, because even if we called them, I suspect people would convert. To the extent that they're not in the money, my bias, as we sit here today, given our ample liquidity, would be just to put it on our bank line. As we talked about in our prepared remarks, recently increased our bank facility to $750 million from $560 million, have $150 million of buy lots, which I would highlight. And we didn't have this in the prepared remarks. But those buy lots are actually available for general corporate purposes as well. So that is true liquidity that we have. So to the extent that they're not in the money, would likely look to put it on our bank facility, just given the amount of liquidity we have. But still, we'll evaluate that as we move forward.With respect to the 2024 notes, we certainly would have been looking to potentially refi those pre-pandemic. Even with the make whole, that would have been MPV positive to the company. Given what's happened to credit spreads -- post-pandemic, that's no longer economic to do so. As hopefully we return to a normal, more normal environment here and coupons come back down, to the extent that that does turn back into an MPV positive trade, that's something we'd look to explore, certainly. But as we sit here today, we still have a little bit of a way to go before we see enough of a recovery in what coupons would be, before that turns economic.

[Patrick Kenny, Managing Director]

Okay. That is perfect. And then just last one for me, guys, housekeeping item. But looks like the $30 million sale of the Edmonton field office to Trimac has been delayed here into 2Q. Do you see any risk that this won't close at all now, just given everything that's happened, or at least continued to be pushed out until things get back to normal?

[Steven R. Spaulding, President, CEO & Director]

Sean, why don't you take that one.

[Sean M. Brown, Senior VP & CFO]

Yes. Yes. No. No. We actually do not. I mean the initial intention, I think we had late Q1. It was actually in around April, and now it looks like it'll be late Q2. But no, we've been in regular dialogue with Trimac around acquisition of that field office. They've actually moved in. That's their new head office from a trucking perspective in Edmonton. Still very much in their plans. And all dialogue and intention is that they will look to close that, and we'd expect that late in the quarter. So absolutely no change in our viewpoint and would expect that we receive those funds in the second quarter.

[Operator]

Our next question comes from Andrew Kuske with Credit Suisse.

[Andrew M. Kuske]

I think your comments throughout the call really echo how conservatively you are running the business. But with all the volatility we saw in the quarter and really for the year-to-date, could you just give us maybe a better color on how your risk management activities held up? Did you hit any limits where anything -- was anything breached? Or did everything really perform as you expected?

[Steven R. Spaulding, President, CEO & Director]

Andrew, I would say we reached some bar limits. But the bar limits that we reached, were really generally on the positive side as our positions hit on the positive upside of the bar. Our bar calculations were maybe a hair flawed, but we're looking into that. But overall, very tight controlled. And as you can see, what I explained really in the call and what we talked about really on the inventory, we had inventory in December of last year, or 2019, priced at $50 and $60. We wrote that down all the way down to the low teens and that was on the Marketing books, yet, we still had that $35 million to $36 million Marketing earnings. And that just shows that discipline in our hedging policies.We really don't take a lot of risk. We weren't involved in the last 2 days at close, because we always, if we're rolling a position, we never roll a position on the last 2 days of the cycle. So that's just a rule of ours. So you can see we have multiple -- and I'm in constant conversations with our head of Marketing, really on a daily basis about where we are and what we're doing.

[Andrew M. Kuske]

Okay. That's great. I guess another element of the conservative nature. And I think, Sean, you touched upon this, just the value of the liquidity that you have and your liquidity position being really greater than what you see in a normal market environment.And I guess the implication of all of this is you've now devalued the liquidity more, but if you were to find something attractive in the market, the returns on any perspective acquisition or capital deployment would just have to be much greater than normal than in a normal market. Is that true?

[Steven R. Spaulding, President, CEO & Director]

Go ahead, Sean.

[Sean M. Brown, Senior VP & CFO]

Yes. I mean, again, I think our prepared remarks are fairly clear and I think our messaging has been quite clear throughout. This environment, I think for us, we have been comforted by the fact that we can get on every call with investors and stakeholders and talk about the defensive characteristics we have. We're really not looking to do anything to sacrifice those defensive characteristics, and liquidity is one of them. So I mean, as we sit here today, I wouldn't say that acquisitions are a significant focus of this management team. Remaining defensive and nimble in this environment really would be. I mean, to the extent that there's something absolutely opportunistic, I mean, of course, we would always look at it. But again, I would probably refocus more on our focus on remaining defensive as we continue to move through this pandemic.

[Operator]

Our next question comes from Ben Pham with BMO Capital Markets.

[Benjamin Pham, Analyst]

Had a question on your customers' residence days at the tanks. I'm wondering if you have a sense of where that will go once you add the 3 tanks, like this year.

[Steven R. Spaulding, President, CEO & Director]

Ben, can you restate that one more time?

[Benjamin Pham, Analyst]

Yes, sure. Absolutely. I was wondering when you add the 3 tanks this year, if you have a sense of what the residence day is going to be relative to that 10-day average you've seen in the past.

[Steven R. Spaulding, President, CEO & Director]

Yes. So on the tanks that we did the long-term leases on, of course, 1 is the marketing tank that'll come on, and that's really one of the first marketing leases or builds that we've ever done. And then the other is with a large U.S. refiner. And then another one is really a marketing organization. So I would say overall residence time will be -- those will not have the normal residence times that we've seen from the oil sands producers. So they'll be used probably potentially more -- it would be used differently than the operational storage.

[Benjamin Pham, Analyst]

Okay. Sorry about that. But I was thinking more the -- I don't know, and maybe it's just not an easy quantification to get. I was wondering more the overall industry days on average that you're seeing, because you look at the past couple years, it seems to be more folks, the residence days have been underestimated in terms of what's needed in the market. So that's been driving a lot of tanks. So I was just trying to get a sense of where that's going relative to the historical norms.

[Steven R. Spaulding, President, CEO & Director]

Well, I think in this time, there is more residence time, because the producers have cut. So on a go-forward basis, I think, again, storage and the importance of storage becomes even more pronounced to our customers. And so there will be the opportunity to continue to discuss additional storage with numerous of our existing customers' ability.

[Benjamin Pham, Analyst]

Okay. And maybe my second question is maybe for Sean, some of the numbers around the Infrastructure run rate. And I wanted to clarify, I believe there's an $80 million number that was mentioned. Is that more of the worst case scenario like you're contemplating in that segment?

[Sean M. Brown, Senior VP & CFO]

Thanks, Ben. I mean I think we walked in one of the earlier calls, we walked it down. I mean the challenge whenever you put out a range is how precise do you want to be. So I'm not sure we felt like a range of like $83 million to $87 million made a lot of sense. But again, perhaps the easier way to answer that is to walk you down, as I did earlier, from the number. And I think if you listen to the remark I gave earlier, probably the $80's not a number that we would necessarily expect. But I mean, again, $98 million Q1 Infrastructure segment profit you take off $4 million for the equity pickup. So that gets you to $94 million on a recurring basis. Take out $5 million from there for Moose Jaw, the sort of OpEx that we normally see plus some additional OpEx from the turnaround that gets you to $89 million. And then from there, you take off, call it probably circa $5 million from both the small terminals, and that would be inclusive of the $1.5 million to $2 million that Steve talked about at our main terminal business. And that gets you to sort of the high end of that $80 million to $85 million.So I don't think we'd expect that $80 million, certainly. And if you walk down sequentially like I did, it would get you to the higher end of that $80 million to $85 million. So I'm not sure if that answers your question.

[Benjamin Pham, Analyst]

Okay. No, it -- yes, it absolutely does, Sean. And I'm sorry for having you have to repeat it 3 times. I wasn't asking that. It just sounded like the last commentary was $85 million for the Moose Jaw outage, so then from the Q3, it should be going up effectively in the 90s. So I just wanted to square that. Plus, $80 million, $85 million plus Q1 doesn't really add up to $360 million. So I was just more getting an additional clarification on that.

[Sean M. Brown, Senior VP & CFO]

Yes. No, I mean, we also did say that we expect Q2 to be absolutely the low for the year. But I mean even if you -- implicit in that, and I think it is important that we did confirm that $360 million, because just pure math tells you if we had $98 million in the first quarter, $85 million in the second quarter, to get to that $360 million, it assumes we're at $88.5 million for both Q3 and Q4. So just implicit in the numbers we provided, we certainly expect some measure of recovery not only from Moose Jaw. But I mean certainly that Moose Jaw turnaround won't extend into Q3.

[Benjamin Pham, Analyst]

Okay. And then my last one, same topic. The $100 million next year, does that include the DRU contribution in the second half?

[Sean M. Brown, Senior VP & CFO]

No, it would not. I mean if you think about we had said that as we exit Q4, we expect to be run rating $100 million. So really, that would be taking sort of existing assets right now and adding the 3 tanks we're going to put into service in Q4.

[Benjamin Pham, Analyst]

Okay. So this is likely if DRU comes in service on time, which is likely, your full year is likely more than $400 million, if everything goes to your budget?

[Sean M. Brown, Senior VP & CFO]

Yes, that makes sense.

[Operator]

Our next question comes from Robert Catellier with CIBC Capital Markets.

[Robert Catellier]

Thanks for taking the time to go through those more detailed updates. In your Infrastructure comments, I think in the MD&A on the new presentation materials, I think there was a comment about in getting to that $360 million, some type of volume recovery. So I'm wondering what you see in terms of pace or recovery. And maybe on a related question, how long do you think it'll take to get back to 2019 levels of oil demand?

[Steven R. Spaulding, President, CEO & Director]

Well, thank you, Robert. So that when we did our forecasting, we looked really for -- we looked at the economies, the North American economy and the world economies to kind of restart on a June 1 time frame. And with that, we -- so we really kept the second quarter, as far as impacted by volumes in our facilities, still impacted in the second and the third quarter. And then in the fourth quarter, we started to grow the volumes back as demand started to come back online.And kind of walking us back up is real important. So if we're at the $85 million and you put the $5 million on from Moose Jaw, and then as you volume recover, you come on, and then as those 3 tanks come on, we have additional revenue, that this is that $400 million run rate in the fourth quarter on equity.As far as full recovery of crude oil, I don't know. I think that might still be 2 years out, probably 2 years out from full recovery up into where we were approaching almost 100 million a day in total production. But during that time, we think we'll see significant decline. So we think refined products demand will ramp up quicker. But we think crude, we believe crude will remain relatively depressed over the next 1 year or 2, and then move up fairly quickly once you cross that supply and demand and you need that additional drilling to come on. So wherever that crossover is, you'll see a pretty quick spike in pricing, because I don't think the U.S. will respond as quickly this time.

[Robert Catellier]

Okay. That's helpful. Throughout your commentary today, I noticed it was a little bit conservative at times. But in the big picture, it sounds like you do have some excess funding capacity and you're being pragmatic about the progress on new growth projects adding to your capital spending roster.So with that, I'm wondering if there's an opportunity or an appetite to deploy more capital into the Marketing segment if you expect the pace of new projects to reflect a market reality be a bit slower.

[Steven R. Spaulding, President, CEO & Director]

I don't see that happening right now, unless we see a real opportunity. When it comes to those higher volatile earnings, we do use a higher rate of return requirement, generally in the plus-20% rate of return for commodity base-driven opportunities. We do some of those every year. Like the Moose Jaw expansion would have been one of those, where it was a 1x to 3x payback. There may be additional opportunities at Moose Jaw. There may be some small connections of small projects at Hardisty and Edmonton. But we're talking relatively small projects. And again, nothing that could actually drive up our total capital spend by any significance, Robert.

[Robert Catellier]

Okay. And just my final question here, might be early days still. But what has the collection experience been recently? Any negative trends in bad debts, I mean particularly in the U.S.?

[Steven R. Spaulding, President, CEO & Director]

I can address that, but I'll let Sean kind of clean this up. But our credit committee, we've become quite active in early March as the event started to unfold. Bad debts, we've moved -- we really went -- it was really on the refined products side where we're selling to the smaller -- where we're selling to smaller players with potential credit issues. And with that, we went to AR insurance or prepays. So right now we're in a very good position really on those sales of our refined products. We feel very comfortable where we are. If a default did occur, we would be protected. But I'll turn it over to Sean.

[Sean M. Brown, Senior VP & CFO]

Yes. No, I think you covered the vast majority of it. I mean we really haven't seen any increase in our aging. As Steve noted, we have taken an extremely close look at all receivables. I wouldn't say that's entirely abnormal. I think I'd be more concerned if we said that things have increased a ton. But I mean in this environment, you can only be too safe and we have reviewed everything multiple times and, at a high level, have really seen no increase in our aging or really in what we would think the risk thereof, of our AR.

[Operator]

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Chyc-Cies for closing remarks.

[Mark Chyc-Cies]

Thanks, operator. And thanks, everyone, for joining us on our first quarter 2020 conference call. Again I would like to note we have made certain supplementary information available on our website at gibsonenergy.com.I would also remind everyone that we will be holding our virtual AGM today later at 10:00 a.m., Mountain Time. The details are on our website and in the press release. And participants are encouraged to register for the live audio webcast at least 10 minutes prior to the presentation start time. Hope you're able to join us.Lastly, if you have any further questions, please do reach out to us at [e-mail]. Hope you have a great day and stay healthy.

[Operator]

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