Gibson Energy Inc

TSX:GEI

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to Gibson's 2018 Second Quarter Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President of Investor Relations. Mr. Chyc-Cies, please go ahead.

[Mark Chyc-Cies]

Thank you, Daniel. Good morning, and thank you for joining us on this conference call. In addition to discussing our second quarter operational and financial results, we'll also provide additional color on the incremental capital projects and increased capital budget announced last night. On the call this morning from Calgary are Steve Spaulding, President and Chief Executive Officer; and Sean Brown, Chief Financial Officer.Before turning the call over to Steve, I would like to make listeners aware that we are also providing some additional information on both the quarter and the incremental projects on our website at www.gibsonenergy.com.Lastly, I would like to caution you that today's call contains certain forward-looking statements that relate to future events or to the company's future performance. These statements are given as of today's date, and they are subject to risks and uncertainties, as they are based on Gibson's current expectations, estimates, judgments, projections and risks. Actual results could differ materially from the forward-looking statements expressed or implied today. The company assumes no obligation to update any forward-looking statements made in today's call. Additionally, some of the information predict -- provided today refers to non-GAAP financial measures. To learn more about financial -- forward-looking statements or non-GAAP financial measures, please refer to the June 30, 2018 management discussion and analysis, which is available on our website and 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. We're very excited about both the very strong operational and financial results we delivered in the second quarter as well as the meaningful progress we are making in executing on our strategy. When we outlined our strategy at the end of January, we presented a vision of a very different Gibson, company focused on oil Infrastructure and a business with multiple growth areas to drive infrastructure investment opportunities. We explained our targeting consistent growth of at least 10% per share of distributable cash flow on a distributable cash flow basis. Combined with a dividend supported by high-quality, long-term infrastructure cash flows, should position Gibson as one of the more attractive opportunities in the Canadian energy infrastructure space. While there is certainly more work to do, it's important to consider the progress made in the roughly 6 months since we outlined our vision.With the incremental capital we announced yesterday, we have clear line of sight of obtaining our growth targets over the next 3 years, with our continuing business growing of at least 10% per year into 2020.With the sanctioned projects, we are now above our target capital range of $150 million to $200 million per year to reach that 10% growth target. We continue to advance discussions that will lead to additional infrastructure capital investments in 2019 and '20. As we said on our last call, on the tankage front we were in discussions with more than a half a dozen parties. A couple of these discussions resulted in the execution of long-term agreements for an additional 1 million barrels of tankage at Hardisty, adding 2 more tanks at a build multiple between 5x and 7x EBITDA. Importantly, we continue to advance several other conversations and begun new ones as well. We are very optimistic that these ongoing discussions will translate into an additional phase of tank build-outs by the end of this year. We continue to be very confident that we will sanction at least 1 to 2 tanks each year. As you might recall, we developed a tank build-out forecast on $50 WTI price. In the current price environment, even with the wider differentials to WTI, we are more likely to build 2 to 4 tanks per year. Following our Investor Day, one of the concerns we heard was our ability to grow our key assets in Canada's constrained egress environment given the perceived impact on the pace of future oil sands development. Our view remains that the current tight egress environment is driving tankage demand today and bringing forward future demand. As only an additional residence time increases the customers' flexibility and helps ensure the best pricing for their crude.Over the medium term, we believe the oil sands will grow, largely through phased brownfield In situ developments as opposed to the large Greenfield projects in the past. That said, there are several Greenfield in situ projects that continue to be advanced and likely over a longer time horizon. Also it seems that the market consensus is that additional egress out of Western Canada will happen. Whether it is Line 3, Keystone XL or TransMountain, each would be supportive of future oil sands development. To the extent that Keystone XL or TransMountain are built, we believe that each pipe would drive demand for several new tanks, either at Hardisty or Edmonton right away. We've changed our commercial approach and our terminal business. In the past, nearly all our tankage was directly linked to new oil sands projects. As you might recall, one of our avenues of growth we outlined at our Investor Day was to expand our focus to include other potential customers, including looking to downstream customers of Canadian -- of our Canadian crude, terminalling other products across our Edmonton terminal and new customers at USD's Hardisty unit train facility. Many of the discussions we are having and even 1 of the tanks we just sanctioned is a product of this expanded approach. And we expect -- we will continue to see more diverse range of customers in the future. Looking beyond tankage, while we believe the current environment is bullish for our ability to sanction tankage, and thereby reach our growth targets, we also want to develop additional growth platforms beyond the terminal business. Securing additional growth beyond our tankage means, we will easily exceed our 10% target. Earlier this year, we sanctioned the $50 million Viking Pipeline Project, which was part of our strategy to grow outside the fence in Canada. And it's incremental to that $20 million to $30 million each year we invest on smaller projects within our terminals at Hardisty and Edmonton. We continue to advance other gathering system opportunities in Canada and believe that these outside the fence projects will remain part of our growth strategy. Yesterday, we announced the expansion of the Moose Jaw facility. Although the capital for this project's smaller than the other 2 announcements, at 1x to 3x EBITDA investment multiple, depending on the differentials when the incremental capacity is placed in service, it is certainly a very strong return on capital. To quickly provide an update on our progress at Moose Jaw since the start of the year. We've been able to thoroughly review the business and found opportunities to reduce both operating cost and maintenance capital. We're running lower cost crude slates focused on improving our product pricing to maximize margins from the facility. Admittedly, the vast majority of the increase in the profitability of Moose Jaw has been due to the wide differentials and improvement in product pricing. We are continuing to look to put a longer-term tolling structure in place on a portion of the throughput, but the wider differentials have slowed down discussions by creating a somewhat meaningful gap between the perceptions of a medium-term of -- and the medium-term price and what Moose Jaw is realizing today. Our goal was to have something in place by the end of the year, and we continue our efforts. And we will reassess as we get closer to that time period.With the acceleration of our U.S. strategy we announced yesterday, we have now created a third platform for infrastructure growth. At Investor Day, our goal in the U.S. was fairly straightforward. We sought to concentrate our trucking and injection station business into the just this -- Permian basin and the SCOOP/STACK and get the injection stations and trucking business back in the black.In the quarter, we cut costs, divested and shut down all areas outside these 2 basins. The fleets -- the fleet of trucks and trailers in areas that we shut down have been consolidated into the Permian basin or divested. Trucking and injection stations in these 2 basins are a complementary business to help us enable infrastructure investment opportunities. The agreement we entered into to expand the Pyote crude oil gathering system significantly accelerates our strategy. We are now going to invest our $25 million to $50 million or more per year right away. And with a larger footprint and increased connectivity to major egress pipelines, we will be better positioned to secure opportunities in and around our expanded Pyote system.This was really great work being done by our U.S. commercial team. We have deemed the existing Pyote system to be mechanically available for service and expect to begin flowing crude from previously connected producers in short order. The next step will be to place the Pyote expansion into service early 2019, at which point, we should have over 12,000 barrels a day of throughput through our combined system. Similar to Canada, the issue of the current pipe constraints in the Permian is a paradox. One side it hurts, because we're limited in the amount of crude we can deliver through the 2 delivery points we have -- we will build. But in the third and fourth quarter of 2019, these delivery points and this egress issue will be solved. On the other side, the bottlenecks create the huge [indiscernible] opportunities and give our trucks, injection stations on the non-constrained pipelines the opportunity to make healthy returns. In the current environment, we make $1 to $4 more moving the dedicated production by truck around the pipeline bottlenecks than we will make moving the production on the gathering system.In terms of our strategy in the area, the Pyote system is located in the heart of the Permian basin in northern Ward County, about 10 miles south of Wink, which is an emerging hub in the area. There's currently over 3 million barrels a day of long-haul pipeline being built into Wink, which speaks to the scale of growth that we are seeing in the surrounding area. For us, the next step will be to connect the Pyote system into the Wink Hub as these egress pipelines are built. Similar to the Hardisty terminal, it is this type of flexibility that gives us the best netback for our producers and drives incremental growth. So very much a timely strategic opportunity but we will like -- but we really like the opportunity itself as the contracts in place provide that 5x to 7x EBITDA investment multiple. One area where the U.S. gathering system landscape is very different than Canada, particularly in the Permian, is that these type -- these deals are typically fee-based with an area dedication. We currently have over 65,000 acres dedicated to us under a long-term agreement, and we are actively working on more. Also, understanding the rock and the economics to the producer is critical. With very compelling economics across multiple formations, including the Woodford, Barnett, Wolfcamp, Penn, and Wichita/Albany, we are very comfortable with this acreage. Although not in the economics, we're still -- there's still significant acreage across the more than 50 miles of gathering system we are developing. The 12-inch main line of the gathering system will be expandable to 100,000 barrels per day. In all, we're very excited about being able to accelerate our U.S. strategy. At only $10 million in 2018 and $20 million in the following years of EBITDA from the Pyote system, it's still a small part of our overall cash flow. But having another platform driving infrastructure growth will be important to ensuring we invest that $150 million to $200 million each year to drive that 10% per share growth we are targeting.In summary, 6 months into the execution of our strategy, we're very pleased with the progress we've made. And we are well-positioned to continue to deliver. With the projects we sanctioned, we have visibility to the capital that will drive growth at or above 10% target into 2020. Our growth capital is fully funded. While Sean will provide more detail, we remain confident that the sale of the noncore assets will be at the high end of our range. We are focused on delivering strong operational and financial results each and every quarter, particularly from our Infrastructure segment. And as an upside to the forecast we outlined in January, a very strong contribution from wholesale has been a welcome tailwind, helping to push down our payout and leverage ratios and improving our ability to fund future infrastructure capital with each quarter we realize these strong results.We've made meaningful progress, but there is still more to deliver. I will now pass the call over to Sean, who will walk us through our outstanding financial results in more detail.

[Sean M. Brown, Senior VP & CFO]

Thanks, Steve. As Steve mentioned, beyond making meaningful advances in the delivery of our strategy, we also had a very strong quarter.Similar to the first quarter, the results were driven by very strong though predictable contribution from the Infrastructure segment, while wide differentials helped push wholesale well above the top end of our expectations. Looking at our key metrics, adjusted EBITDA from continuing operations of $100 million represents a meaningful increase relative to the $93 million earned in the first quarter of 2018 as well as the $59 million earned in the second quarter of 2017. Though that figure in 2017 would have been burdened by $14 million in operating leases. Similarly, distributable cash flow from combined operations of $78 million was a 20% increase over the $65 million generated in the first quarter of 2018 and nearly an 80% increase over the comparable quarter in 2017. Recall, there was no change to distributable cash flow as a result of adopting IFRS 16. Getting into the drivers of the financial results, total segment profit increased by $34 million or 50% relative to the second quarter of 2017. About half of this increase was driven by a higher contribution from wholesale, with the remainder roughly split between higher earnings from infrastructure due to an additional tankage at the Edmonton Terminal being in service, and the impact of IFRS 16. Looking into infrastructure in more detail, the segment continued to provide consistent cash flows. Terminals and pipelines is very much in line with the first quarter, and we continue to expect very ratable earnings from that business with the next step change being when we place additional projects into service at the start of next year. At Moose Jaw, we continued to deliver stable reliable operations. The slightly higher contribution than last year was a result of the cost savings we've been able to achieve. However, the contribution from Moose Jaw would've been slightly lower than in the first quarter of this year as we perform a turnaround at the facility each year during the second quarter. Also, performance from our Canadian PRDs was a little stronger in the second quarter of this year than last year, which helped to offset the reduced contribution from our injection stations in the U.S. Within our Logistics segment, with the sale of U.S. Environmental Services, that business has been moved into discontinued operations, meaning results for the quarter reflect the combined performance of Canadian and U.S. truck transportation, and would exclude any contribution from U.S. Environmental Services. In Canada, volumes and margins were generally weaker, particularly for water and LPG relative to the comparative quarter in 2017. In the U.S., volumes are down relative to the second quarter of last year, as we exited the business outside of our focus basins, which also resulted in various shutdowns, severance and equipment relocation costs in the quarter.Within the continuing business, we are seeing some difficulties with recruiting and retaining drivers in the Permian with available opportunities from potential customers exceeding what we are able to service. This is an issue faced by our competitors in the last few months. We believe that we have a plan in place to recruit and retain drivers we need to continue growing our business in the Permian. As a result, losses south of the border largely offset profits in Canada, resulting in a segment profit of $300,000 in the quarter. We expect that the U.S. business will continue to improve to be profitable for the full year, and will not be hampered by costs related to rationalizations of noncore basins going forward. While we were certainly disappointed with the overall segment performance within Logistics, we continue to expect that there will be strong interest from potential buyers for our Canadian trucking business, and that we will be able to reestablish our U.S. business in our focus basins to support future infrastructure growth. And as we continue to deliver the strategy we outlined at Investor Day, which focused on crude oil infrastructure and the businesses that complement it, the prominence of the Logistics segment will continue to diminish. With the disposition of U.S. Environmental Services, Logistics now comprises a minimal portion of Gibson's overall financial results, and this will be even more so the case as we divest the Canadian trucking business. In Wholesale, the wide differentials resulted in a very good quarter with contribution to adjusted EBITDA coming in at $40 million -- $41 million and segment profit of $32 million. On a comparative basis, this contribution to adjusted EBITDA is almost 30% higher than in the first quarter this year and adjusting for $11 million of impact from IFRS 16 related to railcars, have made $20 million ahead of the second quarter of last year. Internally, we managed the Wholesale business on an economic basis as we think of positions in terms of the physical inventory net of the corresponding hedges we put on to mitigate risk, even though the accounting recognition of hedges and inventory is different over the term of the position. As a result, we look more at contribution to adjusted EBITDA as a measure performance, which in the current quarter, excludes $9 million of unrealized hedging losses, where we are unable to write-up the corresponding physical inventory. In fact, with these specific positions, most were crystallized in July, so it was really a timing issue crossing over the end of the quarter. With the wider differentials, the crude oil business performed largely in line with the first quarter. As a result, the second quarter significantly outperformed the comparable quarter in 2017 with our adjusted EBITDA roughly tripling.The majority of the increase in Wholesale relative to the first quarter of 2018 was as a result of an increased contribution from the refined products business. Recall, that while wider differentials expand our margins due to the ability to purchase discounted Canadian heavy feedstocks and sell products into North American or globally priced markets, in the first quarter, we reported low profitability as a result of shortage of rail service and the accounting treatment of inventory causing associated costs to reflect crude purchases at tighter differentials.Absent these factors in the second quarter, Moose Jaw was able to post stronger results more indicative of the margins that can be realized at current differentials. As Steve mentioned, we've also been able to decrease cost at Moose Jaw, but the main driver is wider differentials. With the NGL market into injection season in the second quarter, there was effectively no contribution in the quarter from NGL Wholesale, similar to the second quarter of 2017. Looking forward to the rest of the year for the Wholesale segment, based on the current differential environment and performance experienced to date, we believe this segment should meet or exceed the first half adjusted EBITDA of approximately $70 million in the second half of the year, resulting in a full year adjusted EBITDA of $140 million or greater. This view would be based on a contribution from Moose Jaw largely consistent with the second quarter, a similar contribution from crude wholesale as the first half of the year and no contribution from NGL Wholesale, which is now in the summer injection season with the intention to sell the business before the winter withdrawal season. G&A expense in the second quarter was just over $7 million, a decrease of about $2 million relative to the second quarter of last year. There are a couple of things moving around within that G&A number with about $2 million in building leases related to IFRS 16. What is most important is that we are seeing our costs come down on a cash basis. For example, salaries and wages were down $6 million or 17% relative to the second quarter of 2017. While salaries and wages would be part of G&A as well as costs within each of our businesses, what these figures demonstrate is that we are realizing the cost savings we talked about. In terms of interest expense, the second quarter of 2018 was in line with both the first quarter of 2018 and the second quarter of 2017.On the tax front, we realized a $12 million cash refund during the quarter. Based on our tax position in late 2017, we elected to suspend our installments to CRA for 2018 with the intention of resuming these cash payments in 2019, with minor discrepancies trued-up in the first quarter of 2019. With a significant outperformance from Wholesale this year, we expected our tax liability would be between $35 million and $45 million for the year, or roughly $20 million or $30 million net of the cash refunds received in the first half of the year. Balancing the obvious benefits of withholding cash payment with the desire for our distributable cash flow to faithfully represent the cash flow generated by our business, we're currently evaluating our options. At this point, we intend to either make an installment late in the year or look to reflect in our results that these tax amounts relate to our 2018 distributable cash flow, if we carry the obligation in 2019. In 2019, we will resume making installment payments each quarter. On the maintenance capital front, spend of $6 million this quarter was slightly higher than the $4 million incurred in the first quarter, largely as a result of costs related to the turnaround at Moose Jaw and tank inspections at Hardisty. Consistent with our focus on cost, we have recently completed a review of maintenance capital for the remainder of the year and have adjusted our outlook for 2018 to be approximately $25 million, a reduction of $5 million or close to 20%. With $78 million of distributable cash flow from combined operations generated in the second quarter, the trailing 12-month figure improves to $239 million, and implies a payout ratio of approximately 79%, which is within our target range of 70%, 80%. At the start of the year, we saw getting to the top end of our range as something we'd be able to do post-2019. It is important to remember this is a business that was at nearly 140% payout only a few years ago. So this is a big win for us, and we did it the right way, by controlling costs and growing our business rather than cutting our dividend. We continue to see the business performing well. And with the strength in Wholesale segment, we now expect our payout ratio will remain within our target range of between 70% and 80% for the remainder of 2018. Looking into 2019, we would also expect to be in that target range with continued strength in Wholesale. While we will lose the contribution from several noncore businesses we are divesting, those cash flows will be largely replaced with infrastructure projects currently under construction, including the first phase of the Top of the Hill project, which we now expect will be in service ahead of schedule in the first quarter, with the Viking Pipeline also expected to come into service in the first quarter, plus a growing contribution from the U.S from the Pyote expansion. On top of this, we continue to believe we have line of sight to additional potential cost savings. Given the stable nature of our infrastructure business, which comprises the majority of our cash flows, the key variable of where we will be on a payout basis within that range is the contribution from Wholesale. To be clear, our dividend is already completely covered with our infrastructure cash flows, which is key to how we think about the level of dividend we are able to pay. To the extent differentials remain wide, which is supported by a tight pipeline egress outlook through the end of at least 2019, Wholesale should remain above mid-cycle levels. That won't change how we think about our dividend, but it certainly helps reduce the payout ratio and provides retained cash flow to pay down debt and fund infrastructure growth in the future. And looking into 2020, we feel that our inventory of sanctioned infrastructure growth projects will ensure our payout ratio is comfortably within our target range of 70% to 80% even assuming a more conservative mid-cycle contribution from Wholesale, and would be lower than target if the contribution from Wholesale remains at current levels. That's the scenario we'd love to see, but it's certainly not our base case, and by maintaining that 70%, 80% payout ratio in 2020, post our divestiture activities, we've positioned ourselves to be fully funded for the capital we will need to invest to continue our 10% plus growth rate. In terms of funding our current growth to get to that position in 2020, with the sanction of the additional 2 tanks at Hardisty, the Moose Jaw expansion and the acceleration in the U.S strategy, we have increased our capital commitments through the end 2019 by between $200 million and $250 million, including increasing our capital outlook for 2018 to be between $250 million and 350 -- $300 million. It is very important to our strategy that our growth remains fully funded. And despite the significant increase in capital, we remain fully funded for all our capital commitments. Consistent with the funding strategy we outlined at the start of the year, the proceeds of our noncore dispositions will be reinvested to drive our infrastructure growth through the end of 2019. During the second quarter, we closed the sale of our U.S. energy services business, including U.S. Environmental Services and U.S. Seismic business for approximately CAD 125 million. We've also completed the divestiture and rationalization of our noncore U.S. trucking assets and injection stations, meaning, we have finished all our noncore divestitures in the United States, leaving us with a very focused footprint south of the border with the assets in only our focus basins, the Permian and SCOOP/STACK. In Canada, the sales process for NGL Wholesale is progressing as we continue to work towards an announcement, which we hope to occur in the third quarter. We are also progressing the 2 larger dispositions in Canada, the Truck Transportation and noncore Environmental Services, with the noncore Environmental Services process well underway, and Canadian Truck Transportation in the final preparatory stages before reaching out to potential buyers. We continue to see the potential for these remaining divestitures to be announced by the end of the year, with proceeds near or above the high end of our initial range. From a funding perspective, our sanctioned capital for 2018 and 2019 now exceeds $400 million, meaning, we're a little bit above the high-end of our previously discussed disposition proceeds range. However, we remain fully funded as a result of our retained cash flows in the first half of 2018 with additional comfort as a result of the potential for disposition proceeds to exceed our target and visibility to continued strength in Wholesale through the end of the year and potentially until differentials tighten when more egress out of Western Canada is placed into service in late 2019 or beyond. Recall, that as part of our governing principles, our long-term capital funding strategy was to fund infrastructure growth with a maximum of 50% to 60% leverage, which has allowed us to appropriately lever our infrastructure growth, while sustaining our 3 to 3.5 net debt-to-adjusted EBIDTA ratio and helping us work towards our goal of securing an investment grade rating. We also expect that retained cash flows through the end of 2019 would be fairly modest. With the stronger than expected contributions from Wholesale, we're seeing meaningful retained cash flow much sooner with nearly $50 million in the first 6 months of 2018 alone. Consistent with our capital funding strategy, retained cash flows will initially be used to reduce our debt, but we will use those amounts to fund the equity portion of our growth capital in the future, smoothing out the timing gaps between our excess cash flows and our investment cycles. On that basis, each quarter we retain cash through the end of 2019, keeps building our funding capability relative to our initial plan. So in summary, we are very excited about our business and where we are headed. We had a very strong quarter demonstrating the reliability of our infrastructure businesses and the potential upside from our Wholesale segment. We continue to deliver on our strategy. We are just over 6 months into executing it. And the additional opportunities we have announced provide visibility to achieving our 10% growth into 2020. We're fully funded and the dispositions continue to advance. We are very pleased with how things are going, and we'll look sustain that momentum. At this point, I will turn the call over to the operator to open up for questions.

[Operator]

[Operator Instructions] Our first question comes from Jeremy Tonet with JP Morgan Chase.

[William Paul Kawas, Analyst]

This is Bill on for Jeremy. Could you share more detail on the acquired acreage in the Permian in terms of producers and activity on that acreage?

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

Sure. This is Steve Spaulding. The acquired acreage has a -- there is a well -- as far as the producers themselves -- it has 2 producers on the acreage. One is a large E&P company that you would be very familiar with and the other is a well-funded E&P business. The acreage itself -- it has existing around 10,000 barrels a day of production on it. That's a well depleted 10,000 barrels a day. So that -- we don't expect that 10,000 barrels a day to decline more than 5% a year on an ongoing basis. And we're also -- also with that acreage, there is a drilling commitment with that acreage that we're very excited about.

[William Paul Kawas, Analyst]

Great. That's helpful. And then the Moose Jaw expansion looks to be a very attractive multiple. Can you discuss the decision to move forward with the expansion now as opposed to a point from the past?

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

As soon as we announced the -- our strategy to keep Moose Jaw back in January, we started doing the engineering to move forward with this project. I wish we would have done it a year ago with the current dips. We're definitely doing it on as accelerated a timeline as possible, because we really like this project and the rate of return of this project.

[William Paul Kawas, Analyst]

Great. And one last one. Can you share more color on the drivers you're seeing in the Alberta Montney that drove lower PRD terminal volumes this quarter?

[Sean M. Brown, Senior VP & CFO]

Yes, I think we'll have to get back to you on that specific question. I don't know have the details in front of me here.

[Operator]

Our next question comes from Linda Ezergailis with TD Securities.

[Linda Ezergailis, Research Analyst]

I'm wondering maybe you can provide us with some thoughts on, given the current outlook, how you might consider financing any additional projects announced either later this year on the tank front or into next year as well for your other initiatives as well. And specifically, within that mix, can you comment on once the Moose Jaw expansion is complete how you might reassess the merits of keeping that versus potentially divesting that?

[Sean M. Brown, Senior VP & CFO]

Yes, yes. No, I'll -- happy to address that, Linda. I think there's a couple of ways. First and foremost, remaining fully funded is fundamental to our strategy, so that will certainly be the case. The first half of your question is what's our financing strategy if we announce additional tanks or something like other attractive investment opportunities later in the year. That, to me, is a very high-class problem to have. So first and foremost, as we talked about it in our prepared remarks, with the capital that we've announced today, roughly $400 million through 2019, that is roughly covered with our distribution -- with our disposition proceeds alone. So that's first and foremost for today's capital. What that ignores is the retained cash flow that we've seen through the first 6 months of this year. And if you heard in my prepared remarks, we expect wholesale contribution to be at or above the first -- through the second 6 months that it was the first 6 months, so we'd expect excess retained cash flow certainly through 2019. So the first question we have when it comes to the funding strategy is where do we sit through the year, what's the retained cash flow and what part of that retained cash flow can we utilize to fund the equity portion of that. So fundamentally, we want to remain fully funded -- or will remain fully funded, but the retained cash flow we have from the business really helps us achieve that even with increases in our capital commitments over the next year or so. For the second part of your question on Moose Jaw, and I think -- to be more direct, you're basically asking if we have the additional investment, would we consider divesting Moose Jaw to help fund that. I think as we've always said, as we think about our core business, really, that is crude oil infrastructure, the tankage, the pipelines and the businesses that complement that. We feel that Moose Jaw is a very attractive facility for us, especially in today's differential environment. Longer term, if we have something extremely attractive, I mean, really anything is up when we consider how we might fund it. But I think the challenge, as we think about Moose Jaw in this environment, is what the valuation differential would be between the actual cash flows we're realizing from the facility and what people would be willing to pay for it. So in this differential environment, I think it would be somewhat challenging to actually get real value for that facility, but it doesn't mean longer term that would be the case.

[Linda Ezergailis, Research Analyst]

That's helpful. Just maybe as a follow up, maybe we can kind of cut it another way and maybe you can help us with the arithmetic as to what you see as additional capacity available when you lever that up in '19 in terms of order of magnitude of additional projects, absent asset sales or other sources of capital to grow.

[Sean M. Brown, Senior VP & CFO]

I think that's more of a theoretical question. So if we think about it, so the wholesale, the outperformance we're realizing through wholesale, specifically, there's no intention to lever up those cash flows, to be clear. What our intention is, to the extent we have $50 million of retained cash flow, that can be utilized to fund the equity portion of growth projects going forward. As we add infrastructure EBITDA, as we move through the year -- and as a point of reference, I think I have it here somewhere, our infrastructure alone in the last 12 months has gone up close to $40 million or $50 million. If we're levering that infrastructure cash flow, that would imply at our 3x multiple an additional $150 million of debt capacity. So as I think about additional leverage as we move forward, it's not going to be on the back of wholesale contribution, it's going to be on the back of increases in contribution from our Infrastructure segment.

[Linda Ezergailis, Research Analyst]

That's helpful context. And maybe if you can give us a sense as well of some of the maintenance capital efficiencies you found for 2018. I assume that's sustainable prospectively. And would 2018 be a good run rate for 2019 and going forward to maintenance capital?

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

Yes, Linda, this is Steve. Yes, our run rate is going to be between that $20 million to $25 million on a maintenance capital. I see that as a go-forward business. A lot of the maintenance capital that we incur today or incurred in the past were in the businesses that we're actually divesting. And so on a go-forward basis, that $20 million maintenance capital is a very good target to keep our asset well maintained.

[Operator]

Our next question comes from Andrew Kuske with Crédit Suisse.

[Andrew M. Kuske]

I'm not sure if this is a question for Steve or Sean. But when you think about the development economics you highlighted in the project sanctioning release on the 5x to 7x EBITDA on the tanks. How do you think about just Gibson's overall embedded value on the existing assets, let alone the development potential, when you think about some of the transactions we've seen in the market recently for infrastructure assets in Western Canada?

[Sean M. Brown, Senior VP & CFO]

So just so I understand your question, are you really talking about the multiple differential between a brownfield investment and what we're seeing in the M&A market right now?

[Andrew M. Kuske]

Exactly.

[Sean M. Brown, Senior VP & CFO]

I mean, clearly, that is -- in my mind, that's evidence of the strategy we have. I mean, we have a real focus on our -- on investing organic growth capital because that is by far the best risk-adjusted return. Because of our footprint that we have at Hardisty and Edmonton, we're able to invest and secure infrastructure growth projects at that 5x to 7x. But you're absolutely right. In a private market or in an M&A context, that certainly would trade at a multiple well, well in excess of that. So to me, the differential there is really evidence of the strategy that we're executing on. Execute at our best risk-adjusted returns and, hopefully, the market will reflect that.

[Andrew M. Kuske]

And then maybe just a question specifically on the tankage expansion on the Top of the Hill and given the topography on Hardisty and just the position, and effectively, the name of the expansion, the Top of the Hill, I would assume your op costs there will be a little bit more than they would be in the core Hardisty base. Does that give you a bit of an argument to have margin expansion on some of the core assets that you can effectively push price upwards a little bit?

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

The first Phase 1 of the project, we were able to do most of the civil work there on Top of the Hill and actually build the piping -- the piping racks to allow for Phase 2 which we announced yesterday. And actually, our rates of return on Phase 3, which we hope to push forward by the end of the year, are even better than our -- than Phase 1 or 2 just because of the infrastructure that we have in place. And then we're moving forward with developing more acreage adjacent to our Top of the Hill project.

[Operator]

Our next question comes from Ben Pham with BMO.

[Benjamin Pham, Analyst]

I had a couple of questions on the new tank announcements. And I'm wondering, did Line 3 -- did that have any impact in terms of [ as far as ] those -- the 6 dozen conversations that you had, crystallizing that into reality? And then the other question I was wondering about is, you mentioned expanding or, I guess, diversifying conversations with nontraditional customers, the producers, refiners, for example. And I'm curious when you actually do that, are you giving anything up in terms of contract duration or counter-party quality when you sign deals like that?

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

I'll let Sean address the counter-party issues, but I'll address the commercial concepts. Yes, as I spoke earlier, these first 2 customers, one is a downstream customer, the other is an upstream customer. Both of them are -- one's wanting security of supply for their refinery, and the other's wanting that additional tankage for security offtake of their production from their oil sands project. So then you look at what I think the next phase will be, and that is kind of driven by 2 phases. One is incremental growth in their production and the other is just the constrained market conditions today and the need for tankage to help them receive the best market price and egress out of Canada into the U.S. markets.

[Sean M. Brown, Senior VP & CFO]

And then to follow-up on the second part of your question, Ben. As you know, commercially, we don't disclose much about the specific contracts when we announce them. What I would say is that we definitely did not give up much. I don't know if you mean by counter-party moving down the credit scale, I wouldn't say so here. I mean, we've got a diverse mix of counter-parties at our terminal. And this is 2 different counter-parties we have with this. We're very comfortable with both. With respect to tenor of the contract, again, we don't disclose a specific tenor. I mean, with these contracts, the weighted average contract length of our entire tankage portfolio remains in and around that 10x -- sorry, 10 years.

[Mark Chyc-Cies]

And Ben, this is Mark. You also asked about the impact of Line 3. We don't see that as being directly related to the sanction of these tanks. Just wanted to close that for you.

[Benjamin Pham, Analyst]

Okay, that's great. And then my other question is -- in terms of the -- along the similar lines of Linda's questioning on funding, and I'm thinking more longer term, post-2020. Do you guys think that with the CapEx visibility that you see mid-cycle, wholesale margins, looking at various scenarios, that you're effectively self-funding in perpetuity?

[Sean M. Brown, Senior VP & CFO]

Yes, yes, I think that's absolutely the case. As we've talked about previously, our view is we need sort of circa $200 million investment capital per year to achieve that 10% growth rate in that 70% to 80%, probably at the lower end of 70% to 80% payout ratio. If you do the math around the build multiples we have and what our target leverage is, we think, we are fully funded into perpetuity.

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

That's a long time.

[Benjamin Pham, Analyst]

Okay. And then just one quick cleanup. Logistics, is that effectively disappearing by the time you sell the assets by year-end, mid-19? Is there anything to mention there?

[Sean M. Brown, Senior VP & CFO]

Yes, I mean -- what we'll have left in there post the sale of Canadian Trucking will be the U.S. trucking business. We are currently -- given that, that business is extremely small in the context of the rest of the company and really is only there to support the infrastructure growth that we're targeting, we are currently evaluating what that means from a segmentation perspective. But that's absolutely right. Sale -- post the sale of Canadian trucking, that business will be de minimis, and so we're evaluating what that means as we think about our reporting.

[Operator]

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

[Robert Michael Kwan, Analyst]

Maybe I'll start with Moose Jaw. And Sean, appreciate the comment just around how you're thinking about it right now. But just to be a little bit more clear, is it fair that Moose Jaw is strategic to you at this point, especially financially from a cash flow perspective, particularly given just the balance sheet and the funding needs, but that it's not strategically necessarily a fit into how you see the overall business?

[Sean M. Brown, Senior VP & CFO]

So I think I'll start, Robert, with that. I would say that's absolutely certainly true in the first half of your question. And then with respect to the second half of your question, I don't know if I'd be quite as direct. I think, at least in investor meetings I've had, my commentary has been it's a facility that we like and -- but as we think about our core strategy, it's probably on the periphery of that core. So I wouldn't be as direct to say it is off strategy -- to dig into your question, I wouldn't be as direct to say it's off strategy, but its financial profile makes it attractive right now. What I'd say is its financial profile makes it attractive right now, and that it is on the periphery of our strategy. So not directly in the core Hardisty, Edmonton, crude oil pipeline system, but still a facility that we do like. Steve, anything?

[Robert Michael Kwan, Analyst]

Would you consider a partial monetization of Moose Jaw?

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

No.

[Sean M. Brown, Senior VP & CFO]

It's not something -- as a funding vehicle, it's not something we've actively considered at this time. I think, similar to my comments earlier, Robert, I think the challenge would be again the divergence between the multiple people would be willing to pay and the cash flow that we're realizing. I mean, to the extent that somebody was able to pay for the financial performance in the facility right now, I'm certain -- it's not something we've actively considered, but it's something that I think we'd probably look at. But I struggle to see that actually manifesting itself.

[Robert Michael Kwan, Analyst]

Got it. Turning to the U.S. side of things with the expansions that you're doing there. Do you see another bolt-on asset or acquisition potential to kind of further accelerate the strategy? Or is that really kind of what you've laid out at this point?

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

Yes. No bolt-on acquisitions are contemplated. But building out in and around our pilot system and in -- and up and around the weak assets is very much core to our strategy. And we will -- and we continue to push hard to build out that system. And as I said, what we contracted and what we see is 20,000 barrels a day. The core gathering pipe that we're building's a 100,000 barrel a day pipeline.

[Robert Michael Kwan, Analyst]

Got it. And just the $55 million acquisition price, what's the timing of the installments there?

[Sean M. Brown, Senior VP & CFO]

First installment is payable basically immediately, and then the second installment is 2019.

[Robert Michael Kwan, Analyst]

And is it 50-50 or is it a different split?

[Sean M. Brown, Senior VP & CFO]

From a -- close enough. It's slightly off, but for modeling process, that's a safe assumption.

[Robert Michael Kwan, Analyst]

Okay, great. Just the last question, I get that you don't want to get into the commercial terms around some of these contracts, but can you just refresh what your definition is of long term in terms of long-term contracting?

[Sean M. Brown, Senior VP & CFO]

We think, in general, as long term as being anywhere from 5 -- through an entire portfolio of contracts, and this is inclusive of pipelines, it would be 5 to 25 years.

[Robert Michael Kwan, Analyst]

Okay. That's across the portfolio. But sorry, just to be clear, if you sign a 5-year contract, does that get described as long term?

[Sean M. Brown, Senior VP & CFO]

Yes.

[Operator]

Our next question comes from Rob Hope with Scotiabank.

[Robert Hope, Analyst]

Just wanted to turn attention to the asset sale process. Just looking at the assets and liabilities held for sale, specifically NGL Wholesale as well as PRG Canada, this would imply the upper end of the range is very achievable with, let's call, it mid-single-digit EBITDA on the Canadian trucking. Are you still pointing to the upper end of the range? Or are you comfortable that you could get above that?

[Sean M. Brown, Senior VP & CFO]

That is a good question. As we sit here today, we're still pointing to the upper end of the range. We certainly -- and consistent with our commentary that we had on the first quarter call, and now, second quarter call, we certainly see potential for that to go above the high end of the range. The challenge is, having performed a lot of M&A prior to joining Gibson, certainly, that there's always uncertainty in these processes. So before we update what we expect the disposition's proceeds to be, we'd like to advance those processes a bit more. My expectation is that we when we announce our next disposition, we will probably update what our expectations are at that time. But as of today, we're still comfortable at the high end of the range and are not prepared to go above that.

[Robert Hope, Analyst]

And just to confirm on that, NGL Wholesale and PRD Canada carrying values, they would be -- there were unimpaired, so that would imply that bid values are either coming in at that or above that?

[Sean M. Brown, Senior VP & CFO]

Yes, I mean, there is -- we can take it off-line. I mean, there's number of different accounting tests you'd do when you look into whether or not you need to impair an asset, and specific bid values would be something that goes into consideration but not the only one. But I mean, that's a relatively fair inference. I mean, to be clear, every process is at different stages. So I'm not going to say directly in and around what the bid values are and what was being bid for, but think that's a fairly fair inference that looking at whether or not we impaired things. We are comfortable with carrying them at their value in the balance sheet, as you noted, and when you look to the financials.

[Robert Hope, Analyst]

All right, I appreciate the color. And then just moving to the 10% DCF growth target. Just want to get your thoughts on -- is this versus your 2018 base, given the fact that you have high marketing margins as well as the uncertainty in terms of cash payments? Just want to get a sense of what that 10% growth is based off of? And are you adjusting for, let's call it, high marketing margins and no cash taxes in '18?

[Sean M. Brown, Senior VP & CFO]

So the 10% target, if we're thinking specific from '18 to '19, it really is a question of where wholesale comes in, in both years. If you recall our previous -- from Investor Day, we basically had relatively flat distributable cash as we thought about '18 and '19, and that was for mid-cycle contribution from wholesale. And really, the result was that -- from that was that our infrastructure growth would more equal or be slightly greater than our -- the lost EBITDA from the disposed of assets. As we sit here today, under the same assumptions, if you assume mid-cycle contribution from wholesale in both '18 and '19, then we probably would see some modest growth because our infrastructure, we -- as we talked about earlier, first phase of the Top of the Hill has moved up rather significantly to the first quarter. We got Viking coming on. We're going to see some contribution from Pyote. So absent that, I think from where we thought we would be relatively flat '18 to '19, now we would probably achieve that 10% or greater. I don't have the number in front of me. The real question is what's the wholesale contribution in '18, and what's the Wholesale contribution in '19? As we talk about 10% growth, the way I think of it is less specifically '18 to '19 because of everything that's going on, but '19 and beyond. And that assumes mid-cycle for wholesale. I mean, you heard earlier our expectation for wholesale for the full year is now $140 million or greater, which is significantly above what we had budgeted. It's difficult to point to a specific growth target for '19 until we have a bit more visibility into what that wholesale will look like for '19.

[Operator]

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

[Patrick Kenny, Research Analyst]

On Pyote, just wondering, with respect to the guidance of adding $20 million of EBIDTA by, call it, 2020, just to confirm, is that incremental cash flow in any way contingent on those 3 major egress pipelines out of Wink coming into service on time by late 2019? Or do you see that level of cash flow as is being insulated from the risk of any potential pipeline bottlenecks?

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

I mean, when we ran the economics, we definitely ran the economics with the egress pipelines being solved by fourth quarter of 2019. But if you remember in my prepared remarks, is that -- the egress issue is kind of a paradox, right? Because there is an opportunity with all of our injection stations and with our trucking business to actually hop the bottlenecks. And so we're preparing and actively recruiting drivers on a very focused approach to build the ability for us to use our trucking fleet and terminal -- and our terminals to take advantage of the arbitrage in the market today. So I don't know that it'd impact it because the barrels are dedicated to us and we'll be able to achieve those earnings before or after the pipeline egress. Now on a long-term basis, yes, it would impact us, if the egress pipelines were a major issue. I mean, this is Texas. They are able to build pipelines in Texas, and I'm pretty confident in the companies that are doing this and that they will be able to execute on time.

[Patrick Kenny, Research Analyst]

Got it. And then switching over to Hardisty and the expectation of building 2 to 4 tanks per year versus the prior 1 to 2. Would that also potentially accelerate or bring forward some of those inside-the-fence opportunities? In other words, could you also potentially double up the $20 million to $30 million of CapEx per year to $40 million to $60 million? And maybe you can remind us to as what some of the more near-term inside-the-fence projects might look like.

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

Yes, I think, we approved a $5 million one at the board just last week. So we continue to build additional pipeline infrastructure in the terminals for our customers as they need that to deliver to different pipelines or give them additional flexibility to their storage contracts. The $20 million to $30 million, I think that's still a good number. There's potential that, that could double up, but it would be like a one time or a -- it would be more of a onetime capital expenditure versus continuous.

[Sean M. Brown, Senior VP & CFO]

Yes, I don't think you would see us put it in our budget necessarily. I think the thesis is probably relatively true whether or not it's to that quantum. There should be additional opportunities, but I don't think we'd guide people above sort of what we'd previously said.

[Patrick Kenny, Research Analyst]

Great. And then lastly, guys, just if there's any update on the Hardisty rail terminal in terms of extending those contracts maybe just given what we saw there from USD in Q2. But I guess, we would've heard additional contracts, but just where we are in terms of approaching the -- kind of the mid-2019 expiry of the initial 5-year deal.

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

USD leads the commercial side, and we're very bullish. And as long as -- USD is, right? And if you want to know really where we are in contracting additional -- re-contracting and then additional contracting, you need to probably go to the USD scripts, right? But we're very excited about what's going on there and what they're being able to do and participating with them on the capital side to expand that terminal in the future.

[Operator]

And our next question comes from Rob Catellier with CIBC Capital Markets.

[Robert Catellier]

I do have some questions on Pyote. You've partially answered them, but maybe a little bit more color. I was wondering how you got the confidence to deploy that $75 million for the acquisition and the development of that system when the only volume commitment really is the area dedication, which is common in the U.S. I mean, it sounds like you partly answered it with the drilling commitment as well, but maybe you can reference producer netbacks in the play and the deal terms of egress that they may or may not have.

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

Yes, probably the one thing that gives me a lot conference is really the existing production, right? And then so if you look at just the existing production, we like the return kind of on the existing production with the decline rate that we see on the existing production. We also really like the opportunity in the Woodford and the Barnett, and we've done -- we've had consultants come in and give us their opinions. We're going to keep that confidential. But we had us -- give us their opinion on the dollars. The barrel -- what crude oil price would develop these reserves, and we're very confident that these reserves will be developed.

[Robert Catellier]

Okay. And I just wasn't clear on the -- how you get to the upside case. If you're -- you're running your economics, obviously, on the egress being solved late 2019. It sounds like you do have the dedicated barrels with or without the bottlenecks. So what really drives the upside cases? Is it just the passage of time and more drilling by the producers?

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

Yes. We didn't even actually tell you the upside case, Robert. I mean, the upside case is -- there's a lot of drilling in the area in between our systems, and we're actively going after that. So the upside case is well above a 5x or a 7x multiple. If we're successful in contracting additional acreage, Robert.

[Sean M. Brown, Senior VP & CFO]

The numbers in the press release, Robert, on -- and as well as in the capital supplemental deck, those would just be the passage of time rather than different cases.

[Robert Catellier]

Right. And so just to be clear, the incremental EBITDA you're expecting is net of the potential lost trucking opportunities that -- I think you mentioned $1 to $4 barrels in that paradox -- $1 to $4 per barrel paradox.

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

True.

[Robert Catellier]

So the upside is net, yes. Right.

[Operator]

[Operator Instructions] Our next question comes from Ian Gillies with GMP.

[Ian Brooks Gillies]

Just to follow on the West Texas system. Can you confirm whether there's been any potential marketing opportunities contemplated in the -- I guess, the 2020 dates from EBITDA generated -- for EBITDA generation?

[Sean M. Brown, Senior VP & CFO]

No, no. From -- also, what that means from a pure math perspective of what we've put in the deck, in the supplementary deck, that is just the infrastructure cash flows. And I mean, certainly, as we build out that system and get more active in the Permian, that is something we will be focused on, is developing a strategy there from a wholesale perspective like we have in Canada. But what we put out yesterday is specific to the infrastructure, Ian.

[Ian Brooks Gillies]

Okay. That's helpful. And then with respect to the rail facility, maybe just provide some details on what an expansion may look there, and perhaps, what effective utilization looks like currently? Or what it'll look like in 2Q?

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

Last year -- the difference between last year's Q2 and this year's Q2 is, I think is -- the facility is running close to 75% in the late 3Q. And we continue to see that move to 100%, we think, very shortly as the customers are able to do the long-term contracts with the railroad. The one thing that's really going to help and push this contracting is -- our longer-term extensions or USD's longer-term extensions, is that railroads are requiring the long-term extensions. And the railroad take-or-pays are much higher than USD and Gibson Energy's fees.

[Operator]

And I am not showing any further questions at this time. I would now like to turn the call back over to Mark Chyc-Cies for any further remarks.

[Mark Chyc-Cies]

Thank you for joining us for our 2018 second quarter conference call. Again, I would like to note that we have made available certain supplementary information on our website at gibsonenergy.com. If you have any further questions, please reach out at [e-mail]. Again, thank you for joining us today, and have a great day. Thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.