Gibson Energy Inc

TSX:GEI

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gibson Energy Q2 2022 Conference Call. [Operator Instructions] Thank you.

I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President, Strategies, Planning and Investor Relations. Mr. Chyc-Cies, please go ahead.

[Mark Chyc-Cies, executive]

Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our second quarter 2022 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. Also in the room from the senior management team are Sean Wilson, Chief Administrative Officer and Sustainability Lead; and Kyle DeGruchy, Senior Vice President, Commercial.

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 Spaulding, executive]

Thanks, Mark. Good morning, everyone, and thank you for joining us today. I'm pleased to say we had another solid quarter with both Infrastructure and Marketing segments in line with our expectations.

We view our adjusted EBITDA of $114 million and distributable cash flow of $74 million as strong results and are very pleased with our solid financial position, exhibited by a leverage ratio of 3x, which is at the bottom end of our target range, and our payout ratio at 73%, which is also at the lower end of our 70% to 80% target range.

Given the solid financial position, we've been able to meaningfully add to the amount of capital we return to shareholders. So far this year, we've increased our dividend by 6%. And on top of that, we have already bought back $60 million in shares or 1.6% of our outstanding shares.

And in the back half of this year, we would expect to continue these repurchases, targeting that $100 million for the year. We're also seeing strengthening performance in our business. And to the extent that this improving outlet materializes, we see the potential to increase this targeted amount.

On the project execution side of our business, we've had several noticeable milestones. We successfully completed the Moose Jaw turnaround and used the downtime as an opportunity to perform required connections to complete our planned expansion and fuel switching project, where we captured the NGLs being used as fuel and replace them with less expensive natural gas. It also increases our capacity of the plant by an additional 10% to give us just over 24,000 barrels per day. The project also has some pretty good significant savings in our fuel cost and a reduction in our emission intensity by 15% per barrel.

At Edmonton, the biofuels blending project was placed in service at the start of the quarter. This project was delivered on schedule and on budget. It was sanctioned early last year under the MSA with Suncor, which is our principal customer at the terminal.

Capital cost was roughly equivalent to 1.5 tanks and it's under that 25-year term. And one of the really big benefits is its ESG positive and aligned with energy transition. At Edmonton, we continue to progress construction of that TMX related tank and it's expected to be placed in service early next year.

Shifting to our outlook for next round of capital at Edmonton, we continue to hold discussions for additional tankage. We believe Gibson is very well positioned to support shippers on TMX, optimize crude netbacks and meet stream requirements. We remain optimistic that we can sanction additional tankage over the next several quarters, with clear visibility of a TMX in-service date being important to several of our potential customers. We also believe we'll continue to build out additional infrastructure at Edmonton under the MSA.

On the DRU at Hardisty, we continue to believe that the economics for the value chain will remain strong relative to pipelines, well into the future. Discussions have advanced and I'm very optimistic we will sanction a second 50,000 barrel a day facility under a long-term contract prior to the end of the year.

On our development opportunities for transitional energy, we continue to advance numerous discussions with partners on the development of a HRD or hydrotreated renewable diesel facility. We see it as an attractive opportunity in an energy transition aligned value chain. There is still significant work to be done here. And any sort of FID is likely going to be mid next year.

If we do proceed, we will ensure that this project and its approximate size to our company are aligned, especially given the current inflationary environment. And the returns that we will be very attractive on a risk-adjusted basis relative to our capital allocation opportunities, including share buybacks.

And while renewable diesel is interesting opportunity, our core focus on the commercial side remains deploying that $150 million to $200 million in growth capital each year in our existing value chain at those 5 to 7x build multiples and under high-quality long-term contracts with investment-grade partners.

For this year, recall that we set that $150 million in growth capital range in December. It was contingent on timing of sanctioning additional projects through the balance of the year. As I discussed earlier, the tank and the DRU expansion opportunity has been pushed back to later in the year or next year.

The lagging effects of the slowdown we saw in the sector during COVID has persisted longer than we expected and is reflected in the tepid increase in capital redeployment in the upstream sector. We now expect to deploy $100 million to $125 million in growth capital this year with where we end up in the range, still dependent on sanctioning new projects and how much work we're able to complete by the end of the year.

To close, we feel we had another strong quarter. Both our Infrastructure and Marketing businesses are within line of our expectations. We continue to execute operationally, successfully completing the Moose Jaw turnaround, bringing both the biofuels blending and the fuel switching projects into service. Our financial position is very strong, which has allowed us to return more capital to our shareholders.

I will now pass the call over to Sean, who will walk us through our financial results in more detail. Sean?

[Sean Brown, executive]

Thanks, Steve. As Steve mentioned, another solid quarter as both our segments were in line with our initial expectations. Infrastructure adjusted EBITDA of $112 million was a $3 million increase from the first quarter of this year. However, the current quarter benefited from some onetime revenues related to a capital project that offset the roughly $5 million decrease we are expecting from the Moose Jaw turnaround, which, as a reminder, we perform every 3 years.

Contribution from the Edmonton term loan increased with the biofuels blending project coming into service at the start of the quarter and volumes continue to increase on our Canadian pipelines driving higher revenue.

Comparing this quarter to the second quarter of 2021, on a comparable basis after normalizing both quarters, adjusted EBITDA increased by about $9 million despite the turnaround at Moose Jaw this quarter as revenues at Edmonton benefited from additional infrastructure and service as well as entering into the MSA, Hardisty benefited from the DRU being in service and the contribution from Canadian pipelines roughly doubled.

In the Marketing segment, adjusted EBITDA of $12 million was within our outlook range. Though I would note that our view of the actual performance was a bit stronger with volatility in crude prices resulting in the timing of some gains being deferred into the second half of the year.

Refined products, was fairly strong in the quarter in terms of asphalt and drilling fluids. Crude marketing did see opportunities from the increased volatility. But if you think of our core strategies, it still remains a somewhat challenging environment.

The result this quarter was a decrease of $9 million from the first quarter of the year and a $6 million decrease from the comparable quarter last year. In both instances, contribution from refined products was higher this quarter and crude marketing was lower.

In terms of our outlook for Marketing, we see a very much improved environment for refined products such that we would expect adjusted EBITDA of at least $30 million in the third quarter. And if the current market environment persists, we are optimistic that adjusted EBITDA for the full year will be in or around $100 million or the midpoint of our long-term run rate range.

Finishing up the discussion of the results, let me quickly walk down to distributable cash flow. For the second quarter, we reported distributable cash flow of $74 million, which was a $5 million decrease from the first quarter of this year and an $18 million decrease from the comparable quarter last year.

On a normalized basis, the majority of the differences would be the factors I already spoke to when discussing the segment results. Smaller drivers would include higher replacement capital, in part due to the Moose Jaw turnaround as well as slightly higher G&A, more as a result of higher technology spend than inflation impacted factors.

In all, we continue to expect G&A to run around $9 million or $10 million per quarter. When looking at the comparable quarter last year, we also had the $20 million onetime item we realized, which would have rolled off this quarter and even with a positive onetime item of $5 million this quarter, it is clearly driving a large part of the $18 million decrease.

Cognizant that inflation is a focus for many right now, I would quickly say that we have seen some impact, though mostly on our operating side in items such as power and utilities as well as repairs and maintenance. We also have escalators on the majority of our tank contracts and our operating costs as a percent of revenue are low. So we see the risk is limited relative to other business models.

On the capital side, we have also seen cost escalations. But these so far have been contained within contingency amounts. That being said, inflation is certainly a consideration as we review new capital sanctions, including the increase in funding costs for capital impacting required returns.

In terms of our financial position, our payout ratio now sits at 73%, which is towards the bottom end of our 70% to 80% target range. Our debt to adjusted EBITDA increased to 3x, which is at the bottom end of our 3 to 3.5x target. This increase in leverage from last quarter was driven by a normalization of working capital as we discussed on our call last quarter.

On an infrastructure-only basis, our leverage would be 3.6x and our payout ratio would be approximately 71%, where we seek to be below 4x and 100%, respectively, under our financial governing principles. And speaking further to our financial position, we continue to maintain a fully funded position with ample cushion. Between our credit facilities and cash on hand, we had approximately $600 million of available liquidity as at June 30.

Also as part of being proactive to maintain our financial flexibility, during the quarter we extended our sustainably linked credit facility to a full 5 years, now maturing in 2027. In taking into account our very strong financial position and consistent performance of our business, especially on the Infrastructure side, we've continued to adhere to our capital allocation philosophy, having bought back $60 million in shares so far this year, including approximately $40 million in the second quarter. This repurchase of 2.4 million shares thus far this year represents approximately 1.6% of shares outstanding, an amount we view as particularly notable relative to peers.

And as Steve mentioned, we are currently targeting buying back up to $100 million this year. To the extent that our share price remains around current levels, this would imply that we would repurchase just under 3% of outstanding shares within the year, with the potential for that to increase with continued strong performance from our business.

In summary, it continues to be a good start to the year. Results from both the Infrastructure and Marketing segments were very much in line with our expectations. From a financial perspective, we remain in a very strong position, being at the lower end of both our leverage and payout target ranges, and remain fully funded with ample cushion with significant available liquidity. And we continue to be of the view that our business offers a strong total return proposition to investors, which we believe we have bolstered with our use of the buyback, both in terms of what we've executed on to date and our intention through the balance of the year.

At this point, I will turn the call over to the operator to open it up for questions.

[Operator]

[Operator Instructions] Your first question comes from Linda Ezergailis with TD Securities.

[Linda Ezergailis, analyst]

I'm wondering if you could give us some more context around some of the outlook around your projects. How might we think of a 2023 and beyond growth capital run rate absent some of the bigger projects like your HRD? And then maybe within that context, can you just give us an update on the composition and potential timing of your project backlog, how it might have shifted a little bit in your outlook over the past quarter?

[Steven Spaulding, executive]

Yes. Thank you for the question, Linda. So when we -- back in December when we gave out the $150 million capital forecast, we expected at that time that probably in the third quarter, we've been able to move forward with the DRU. And now we're kind of -- which meant we would have capital spend in the third and fourth quarter. And now that's kind of been pushed back, we think, to probably later part of the fourth quarter as far as sanctioning the project.

And then on the tankage side that $150 million, we did include some expenditure and tankage in the third quarter and probably some steel costs for -- in the fourth quarter, so building the rings out in the third quarter and steel cost in the fourth. And as I said in my prepared remarks is that that is probably -- that has been pushed back as TMX still the exact start-up date of TMX is still kind of uncertain. Those capital expenditures, we will expect next year.

And then, you -- one of the things that we're always good at is we spend probably $30 million to $40 million a year in projects in and around our existing assets. They're not big enough projects for us to talk about on this call. But together, they're that $5 million and $10 million projects that normally have quite good payouts, more like in the 4 and 5 range. So when you look at '23, I think we're still kind of confident in that $150 range. And then, when we look on, we still -- we have a business development team. We have good assets. And we're continuing to look for other opportunities besides our traditional expenditures going forward.

[Linda Ezergailis, analyst]

That's helpful context. And maybe just a follow-up question with respect to broader capital allocation. How might we think of the maximum buyback above $100 million this year if current expectations of your business performance are realized?

[Sean Brown, executive]

Yes, Linda, I don't think -- as we've talked about previously, we're not going to be absolutely prescriptive in how we think about the buyback. With what we've seen thus far this year, the performance we expect, we did come out with a bit more of a formal target this year of that $100 million.

As we noted in our prepared remarks, there's certainly a potential for that to increase. But I don't think really we want to be in a position to be absolutely prescriptive on that. I mean the other factor that certainly goes into that is that we have historically and we'll continue to have a conservative bias towards our capital structure. You would have seen this quarter that we are at 3x or the low end of our 3 to 3.5 range target. That's a place that we're actually quite comfortable being as well.

So balancing in, as Steve talked about some of the timing of capital for next year, performance of business through the end of the year and that bias towards being at the lower end of the target range are all some of the factors we've put in there. But I don't think we're in a position to be absolutely prescriptive on where that may go to this year.

[Linda Ezergailis, analyst]

And just another contextual question around that. How might your decision whether or not to proceed with the HRD mid-next year influence buybacks beyond that or your dividend policy?

[Sean Brown, executive]

Yes. I mean that's capital next year. I think our view would be that to the extent -- we're going to adhere to our capital allocation philosophy as we move through. I think to the dividend specifically, we definitely see a benefit in modest annual increases. We've been very clear on that messaging. I think sanctioning of something like the DRU -- sorry, the HRD would not change that. A quantum of capital for the HRD would be higher than some of our other projects to the extent that that does get sanctioned and certainly that would factor into things like our buyback.

But again, its reasons like that that we do have this conservative bias to our balance sheet as well. If you think about our positioning as we move into a period of capital like that, it would be certainly what we view is being best-in-class. So certainly a consideration that we would take into account in around the buyback, as we've talked about, to the extent that we have excess cash flow, and it's from marketing, we would likely allocate that to the buyback. Another factor is just our capital outlook going forward.

So mid to late next year, potential sanctioning for the HRD, we wouldn't wait to -- for that to happen. So in other words, we wouldn't wait throughout the year, not buy back shares because of it. As we came closer to the date and potentially saw that sanctioning happening, then we have to consider what that means.

[Operator]

Your next question comes from Jeremy Tonet with JPMorgan.

[Jeremy Tonet, analyst]

Just wanted to start off with Moose Jaw, if I could. And given the expansion that was just completed, does this impact, I guess, your long-term run rate guidance for the asset or for marketing in general?

[Steven Spaulding, executive]

It definitely helps. The expansion has given us 10% extra capacity. Our OpEx on that is almost 0 additional OpEx, right, because we're not adding additional fuel. We continue to, we continue to reduce OpEx per barrel with this. And so the other really big thing on that that it really helps us on is we captured all the butane and light NAFTA that we used to burn in the facility. And now we can sell those as purity products. And so that was almost like a frac spread across a straddle plant for us. And so that's a pretty -- in this, I think it's like 600 barrels a day that we're capturing that we used to burn. So that's a pretty significant add back to the overall earnings. We think it's a cost savings because we used to see it as a loss. So we think it's a cost savings of potentially $7 million a year, Jeremy.

And then you add on the 10% capacity add. So long term, that's probably a $10 million -- $10 million to $12 million run rate on a long-term basis. Whether that's in the Marketing or in the Infrastructure, we have -- I would say the majority of that is going to be in the Marketing, Jeremy.

[Jeremy Tonet, analyst]

That's a nice little add there. And continuing with the marketing and refinery outlook, you talked about getting to $100 million there. Just wondering if you could flesh through what things we should be watching are most beneficial at this point, be it crack or basis spreads. It seems like we're -- it seemed quite elevated cracks out there. So are there any in particular that we should be looking at?

[Steven Spaulding, executive]

Yes, Jeremy, I'm going to hand this over to Kyle DeGruchy and let Kyle answer that for us.

[Kyle DeGruchy, executive]

Yes, sure. Thanks, Jeremy. Yes, I mean what I'd say the things look for is, as we've said, refined products is looking healthy for the rest of the year. I mean I think part of that is off of the lower differential that we've been seeing lately, but also the refining margins in general have stayed strong. So I think crack spreads are a good indicator. Not all of our products are the same as some of the larger refiners with diesel and gasoline really running their yields, but it's a good indicator.

I'd say on a weaker differential in the first half of the year, I mean you really have to pay attention to the Gulf Coast to really see that reason why. I think up here in Canada we're very used to a wide differential based on a lack of pipeline egress. And I'd say the first half was really more the weakness in the Gulf Coast driving that price backwards. Going forward though, I think our view is that volume in Canada will increase. We're coming out of upstream maintenance in the second quarter. So that will bring volumes to our assets. And I would think that that's also supportive of a wider differential certainly as it relates to the first half. So I pay attention to those things. And I think we'll see those opportunities in our crude marketing book as well, particularly on the location side.

So we're optimistic that that wide differential is going to stay there kind of for 2 different reasons, one, first half being the Gulf Coast and so we'll certainly be paying attention to that. But also the outlook in Canada as we head into the winter and which is traditionally more of a volume season for us, especially when you think about daily even requirements adding to that. So those are kind of a few other things that at least we think about and hope to positively impact our business in refined business and also the crude marketing side.

[Jeremy Tonet, analyst]

Maybe just to ask more directly, what would drive you towards the bottom half of the range. You talked about $100 million there because the numbers we're seeing for cracks point to some pretty high numbers. So just wondering if there's any offsets that are holding it back because it seems like you guys could sure pass $30 million in a quarter here?

[Sean Brown, executive]

I mean I think the $30 million number really includes a lot of the things that I've talked about. But I mean, there's, obviously can be some downsides. But one being, let's just say, the export market opens up and we see a real strengthening and pull on crude. But again, I wouldn't say that we see that as being a high likelihood, just given the fact that Canada is also going to be producing more into the second half of the year. So although I temper soaring above $30 million, I think that most of what I said would balance into that number.

[Jeremy Tonet, analyst]

Just real quick last one, if I could, a finer point on the buyback conversation. And just when you look at them and you talked about being opportunistic there. But is timing of buybacks more influenced by where leverage sits at a certain point in capacity for buybacks? Or is it more driven by kind of stock price at a given point in time?

[Steven Spaulding, executive]

Good question, Jeremy. I mean it's not influenced by stock price at a given time. It'd be more by funding position capital allocation. We're always going to think our share price is undervalued and is a good opportunity for buybacks. So certainly, we monitor buyback. And with some of the weakness that we saw into the tail end of the quarter, we would have accelerated the buyback a bit to take advantage of that. But we are not stock-pickers that it relates to the buyback. We commit to amount and we execute on that amount.

[Operator]

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

[Robert Kwan, analyst]

Steve, earlier on the call you talked about opportunities beyond traditional expenditures, presumably the HRD is one of them. But can you talk about some of the other things that are kind of in the realm of possibilities for the company?

[Steven Spaulding, executive]

I would say the DRU, in expanding around the DRU value chain is probably some of our opportunities. That's not a typical tank or tank ad. And then I think the other one would be at Edmonton where we have the MSA with Suncor and continue to advance additional transitional fuel terminaling opportunities with them. Those are some of the -- those are a couple.

[Robert Kwan, analyst]

Okay. So largely those still what you're doing. Just around your comment on the DRU, are you just talking about the expansion itself or you talked about in and around the value chain, are you talking about downstream terminals or rail or what was in that comment?

[Steven Spaulding, executive]

Yes. I think we like the DRU and the value chain around there. So potentially terminals around that are an option for us into the future.

[Robert Kwan, analyst]

As you think about the HRD and evaluating the growth you've got traditional metrics like NPV and IRR, but how much do market valuations factor into your thinking? For example, you've got a Canadian publicly traded comp. It's not very well valued right now. So how does that valuation factor into how you think about going forward with a project of your own?

[Sean Brown, executive]

It's a great question, Robert. I mean, this is Sean here. I would say it's a bit dangerous to look at a Canadian publicly traded comp in isolation and just assume that that is the read-through for the multiple that any sort of asset would attract. I mean to me, multiples are garnered for many reasons, one being leverage, 2 being quality cash flows reading growth profile, a number of factors that you would be acutely aware of.

I would say that for us, we would look less at something like a Canadian publicly traded comp and just ensure that any project that we execute on, we're very aware of what the quality of cash flows are, what the quality of counterparties are, what exposure it introduces or does not introduce, and how that fits into the overall Gibson portfolio in totality. And that would be more of the balance that we would consider as we look at sort of projects like this. But that would be true of almost any project that we execute on.

[Robert Kwan, analyst]

I guess it's just easier with the storage or the core storages you've done it. And do you then look at -- I know you have talked about the Canadian comp. If you look at U.S. comps? Or is it really just lean on NPV IRR and your kind of long-term valuation work and if you got to fight the market on valuation, you'll kind of fight that fight at that point. Is that the approach?

[Sean Brown, executive]

I'd say that would be more of the approach. But again, we need to remember what the overall quantum of this project is going to be in relation to Gibson. And I think we said not only in our prepared remarks but certainly in discussions, that's something we're extremely cognizant of. This is something that we think could potentially be exciting for the company. But at the same time, we're quite measured on what the overall size will be relative to other assets. It needs to fit into the portfolio for sure. So if the economics makes sense, the economics makes sense. But at the same time, it needs to be something that is an appropriate size in the context of everything else we do.

[Robert Kwan, analyst]

If I can just finish with just a question on cleaning up a few things just moved in the quarter. You mentioned that you had some deferred gains in Marketing. I'm just wondering if you could quantify those. And then on Infra, I don't know, is there any color on the nature of the onetime fee as well as what looked like some unusual earnings booked down in Jillian?

[Sean Brown, executive]

Jillian always has -- I'll go through the backwards here. Jillian always has some unusual -- I wouldn't say unusual, it's just the way it gets booked in our -- it's noncash. It's not really much to add there. You'll see a bit of lumpiness there, but never really of any size.

With respect to the nature of the sort of onetime revenue that we had in our Infrastructure segment, that was just part of a contractual arrangement. Those were revenues that we earned under that contractual arrangement. It is not abnormal actually for something like this. We have potential for things like this in the future. The other reason we really highlighted it as people started to look at the run rate for the business. We wanted to make sure that they didn't bake that in.

So really that offset the impact that we would have expected for Moose Jaw. But again, it was just something that contractually was built in and was just revenues earned as part of that contract at a point in time.

From a Marketing perspective, I would say the quantum that we carried in wasn't all that significant in the grand scheme of things. If you think about it as we move through the quarter, our expectation probably would have been that we would have been at the higher end. It's not slightly above our targeted range. So think of that as being circa that $15-ish million. We came in at $12 million, $12.5 million, to the midpoint of the range. So the quantum really was not all that significant in the grand scheme of things. But absent that, we probably would have been at the high end or slightly above our range.

[Operator]

[Operator Instructions] Your next question comes from Will Gu with CIBC Capital.

[Will Gu, analyst]

I just wanted to ask about your expectations for buybacks for the remainder of the year. Do you still expect to see roughly $20 million to $25 million per quarter? And is that roughly equal amounts per quarter? Or do you expect to see a skew towards a specific quarter?

[Sean Brown, executive]

Thanks for the question. I think with respect to buyback, our target earlier in the year that we provided in the call would have been $20 million to $25 million per quarter. We did exceed that somewhat through the first half of the year. I talked about that in a reply earlier where we saw some of the weakness in the share price in the back half of this past quarter, so we took advantage of it.

In the prepared remarks today, we did indicate that we expect to buy back. The current target is buyback $100 million per year. So that would imply, if we spread it out evenly over the few quarters, roughly $20 million a quarter, that's the guidance we're providing right now. But as we also noted, there's certainly potential for that to increase as the year unfolds and we see how the business performs. So not going to be totally prescriptive as I said earlier, target we have out there is $100 million for the year. And at $60 million right now, that imply $20 million a quarter with potential upside to that.

[Will Gu, analyst]

And just one more. Any thoughts on the potential size of the renewable diesel project? And would you consider M&A as the [indiscernible] of the space going forward?

[Steven Spaulding, executive]

Thank you, Will, this is Steve. When I think of the size of the renewable diesel project, we've been anywhere from a little over 6,000 barrels a day up to 15,000 barrels a day. But I would say we're kind of looking at a 9,000 barrel a day range right now. And so we're still evaluating several opportunities in this space in Alberta and in Saskatchewan, so all of them will include partners. And just as Sean said earlier, we'll be quite measured in the size of our expenditure into this new space.

As far as M&A, I mean, M&A is always a possibility. We always look for M&A opportunities. And so if one came in and fit what we want in our strategy that is definitely an outlet.

[Operator]

Your next question comes from Scott Taylor with Pembroke Management.

[A. Scott Taylor, analyst]

Relating to the DRU unit, is there much sensitivity to crude oil prices as far as the economics of that project are concerned, meaning $80 crude versus $120, is there a great variation? And if not, are there any new variables that have come into the picture here in terms of a potential customer going through all the pluses and minuses in evaluating how the DRU unit might fit a new person or a new company?

[Steven Spaulding, executive]

Well, thank you, Scott. When I think of the DRU, absolute crude price is not a big driver, especially not in the short term. In the long term, it definitely impacts because that drives forward more growth in the oil sands, more brownfield expansions in the oil sands. Probably the biggest -- there's the 2 biggest drivers around the economics of the DRU. One is condensate price in Canada versus WTI or versus WCS. And then the other one is just as Kyle talked about earlier, the price of the value of the deal bit on the U.S. Gulf Coast is a driver.

I don't think anything has really changed in those. We still think that the DRU is better on a netback basis to our -- versus pipeline. And so there's nothing in the market that has changed recently that would drive us one way or the other on that. As far as additional customers, we continue to talk to other upstream here in Canada and continue to talk to customers on the U.S. Gulf Coast, which are some of the large refiners. They're in the -- in that Port Arthur Beaumont area.

[Operator]

Your next question comes from Ben Pham with BMO.

[Benjamin Pham, analyst]

I want to go back to HRD. I'm wondering your thoughts on the clean fuel standard. Are those supportive of your economics there? Did create a bit more variables to your analysis?

[Steven Spaulding, executive]

We discussed that yesterday. I would say it was consistent with where we thought it was going to be. It's supportive of the project. And the potential of SAS going forward is even more positive for a project. We think that on a long-term basis, SAS is going to be -- give long-term terminal value to this project.

[Benjamin Pham, analyst]

Maybe going back to some of your comments on share buybacks this year and you also comment on your CapEx program next year being at $150 million range. I'm curious, how do you -- I mean how do you weigh the share buyback versus delevering into CapEx rising and risk of equity issuance? Like how do you -- I know a bunch of moving in different parts, but how do you balance all of that?

[Sean Brown, executive]

Yes. I mean I think a good question, Ben. I don't think -- we're not looking to buy back shares to reissue them. I mean our buyback target certainly would take into account where we think current and future capital is going to be. If anything, if you look at sort of that $150 million circle that amount, that would be lighter than what we have spent previously on a fully funded basis. So even at $150 million, we would see certainly the ability to buy back shares above and beyond that on a fully funded leverage-neutral basis.

So I think a good question. But I mean, if you think of it the setup we have, right now we're at 3x levered. We'd expect to stay at or even probably slightly below that range, even with the quantum buybacks we're talking about right now. So the setup going into next year will be equally as strong. And we certainly see the ability to fund $150 million or more. So for that, at that quantum, we would see the ability to continue to buy back shares.

[Operator]

Your next question is a follow-up from Jeremy Tonet with JPMorgan.

[Jeremy Tonet, analyst]

And although admittedly a smaller piece of the puzzle, I just wanted to touch base with regards to Pyote here, if there's anything worth discussing, given the quantum of activity in the Permian these days?

[Steven Spaulding, executive]

Thank you for that question, Jeremy. We have 250,000 acres dedicated to us there and about 100,000 of them is with one producer. That's a mid-major producer. They came on with the -- PADD last year that came -- that flowed around 4,000 barrels a day and 12 million cubic feet a day of gas is really, really nice well. They're going to come on with another 4-well PADD this year. With that, we think they'll go to 8,000 barrels a day on that 4-well PADD.

So pre-COVID, we kind of got there to what their depletion plan looked like. And it really depends on how many rigs they put on. If they keep going this 4-well PADD, obviously, there's not a lot of real opportunity there with just a slow kind of increase. But if they move to 1.5 rigs, we'll see pretty substantial gains in the revenue there. And if they stay at 1.5 rigs, it will get back, it will grow to maybe $30 million or $40 million a year.

[Operator]

Your next question comes from Matt Taylor with Tudor Pickering & Holt.

[Matthew Taylor, analyst]

I just wanted to come back to Q2 marketing. When you said that $10 million to $15 million guidance back in May, crack spreads were a lot lower, so I was just wondering why that didn't translate to more of a Q2 EBITDA uplift from refined products. Is it just that margin got deferred? Or is it something else?

[Steven Spaulding, executive]

But we had the turnaround in the quarter. So that took away more than 1/3 of our revenue for the quarter with the turnaround because it was -- the turnaround lasted -- total downtime for the refinery was more than 30 days because you got to cool it down and then you get started up and run. So the biggest impact to refined products book was we missed 1/3 of the business, right? So if refined products would have been up, we would have pushed up in the $20 million plus range, if it'd have been up for the quarter.

[Matthew Taylor, analyst]

So the $5 million was the cost, but obviously, opportunity cost there right of having volumes taken offline. And then, one more on renewable diesel. Sean, you mentioned a couple of different times that I think, is important risk-adjusted returns. So maybe 2 quick questions. What's your appetite for commodity exposure there to balance that risk-adjusted return framework you're thinking of? And then you've talked about making sure the CapEx size is the right size for the company. So what guidepost is driving that right size framework?

[Sean Brown, executive]

When we talk about risk-adjusted returns, I mean this is -- the HRD right now is going to be a commodity-based asset similar to what we see with Moose Jaw. And obviously, government framework and incentives will drive that along with the supply cost of the canola oil and price of diesel. So there's, so many variables there when we look at it. And we'll continue to refine and gain our -- gain a really knowledge of the business, right? And we're going to continue to hire experts to help us with that.

We like this business. We see it as a good fit for our long-term opportunities for us. But at the end of the day, we're going to be quite measured in that. Now we're not going to get real prescriptive in what percentage that is or what our risk-rated return is at this time. But at the end of the day, we are a crude oil infrastructure company. And so we'll be quite measured as we step out of that business.

[Operator]

Mr. Chyc-Cies, there are no further questions at this time. Please proceed.

[Mark Chyc-Cies, executive]

Thanks, operator, and thanks, everyone, for joining us here for our 2022 second quarter conference call. Again, I'd like to note that we have made certain supplementary information available on our website, that's gibsonenergy.com.

Also, if you have any further questions, please don't hesitate to reach out to us at [e-mail]. Have a great day, and thanks for your continued support of Gibson.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask please disconnect your lines. Have a great day.