Gibson Energy Inc

TSX:GEI

Earnings Call Analysis

Gibson Energy Posts Strong Q2 2024 with Record Infrastructure EBITDA

Gibson Energy showcased its prowess in Q2 2024 by securing an adjusted EBITDA of $159 million and distributable cash flow of $101 million. The record infrastructure EBITDA of $153 million was chiefly driven by the Gateway Terminal's robust performance. The Marketing segment, despite a decrease from Q2 2023, met its $20 million guidance. Looking ahead, Q3 EBITDA is projected to stay near $20 million, with the long-term annual guidance set between $80-$120 million. Investments of approximately $150 million in growth capital are anticipated, focusing on Canadian infrastructure, notably Edmonton. The company extended a significant long-term contract with an investment-grade counterparty at Gateway, underlining the stability and quality of its cash flows.

Strong Financial Performance in Q2 2024

In the second quarter of 2024, Gibson Energy reported a robust financial performance, with adjusted EBITDA reaching $159 million, marking an increase from the previous quarter and up by $43 million compared to Q2 2023 when normalizing for a prior year's environmental remediation provision. The distributable cash flow also saw an impressive rise to approximately $101 million, representing a $19 million increase year-over-year, primarily driven by the strong growth in the Infrastructure segment.

Infrastructure Segment Drives Growth

The growth in the Infrastructure segment was bolstered by the Gateway Terminal, which continued to perform exceptionally well, achieving $153 million in adjusted EBITDA. This segment's results reflected stability as they remained consistent with Q1 2024, showcasing the quality of cash flows from Gibson's infrastructure assets. The company anticipates continued strength in this segment, supported by a recently extended long-term contract with a high-quality investment-grade counterparty.

Challenges in Marketing Segment

Conversely, the Marketing segment faced challenges, with adjusted EBITDA decreasing to approximately $20 million, a $15 million decline from Q2 2023. The reduced earnings in this segment were influenced by fewer storage opportunities and pricing pressures. Looking ahead, the company expects the Marketing segment's environment in Q3 to mirror that of Q2, anticipating adjusted EBITDA to remain around or slightly below $20 million. Long-term guidance for the Marketing segment remains steady at $80 million to $120 million for 2024.

Strategic Initiatives and Growth CapEx

For the second half of 2024, Gibson plans to deploy approximately $150 million in growth capital, primarily focused on Canadian infrastructure projects, including the Edmonton and Gateway terminals. The company is also advancing a project, the Cactus II pipeline connection, which is scheduled to be completed in Q3 2025, expected to provide an additional 700 barrels per day of supply to its customers.

Stable Financial Metrics and Dividend Policy

Gibson maintains healthy financial metrics, with a leverage ratio of 3.5 times, comfortably within their target range of 3x to 3.5x. The payout ratio stands at a conservative 63%, significantly below the target range of 70% to 80%, indicating the sustainability of its dividend. This balance between dividend payouts and investment in growth positions Gibson favorably for future shareholder value creation.

Outlook and Key Operational Updates

Looking forward, Gibson Energy remains optimistic about its prospects, particularly with the ongoing strength of its Gateway terminal and a favorable contracting environment. The weighted average contract life at Gateway has been positively adjusted to approximately three years following contract extensions. This indicates a strategic focus on enhancing contract tenure while continuing to engage in further negotiations to expand their customer base and long-term agreements.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the 2024 Second Quarter Gibson Energy Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

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

[Beth Pollock, executive]

Thank you, Marvin. Good morning, and thank you for joining us to discuss our Second Quarter 2024 Operational and Financial Results. Joining me on the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive Officer; and Sean Brown, Senior Vice President and Chief Financial Officer. We also have the rest of the senior management team in the room to help with questions and answers at as required.

Listeners are reminded that today's call refers to non-GAAP measures, forward-looking and pro forma financial information, which is derived in part from historical financial information of South Texas Gateway Terminal, LLC and is subject to certain assumptions and adjustments and may not be indicative of actual results. Descriptions and qualifications of such measures and information are set out in our investor presentation available on our website and on our continuous disclosure documents available on SEDAR plus.

Now I would like to turn the call over to Steve.

[Steven Spaulding, executive]

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

I look forward to the next chapter for Gibson this time as just as a shareholder. As Curtis continues to execute, enhance and grow our successful infrastructure strategy. This quarter, Sean will speak to the financial results and I will focus my remarks on the commercial developments around our assets. On July 15, we announced the extension of a long-term contract at our Gateway Terminal underpinned by high-quality investment-grade counterparty. This development is the first step in demonstrating the value Gateway brings to our customers and aligning the high quality of cash flow at our Gateway Terminal with those of Canadian infrastructure assets.

In addition, we also announced the sanctioning of the Cactus II connection, which we expect to be in service in Q3 2025. This project will provide our customers with access to approximately 700 barrels a day of incremental Permian supply. As the company looks forward during the second half of 2024, we still expect to deploy approximately $150 million in growth capital, with the majority directed towards our Canadian infrastructure assets, predominantly Edmonton and the rest at Gateway. Construction of the 2 tanks at our Edmonton Terminal continues to progress as planned, with completion expected to be in late 2024. These tanks will support Synovus with their shipments on the TMX pipeline by providing them with 870,000 barrels of storage capacity.

Construction is supported by a 15-year take-or-pay agreement. With TMX now operational, we remain in discussions with other customers on ways we can effectively support them during this pivotal period moving forward. With respect to Gateway, we continue to perform ahead of our expectations. Volumes remain near all-time highs, consistent with that first quarter. Further, our contracting discussions -- in the extension of our long-term contract with a valued partner at our facility, which met our previously communicated commercial objectives related to rate and tenure. We still expect to be in a position to provide additional news on the second contract on a 5- to 7-year term at or above existing rates in a relatively near term.

On the ESG front, yesterday, we released our 2023 sustainability report, which highlights the progress we've made thus far towards our sustainability goals. Other achievements during the quarter that we are proud of include being recognized as 1 of Alberta's top 80 employers and Canada's best diversity employers for the third year in a row. To conclude, Gibson has delivered another strong quarter.

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

[Sean Brown, executive]

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

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

Turning to the Marketing segment. Adjusted EBITDA of approximately $20 million was in line with previous guidance, though it represents a $15 million decrease relative to Q2 2023 and a $14 million decrease relative to the first quarter of this year. These results were largely driven by fewer storage-based opportunities and tighter heavy differentials impacting Moose Jaw feedstock pricing.

Looking forward, as we sit here today, our expectation is that the environment for our Marketing business will remain very similar to what was experienced in the second quarter. As such, we'd expect Q3 adjusted EBITDA to be at or slightly below $20 million but are hopeful additional opportunities present themselves within the quarter, and we will be positioned to take advantage of them to the extent they do. With this guidance, we would also reiterate our long-term annual guidance of $80 million to $120 million for 2024.

To complete the discussion of results for the quarter, let me briefly walk through a couple of items impacting distributable cash flow. The Q2 2024 distributable cash flow result of approximately $100 million with a $19 million increase from the second quarter of 2023. With the majority differentiate -- attributable to higher infrastructure EBITDA due to the Gateway acquisition, which was only partially offset by higher finance costs. We also maintained our commitment to our financial governing principles with leverage of 3.5x within our target range of 3x to 3.5x when adjusting for a full year of Gateway, our payout ratio of 63% was well below our 70% to 80% target range, demonstrating the sustainable nature of our dividend.

Looking at our ratios on an infrastructure-only basis. Our payout ratio is approximately 71%, well below our target of 100% and leverage of 3.8x is also below our target of 4x when accounting for a full year of Gateway adjusted EBITDA contribution. Our low leverage, ample liquidity and staggered debt maturity profile continue to provide us with significant financial flexibility. In summary, Gibson delivered solid results in the second quarter of the year. Record infrastructure results ahead of the previous high watermark achieved in Q4 of 2023, which demonstrates the strength and stability of our business.

Marketing adjusted EBITDA of approximately $20 million was in line with our previous guidance and support full year contributions within our $80 million to $120 million run rate and subsequent to the quarter, we announced a long-term contract extension at Gateway with a high-quality investment-grade counterparty, which further enhances the quality of our infrastructure cash flows as well as the sanctioning of the Cactus II pipeline connection which will expand supply available to our customers at the facility.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Benjamin Pham of BMO.

[Benjamin Pham, analyst]

Maybe first to start off on Gateway recontracting. Can you comment on potential timing of the second renegotiation? And then can you confirm your -- I know you mentioned the weighted average went up by about half a year. Can you confirm the -- where things are right now on an overall base, is it 3.5 now?

[Steven Spaulding, executive]

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

[Sean Brown, executive]

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

[Benjamin Pham, analyst]

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

[Sean Brown, executive]

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

[Operator]

Our next question comes from the line of Robert Kwan of RBC Capital Markets.

[Robert Kwan, analyst]

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

[Steven Spaulding, executive]

I don't say there was anything unique it was kind of -- if you look back over at the beginning of the time, I mean, bringing forward these contracts and extending these contracts 2 years prior at the same -- prior to the contracts expiring is really unusual in the commercial world. Generally, it's within a year. So to actually execute that contract probably 1.5 years earlier than we anticipated than is normal is just shows the strength of the terminal and executing it at really the same exact terms, just adding term -- existing term length. All of the contact of a little bit different fees -- Robert, all of our contracts have a little bit different fees. They're all not a cookie cutter. They're all not the exact same contract. They're kind of tailored to our customers.

[Robert Kwan, analyst]

Got it. You previously talked about some of the carats of just getting people to extend the contracts early. Can you also just -- are there other things that maybe create a bit of tension or just the sticks to get deals over the goal line? Like, for example, do you need to get Cactus that connection done so that there is at least the lack of better term threat of additional supply trying to get into the terminal and then -- do you have the ability to layer in a contract with a different customer after an existing 1 expires? And does that create tension for somebody just to extend turn?

[Steven Spaulding, executive]

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

[Robert Kwan, analyst]

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

[Steven Spaulding, executive]

Sean.

[Sean Brown, executive]

Yes, I mean we -- it's a fairly specific question. But I mean at the end of the day we're actually really -- yes, at the end of the day, we're actually really happy with the rail exposure we have. So we're very comfortable with that. We think the facility is a fantastic facility. It's a necessary part of the DRU value chain, which we continue to think is incredibly positive for the company. So we are very fine in a status quo environment. At the same time, we do see the option value through a rail facility. So anything like that would have to make absolute sense from an economic perspective and create real value for our shareholders. So I mean we are very comfortable with our existing position. We're comfortable as we move forward with that existing position and would have to consider options as they present themselves.

[Robert Kwan, analyst]

Okay. That's great. Steve, all the best in retirement.

[Steven Spaulding, executive]

Thank you, Robert.

[Operator]

Our next question comes from the line of Robert Catellier of CIBC Capital Markets.

[Robert Catellier, analyst]

I just wanted to digging into the Marketing business a little bit here. Has there been any appreciable change to your long-term marketing outlook? I know you just reiterated those numbers for '24. But just wondering if TMX being placed into service has any impact on that long-term outlook?

[Steven Spaulding, executive]

No, Robert, I mean, we've always been that $80 million to $120 million and I think that's still a good number going forward. We haven't had anything really drive a major upsets in the market over the last second quarter or even in the third quarter going forward. So when there's not a disruption in the market and a lot of opportunities for the traders. We can't be in that $20 million mark through a quarter. But as opportunities do develop, we can pop into a $30 million or $35 million or $40 million in a quarter, and we see those opportunities moving forward, Robert.

[Robert Catellier, analyst]

Okay. Can you just spend a minute on the -- it is a rather minor variance to your previous $20 million guidance and certainly within the range of a normal forecast for this type of business. But you were a little shy of the $20 million guidance for the quarter, and you're carrying a little bit higher NGL and crude inventory at quarter end. Can you explain what's going on with those 2 dynamics.

[Steven Spaulding, executive]

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

[Robert Catellier, analyst]

Okay. So it sounds like your question on timing. Just on the waste to energy FEED study, is there anything you can update us on there? Has that -- what have you learned? And what are your expectations in terms of finalizing of FEED and as FID is still expected early 2025.

[Sean Brown, executive]

Yes, Rob, Sean here. Robert, really no update on where we stand on that. We continue to progress the feed. As I think we've talked about before, backstopped by long-term contracts. We like the stability of cash flows we have from that. But from a timing or update perspective, really, still so relatively early stage. As we sit here today, we're going to progress through the FEED progress through the year, make sure that it gets 100% commercially secured. We're at 80% right now. And then certainly hope that we'll have more of an update on next quarter's call. But as we sit here today, really, we continue to work on it, not much of an update from previous.

[Robert Catellier, analyst]

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

[Sean Brown, executive]

No. No, I don't think. I mean, we're comfortable. Our payout ratio range is -- our target range of 70%, 80%. We've actually, as you know, lived probably closer to that 60% for a while, as we think of it generating excess cash flow support growth capital and not necessarily step out growth capital. I think we have been very disciplined as we've deployed growth capital certainly through our history. So I mean, our focus continues to deploy growth capital on long-term contracted assets backstopped by investment-grade counterparties, really nothing has changed there, and we'll continue to do that.

At that sort of 60-ish to 70-ish percent payout ratio, I think it creates the appropriate balance as we look at our cash flow waterfall as we also balance the fact that we very much, and I think the Board does as well, believe in steady annual dividend growth. So no real plan or intent at this time to flex the payout ratio up. We think it's appropriate for our business. And as we look at sort of our overall cash flow waterfall and capital allocations and priorities.

[Robert Catellier, analyst]

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

[Steven Spaulding, executive]

Thank you, Robert. I hope too.

[Operator]

Our next question comes from the line of Robert Hope of Scotiabank.

[Robert Hope, analyst]

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

[Steven Spaulding, executive]

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

[Robert Hope, analyst]

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

[Steven Spaulding, executive]

Yes. That's a very -- I mean that's an exciting project. It's a project that we very much are doing the engineering work on right now. We do -- we're getting close to understanding the costs there. And we believe that will be -- that will really have 2 income streams. The first income stream really is some contracts actually adding additional MVC to those contracts. Like it's best -- I was talking to Beth yesterday and she came up with a really great analogy on deepening the terminal.

So what happens here is currently, we can load a little over 1.2 million barrels onto a ship. And when we deepen the terminal, we'll be able to load over 1.4 million barrels on a VLCC. So the way Beth explained it and I loved it was when you go to a gas station, do you just fill it up to 3 quarters? Or do you fill it up, right?

So what we've seen, we did do a small deepening project, the traditional foot. And what we've seen is they use that foot every time they load. So that incremental 50,000 barrels, they use every time they grow, they load. And so we believe that the terminal is sort of loading VLCCs they'll go from 1.2 million to 1.4 million and VLCCs are over 65% of our loading. So that's 1 of those ways that we really see income moving forward.

[Robert Hope, analyst]

All right. Thank you. And all the best.

[Steven Spaulding, executive]

Thank you, Robert.

[Operator]

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

[Beth Pollock, executive]

Thank you, Marvin, and thanks, everybody, for joining us for our 2024 Second Quarter Conference Call. Again, I'd like to note that we have made available certain supplementary information on our website, gibsonenergy.com. If you have any further questions, please reach out to [e-mail]. Thank you, and have a great day.

[Steven Spaulding, executive]

Thank you.

[Operator]

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