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Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to Gibson Energy's Q3 2021 Earnings Conference Call. [Operator Instructions] 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.
Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our third quarter 2021 operational and financial results. On the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive Officer; and Sean Brown, Chief Financial Officer. Listeners are reminded that today's call refers to non-GAAP measures and forward-looking information. Descriptions and qualifications of such measures and information are set out in our continuous disclosure documents available on SEDAR. Now I'd like to turn the call over to Steve.
Thanks, Mark. Good morning, everyone, and thank you for joining us today. I'm pleased to say we delivered another strong quarter, both operationally and financially. As is important, we also made progress on the commercial front, and we continue to advance ESG and sustainability at Gibson. Looking briefly at our financial results. Infrastructure adjusted EBITDA of $104 million was slightly above our expectations, and it includes a partial contribution from the DRU. On the marketing side, adjusted EBITDA of $16 million was within our outlook range we provided.Our payout of 72% remains near the bottom of our target range of 70% to 80%. Leverage of 3.2 is within our 3 to 3.5 target range. Our balance sheet remains very strong, including being fully funded for all capital and operational front. We noted on our last call, during the third quarter, we completed the construction of the DRU on schedule within our initial capital range. We continue to be in that start-up phase and have line of sight producing fully on FEC product by the end of the year. The DRU has been operating around nameplate capacity for the past few weeks. And we're loading trains of neat bitumen.Our customer is moving this crude to the U.S. Gulf Coast. Importantly, we understand they're staying really strong pricing on their product. And the refinery customers are seeing meaningful improvement in refinery runs versus dilbit. The diluent continues to see strong pricing advantage versus bill bid at Hardisty, all furthering DRU competes head-to-head with pipelines, improving out the cost competitiveness of the DRU, really should help us with discussions with additional phases. The DRU requires a complicated set of agreements. And given we're already in November, the extent we are successful in securing additional customers, the time line would definitely be in 2022. On the tankage front, we're very pleased to announce the sanction of a new tank at Edmonton during the quarter. With this tank, we welcome a new investment-grade energy customer to our Edmonton terminal.We continue to be in discussions with other TMX shippers. We believe Gibson is very well positioned to support shippers on TMX and optimize producer netbacks and meet stream requirements for them. While we generally provide our 2022 capital budget in December, I will reiterate. Our target is to deploy between $150 million and $200 million per year. Our tankage will remain certainly a big portion of this, but will also likely include projects such as incremental DRU phases, expansions under the MSA with Suncor at Edmonton and potential renewable diesel facility. What hasn't changed is we still expect our capital projects will remain within our 5 to 7-point EBITDA build multiple range, which means we'll continue to generate very attractive risk-adjusted returns for our shareholders.Shifting to ESG. We took another major step a couple of weeks ago with our net 0 by 2050 commitment. This is in addition to our pre-existing 2025 and 2030 climate change targets, which include reducing our overall emissions intensity by at least 20% and eliminating our scope 2 emissions by 2030. Because for us in setting the net 0 target was to have a credible path through the applications of existing technologies, already in commercial use in North America, we were able to address 90% of our Scope 1 and scope 2 emissions. We see the potential for further technology and cost improvements to emerge over time. This is important. Our net 0 target will not or impair our ability to secure growth opportunities. Also, all investments, including energy transition-related opportunities, we'll need to meet our existing internal return hurdles. But our efforts on ESG and sustainability front.We are very pleased to see the company continues to be recognized, including through the recent MSCI, upgrading us to AAA. This is the highest rating in our sector, and we are the only one of 3 companies globally, the only company in North America to receive this leadership rating. In all, we believe we have positioned Gibson to the great fit for ESG minded investors. We have the lowest carbon intensity of our peers. And the steps we have taken consistently move us forward to strong ESG ratings from all the major agencies. Again, we feel we had another strong quarter and remain very well positioned going forward. Our infrastructure business remains solid with our run rate increasing with the start-up of the DRU. We continue to sanction new growth within our target 5.0 to 7x build multiple, and we remain focused on deploying $150 million to $200 million per year in capital. The progress we're making on ESG and sustainability continues to distinguish us from our peers. I will now pass the call over to Sean, who will walk you through our financial results in more detail. Sean.
Thanks, Steve. As Steve mentioned, another solid quarter from a financial perspective, especially for our infrastructure segment. Infrastructure adjusted EBITDA of $104 million was slightly ahead of our expectations when taken into account our $100 million run rate in the first half of the year and adjusting it for the payment of the remaining term of the rail loading contract last quarter as well as the partial contribution from the DRU this quarter. In terms of the drivers of the slate out performance, we saw an increase in third-party revenues at our terminals related to our recent recontracting and the contribution from the DRU was a bit higher than forecast. Marketing adjusted EBITDA of $16 million was within our outlook range. We continue to see opportunities on the crude marketing side, although they were a bit more limited relative to the second quarter and the contribution from Moose Shaw was also slightly lower, driven partly by asphalt margins narrowing through the quarter. However, we are noticing the drilling fluids market strengthening.In terms of our outlook for marketing, we would expect Q4 to come in a bit lower than our Q3 result at between $5 million and $10 million in adjusted EBITDA. This range is reflective of winter asphalt demand at Moose Jaw as well as our strategy to store product in the winter quarters. Also, given our conservative approach to the marketing business, where we seek to hedge the exposure to the underlying commodity prices with financial instruments, with crude prices continuing to rise, that has led to unrealized losses that will need to be realized in the fourth quarter. It's important to note that we are realizing an offsetting gain on the physical inventory that these financial instruments are hedging. However, the financial impact in the fourth quarter is a bit outsized in part to due to just how much commodity prices have moved as well as some of the physical gains being realized in either prior or subsequent quarters.And despite the increase in crude prices and differentials, it remains a fairly challenging environment for our crude marketing business. While the marketing segment is able to earn sufficient margin to cover their fixed costs, the current environment and the outlook for the key drivers of profitability within this business in the near future, likely require some measures of events or catalysts to arise for the marketing segment as a whole to reach our $80 million to $120 million long-term run rate over a 12-month period. And on that basis, given what we are seeing right now, and absent any events or increased volatility, we'd expect that 2022 could be at or somewhat below the bottom end of our long-term run rate of $80 million for the full year, and that's fine as we don't rely on marketing to deliver our strategy. Finishing up the discussion of the results, let me quickly work down the distributable cash flow. Interest costs were $13 million, $1 million above the third quarter of 2020. Replacement capital of $8 million was above the $4 million incurred in the third quarter of 2020 as we were catching up on work in the second half of this year following a reduced rate of replacement capital projects over the last number of quarters as the COVID pandemic limited the number of projects we could safely execute. For the full year, we continue to expect replacement capital to be between $25 million and $30 million. Taxes of $5 million this quarter were $3 million higher than the third quarter of 2020, largely due to higher infrastructure and marketing earnings this quarter. Also, lease payments were slightly lower in the current quarter relative to the third quarter of last year as we continue to actively reduce the number of leased railcars in our marketing segment. And on a trailing 12-month basis, for the first time in a while, both adjusted EBITDA and distributable cash flow increased relative to the prior quarter as we posted a stronger quarter in both infrastructure and marketing segments than we are rolling off. As a result, our payout ratio decreased slightly to 72%, which is still at the bottom end of our 70% to 80% target range. Our debt to adjusted EBITDA remained flat to the second quarter at 3.2x, which is in the bottom half of our 3 to 3.5x target.Also, I would note that on a trailing 12-month basis, given the growth of our infrastructure cash flows and lower marketing contribution, both our adjusted EBITDA and distributable cash flow would be over 90% infrastructure weighted. On an infrastructure only basis, our leverage would be 3.5x, and our payout ratio would be approximately 67%, where we would seek to be below 4x and 100%, respectively, under our financial governing principles. Clearly, our dividend is firmly underpinned, and while always strictly a Board decision that is considered once per year at the February meeting, there's certainly room for Gibson to continue its steady, modest dividend growth.And speaking further to our financial position, we continue to maintain a fully funded position for all our capital with ample cushion for additional projects. At the end of the quarter, we are $185 million drawn on our $750 million credit facility with $67 million of cash on the balance sheet. We also have $115 million of unutilized capacity on our $150 million bilateral demand facilities, implying about $750 million in available liquidity relative to $150 million to $200 million per year capital program target. In that sense, very much years of running room. In summary, a solid quarter. Results from the infrastructure segment were slightly ahead of our forecast, though the environment remains challenging for our marketing segment.From a financial perspective, we remain in a very strong financial position being within both our leverage and payout target ranges, remaining fully funded with ample cushion and with significant available liquidity. And we continue to be of the view that our business offers a strong total return proposition to investors with visibility to continued growth in our high-quality infrastructure cash flows and an attractive growing dividend, all while maintaining a very strong balance sheet and financial position.At this point, I will turn the call over to the operator to open it up for questions.
[Operator Instructions] Your first question comes from Rob Hope with Scotiabank.
First question is on Moose Jaw in your largest emitter source right now. We have additional clarity on the federal level for politics and kind of potential support for renewable diesel projects there. So what are -- what's the path forward for Moose Jaw in terms of kind of the decarbonization plan as well as looking at some renewable fuels there?
So thank you for that question, Rob. We have a team and that is looking at all the different opportunities to reduce our carbon footprint at Moose Jaw. I would say we have 4 different projects that we're evaluating to reduce that plan. And then if you look at our first release on metrics as far -- as far as 2025 and 2030, a lot of them were targeted for Moose Jaw because it is our largest emitter. We have a project underway right now that reduces our carbon footprint quite substantially on Scope 1. And we continue to look at additional opportunities there. And we feel very comfortable we'll be able to meet that with economic projects going forward.
Appreciate that. And then just switching over to Edmonton. So we had the tank secured during the quarter. And let's assume Trans Mountain under service mid-23, when do you need to sign on the dotted line to get tankage in service for that start date? And kind of are we seeing conversations accelerate there?
We're talking to 4 different customers there right now. We'd hope to sign within really spring because that's when we can start building the rings. We're in the winter now. So whether or not it's now or April doesn't make a big, big difference because it's really about constructing the rings for those tanks.
All right. I appreciate the color. I'll jump back in the queue.
Next question comes from Robert Kwan with RBC.
Just on maybe starting on the Edmonton side of things and following on that. What's the visibility on expansion at Edmonton terminals around the Suncor agreement? What do you think you can deploy capital wise? And what's the pace do you think of that spend?
Good morning, Robert. Right now, we have the one project under construction. I would say that's going to be spotty over the next 5 years, off and on. I can't see any real capital beside of that project right now in next year. But going forward, we believe we'll continue to have projects there, especially with this energy transition plan and fuels transitions going on.
Got it. And just on the DRU start-up. You talked about being on spec by the end of December. What is it -- what do you need to do just to kind of get that product on spec? And is that really the gating factor at this point in terms of getting a second or a third contract to underpin the expansion? And just your commentary that if that comes together, it's kind of definitely a 2022 event?
Yes. Thank you for that question, Robert. So we're making a neat bitumen. So actually, when you look at the boiling points and everything, it is dead on spec. So when it gets down to the U.S. Gulf Coast, to a refiner, there's -- it's not off back at all to a U.S. refiner. What it is, is in trained vapor or little bubbles in the crude that increases the flashpoint temperature. And so with that, we were putting in a [ steam ring ] and a couple of more trades, and that -- we hope to have that completed by the end of December. And we're quite confident in this because this is something we do at our Moose Jaw facility today.
Got it. And what's the capital that's required to get to that?
That's all part of our agreement with our contractor on kind of guaranteed service. So we don't see any capital coming out of this. But it's not very substantial at the end of the day. It's no substantial at all.
Okay. And if I can just finish with a small question probably for Sean. How should we think about cash actually coming out of the hard to see partnership, especially just kind of versus what you're actually booking into EBITDA?
Yes. Thanks for that, Rob. It's a good question. So the way it works is that we actually booked the EBITDA as it's earned, as you might expect. And then at the end of each quarter, partnership gets together and then formulaically distributes that cash out. So you would have actually seen in this quarter a bit of a lag between the EBITDA that was booked versus the cash. Now we had other offsets to that when you work down to distributable cash flow. So it probably wasn't as visible. But going forward, given that's just a 1 quarter lag, you won't actually see that again. But from a [ here ], given the take-or-pay, every quarter is going to be quite ratable here. But that is the dynamic you would have seen this quarter, where we booked EBITDA. We didn't actually see the cash and our distributable cash flow. We will see that in the subsequent quarter. And because we won't see that dynamic again now that it's up and running. Yes.
Okay. So -- and you expect -- so for example, I think you booked a little over $4 million into EBITDA. Roughly speaking, that will then show up in cash flow next quarter?
Yes, definitely in next quarter, absolutely.
Okay. And is there any expectation that anything is going to come out of July yet? Or do we need to see business conditions improve before you see cash?
Yes. I mean, a small amount, I would say, at [ Agilia ], nothing material.
Your next question comes from Andrew Kuske with Crédit Suisse.
Maybe if you could just focus a little bit on the DRU is obviously you validated the project in the market. I'd say we've always thought that, that had very compelling economics, but you've got the anchor it's up and running. Could you maybe just give us some color on what happens with the second increment of the DRU? Should it proceed? Do the anchors cost effectively tilt down, but you deliver more attractive economics on the second leg to yourself.
So with that -- with our anchored tenant, being that they were an anchor tenant, if we do contract a second DRU, there is substantial improvement in the economics, right? But a large majority of that improvement goes to that anchor tenant for being that anchor tenant. So it is better than the first economics, but not by as much as you would think.
But then, Andrew, I mean I think subsequent to that, you don't have that same dynamic. So if you think about additional phases, as Steve said, second customer, you don't see as much of a benefit because of the fact that, as Steve said, they help backstop that first phase. Subsequent phases to that, you don't have that same dynamic. And so we see tremendously better economics to the extent that it goes beyond that 100,000 barrels a day of inlet capacity.
That's very helpful. And then if you could maybe just give us some color around the tone of conversations with people now that you've really validated the concept, the project, your shipping barrels all the way to the South and just the appetite for people to engage and to explore the expansion opportunity.
Yes. I mean, obviously, with my commercial team down in Houston, and we were talking to a lot of the big U.S. refiners there that are running this. They're very, very pleased with this product. The neat bitumen, it allows them to -- they do blend that neat bitumen, but they blend it with like a WTI or something. They don't blend it or WTI or WTL Westex is light. You're not blending it with that condensate like Mont Belvieu, natural gasoline, which causes kind of like a dumbbell crude, dilbit is kind of a dumbbell crew, which kind of -- which makes refinery runs not optimal. And so they can blend this neat bitumen and really improve the refinery runs. So I think there's gaining excitement on the long the U.S. Gulf Coast with this product. So with that, we believe we're gaining some momentum to around contracting the DRU next year.
Okay. That's helpful. And if I may just sneak in one more. Obviously, we've seen a couple positive budget announcements out of the Canadian E&PS, but as we really head into the full thrust of budget season in December, how do you think that translates through your business? Because you've seen volumes lift across your systems? Just how do you think about the positivity into 22?
Yes. I mean, that quick response is more around the conventional systems, both in the U.S. and in Canada. They're not a large portion of our business overall. So even if we did see maybe a 20% uptick in that, it's nothing substantial because that total business is less than 5% of our total EBITDA. As far as the long run, if we're able to do brownfield expansions in the oil sands, I think that's a great opportunity for potential tankage at Hardisty. Now that line 3 is back on is totally in service.
Our next question comes from Robert Catellier with CIBC.
Yes. Just a follow-up on the DRU here. I wonder if you could discuss the interplay of the Enbridge Mainline contracting with the producer, the customer behavior? In other words, do you think you need a resolution as to what the mainline contracting might look like and what the allocations to specific refiners might be before they'd be willing to commit to capacity at the DRU?
Thank you, Robert, for that question. That's an interesting question. When you look at mainline contracting verse, which is transport versus DRU, DRU in the current environment is actually better than mainline all the way to the U.S. Gulf Coast? When you look at the increase in a neat bitumen or DRUbit sale along the Gulf Coast versus dilbit and you look at the uptick of condensate versus dilbit here. So you've got that 35% to 40% of condensate that you're taking out of the stream, and you're getting, I believe, today is WTI plus 3 or 4 versus minus 15% to 16% on the dilbit. So that economics, when you look at all of the -- when you put everything together today, the DRU actually is better than the pipeline, and it provides a different type of service and a different type of reliable offtake.
Yes. That's one I thought. And then so what you're saying previously in your comments to other questions, is that the DRU performance in terms of meeting spec is there already. So it's just a question really of the customer getting confident with the process and spending more time with it to get the confidence they need to contract.
That's correct, Robert.
Yes. And then just last one here quickly. Obviously, you've done a lot on the ESG front, and have a good path forward on the emissions. Early days, but there was a commentary about putting a place -- in place a cap on emissions for the oil and gas industry. How do you look at that given you already sort of at the front of pack lowest emissions intensity. But what do you think it means for business development in terms of the impact that cap might have on your customers?
We've been thinking about that for a while. And obviously, after the announcement yesterday, we did get together and talk a little bit about it. But overall, I think the oil sands producers -- I think they've been kind of computed here, right? And they've been thinking about this solution for the last couple of years and looking at the different opportunities in which they can reduce their carbon footprint. So I think that, that solution is going to be solved by our producers, especially in the oil sands. So -- and then whether or not CC -- CCs is viable, which I think it will be. And then also you get the tertiary recovery in the co2 and the tertiary recovery, and we're starting to see those stock opportunities start to pick up. So we think Canada is going to be one of the lowest carbon producers in the world. And one of the people that the world relies on to produce reliable, low carbon fuels. And we'll be there supported.
Okay.
[Operator Instructions] Your next question comes from Patrick Kenny with National Bank Financial.
Just maybe back to Hardisty, Steve. You mentioned line 3 being in service, and I know it's still early days, but operationally, I just wanted to confirm if you're seeing overall tankage being sufficient for customers? Or do you see a need for an extra tank or 2 as volumes through Hardisty continue to ramp up, this being outside of another tank to support the next phase of DRU.
Patrick. So I think we've said this in the past. If we didn't -- we contracted really around that tank that line 3, really a couple of years ago. So a lot of the tanks that are in service today are for production that was -- that is this line free production. So I don't know that line 3 service is going to impact us in the short term. I think in the long term, it will impact us as the brownfield SAGD opportunities are developed.
Got it. Great. And then just on marketing, Sean, you mentioned the fixed cost component. So I'm just curious if you fully rightsized the cost structure there for the business? Or if there's more that can be done through 2022, just to help hold that $80 million base level? And then also maybe below the EBITDA line, if there's more that can be done to, say, reduce the lease payments for that business to help support free cash flow.
Yes. No, thanks for that, Pat. I think as you would have seen, I mean, on the lease side, our marketing group has actually been actively reducing our leases. So you would have seen those lease payments already go down last year, and then they've come down again this year. On the fixed cost side, it really depends on what we're talking about there. But what that is, is our marketing business takes those commitments and then optimizes around those commitments. And so to actually earn their margin, you need some of those commitments to make it. So I mean, like anything, especially in an environment that's somewhat more challenging for them right now. They are looking at all commitments they have and make sure that they still make sense in this current environment, but nothing to point to right now. I think the position they have is one that they think that still makes sense and gives them the best opportunity to not only earn margin in what is a more challenging environment right now. But if the marketing environment recovers, to then get back to a period of where potentially can make more outsized profits.
Got it. And sorry if I missed it, Sean, but being a month into Q4 here, any near-term guidance on the contribution for Q4?
We came out. And in my prepared remarks, it was $5 million to $10 million. Lower than this quarter. A couple of factors that we talked about in the prepared remarks there. We are in the winter season for Moose Jaw. Drilling hasn't really picked up like it has in other years to offset that as much. And another factor being just with the rising crude here, we do have some financial positions that offset physical gains.
Perfect. Appreciate it.
So our next question comes from Matthew Weekes with iA Capital.
All my questions have actually been answered at this point. So I'll just put myself back in the queue.
Your next question comes from Ben Pham with BMO.
I'm just -- I'm just wondering -- I know you've kept your base strategy, 1 or 2 tanks a year DRU Phase II, use marketing profits to buy back stock or if you had excess profits. I'm just curious, are you evaluating Board valuing any other sort of different cap allocation strategies, whether it's asset sales or debt restructuring, M&A? Like anything else that you're looking at to maybe bridge the valuation discount on your shares?
Let me start this, and then I'm going to let Sean kind of wrap it up. But this time each year, we do take a hard look at our strategy, what is our strategy looking forward. And we'll look at all of those things as far as any kind of change in our strategy. I think we've been exceptionally good at executing the strategy that we laid out in 2018, and we'll look at how do we need to tweak that strategy going forward. Sean?
Yes. I mean, I couldn't agree more. I mean, certainly, we are not complacent. We're doing everything we can to try and maximize value. I mean, the some of the specific items you talked about there. And I think to the extent that we have an ability to deploy capital at 5 to 7x under long-term contracts with investment-grade counterparties. I think if you look across the energy infrastructure spectrum, those are some of the most attractive capital deployment opportunities in the space. So we'll obviously continue to do that and maximize that. Outside of that, we do have the NCIB. That's something that we expect that we will be active in it over time. So that certainly is a tool in the toolkit. Asset sales, as you would know, we have already really largely rationalized our portfolio.We did that through -- since Steve joined in 2017 and through the execution of our strategy, there's not a lot on that side. And then M&A, as we've talked about, it's something that we always evaluate. Now there's always going to be a competition for capital as you think about M&A and when you're deploying capital in a fashion that I talked about earlier, that bar or the hurdle rate for that M&A is extremely high, but that's still something that we're always investigating. Is there M&A opportunity that there that we think will be additive to the strategy. So the short answer is, yes. We are investigating all of the above.As a management team and with the Board. But that, quite frankly, isn't all that different than any year, as Steve talked a bit earlier. On the debt restructuring side, there's really not a lot to be done there either. I mean we -- as you'd be well aware, Ben, with our move to investment grade, we have completely cleaned up our old legacy [ sub breast and ] grade capital structure. We would have [ monologs ] coupon and amongst the longest weighted average center in our peer space. So never complacent, but still, unfortunately, there's not a lot more we can squeeze out of that one there. But again, always investigating, certainly.
Okay. That's great context. And I want to follow-up too, when you think about even M&A or even new investments, would you consider even heading out of the crude business, whether it's gas process? I know you talked on the DRU, for example, any thoughts of even heading outside a bit?
Those are things that we'll definitely discuss with the Board. And those types of strategies. The Board is definitely going to need to weigh in on anything like that. Those are Board decisions, but we're taking a hard look at our strategy going forward.
Yes. I think one thing, Ben, is that cash flow quality, we understand very much why people invest in Gibson. And part of it is the quality of cash flow, as you see through our core infrastructure business. And so that will remain part of the strategy moving forward. We've got financial governing principles that include the level of take-or-pay we have, fixed fee-for-service, investment-grade counterparties, and we're going to stay true to those as we think about sort of evolution of the strategy as well, though.
There are no further questions, please proceed.
Well, let me take this opportunity to thank everyone for joining us on our 2021 third quarter conference call. Again, I just want to note that we have made certain supplementary information available on our website, gibsonenergy.com. If you have any further questions, please reach out to us at investor.relations@gibsonenergy.com. Thank you, and thanks for your support for Gibson.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.