Gibson Energy Inc

TSX:GEI

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Gibson Energy's 2018 Full Year and Fourth Quarter Conference Call. Please be advised this call is being recorded. I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President, Strategy, Planning and Investor Relations. Mr. Chyc-Cies, please go ahead.

[Mark Chyc-Cies]

Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our full year and fourth quarter 2018 operational and financial results. On the call this morning from Gibson from Calgary are Steve Spaulding, President and Chief Executive Officer; and Sean Brown, Chief Financial Officer. Listeners are reminded that today's call refers to non-GAAP measures and forward-looking information. Descriptions and qualifications of such measures and information are set out in our continuous disclosure documents available on SEDAR. Now I'd like to turn the call over to Steve.

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

Thanks, Mark. Good morning, everyone and thank you for joining us today. 2018 was truly an outstanding year for Gibson Energy. On a financial basis, 2018 adjusted EBITDA of $457 million and distributable cash flow of $284 million were both new highs for the company. The financial results we delivered last year demonstrate how our new strategy and continued focus on operational excellence is taking us in the right direction. Today, we are a very different Gibson Energy than we were at the start of last year. We are company focused on oil infrastructure and the business driving 10% plus per share growth through infrastructure investments. The market is starting to take notice. When we announced our strategy and hosted our Investor Day in January of last year, the vision we talked about was very different than the Gibson Energy people knew. We needed to deliver on many fronts to move the company forward.We said Gibson Energy would become oil infrastructure focused and exit its non-core businesses. We have closed the divestiture of 4 of the 5 of those businesses. We expect we will complete the final sale of the Canadian truck transportation business on schedule by the middle of this year with aggregate proceeds within our target range. We said that Gibson Energy would grow at least 10% per share. To reach that growth, we needed to deploy $150 million to $200 million a year in infrastructure capital. In 2018, we deployed $300 million in oil infrastructure capital with most of the capital spent on building tankage at Hardisty. Exiting 2018, we had 7 tanks under construction, representing a 35% expansion of the Hardisty Terminal. This was achieved against a backdrop of challenging industry conditions, demonstrating that our Hardisty Terminal is a platform that can grow and deliver value to our customers across all business environments.Last week, we placed 3 of these tanks in service. They were 3 months ahead of schedule and on budget. Last fall, we doubled our long-term outlook for tankage capital. At 2 to 4 tanks a year, we are growing our distributable cash flow a little less than 10% per share based on tankage alone. We remain confident in contracting 0.5 million to 1 million barrels of tankage per year based on our current discussions with customers. This year, we have already sanctioned one tank and we are negotiating with customers on additional tanks. We delivered on our strategy to grow outside the fence in Canada. In 2018, we sanctioned the $50 million Viking project. In December, we placed the pipeline in service ahead of schedule and on budget. This is the first pipeline of any significance Gibson Energy has built in over 20 years. We are excited about the infrastructure position Gibson is building in the U.S. around our Pyote system and into the emerging Wink Hub. In 2018 and 2019 combined, we are deploying approximately USD 100 million to expand the Pyote Gathering System and connect multiple export pipelines at Wink. In 2020, we expect EBITDA from our Pyotek/Wink assets to be at least USD 20 million per year. Moving forward, we will continue to invest in building infrastructure around our Wink position providing us another platform to reach or exceed our growth targets.Putting it all together, with the growth we sanctioned in 2018, we have clear line of sight to deliver 10% plus distributed cash flow per share growth into 2020 and we are confident we will grow at that rate or better well past 2020. What can't be overlooked are the changes made within the organization. We have already built a winning culture at Gibson Energy. With the changes we've made at every level in the organization, we are now truly commercially minded and focused on operational excellence. The last part of the strategy outlined at the Investor Day that I want to address is the strength of our balance sheet and security of our dividend. With our strong financial performance in 2018 driven by both the infrastructure and wholesale parts of our business, we are well ahead of plan. At the end of 2018, our payout ratio of 67% was below our 2020 target of 70% to 80%. Net debt to EBITDA was 2.3x, well below our target of 3x to 3.5x. Perhaps most importantly, our $0.5 billion of sanctioned capital for 2018 and '19 is fully funded through disposition proceeds and retained cash. In summary, our financial results in 2018 were outstanding setting records for adjusted EBITDA and distributed cash flow for the full year. We are executing our strategy. We are doing what we said we would do and with Gibson Energy being the top performer in our peer group in 2018, the market is starting to take notice. And just as importantly, the future remains very bright for Gibson Energy. We are excited about the next phase of growth for the company and look forward to providing more details at our upcoming April Investor Day. I will now pass the call over to Sean who will walk us through our financial results in more detail. Sean?

[Sean M. Brown, Senior VP & CFO]

Thanks, Steve. As Steve mentioned, we had a very strong 2018, setting new high water marks for both adjusted EBITDA and distributable cash flow during the year. As you've heard us talk about on prior calls for both the full year 2018 and in the fourth quarter, the results were driven by a very strong predictable contribution from the infrastructure segment, while wide crude oil differentials helped push wholesale well above the top end of our expectations.Looking first at our key metrics on a fourth quarter basis, adjusted EBITDA from continuing operations of $134 million was slightly lower than the $140 million earned in the third quarter of 2018. Breaking that down by segment, infrastructure was in line after adjusting for the onetime net benefit we recorded in the third quarter at Edmonton. Importantly, terminals and pipelines is right around the $60 million per quarter run rate we've been at since the Edmonton tankage was placed into service at the start of 2018 with the next step change to occur in Q1 2019 with the sanction of the 3 new tanks, or 1.1 million barrels at Hardisty in February of this year, and the Viking pipeline entering service.In wholesale, segment profit of $81 million in the fourth quarter was a $13 million increase from the $68 million earned in the third quarter. However, in the fourth quarter, we had a $13 million unrealized gain relative to a $4 million unrealized loss in the third quarter. As a result, even though our aggregate segment profit was up from the third quarter to the fourth quarter, adjusted EBITDA from continuing operations was down marginally. In summary, the fourth quarter results in wholesale were meaningfully above our expectations. While the Government of Alberta's announcement on December 2, 2018, quickly compressed differentials, it had a limited impact on our feedstocks into Moose Jaw as the trading cycle for December delivery had already finished.In fact, in the fourth quarter, Moose Jaw benefited from some of the lowest cost feedstocks of the year. Also, with the wide differentials, we are able to use our asset base to work with customers to ship crude by rail to premium markets, and the volatility seen in the fourth quarter also created opportunities for the wholesale group. Looking into the first quarter of 2019, we expect wholesale will post another strong result, likely in the range of $60 million or greater. Our optimism is largely due to some onetime opportunities created by the volatility in the market following the intervention by the Alberta Government. Beyond the first quarter, we expect that while differentials are likely to push out towards levels that will support incremental crude by rail to help clear the glut of oil in Western Canada, with the managed production curtailments, we aren't likely to see the same wide differentials as in 2018. As a result, the contribution from wholesale in the last three quarters of 2019 is likely to remain at or above midcycle levels, but we are not budgeting for wholesale to remain at levels expected in the first quarter of 2019 or seen in the last three quarters of 2018.Moving quickly to our logistics segment, now encompassing only our U.S. truck transportation business from a continuing perspective, we are pleased to say it was in the black in the fourth quarter. We have focused on rightsizing the overhead in that business in the past few quarters and wide differentials in West Texas caused by the lack of egress improved our truck volumes. That said, we still expect U.S. truck transportation to be around breakeven in the near term as those differentials have since tightened and we've seen decreases in both hauls and volumes at our injection stations, which are reported under infrastructure. On a distributable cash flow from combined operations basis, the fourth quarter results of $84 million was effectively in line with the third quarter's $85 million. While adjusted EBITDA from continuing operations in the fourth quarter was slightly lower than in the third quarter and replacement capital in the fourth quarter of $10 million was higher than prior quarters of 2018 due to several small projects mainly within the infrastructure segment, this was more than offset by slightly lower taxes and adjustments for certain noncash items related to sold businesses.Turning to a year-over-year comparative. 2018 was simply a much, much stronger year than 2017. Adjusted EBITDA from continuing operations of $457 million was effectively double the comparable results in 2017 and distributable cash flow from combined operations of $283 million was $103 million or 57% higher than in 2017. Segment profit from infrastructure was $48 million higher, an increase of 20%. Our cash flows from the segment particularly from terminals and pipelines are very stable and grow mostly as we place new assets into service under long-term take or pay and stable fee-based contracts. At the start of 2018, we placed 2 new tanks into service at our Edmonton terminal and 2018 also benefited from higher throughput volumes, mostly as a result of a ramp-up in production from an oil sands project with dedicated tankage at our Hardisty Terminal.Our wholesale segment had a spectacular year. With segment profit of $211 million, an $180 million or nearly 6x increase over 2017. About 1/5 of that increase was due to the adoption of IFRS 16 in 2018, where segment profit is reported before the impact of about $40 million in lease costs. But very clearly, the main driver was the wider differentials and other opportunities created by the volatility and displacement in the Western Canadian crude market.With the combination of the stable cash flows from infrastructure and the significant contribution from wholesale, our financial position at the end of 2018 was much stronger than at the end of 2017. Our payout ratio improved from 104% to 67%, which is below our 70% to 80% target range. Our net debt to EBITDA improved from 4x to 2.3x with EBITDA increasing and also our net indebtedness decreasing by about $145 million, while funding a sizable capital program.Looking forward, we remain fully funded for all our capital projects without the need for external equity and we continue to build cushion each quarter, we see upside from wholesale, and as we start to place these infrastructure projects under construction into service. In terms of the divestitures, since our last call, we have announced and closed the sales of wholesale propane and noncore environmental services north for proceeds of approximately $100 million, bringing proceeds from the noncore divestitures to $225 million. We continue to progress the sale of Canadian truck transportation. Although we would acknowledge that the weakening sentiment around oil and gas in Western Canada has had an impact on the process, we still believe we will be able to complete the process within the initial midyear time frame and aggregate proceeds from the dispositions are expected to be in or around the midpoint of our target range of $275 million to $375 million. So in summary and reiterating Steve's points, we had a very strong 2018 both in terms of financial performance and the execution of our strategy. Our infrastructure segment continues to provide visible, high-quality growth and the upside earnings from wholesale have meaningfully improved our financial position. Our payout and leverage ratios are now below target levels. We're fully funded with ample ability to fund more capital and we have one more disposition to work through. We are very pleased with how things are going and will look to sustain the momentum in 2019. 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 the line of Patrick Kenny with National Bank Financial.

[Patrick Kenny, Research Analyst]

With respect to the Alberta Government's contracts here with the rail companies, are you guys involved or do you expect to be involved at all, either at Hardisty or Edmonton with a similar deal to load those cars starting this summer? And if so, can you speak to what your contract structure might look like with the government and what the financial benefit might be?

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

Thank you, Patrick, for the question. We never talk about any customers that we actually do any contracts with and then when it comes to the actual terminal itself, any transactions that would be done at the actual rail terminal are done by our partner, United -- USD.

[Patrick Kenny, Research Analyst]

Got it. And then just on the Line 3 news here, do you expect this to have any negative impact on your discussions right now with shippers for new tankage or at least the timing of when you might be able to sanction the next one or two tanks. Does everything get pushed back a year on your end as well?

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

That really kind of depends on what the government does with the curtailment. USD is looking to actually expand that terminal more to help alleviate some of the bottlenecks in Western Canada. Obviously, the most important thing is that that line does move forward in the future for the health of Western Canada crude oil.

[Patrick Kenny, Research Analyst]

That's great. And then last question maybe for Sean here. Assuming the sale of the Canadian trucking business goes as planned by midyear, would you be expecting a pretty quick turnaround from S&P with respect to reviewing the potential upgrade to investment grade? I believe the last review was in August. Can we maybe expect a similar time line for a review this year?

[Sean M. Brown, Senior VP & CFO]

I think that -- as you're aware, really the timing of the review is out of our control. You're correct, they did upgrade us in August of last year. My plan would be to go in and see them certainly once we've announced the sale of trucking with sort of a new investor deck to just walk them through the story and where we sit right now to hopefully try and expedite the review ahead of that August time frame. But again, out of our control but certainly it is an initiative that we will look to move forward on.

[Operator]

Our next question comes from Rob Hope with Scotiabank.

[Robert Hope, Analyst]

Maybe first question just on the allocation of capital. You're exiting 2018 well ahead of where I guess what was communicated at your Investor Day given the strong wholesale results. When you look at excess capital moving forward, how are you thinking about putting it to work, whether it be continuing to pay down debt, invest in either new organic projects, M&A or increase the dividend?

[Sean M. Brown, Senior VP & CFO]

Thanks, Rob. A great question. I mean first and foremost I think as you would have seen at the end of the quarter or year-end, leverage is at 2.3x. So really not a focus on reducing debt given our spend profile initially would be to reduce debt. But then that really is just temporal in the fact that our biggest priority would be to deploy into infrastructure growth capital.So to the extent that is there, which we have seen, you would see that we've got a 2 to 2.5 current growth capital target. The basis of that was [ 200 ] in sanctioned capital at the time we put that out, plus potential upside of another [ 50 ]. With the sanction of the tank, we announced last week that would push us to the higher end of the 2 to 2.5 already as we sit here in early March. So absolutely from a deployment of capital, it would be into the high-quality infrastructure growth projects that we're currently pursuing.To the extend beyond that, that we didn't have additional opportunities, which is certainly not what we see here, then we'd look to probably redeploy proceeds to shareholders in some fashion, be that through a buyback or otherwise. But M&A really is not a focus for the management team right now.

[Robert Hope, Analyst]

Then just a more granular question. The outlook for wholesale in Q1 just given that [ difs ] moved in pretty quickly in December, can you walk us through some of the dynamics that are giving you that $0 million plus for wholesale?

[Sean M. Brown, Senior VP & CFO]

Absolutely. So again, $60 million plus is a mix of refined product plus crude marketing. If you think of the shape of that $60 million, it's really January has been the strongest month, which we do have some visibility on. Refined products still benefited from some of the cheaper feedstock purchased precurtailment. And the crude marketing business did set up some positions in December that had crystalized in January.So it really is probably -- January would be the strongest month of the three. The other part is I would remind people that if we think forward to Q1, it's really just not the wholesale story. So we did come out on the call or prepared remarks with the $60 million but do want to remind people that from an infrastructure perspective and a tankage perspective, specifically we talked about it being extremely ratable with the step changes being within the sanctioning or commissioning of new projects.So we'll remind people that we will get a bump in infrastructure in Q1, A, from the Viking pipeline that was put into service in late December. And then B, from the 1.1 million barrels, the three tanks that we just put into service on March 1.

[Operator]

Our next question comes from Jeremy Tonet with JPMorgan.

[Jeremy Bryan Tonet, Senior Analyst]

Just wanted to pick up on the wholesale as well. As far as what midcycle might look like, just wondering if you could provide any thoughts there, where it could be post 1Q? If I look at 1Q '18, it was $30 million. If I look at 2017, it was also about $30 million. So how do you guys think about bookends of the cycle and where midcycle lands for wholesale post these Moose Jaw enhancements that you're in the process of doing?

[Sean M. Brown, Senior VP & CFO]

Thanks, Jeremy. So I don't think I'm going to provide bookends necessarily. But what I will say is, as we think about midcycle generically, we think of that as being on an annual basis, something in the range of $60 million to $80 million for the wholesale business.So if you think about the entirety of 2019, we've talked about $60 million for Q1 here. If you think of the $60 million to $80 million that would imply $15 million to $20 million per quarter. So on a full year basis, as we sit here today, and we're certainly update this at Investor Day and as we move through the year, depending how the business progresses. But that would imply sort of $100 million to $120 million on a full year basis.

[Jeremy Bryan Tonet, Senior Analyst]

And maybe I'm getting a little bit ahead of myself here with what you might talk about at Investor Day. But just wondering for the U.S. platform, what do you think next steps could look like here? Post the current Pyote expansion you're doing here, what more do you think is possible there? There's a lot of competition in that area. So would future U.S. expansion be kind of concentrated more there or could you build off the injection stations kind of elsewhere in the U.S. and kind of do more there?

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

Jeremy, this is Steve. I would say the project itself, the East Pyote Project, is going very well and we expect to place that into service in late third quarter, early fourth quarter, kind of on time, on schedule. The volumes look really good there. As far as what we're going to do in the U.S., we really want to talk about that at Investor Day. We do have a lot of opportunities that we are currently chasing.

[Operator]

Your next question comes from Linda Ezergailis with TD Securities.

[Linda Ezergailis, Research Analyst]

Maybe this is something that will be addressed more at Investor Day but I'm just wondering where you're at in realizing your efficiencies in your Moose Jaw refinery and at what point might you revisit whether or not it's a core strategic asset to keep holding on? I'm just trying to think of what conditions would be in place for you to consider a strategic divestiture or an opportunistic one?

[Sean M. Brown, Senior VP & CFO]

It's Sean here. I'll take that. So as you said, really right now, what we are focused on is the efficiencies exercise and really cutting costs there. I think that has progressed extremely well. Really, the next focus is on the de-bottlenecking exercise or the expansion of the facility. We would expect that to be completed sort of end of Q2 and that is absolutely the focus right now.As you'd be aware, Moose Jaw contributed significantly to the funding of our capital in 2018, and as we look into Q1 2019. So as a whole, we would still view the facility as absolutely being core. And we do get the question a lot is how would you ever consider -- or what would allow you to consider monetizing the facility and really what it would require is an extremely, extremely attractive price for us. So absent that, we still view the facility as being core.

[Linda Ezergailis, Research Analyst]

And have you assessed the impact of the accelerations, UCA incentives announced by the government in November on your cash tax outlook over the next couple of years? And can you just give us a sense of what you see in terms of cash taxes generally?

[Sean M. Brown, Senior VP & CFO]

So thanks for that. We have investigated it and really, the primary place that we think there will be an impact is at our Moose Jaw facility. It's not really -- or our view is it's not going to be a material impact. But similar to 2018, as we look forward to our cash taxes, really where we pay the majority of our cash taxes would be on our wholesale earnings. We've got position NOLs in our U.S. business to offset any income there. And given the capital spend on our terminals business, we [indiscernible] there as well. So as we think about cash taxes really think about applying sort of your standard tax rate to sort of what you would forecast for the wholesale earnings and going from there.

[Operator]

Your next question comes from Robert Catellier with CIBC.

[Robert Catellier]

You've I think answered my question here by responding to other questioners. But was really wanting to dig into the Line 3 delay and what it means for your expectations on differentials. And separately, on demand for new tanks. Firstly, on the tank side, it seems likely that these increasingly volatile differentials could increase the need for tanks on the short-term, but arguably might slow long-term demand. And want you to speak to that and if that's the case then will these recent delays in pipeline capacity additions we've seen over the last 6 months, require the company to look at another growth platform other than the existing initiatives you have underway today?

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

If you look at our tank builds, our tank builds are really 16 to 18 months out. And so Line 3 is still within that window. We do continue to talk to customers at Hardisty for building tanks out at Hardisty. Also, if it continues to get pushed, USD is looking to expand that facility an additional rail car day or almost an additional rail car day, which would add additional tankage. As far as the government goes, their intervention as far as cutting, that does actually have a negative impact on movement of railcars out of USD due to the price differentials. New platform. I don't know about any new platform. We kind of like our platform in the Permian, and at Hardisty, and at Edmonton.

[Robert Catellier]

So the calculus I'm really trying to get at here. I don't want to overlook the growth that you've had in the last year and all the while, you were advancing some other priorities, including deleveraging. But if you look at the current dynamics, can you still get to the 10% per share distributable cash growth with the current market dynamics being delayed pipeline additions and the ongoing government intervention? Or do you need another asset platform to help you get there?

[Sean M. Brown, Senior VP & CFO]

It's Sean here. No. We don't think we do. I mean if you about the Line 3 delay, really, the biggest question is what government intervention will you have. But again, we've got to remember that our primary customers at the oil sands are extremely long-term in thinking and capital planning. So even though Line 3 is disappointing, it is somewhat temporal in nature. So it's, call it, a 12-month delay. So it's not like people are changing decades long capital plans in around a 12-month delay.So our optimism in the tankage front hasn't really changed. Our optimism on our U.S. platform hasn't really changed. That is one of the reasons we think it's important we have a U.S. platform because it is something outside of tankage. So no, our view is not that we need to move into a different vertical or platform to try and deliver on what we've previously talked about.

[Operator]

Our next question comes from Andrew Kuske with Credit Suisse.

[Andrew M. Kuske]

I think the question is probably for Sean and when you look at the quarter and Q4, obviously a volatility on a number of specs. Could you maybe give us just some context on your risk management systems and how they stood up in the quarter, and any changes that you made really for the following quarters?

[Sean M. Brown, Senior VP & CFO]

That's a good question. The risk management system, this is probably a better one taken offline, but I mean in general, we've got a risk management system that monitors all activities. We get trade signals that come in depending on a bunch of different factors, as people are aware. We do have VAR limits and those VAR limits weren't triggered at all during the quarter.We do also have trade signals that are impacted through changes in sort of mark to market positions and they go to different levels, be it me, Steve, or even the Board. And so given the volatility, there was an increase in trade signals in the quarter. But everything was handled appropriately. Everything was within the limits. So really no concerns from that perspective. I mean I think we have a very robust risk management system that worked extremely well. And the other side of this is that if you think about this, the vast majority of anything we're doing on that side is really just offsetting physical positions. So it's sort of back-to-back hedges. So even if you think about the unrealized gains that we experienced in the quarter that would have been in our wholesale segment profit, but was backed out from an adjusted EBITDA perspective, that would have been a position that had an offsetting physical position. So as crude prices feel during the quarter and ended the year below where they started certainly at the quarter or the start of December, we would have had a gain on a hedge there, that was offsetting a physical position. So the hedge actually worked.And as you moved through January, you would have seen that hedge crystalize but again, you would have had an offsetting mark to market for that. So which would tell you that the hedge was actually effective for the quarter. So really no concerns that I have from a risk management perspective and no material changes. I think with Steve on board, he's got some thoughts from a risk management perspective but that has nothing to do with sort of increasing volatility in the quarter.

[Andrew M. Kuske]

And then maybe if you look back to the last Investor Day and the plans that you laid out, and given the year that you've had, just from a financial standpoint, how much farther ahead of your initial plans are you at this stage? And then when you think about the flexibility that you have, and maybe this segues into your next Investor Day, how do you allocate that flexibility?

[Sean M. Brown, Senior VP & CFO]

If you just go from the actual materials, you would have seen that we expected for 2018 and 2019 that we were going to be in a range of 3x to 3.5x from a leverage perspective and we were going to be in a range of probably 70% to 80%, or sorry, closer to 100% from a payout ratio perspective, which was really growth in infrastructure being offset by the loss of cash flow from divestitures.So as we exist '18 here, we're really quite far ahead. Suppose that 3x to 3.5x were at 2.3x, and as we exit, from payout ratio perspective, 67% relative to the range of 70% to 80%. So well ahead. If you think about what do we do with that extra flexibility, I think we're doing it right now. You would have seen an expanded capital program really all towards the high-quality infrastructure in 2018. We've got a capital program -- at Investor Day, we talked about spending $150 million to $200 million to drive the targets that we put forth.And as we sit here today for '19, we've got a capital budget of $200 million to $250 million. I've already talked about earlier in the call that with the sanction of the tank last week that's going to push that to the higher end of that $200 million to $250 million and we'd expect that we will further update that at Investor Day. So really what this is allowed to do is remain fully funded as we increase our capital, all directed towards the high-quality infrastructure projects that we have.

[Operator]

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

[Robert Michael Kwan, Analyst]

Just wondering as you think about how [indiscernible] might think about new tankage and the Line 3 delays, you guys are thinking it's a little more temporal than anything. With the high wholesale, every quarter you deliver results like this, you can pretty much build another tank. So I'm just wondering, if there any contemplation of building one or two tanks on spec given you've got the balance sheet and the cash flow to do that?

[Sean M. Brown, Senior VP & CFO]

It's Sean here. Really, our philosophy hasn't changed around that. As you know, historically, we've sanctioned tanks only backstopped by long-term contracts. Where that has changed slightly is -- or not changed but as you know, we have and we will continue to build an operational tank, which is really a tank that's required as we do a turnaround on tanks so that we can keep all the tanks in service.As we move forward here, philosophically that viewpoint hasn't really changed. The only instance where I could see us looking to potential build an unsanctioned tank would be if there's significant economies of scale of building within an existing footprint or berm. So if for example, we sanction an additional tank or two and there's economies of scale of building sort of the third tank in that existing footprint or berm, that is something that we'd consider. But philosophically, we're not going to move to a model where we just sort of building tanks on spec en masse because of the excess capital that we have generated in wholesale.

[Robert Michael Kwan, Analyst]

And I guess if you think about what you've just announced, presumably if you're not putting another tank in there for yourselves that the economies of scale don't kind of support that kind of activity right here, right now.

[Sean M. Brown, Senior VP & CFO]

That's one I think we'll continue to evaluate as we move forward. I think certainly we are completing that top of the hill build out right now and really the decision tree for that will depend on sort of the next wave of sanctions that we have here. Our preference, of course would, be to sanction up all the tanks immediately to complete the top of the hill build. But that is the question if we have room for an excess tank and it's unsanctioned, I think that would be a decision for us. Because there certainly would be economies of scale in that instance.

[Robert Michael Kwan, Analyst]

Turning to wholesale, you've given a number of different things to think about. I guess first on Q1 '19, the $60 million or greater. Is that number mostly cash or is there an embedded mark in that number?

[Sean M. Brown, Senior VP & CFO]

No, that would be cash.

[Robert Michael Kwan, Analyst]

And then just the general below what you reported in Q2 '18 through Q1 '19 but above kind of that midcycle. Is that on a reported basis or is that on a cash basis?

[Sean M. Brown, Senior VP & CFO]

I would think, as we think of a full year, I think of it on a cash basis. But again, I wouldn't think of the reported and cash to be dramatically different.

[Robert Michael Kwan, Analyst]

And maybe if I can just finish. So if you think about your rail activities on wholesale, certainly you kind of continue to hear the numbers in that high teens or so fully loaded to the Gulf. I'm just wondering when you look at your wholesale activities in that space, can you break down within that total number roughly what the fixed versus variable to move?

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

Robert, I'll answer that one. This is Steve. Currently, we're not railing any -- we're not in the crude rail business. So as far as breaking down fixed versus cost on a rail basis to get to that $18, that's not a business that we're in, in our wholesale business, as far as crude oil goes.

[Robert Michael Kwan, Analyst]

But do you have a rough sense of what those costs might look like in terms of the breakout?

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

I would say it really depends on your contract with the rail company. So if the rail company is fixed, it's going to be closer to -- the majority of that is going to be fixed cost. So it really depends on the contract the company has with the railroad. Obviously, if you do tankage with us that's fixed cost. If you do anything with USD that's fixed cost. Railcars are fixed cost. So really, it's that transport with CP or CN and then whatever railroad that they're using in the States. That's -- and the negotiations there on the unit train whether or not it's fixed or variable cost. Obviously, there would be some sort of fixed cost in that.

[Operator]

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mark.

[Mark Chyc-Cies]

Thank you everyone for joining us for the 2018 Fourth Quarter Conference Call. Again, I would like to note that we have also made certain supplementary information available on our website, gibsonenergy.com. If you have any further questions, please reach out to us at [e-mail]. Thanks again and we look forward to hosting everyone at our Investor Day on April 2 in Toronto. Have a great day. Thanks a lot.

[Operator]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.