Gibson Energy Inc

TSX:GEI

Earnings Call Analysis

Company Reports Record EBITDA and Growth

In 2023, the company's infrastructure segment, bolstered by the Gateway Terminal acquisition, achieved record EBITDA of $494 million, a significant rise from the previous year's $442 million. The compounded annual growth rate for the segment since 2017 post-acquisition is 16%. Overall, adjusted EBITDA rose to $594 million, while distributable cash flow increased to $386 million. With strong performance, especially in legacy infrastructure and marketing, the company's adjusted EBITDA in marketing surpassed its usual range, reaching $145 million. The firm remains financially robust with a leverage ratio of 3.1x and a payout ratio of 61%, both at the favorable end of their target ranges. The prosperous year prompted a 5% dividend increase to $0.41 per share. The prospect for further optimization of Gateway through increased commitments and contract extensions is promising, with infrastructure development like the new Edmonton Terminal tanks progressing as planned.

Infrastructure achieves a record EBITDA with successful Gateway acquisition and continued growth

In a stellar year for the Infrastructure segment, the company broke its own records by achieving a segment EBITDA of $494 million, primarily driven by a full quarter of contribution from the acquired Gateway Terminal. This marks an impressive compounded annual growth rate of 16% since 2017. The solid performance of Gateway, exceeding initial expectations, alongside consistent gains from the legacy infrastructure assets, underscores the strength and reliability of this business segment. The company is now focusing on maximizing the efficiency of the Gateway facility by the end of the second quarter, looking to increase throughput, extend contracts, and add new contracts possibly at higher rates.

The Marketing segment surpasses expectations and provides strong outlook

The Marketing segment recorded an adjusted EBITDA of $145 million for the year, well above the average expected range of $80 million to $120 million. With positive market conditions, the segment anticipates adjusted EBITDA exceeding $30 million in the upcoming first quarter, signaling a robust business environment that continues to offer storage and location-based opportunities, particularly in the crude marketing subspace. This trend is indicative of an agile segment that adeptly navigates the ever-changing market dynamics.

Strengthened financial position leads to increased shareholder dividends

Reflecting a robust financial performance and increased contributions from the Infrastructure segment, the company announced a 5% dividend increase to $1.64 per share annually. This commitment to shareholder returns is further bolstered by a sustainable payout ratio well below target and a healthy leverage ratio, enabling the company to maintain financial resilience and share value growth.

Commitment to a sustainable and ESG-focused future

In line with its sustainability goals, the company revealed strides in its ESG initiatives with the 2022 Sustainability Report. It showcased achievements like top quartile safety performance, a 15-year renewable power purchase agreement for green energy, and high employee participation in community programs. Recognitions like an A- from CDP and a AAA from MSCI validate the company's strong commitment to sustainability and transparent ESG practices.

Future-focused plans with capital investment and strong liquidity

Looking ahead, the company plans to allocate $150 million in its 2024 capital budget, with $125 million earmarked for growth in key regions. With no debt maturities until 2025, an upsized credit facility, and ample liquidity, the company is strongly positioned for future investments and potential share buybacks. The strategic capital deployment, combined with the established financial stability, lays the groundwork for sustained growth and affirms its attractiveness to investors.

New infrastructure additions and completion timelines

Growth milestones include the construction of two new tanks at the Edmonton Terminal which are progressing as planned and are slated to be operational by late 2024. This expansion, underpinned by a long-term agreement, is set to enhance the company's infrastructure revenues and support customer shipments, thereby reinforcing the company's growth trajectory and revenue assurance.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, Laura, and I will be your conference operator today.At this time, I would like to welcome everyone to the Gibson Energy Q4 2023 Conference Call. [Operator Instructions]I would now like to turn the meeting over to Ms. Beth Pollock, Vice President, Capital Markets and Risk. Ms. Pollock, please go ahead.

[Beth Pollock, executive]

Thank you, Laura. Good morning and thank you for joining us on this conference call, discussing our fourth quarter and full year 2023 operational and financial results. Joining me on the call today from Gibson Energy are Steve Spaulding, President and Chief Executive Officer; and Sean Brown, Senior Vice President and Chief Financial Officer. We have the rest of the senior management team in the room to help with questions and answers as required.Listeners are reminded that today's call refers to non-GAAP measures, forward-looking information, and pro forma financial information. Pro forma information 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 our continuous disclosure documents available on SEDAR+.Now, I would like to turn the call over to Steve.

[Steven Spaulding, executive]

Thanks, Beth. Good morning, everyone, and thank you for joining us today. First, I'd like to touch on highlights from our last year.As is customary, Sean will speak in more detail regarding our financial results and financial position. And before we conclude the call, I'll provide some brief remarks regarding the announcement of my retirement.In 2023, we advanced our infrastructure growth strategy through the acquisition of the Gateway Terminal and continue to deliver strong and consistent financial results.In our Infrastructure segment, with the benefit of a full quarter of contribution from the Gateway Terminal, which closed August 1, we set a record for the company with segment EBITDA of $494 million. This breaks the previous record of $442 million, which was set the previous year, and speaks to the growth and stability of our Infrastructure business.We are proud of the rate at which our Infrastructure segment continues to grow, which equates to a compounded annual growth rate of 16% since 2017, pro forma the Gateway acquisition.On a consolidated basis, adjusted EBITDA and distributable cash flow, up $594 million and $386 million, respectively are also high watermarks. Both were driven by the addition of Gateway in August, consistent growth performance from our legacy infrastructure business and our Marketing segment's ability to generate cash flow in an operating environment -- really any operating environment.For the year, our Marketing segment achieved adjusted EBITDA of $145 million, well above our long term run rate of $80 million to $120 million.In terms of the balance sheet, Gibson remains a solid financial position. Pro forma the Gateway acquisition, we exited 2023 with a leverage ratio of 3.1x at the low end of our 3x to 3.5x target range. We also had a sustainable payout ratio of 61% below the low end of our target range of 70% to 80%.Given our financial performance and increased contribution from our Infrastructure segment, we increased our quarterly dividend by $0.02 or 5% or $0.41 per share, which equates to an annual amount of a $1.64 per share.As always, we continue to see significant value in offering our shareholders consistent dividend growth and believe this increase reflects the continued growth of our long term stable Infrastructure business.Speaking to a few of our milestones: Construction on the 2 new tanks at Edmonton Terminal are on schedule and they are expected to be placed in service in late 2024. These tanks, which are underpinned by a 15 year take-or-pay agreement with Cenovus, represent 870,000 barrels of new tankage.And when combined with the previously announced tank which was placed in service in the fourth quarter of last year, result in a total of 1.3 million barrels constructed to support TMX shippers. These tanks will further increase our high quality, long term Infrastructure revenues and support our customer shipments on the TMX pipeline.With respect to Gateway, we are very pleased with our performance so far, which is ahead of our initial expectations and tracking well in line of that 9x forward-looking multiple we disclosed at announcement.As we look forward, our focus is on optimizing the facility with the goal of increasing contracted loading windows, increasing the throughput and minimum volume commitments and extending existing contracts. Discussions with customers are ongoing, and we remain very constructive around our ability to enter into new contracts and extend existing contracts at or above the current rates by the end of the second quarter.Looking ahead, we announced our 2024 capital budget, which includes a target growth expenditure of $150 million. Of that amount, $125 million is focused primarily on Edmonton, Hardisty and Moose Jaw, with incremental $25 million of capital expenditure to be deployed at Gateway.From an ESG perspective, last year we released our 2022 Sustainability Report, which outlines some notable milestones, which take us a step closer to achieving our 2025 and 2030 targets.This included maintaining top quartile safety performance among our North American peers, announcing a 15 year renewable power purchase agreement with Capstone Infrastructure and Sawridge First Nation, and maintaining a first-in-class position in employee participation in our community giving program with a rate of 95%.Gibson was also acknowledged by the key global recognized ESG rating agencies for its performance, transparency and management of ESG issues, reaffirming its position as a global leader in sustainability. This included a fourth consecutive A- in a row from CDP, the Carbon Disclosure Project, and a AAA rating from MSCI.As a forward thinking industrial leader, Gibson will remain resolute in sustainability journey and further leverage its world class asset base and growth opportunities to contribute to a more secure and resilient energy future.In summary, the business delivered another solid quarter, which marked the end of another solid year. Infrastructure reached a new high, partially attributable to the benefit of the Gateway acquisition, but also driven by that continued strong and stable performance of our legacy infrastructure assets.The Gateway acquisition is ahead of initial expectations, and we are optimistic about our ability to optimize the facility by increasing contracted loading windows and extending existing contracts at similar or higher rates.The Marketing segment outperformed our long term run rate for the full year. And as a result of our continued solid financial results and the strength and stability of our business, we are pleased to announce the increase of our dividend by 5%.I will now pass the call over to Sean, who will walk us through our financial results in detail. Sean.

[Sean Brown, executive]

Thank you, Steve. As Steve mentioned, 2023 was truly a significant year for our company. Infrastructure adjusted EBITDA of $153 million in the fourth quarter was $13 million higher than the third quarter and also ahead of the first 2 quarters of the year.This was driven, in part, by a full quarter of contribution from Gateway, as well as continued strong financial performance from our legacy infrastructure businesses, which reflected a full quarter with the new tank in Edmonton. These same factors also contributed to a $42 million quarter-over-quarter increase when comparing this quarter to the fourth quarter of 2022.Turning to the Marketing segment. Adjusted EBITDA of $28 million was $4 million higher than the third quarter and ahead of the outlook we provided on our last quarterly call of approximately $25 million. This difference is attributable to incremental storage and location based opportunities during the quarter, which allowed our crude marketing group to realize higher than expected earnings.Looking-forward for Marketing, the environment for crude marketing remains positive, and we expect to realize storage and location based opportunities within the quarter. Additionally, refined products continues to see strength in our drilling fluids business. Based on market conditions at this time, we'd expect adjusted EBITDA of over $30 million in the first quarter.To complete the discussion around our fourth quarter results, I would like to quickly work down the distributable cash flow. For the fourth quarter, we reported distributable cash flow of $103 million which was a $10 million increase from the third quarter of this year and a $14 million increase from the fourth quarter of 2022.Consistent with previous commentary, the majority of the increase is attributable to a full quarter of cash flow from the Gateway Terminal, but smaller drivers contributing to the increase include lower taxes in the fourth quarter, which was partially offset by the impact of marginally higher replacement capital and interest expense.As the fourth quarter concluded 2023, I would also like to compare year-over-year results. As previously mentioned, on an annual basis, the Infrastructure segment set another record. Adjusted EBITDA was a $52 million increase from 2022 before adjusting for the impact of the onetime environmental provision in Q2 of this year. Excluding that provision, adjusted EBITDA increased by approximately $69 million.At the same time, Marketing adjusted EBITDA increased from $118 million in 2022 to $145 million in 2023, a $27 million increase. The largest driver of this increase was an improvement in our crude marketing business, which was partially offset by a year-over-year reduction from refined products.As such, on a consolidated basis, 2023 adjusted EBITDA increased by $69 million to $589 million, setting a new high watermark for the company, the second consecutive year. These results contributed to distributable cash flow of $386 million in 2023, an increase of $30 million relative to 2022, a new record for Gibson.Our strong financial performance allowed us to maintain our conservative financial position. Exiting the year, our payout ratio of 61% is well below the bottom end of our 70% to 80% target range. Our debt-to-adjusted EBITDA, pro form the Gateway acquisition is 3.1x, at the low end of our 3x to 3.5x target and flat to last quarter.Looking at our ratios on an Infrastructure only basis, our payout ratio is approximately 77%, while our pro form leverage is 3.6x, both well below our targets of 100% and 4.0x respectively.From a financial flexibility perspective, following the Gateway acquisition, we continue to be well positioned with a staggered debt maturity profile with no maturities until 2025 and ample liquidity with the benefit of our upsized sustainably linked revolving credit facility, which was increased from $750 million to $1 billion following the Gateway acquisition and which does not mature until 2028. Certainly, a very strong financial position.In summary, we are very pleased with both our fourth quarter and full year results in 2023. Infrastructure results in the fourth quarter and for the full year represented new high watermarks for the company, largely driven by the successful acquisition of the Gateway Terminal, as well as continued consistent results from the legacy infrastructure assets.Marketing ended the year well above our long term run rate of $80 million to $120 million with a constructive environment providing some momentum as we move into 2024. With the Gateway acquisition, we now have exposure to all key North American oil producing basins with a portfolio of assets that generate stable cash flows, all with a competitive advantage that would be prohibited to replicate.And with this portfolio of assets and our strong and conservative financial position, we continue to present investors with an attractive value proposition, which includes being well positioned to continue to return capital to shareholders through a safe, growing dividend and the potential for share buybacks in the future.Before we turn the call back to Steve for some remarks regarding the announcement of his retirement today, I did want to thank him on behalf of not only myself, but also all Gibson employees for 7 years of great leadership.Over to you, Steve.

[Steven Spaulding, executive]

Thanks, Sean. I'd like to provide some brief remarks regarding my intention to retire this year.It has been a true privilege to lead Gibson's talented employees over these last 7 years. Together, we built a strong operational and financial foundation, extended our Infrastructure platform and created peer leading value for our shareholders and positioned the company for future growth.With the company operating from a position of strength, now is the right time for me to retire and for the next phase of leadership to commence. I am confident in the team's ability to build off this momentum and drive further long term growth and value creation.I look forward to remaining on as President and CEO until my successor is named. Over to you, operator, for any question.

[Operator]

[Operator Instructions] Our first question comes from the line of Rob Hope from Scotiabank.

[Robert Hope, analyst]

Congratulations on the upcoming retirement, Steve.

[Steven Spaulding, executive]

Thank you, Rob.

[Robert Hope, analyst]

2 questions on South Texas. So specifically in Q4 and I guess through 2023, it appears that the contribution from South Texas exceeded expectations. Can you maybe give a little bit more color on the key drivers there? Was it largely more VLCCs, was it incremental spot barrels? And as we look into 2024, is there an expectation that we could see some continued outperformance versus the base plan.

[Steven Spaulding, executive]

Yes. It was kind of driven by 2 things, Rob. The first one was, it was incremental throughput or spot barrels from existing customers and that happened 2 different ways. First is, several of our customers used additional windows in their loading, which drove additional volumes.And the second is, is the percent of VLCCs loaded greatly increased, where I think in the fourth quarter, I believe, 80% of the vessels we loaded were VLCCs. And so how that actually increases versus our projections, where most of our projections were done on Aframax in the loading window, which is that 750,000 barrels versus the 1.2 million to 1.25 million barrels we can put on a VLCC. So you get that incremental volume and additional throughput fee, Rob, and that's kind of what's driven that.And so when you look into the first quarter, it looks like it's going to be kind of a record quarter for the asset. Both in January and February looked really good. And we think March, when we look forward into March, March right now is setting up to be a record month ever for the terminal as far as throughput goes.

[Robert Hope, analyst]

Good to hear. And then maybe just turning over to the recontracting efforts at South Texas. Appreciate the updated language there. However, when you're in discussions with, customers, what are the key sticking points? Is it term, the level of the toll, an understanding of where the barrels are, and -- or is it kind of being put on the VLCC versus Aframax basis

[Steven Spaulding, executive]

Yes. It's really none of that actually, Rob. I think, we've been pretty aligned really with our customers around that. It's really with them setting up their upstream and downstream contracts, Rob.So setting up, making sure that they got firm volumes and transport coming into the facility and making sure that they have a really good view in contracting portfolio for the vessels that they do sell.As far as actually our discussions with the existing customers, talks have been really at or above existing rates and extending the contracts back out to new 5-year and 7-year agreements, probably leaning towards those 7-year agreements, and additional loading windows.And so probably what the hang up has been is probably just getting the lineup existing capacity to get that volume into the terminal.

[Operator]

Our next question comes from the line of Linda Ezergailis from TD Securities.

[Linda Ezergailis, analyst]

I have to add my sincere congratulations, Steve, on a very successful career and all the best in your retirement.

[Steven Spaulding, executive]

Thank you very much, Linda.

[Linda Ezergailis, analyst]

So I don't know, if you or Sean are aware of whether the CEO search has started and where the process is, and if the Board has outlined any expectations as to what bookends of duration might be in any other context?

[Steven Spaulding, executive]

Yes, I'll take that. I mean, obviously, there's a lot of unknowns still. But the Board is currently engaging an international search firm. They will look internally and externally.And I believe, their kind of number one focus would be Canadian candidate, but they also want to look into the States too, because at the end of the day, they want to pick the best candidate, whether or not that's internal or external.As far as timing, these things take more time than anyone really expects. But probably 4 months to 6 months, Linda, if I was to guess. But that is just an estimate.

[Linda Ezergailis, analyst]

Now maybe we could just get some update on some of the crude flow and pricing dynamics that you're starting to see evolving potentially as TransMountain expansion is coming into service.Are you starting to see any impact maybe of crude going into storage in anticipation or anything shifting in terms of pricing and flows?And also, I'm just wondering in your Infrastructure business, are you starting to see any sort of customer higher demand or lower demand for tank capacity given that egress side of the basin will be debottlenecked, but there's not much storage at the terminus of TransMountain by the dock. So that might shift kind of how tanks get used in the basin as well.

[Steven Spaulding, executive]

Yes. There was a lot of questions there, Linda. I'm going to turn it over to Kyle, then I'll kind of finish it off. Kyle is our Chief of Commercial.

[Kyle DeGruchy, executive]

Hi, Linda. Yes, I mean, on your pricing question first. I would say, yes, that the market is anticipating an impact on WCS differentials when TMX comes in service. That is creating some storage opportunities. That's part of what our Marketing group has been able to capitalize on in Q4 and also Q1. And we see that as constructive going forward as well.The other piece on sort of the flow is, I think, that what customers are looking at right now or what the market is looking at is, really a construction timing. TMX is saying Q2 still. We'll see. From there, you'd look at line fill and operational ramp up. And then from there really the development of the pricing at the dock and where the market is going to be for the barrel. So that's a lot there.And so I think our view is that it's going to be volatile throughout the year, and that will lend its hand to opportunities in our marketing business, but also for our customers.I think our customers want to get comfortable with the in service date of TMX, and they want to assess their long term needs. I mean, we're still commercially talking to them about supporting their infrastructure needs from a tanker standpoint. And I just think at this point, they're looking for some certainty on the pipe being in service and how it's going to operate from the get go.So, hopefully, that answers everything. But to your question, yes, the pricing is appreciated on anticipation of it, but there's a lot of variables to get through and our customers are sort of watching that closely, as well as ourselves.

[Steven Spaulding, executive]

Yes. And so at the end of the day, with the potential of it coming online, WCS has priced stronger into the future. And with that, it's given us some time based opportunities in our storage at Hardisty, which lead to that $30-plus million opportunity that we've talked in Marketing.Then you look at actually what's going on with TMX. We heard in December, we had customers starting to line up for line fill going into January. That got pushed back on the -- on -- that got pushed back. And then, they were going to push it back to March. And then just recently on the last kind of announcement, that got pushed back further. They're saying April, but I think this is kind of indefinite right now until they are able to solve the bore issue and the pullback.

[Operator]

We have our next question coming from the line of Jeremy Tonet from JPMorgan.

[Jeremy Tonet, analyst]

Steve, just want to offer congratulations as well on a success at Gibson, and we'll miss you going forward.And just building off, I guess, the transition process and questions here. Just wondering if does this introduce any kind of broader questions on Gibson strategic outlook going forward at this point? Does it change Gibson's role, I guess, thoughts in industry consolidation going forward.

[Steven Spaulding, executive]

Yes. I think it's business as usual, right? We had a meeting with the Board. We're going to continue to develop and execute our strategy and start to develop 5-year and 10-year type strategies as we go forward.I think it's business as usual. I'll be here for the next 4 to whatever, however long it would take to actually bring in a Chairman, and then I'll be here as a consultant to work with the Board as they need for the several months after that. But I think it's very much business as usual on a go-forward basis when we look at strategy. And I wouldn't read anything into my retirement at all.

[Jeremy Tonet, analyst]

Got it. And maybe just kind of shifting gears towards capital allocation here. Just curious, I guess, is there a point with dividend growth, where the stock price where it is, where it doesn't feel like necessarily the market is rewarding a level of -- a certain level of dividend growth going forward?Or does that impact the rate of what dividend growth makes sense. And does pivoting towards buybacks a little bit more make sense in any scenario if the market doesn't respond to certain level of dividend growth?

[Sean Brown, executive]

Yes. Thanks for that, Jeremy. I mean, as we've always said, we think steady annual modest dividend increases are important. It's a big part of the value proposition for our investors. I think, you've heard me say it before, if you respond simply to market reaction to things, I think, it can become a bit self-fulfilling at some point.You don't increase your dividend because the market at that point in time is saying maybe you're not valued appropriately, then you're probably going to get valued even worse.Our focus really here is on executing our plan, which we think is a long term winner. We think we're going to see steady growth in our business, which is going to result in steady growth in our dividend. We are 100% acutely aware of where our multiple is right now in our current valuation. We think we are undervalued, certainly relative to peers, and that's something we are looking to close the gap on.If you speak to the dividend increase in particular, we exited the year at a 61% payout ratio. We executed a transaction that was close to 15% accretive to distributable cash flow per share. We made no dividend announcement at that time. We're very clear we do that with our year-end results every year and we continue to do so.So we felt that this dividend increase was very much appropriate and reflective of our financial profile, and we'll keep that capital allocation moving forward.

[Jeremy Tonet, analyst]

And just a quick last one for me. Just wanted to know, with regards to Gateway expansion opportunities, if you could talk a bit more about what capital opportunity you see there, particularly as it relates to Cactus interconnectivity?

[Steven Spaulding, executive]

Yes. I mean, first off, I mean, I think there's -- when we looked at this asset and as we look forward and the more VLCCs that said, we see quite a bit of growth opportunities without any capital. Right? So we're seeing that we believe we can grow this asset by 15% or maybe even more percent without any capital.When it comes to capital projects, Cactus is a very important one for us. And it's mostly important for our customers, because remember what I talked about earlier was access to supply is very critical to our customers. And so that's why the Cactus connection is important to us and really to our customers who are actually pushing this Cactus connection.And one of the customers that we're driving forward with right now is a big supporter of this Cactus connection as they have quite a bit of production on that pipeline. And so the other one is probably the deepening project, which will -- which might occur later in the year. It takes a while to actually get all the permits in place to do the deepening project.But we're out right now getting bids on what does it take to deepen the deepen the -- deepen our dock to allow us to load vessels up to 1.4 million barrels, which makes it -- which ensures that any kind of reverse lightering even with a lightly loaded Aframax, they can fully load a VLCC with one lightering offshore.And really that -- there's several ways that pays out. One is, we're negotiating with our existing customers on increasing the MVC to help pay that out. But really where we see it is we actually load more volume on each vessel. We're seeing that today, because we were able to raise the depth of one foot just through normal dredging that happened in December, and we're seeing us load more volume on the ships today. So we're very optimistic about that opportunity.The other opportunity is adding more storage, specifically around as existing customers or even potentially some of our new customers that we're chasing want to bring in other grades of crude into the terminal. Right now we have a very fungible system.We have WTL and WTI on a fungible basis for our storage, which is a big advantage that we think in the -- for our customers. But additional storage will be driven by additional windows and additional grades of crude that may come into the terminal. We believe we can build out additional 3 tanks there and maybe add almost 2 million barrels of additional storage with those 3 tanks.

[Operator]

Our next question comes from the line of Patrick Kenny from National Bank.

[Patrick Kenny, analyst]

Just on the early termination of the, the O&M agreement with Buckeye. Just wondering if you had a bit more color on what gave you confidence to take over operatorship of the terminal?And I'm also just wondering if, proving your operating capability of the terminal was a bit of a precursor to some of the contracting negotiations you're having right now.

[Steven Spaulding, executive]

I don't think it was early termination of the O&M agreement. I think that was just normal transition of the O&M agreement that was January 1. But as far as confidence, I'll hand that over to Omar Saif, who is our COO. Omar?

[Omar Saif, executive]

Hi, good morning. Thanks, Steve. Again, thanks for the question. I think, on the onset of the deal, we put a migration team together commensurate with Buckeye who were very helpful. And we mapped out a plan and set that timeline accordingly.Didn't do it too early, didn't do it too late, just set what was the appropriate time and when could we actively do that transition. Completed it seamlessly. Arguably, there was very, very minor hiccups and was superbly handled by the team. We've been operating for well over 1.5 months and no issue. We put a lot of -- again, we've put a lot of process, a lot of focus on the people and then systems and manage that across the board.

[Steven Spaulding, executive]

Yes. And, Pat, just to the comment about the early cutover, I would say the intent always was to cutover as soon as we could. Like, not to get into the details of the M&A process. But as we got into the nitty-gritty, what was pretty clear is that a transition services agreement would take a bit of time to negotiate.So what we felt was best when we executed the deal was to execute the O&M agreement instead of transition services agreement. Our intent always was to cut over as soon as we could. And quite frankly, we would have had confidence in a transition services agreement as well.So I think our messaging was conservative when we announced the deal. That it was a operating agreement for, I believe, up to 12 months, which was cancelable upon 30 days. But our intent always was to cut over really as soon as we could. And so this would have been more in line with our expectations certainly.

[Patrick Kenny, analyst]

Got it. That makes sense. And then maybe Sean, just on the leverage ratio here, so pro forma LTM debt-to-EBITDA 3.1x, kind of low end of your target range. Any update on when you might consider reinstating the NCIB or I guess, what leverage ratio should we be watching out for before we might see you restart the buybacks?

[Sean Brown, executive]

Yes. I mean, from a pure leverage ratio, Pat, we're probably right about there. But the one thing I'd remind you is that we had a really strong first quarter in Marketing last year. Even with our $30 million guide, we'll see some measure of reduction. So consistent with the messaging we had around our budget, we think that certainly a buyback is a consideration near the tail end of the year.The 2 factors that really are going to influence that is, what's the actual level of capital we spend. We've got a $150 million growth capital target, a $125 million of that is sanctioned, and is largely in Canada. The other $25 million would be predominantly Gateway and we fully expect to spend that to the extent that that moves up or down. That would certainly be an influencing factor.And then the second one is, how does the Marketing business perform as we move through the year. So it's certainly something that we would see potential around. But even at that 3.1x, let's see how marketing performs relative to last year, because we could see a slight increase in our leverage ratio even with what we would consider a very strong first quarter at $30 million or greater. And so that's also something that influences it.But I mean, on an absolute basis, if you normalize marketing, I mean, at the low end of our leverage range is certainly where we consider restarting buybacks, depending on our view on capital spend.

[Operator]

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

[Robert Catellier, analyst]

Congratulations, Steve, on your retirement announcement, and in particular your safety track record during your time at the company.I just had a follow-up question here on just how you're insuring volumes at the terminal to give your customers the confidence they need to recontract.Is there anything other than the Cactus pipeline that you're currently looking at to help develop the terminal and give the customers that level of comfort to recontract?

[Steven Spaulding, executive]

We're connected to all the other pipelines, really the Epic, the Gray Oak, also another pipeline that goes into the Eagle Ford there. So I think the Cactus pipeline is kind of that one missing link. We can get it through some exchanges through some of the other pipelines, but we needed kind of a direct terminal.And as far as us facilitating, it's just our customers need to go find the transport and bring that volume in, and they're doing that actively. But we believe the Cactus pipeline will really help them develop a secure supply of volume, right?Those pipelines coming out of the Permian Basin in the Eagle Ford are full or close to full. And that's being driven by our terminal and the terminal next door to us. They're in Eagle side. Those 2 terminals are -- provide the best netback for as far as anybody trying to export barrels out of the U.S. And so that's what's driven those 2 pipelines full.We do believe as the Inner Harbor contracts start to expire in in 2025 that a lot of volume will free up for our customers that's going out of those terminals today.

[Robert Catellier, analyst]

Okay. That's helpful. And then I wondered if you've given any more thought to opportunities to enhance returns at Gateway through marketing expertise and what needs to be done there to initiate that?

[Steven Spaulding, executive]

We don't really have that U.S. expertise right now. And right now, we have several of our customers are really large international traders. So we, definitely, don't want to step on any of our customers' feet with marketing. And if we ever did trading in the terminal, it would just be to help facilitate volumes coming into the terminal to facilitate their export activities. Not really in the type of optimization around that we do currently at Hardisty or Edmonton.

[Robert Catellier, analyst]

Yes, that makes a lot of sense. And just the last one for me, I'm kind of spitballing here. But recently, we've had a pause in LNG export authorizations. What's your sense of stability in liquids exports? Or stated another way, do you think there's -- you're hearing anything about any restrictions on liquids exports?

[Steven Spaulding, executive]

Yes, I don't think any existing terminals are at any real threat, Rob, but it may threaten some of these offshore terminals that are under -- that are under discussion right or initial development, because they're still going into federal waters there. So that makes it quite a bit riskier for them as far as to get all their final permits.

[Operator]

We have our next question comes from the line of Robert Kwan from RBC Capital Markets.

[Robert Kwan, analyst]

I just wanted to circle back with a couple of questions here on Gateway. And Steve, you talked about largely speaking, it sounds like the negotiations in terms of what you're controlling the customers is pretty well defined.And you pointed to the upstream logistics and supply. So you mentioned Cactus. I guess, just what other things can we look for in terms of third party announcements or expansions? And just overall, what gives you confidence that these kind of things that are outside of your control will come together such that you can execute the contracts by the end of the second quarter?

[Steven Spaulding, executive]

Well, I think we could execute the contracts now. I think that's just -- but we'll just have to -- we need to embed some options in there to allow them to increase their loading windows. And so that's probably where we'll push over the next month or 2.But one of them, I mean, there's 2 pipelines they're looking to expand. One is Epic they're looking to expand, and they have pretty significant expansion opportunity. Epic does. I've heard up to 400,000 barrels.And then the other one they can expand is, obviously, Red Oak. And Red Oak is out there right now with an open season, and so that's probably coming to conclusion very soon. And I think that has layers of expansion across it. So those are really the opportunities.

[Robert Kwan, analyst]

And that's...

[Steven Spaulding, executive]

[ Gray ] was the first -- Gray -- I think all the other -- these 66 projects.

[Robert Kwan, analyst]

I'm sorry about that. All good. And then just on the Gateway contracts themselves, you've talked about thinking that you can either keep the rates the same or potentially increase them, but there's a lot of moving pieces here as you think about the extra loading windows, you think about that you're moving spot right now.I guess, just as you distill it down to what you think the EBITDA coming out of Gateway will be, when everything is extended, is it -- are you still thinking it will be very similar? Do you think that there's a potential for an uptick? Or how should we just think about the total impact to EBITDA?

[Steven Spaulding, executive]

I mean, there's so many unknowns there as far as increasing. I said, even without any expansion, there's an opportunity without any real capital besides maybe the Cactus connection, which is pretty minimal capital. I think we can grow that 15% to 20% without any -- 15% to 20% if we're successful. And I think there's even upside on top of that.But I would be -- I wouldn't want to be too optimistic this early on anything above 15% to 20%.

[Robert Kwan, analyst]

Okay. And on the deepening project, should we think about that as a growth project? Or are you just going to be looking at as a capital recovery rider?

[Steven Spaulding, executive]

I think it's a growth project. Right? We're going to look to increase MVCs, which help backstop it. But we know they're going to load more volume on those ships and -- because that's a restraint right now. And so there's definitely a payoff for that project. It's probably in the 3x to 4x type of payout.

[Robert Kwan, analyst]

Steve, all the best in retirement.

[Steven Spaulding, executive]

Thank you, Robert.

[Operator]

[Operator Instructions] We have our next question coming from the line of Ben Pham from BMO.

[Benjamin Pham, analyst]

A couple of, follow-up questions on that last topic of Gateway and every contracting. You've mentioned the potential 15% to 20% increase in EBITDA, and I think that's what I heard. Do you expect that to happen starting Q2 '24? Is that your outlook in 3 years' time? And do you expect that from a starting point of your record volumes in in March, or should we normalize for the strength in the spot volume side of things?

[Steven Spaulding, executive]

I think, it will be a gradual thing. I think we'll see some of it, hopefully, just through this increased volume throughput that I talked about in March, and hopefully that'll carry on through really the second quarter.And then I think we'll see an up -- and I believe we'll see an uptick in the second half. And then -- I think, it's really on a quarterly basis, I believe we'll see growth in that EBITDA business, Ben.I'm going -- I think I fly out Sunday to go down there and talk to some customers. So we're continuing to press forward with this opportunity.

[Benjamin Pham, analyst]

So it's mainly it looks like it's a mix of replacing existing contracts, and it's not a situation where you --

[Steven Spaulding, executive]

It's adding additional throughput through -- by adding additional load windows, the loading more ships in a month on a contracted basis. And then this one -- of the big surprises is that we're loading far more VLCCs, which gives us an incremental throughput volume on every ship that we do load.So I believe we had a record in December where we loaded, I believe -- how many how many VLCCs, Omar, in December? Was it 17

[Omar Saif, executive]

Yes. Yes.

[Steven Spaulding, executive]

16 or 17 VLCCs, which is -- we didn't have that in our forecast at all. So that's one of the things that's really kind of pressing us forward and being optimistic that we'll be able meet that 9x or better as we move forward.

[Benjamin Pham, analyst]

Okay. Got it. And maybe switching to the search process now and your announced retirement. You've mentioned in earlier comments, the Board maybe -- preference for a Canadian candidate. Well, I guess, we'll wait and see. I mean, is that suggesting post Gateway recontracting that there's maybe a suggestion of the Canadian business reinvigorating with growth.And to that, can you remind us that the U.S. side of things, how staffing has been involved in your lieutenants down there, since you've you started in the Permian region again?

[Steven Spaulding, executive]

I wouldn't read a lot into the [ lean ] other than, 75% to 80% of our business is here in Canada. And so that's and those relationships with our existing customers here are very important, and I think that's probably the leaning force why they would look for a Canadian first.And then as far as my staff down in the U.S., we were able to recruit a very good commercial person that had been the commercial person for the terminal. And then we've added some existing commercial support to really beef that up. And so that commercial team is very focused on continuing to drive and develop opportunities around Gateway.

[Benjamin Pham, analyst]

Okay. And maybe just the last one, DRU phase 2. How do you think about that project now of record volumes in Western Canada, rail picking up quite a bit as well?

[Steven Spaulding, executive]

That's a tough one, Ben. I would say that is cooled. Our discussions around that is cooled, especially with TMX coming on. And our customers really want to understand how TMX impacts the market on a long term basis.Also, as upstream continues to develop these brownfield projects, and as the Clearwater Play continues to enlarge and develop, I do think long term that 3 years out, 2026, is probably the opportunity where we may be able to actually recontract, or not recontract, but add a DRU as the TMX pipeline fills up, and potentially even add storage down 4 years or 5 years down the road, too. So they're at Hardesty again. Yes. We are optimistic in Canadian crude oil production.

[Operator]

There are no further questions at this time. I'd now like to turn the call back over to Ms. Pollock for final closing comments.

[Beth Pollock, executive]

Thank you, Laura, and thank you for joining us for 2023 fourth quarter and full year conference call. I'd like to remind you that there is supplementary information available on our website, gibsonenergy.com.And if you have any further questions, please reach out at [e-mail]. Thank you.

[Operator]

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 lovely day.