Gibson Energy Inc . (TSX:GEI) announced record financial performance in the fourth quarter and full year of 2023, attributed primarily to the successful acquisition of the Gateway Terminal and stable legacy asset results. The company's Infrastructure segment saw significant growth, while the Marketing division also exceeded expectations. With a strong financial standing, the company is planning to enhance shareholder value through dividends and potential share buybacks. CEO Steve Spaulding, who has announced his retirement, expressed confidence in the company's ongoing growth and the team's capability to sustain this momentum. Gibson Energy is also focusing on expanding the Gateway Terminal, which includes the Cactus (NYSE:WHD) interconnectivity and deepening project, with the aim to finalize new contracts and increase throughput by the end of the second quarter.
Key Takeaways
- Gibson Energy reports record Infrastructure results following Gateway Terminal acquisition.
- Marketing performance surpasses expectations, with a positive outlook for 2024.
- The company maintains a strong financial position, with plans to reward shareholders.
- CEO Steve Spaulding announces retirement; the company is searching for a successor.
- Gateway Terminal expansion is underway, with a focus on increasing contracted loading windows and minimum volume commitments.
- Dividend growth remains a priority, with a recent increase reflecting the company's financial health.
- Discussions on the DRU Phase 2 project have slowed, with a potential expansion eyed for 2026.
Company Outlook
- Anticipated continuation of positive trends with a focus on optimizing the Gateway Terminal.
- Ongoing customer discussions aimed at securing new and extended contracts at favorable rates by Q2 end.
Bearish Highlights
- Cooling interest in the DRU Phase 2 project due to the TMX (TSX:X) impact and developments in Canadian crude oil production.
Bullish Highlights
- Record volumes achieved in December, with increased throughput from loading more ships and VLCCs.
- Optimism surrounding Canadian crude oil production and potential Gateway Terminal expansions.
Misses
- No significant misses reported during the call.
Q&A Highlights
- No further questions were asked during the call; Beth Pollock directed attendees to the company's website for more information.
Gibson Energy remains focused on steady dividend growth and executing its long-term plan, exiting the year with a 61% payout ratio. The company's leadership is confident in the potential of the Gateway Terminal, specifically the Cactus interconnectivity project, to drive additional volume loading and storage capacity. With the retirement of CEO Steve Spaulding, the Board is considering a Canadian candidate for his replacement, while the company continues to explore opportunities to enhance returns through marketing expertise and strategic pipeline expansions. Despite the slowdown in discussions around the DRU Phase 2 project, the company remains optimistic about the potential for expansion in 2026 and the overall growth of Canadian crude oil production.
Full transcript - None (GBNXF) Q4 2023:
Operator: Good morning. My name is Lara, 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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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: Thank you, Lara. 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 also 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 financial 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.
Steve Spaulding: 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 1st, 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 of $594 million and $386 million, respectively, are also high watermarks. Both were driven by the addition of the Gateway -- 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 exit 2023 with a leverage ratio of 3.1 times at the low end of our 3 times to 3.5 times 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 $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 two 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 (TSX:CVE), 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 9 times 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 outlined 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 its 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: 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, with $13 million higher than the third quarter and also ahead of the first two 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 would 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 to 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 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 one-time 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 this 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 forma to Gateway acquisition is 3.1 times, at the low end of our 3 times to 3.5 times target and flat to last quarter. Looking at our ratios on an Infrastructure-only basis, our payout ratio is approximately 77%, while our pro forma leverage is 3.6 times, both well below our targets of 100% and 4.0 times, 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 the competitive advantage that would be prohibitive 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 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 seven years of great leadership. Over to you, Steve.
Steve Spaulding: 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 seven 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 that 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 questions.
Operator: Thank you, sir. [Operator Instructions] Our first question comes from the line of Rob Hope from Scotiabank (TSX:BNS). Please go ahead.
Rob Hope: Good morning, everyone, and congratulations on the upcoming retirement, Steve.
Steve Spaulding: Thank you, Rob.
Rob Hope: Two 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 of the LCCs, 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?
Steve Spaulding: Yeah. It’s going to driven by two things, Rob. The first one was, it was incremental throughput or spot barrels from existing customers and that happened two different ways. First is, several of our customers used additional windows in their loading, which drove additional volume, and the second is, the% 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 an Aframax in a loading window, which is at 750,000 barrels versus the 1.2 million barrels 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.
Rob Hope: All right. 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 a VLCC versus Aframax basis?
Steve Spaulding: Yeah. 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 and 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 five-year and seven-year agreements, probably leaning towards those seven-year agreements and additional loading windows. And so probably what the hang-up has been is probably just getting the lining up existing capacity to get that volume into the terminal.
Rob Hope: Appreciate the color. Thank you.
Operator: Our next question comes from the line of Linda Ezergailis from TD (TSX:TD) Securities. Please go ahead.
Linda Ezergailis: Thank you and I have to add my sincere congratulations, Steve, on a very successful career and all the best in your retirement.
Steve Spaulding: Thank you very much, Linda.
Linda Ezergailis: 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 the bookends of duration might be in any other context?
Steve Spaulding: Yeah. 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 a 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 four months to six months, Linda, if I was to guess. But that is just an estimate.
Linda Ezergailis: Thank you. 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 Trans Mountain expansion is coming into service. Are you starting to see any impact maybe of crude going into storage and 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 out of the basin will be debottlenecked, but there’s not much storage at the terminus of Trans Mountain by the dock, so that might shift kind of how tanks get used in the basin as well?
Steve Spaulding: Yeah. That 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’s our Commercial -- Chief of Commercial.
Kyle DeGruchy: Hi, Linda. Yeah. 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, I think, that what customers are looking at right now or what market’s looking at is really construction timing. TMX is saying Q2 still. We’ll see. From there, you’d look at line fill and operational wrap-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. That’s a lot there and so I think our view is that it’s going to be volatile throughout the year and that’ll 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 state of TMX and they want to assess their long-term needs. We’re still commercially talking to them about supporting their Infrastructure needs from a tankage 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 watching that closely, as well as ourselves.
Steve Spaulding: Yeah. 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 and fill going into January. That got pushed back on -- they got push 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: Thank you. We have our next question coming from the line of Jeremy Tonet from JPMorgan (NYSE:JPM). Please go ahead.
Jeremy Tonet: Hi. Good morning.
Steve Spaulding: Good morning, Jeremy.
Sean Brown: Hi.
Jeremy Tonet: Steve, just want to offer congratulations as well on a success. Just building off, I guess, the transition process and questions here. Just wondering if -- does this introduce any kind of broader questions on Gibson’s strategic outlook going forward at this point? Does it change Gibson’s role, I guess, in industry consolidation going forward?
Steve Spaulding: Yeah. 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 develop five-year and 10-year-type strategies as we go forward. I think it’s business as usual. I’ll be here for the next four 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: Got it. Thank you for that. 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 -- 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 a certain level of dividend growth?
Sean Brown: Yeah. 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 pond -- 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 a multiple is right now in our current valuation. We think we are undervalued, certainly relative to peers, and that’s something we’re 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 digital 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: Got it. Thank you for that. And just a quick last one for me. I just wanted to know, with regards to Gateway expansion opportunities, if you could talk a bit more about what capital opportunities you see there, particularly as it relates to Cactus interconnectivity.
Steve Spaulding: Yeah. I mean -- first off, I mean, there is -- when we looked at this asset and we looked forward, the more VLCCs that we said, we see quite a bit of growth opportunities without any capital, right? so we are seeing -- 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. 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. 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 our dock to allow us to load vessels up to 1.4 million barrels, which makes it -- which ensures that any kind of reverse lightening, even with a lightly loaded Aframax, they can fully load a VLCC with one lightening offshore. And really that -- there are 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 1 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 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 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 an additional three tankage -- three tanks there and maybe add almost 2 million barrels of additional storage with those three tanks.
Jeremy Tonet: That’s very helpful. Thank you.
Operator: Our next question comes from the line of Patrick Kenny from National Bank. Please go ahead.
Patrick Kenny: Thank you. Good morning. Just on the early termination of the O&M agreement with Buckeye, I’m 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?
Steve Spaulding: I don’t think it was an early termination of the O&M agreement. I think that was just a normal transition of the O&M agreement. That was January 1st. As far as confidence, I’ll hand that over to Omar Saif, who is our COO. Omar?
Omar Saif: Hi. Good morning. Thanks, Steve, and 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. We didn’t do it too early. We didn’t do it too late. We just set what was the appropriate time and when could we actively do that transition. We completed it seamlessly. Arguably, there were very minor hiccups and it was superbly handled by the team. We’ve been operating for well over a month and a half and no issue. We put a lot of -- again, we put a lot of process, a lot of focus on the people and then systems and managed that across the Board.
Steve Spaulding: Yeah. And Pat, just to comment about the early cutover, I would say, the intent always was to cut over 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 was an operating agreement for, I believe, up to 12 months, which was cancelable upon 30 days, but our intent always was to cutover as soon as we could and so this would have been more in line with our expectations, certainly.
Patrick Kenny: Got it. That make sense. And then maybe, Sean, just on the leverage ratio here, so pro forma, LTM, net to EBITDA 3.1 times 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: Yeah. 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 two factors that really are going to influence that is, what’s the actual level of capital we spend? We’ve got $150 million growth capital target. $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? It’s certainly something that we would see potential around, but even at that 3.1 times, 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 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 spent.
Patrick Kenny: Okay. That’s great. I’ll leave it there. Thanks, guys.
Steve Spaulding: Thanks, Pat.
Operator: Our next question comes from the line of Robert Catellier from CIBC (TSX:CM). Please go ahead.
Robert Catellier: Hey. Good morning and 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 ensuring 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?
Steve Spaulding: We’re connected to all the other pipelines, really. The EPIC, the Gray Oak, also another pipeline that goes into the Eagle Ford (NYSE:F) 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 need 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 into Eagle Ford are full or close to full, and that’s being driven by our terminal and the terminal next door to us there in Eagle side. Those two terminals provide the best net back for -- as far as anybody trying to export barrels out of the U.S. and so that’s what’s driven those two pipelines full. We do believe as the Inner Harbor contracts start to expire in 2025 that a lot of volume will free up for our customers that’s going out of those terminals today.
Robert Catellier: Okay. That’s helpful. And then I wonder if you’ve given any more thought to opportunities to enhance returns a Gateway through Marketing expertise and what needs to be done there to initiate that?
Steve Spaulding: We don’t really have that U.S. expertise right now and right now most -- 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’d 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: Yeah. That makes a lot of sense and just the last one for me, I’m kind of spit balling here, but recently we’ve had a pause in LNG export authorizations. What’s your sense of stability in liquids exports, or to state another way, do you think you’re hearing anything about any restrictions on liquids exports?
Steve Spaulding: Yeah. I don’t think any existing terminals are any real threat, Rob, but it may threaten some of these offshore terminals that are under discussion or initial development, because they’re still going into federal orders there, so that makes it quite a bit riskier for them as far as to get all their final permits.
Robert Catellier: Okay. That’s helpful. Thank you.
Operator: We have our next question come from the line of Robert Kwan from RBC (TSX:RY) Capital Markets. Please go ahead.
Robert Kwan: Great. Thank you. Good morning. I just wanted to circle back with a couple 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?
Steve Spaulding: 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 window -- their loading windows and so that’s probably where we’ll push over the next month or two. But one of them -- I mean, there’s two 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 that can expand is obviously Red Oak and they -- the Red Oak is out there right now with an open season and so that’s probably coming to a conclusion very soon and I think that has layers of expansion across it. So those are really the opportunities.
Robert Kwan: That’s great answer…
Steve Spaulding: Yeah. That’s Red Oak. Red Oak was the first great…
Robert Kwan: Okay. I think…
Steve Spaulding: …all the other P66 projects. So I’m sorry about that.
Robert Kwan: Okay. 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 or do you think that there’s a potential for an uptick or how should we just think about the total impact EBITDA?
Steve Spaulding: I mean, that’s -- 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…
Robert Kwan: Got it.
Steve Spaulding: … anything above 15% to 20%.
Robert Kwan: Okay. And on the deepening project, should we think about that as a growth project or are you just going to be looking at it as a capital recovery rider?
Steve Spaulding: 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 payout for that project. It’s probably in the 3 times to 4 times type of payout.
Robert Kwan: Okay. That’s great. I appreciate the commentary, and Steve, all the best in retirement.
Steve Spaulding: Thank you, Robert.
Operator: [Operator Instructions] We have our next question coming from the line of Ben Pham from BMO (TSX:BMO). Please go ahead.
Ben Pham: Hi. Thanks. Good morning. A couple of follow-up questions on that last topic of Gateway and recontracting. 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 2024? Is that your outlook in three years’ time? And do you expect that from a starting point of your record volumes in March or should we normalize for the strength and the spot volume side of things?
Steve Spaulding: I think it’ll 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 believe we’ll see an uptick in the second half. And then this -- I think it’s really on a quarterly basis I believe we’ll see growth in that EBITDA business, Ben.
Ben Pham: Okay.
Steve Spaulding: I have gone -- 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.
Ben Pham: Okay. So it’s mainly -- it looks like it’s a mix of replacing existing contracts and it’s not just replacing where you…
Steve Spaulding: That really -- it’s adding additional throughput by adding additional load windows, so loading more ships in a month on a contracted basis. And then 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 VLCCs, Omar, in December? Was it 17?
Omar Saif: Yeah. Yeah.
Steve Spaulding: 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 to meet that nine times or better as we move forward.
Ben Pham: 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 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 and your lieutenants down there since you’ve started in the Permian region again?
Steve Spaulding: Oh! I wouldn’t read a lot into that -- other than 80% -- 75% to 80% of our business is here in Canada and so 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.
Ben Pham: Okay. And maybe just a 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?
Steve Spaulding: That’s a tough one, Ben. I would say that it’s cooled, our discussions around that is cooled, especially with TMX coming on and our customers really wanting to understand how TMX impacts the market on a long-term basis. Also, as upstream continues to develop these brownfielded projects and as the Clearwater play continues to enlarge and develop, I do think long-term that, three to four -- three years out, 2026 is probably the opportunity where we may be able to actually recontract, or not recontract, but add a DRU, fill those up and potentially even add storage down four years or five years down the road, too. So they’re at Hardisty again. Yeah, we are optimistic in Canadian crude oil production.
Ben Pham: Okay. That’s great color, Steve. Thank you.
Steve Spaulding: Thanks, Ben.
Operator: Thank you. 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: Thank you, Lara. Thank you for joining us for 2023 fourth quarter and full year conference call. I’d like to remind you that there’s supplementary information available on our website, gibsonenergy.com, and if you have any further questions, please reach out at investor.relations@gibsonenergy.com. Thank you.
Operator: Thank you, ma’am. 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.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.