Gibson Energy Inc.

Good morning, everyone. Welcome to the Gibson First Quarter 2023 Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Mark Hischus, Vice President, Strategy, Planning, and Investor Relations. Mr. Hischus, please go ahead.

Thank you, Operator. Good morning, and thank you for joining us on this conference call discussing our First Quarter 2023 operational and financial results. On the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive Officer, as well as Sean Brown, Chief Financial Officer. Also in the room from the Senior Management Team are Sean Wilson, Senior Vice President and Chief Administrative and Sustainability Officer, as well as Kyle DeGrucci, Senior Vice President and Chief Commercial Officer. Listeners are reminded that today's call refers to non-GAAP measures and forward-looking information. Descriptions and qualifications of such measures and information are set out in our continuous disclosure documents available on CDAR. Now, I'd like to turn the call over to Steve.

Thanks, Mark. Good morning, everyone, and thank you for joining us today. We are pleased to report another strong quarter demonstrating the consistency of our infrastructure business. While setting a new high watermark for total adjusted EBITDA, at $155 million for the quarter. This outperformance above our previous outlook was primarily driven by opportunities that developed throughout the quarter within our crude marketing and our refined products business and demonstrates the value of having a team that can capture opportunities when they're available in the market. Our distributable cash flow of $107 million in the quarter has pushed our payout ratio down to 56% which is well below 70 to 80% target range. Our leverage ratio also decreased to 2.4 times, which is again, well below the bottom end of our target range, truly demonstrating what we think is a market leading financial position, which has resulted in us doubling our buyback target for the second quarter to $50 million and increasing our full year target to up to $125 million. With the stock yielding around 7% and the increase in the buyback target representing another 4% approximately, that implies a return on capital of over 10% per share this year. With growth on top of that, which we believe is a very competitive in the infrastructure space,

In terms of developing the business, our major focus right now is securing additional growth projects.

Our goal remains to deploy $150 to $200 million each year. And while our capital target for 2023 remains at that 100 to 125 million, we're gaining increasing confidence that it could be at the high end of that range for this year and potentially above. based on the conversations we're having with customers at this time. So in terms of sanctioning the next round of capital, at Edmonton, we continue to press forward with additional tankage. We believe Gibson is well positioned to support shippers on TMX, optimize their crude oil netbacks, and meet the stream requirements. We remain optimistic that we will announce at least two additional tanks in the relative near term. On the DRU, we continue to have discussions and explore ways we can tailor the project for our customers. We feel these discussions that we're currently having with more than one counterpart demonstrate the DRU does compete directly with pipelines and are hopeful to sanction additional phases in the future.

On the ESG side,

I do want to highlight our continued peer-leading safety performance. During the quarter, we announced that our lost time injury frequency rate and our recordable vehicle incident frequency rate remain at zero for employees and contractors for the third year in a row, which we see as an outstanding result. Also, we continue to maintain top quartile safety performance among our peers in our total recordable injury frequency, or TRIF. That said, we must remain vigilant and not become complacent and continue to evolve our safety program with a focus on achieving zero incidents.

To close, the business delivered an outstanding quarter.

It's given us a strong financial footing to start the year. Infrastructure continued to deliver consistent performance across the asset base. The marketing segment saw meaningful opportunities this quarter, especially in March, resulting in a record-adjusted EBITDA for the company in a single quarter. As a result of this strong business performance, we've been able to increase our return on capital to shareholders with our buyback target for the second quarter now at $50 million. And for the year, up to $125 million, or about 4% of our outstanding shares. I will now pass the call over to Sean, who will walk us through our financial results in more detail. Sean?

Thanks, Steve.

As Steve mentioned, another great quarter and a good way to start the year. Infrastructure adjusted EBITDA of $108 million this quarter was in line with our expected run rate for that business. As we always see a little movement up and down within each of the parts that make up our infrastructure segment, this quarter a few minor things seem to move against us, namely some costs at Moose Jaw and at our Edmonton Terminal, including power costs. But overall, once again, a very consistent result, which is what we expect to see from a true infrastructure business. Comparing this quarter to the first quarter of 2022, Infrastructure adjusted EBITDA is $1 million lower or effectively in line. In the marketing segment, adjusted EBITDA of $59 million was well ahead of the outlook we provided on our last quarterly call. As Steve mentioned, we had a very strong quarter in our crude marketing business due to the emergence of some market opportunities with time-based opportunities around storage also strong during the quarter. On the refined product side, The positive market we saw in late 2022 continued into 2023, notably in both drilling fluids and tops. The road asphalt was weaker this quarter, given its seasonal nature. Relative to the first quarter of last year, this quarter's results were a $38 million improvement, with both refined products and crude marketing well above the comparable quarter. In terms of our outlook for marketing, the environment for refined products remains constructive. though likely not as strong as we've seen over the past few quarters. And we continue to see opportunities within our crude marketing business, though clearly this quarter had some outsized opportunities. As such, our current expectation is that our marketing segment will generate adjusted EBITDA at $25 million or higher in the second quarter. Finishing up the discussion of results for this quarter, let me quickly work down to distributable cash flow. The first quarter result of $107 million was a $28 million increase from the first quarter of 2022. The majority of the difference would be from the marketing performance I discussed. In terms of smaller drivers, the first quarter of this year saw higher cash taxes due to much stronger marketing results, increasing taxable income, higher interest expense, and higher replacement capital. though these were partly offset by the first quarter of 2022, having backed out a non-cash gain on sale. In terms of our financial position, our payout ratio now sits at 56%, which is well below the bottom end of our 70 to 80% target range. Our debt to adjusted EBITDA decreased to 2.4 times, which is also below the bottom end of our 3 to 3.5 times target. This improvement was primarily driven by the meaningful increase in adjusted EBITDA on a trailing 12-month basis. And given that several of the past few quarters benefited from a strong marketing performance, we also continue to look at our leverage and payout ratio on an infrastructure-only basis. Using that lens, our leverage is 3.4 times, and our payout ratio would be approximately 69%. where we seek to be below four times and 100% respectively under our financial governing principles. Taking into account that financial position, the consistent performance of our infrastructure business, and ensuring that we continue to adhere to our capital allocation philosophy, we have doubled our buyback target for the second quarter by $25 million to $50 million. This would increase our annual target to up to $125 million, which represents about 4% of shares outstanding at the start of the year and is an amount we view as particularly notable relative to peers. I would also note that this would be on top of increasing our dividend in February by an additional 2 cents per share per quarter or a 5% increase. In summary, a very strong quarter to start the year. Infrastructure results were in line with our run rate of the past few quarters. Marketing had a great start to 2023 with an outlook for a second quarter that continues that positive momentum. And with our solid financial position, we're able to pass the strong business performance onto shareholders by increasing our buyback target for the second quarter. At this point, I will turn the call over to the operator to open it up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one on your touchstone phone. If you would like to withdraw your request, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Linda Athergailis from TD Securities. Please go ahead.

Thank you. Trying to get a sense of... how these tank negotiations might be a bit different than past negotiations, given the different attributes from a transportation perspective that TMX might have versus other egress. Are there any kind of sticking points in terms of price or service or anything else? Or is it just progressing as negotiations have in the past?

Good morning, Linda. Thank you for that question. I would say this is pretty much standard just state negotiations. They're progressing quite well. We're more and more confident on our ability to execute on these.

Thank you. And maybe you can just help us understand your outlook for marketing. When you look at different opportunities, where do you expect to see more of them? Is it quality-related, time-based, location-based? And how might that shift potentially over the next year or two as TMX comes into service and any sort of change structurally in the Enbridge mainline commercial arrangements?

That's a good question, Linda. When you think of marketing, you know, marketing has a wide variety of opportunities in which they can capitalize on. I would say, you know, that overall WCS to WTI spread is one of them, and that will probably be more challenged as TMX comes online. But generally, that's not the largest driver in our P&L.

that's helpful context um and maybe i realize it's still early days for your new ventures group but as you've staffed up um what are the preliminary thoughts on uh opportunities that you're seeing and how immediate and significant they might be well you know we're just we're still staffing up we'll probably have um

I think one or two people moving into that role, but that was within really the last couple of months. So Linda, I really don't think we'll be talking about things coming in from that new venture team until probably maybe sometime in the, maybe the first quarter call, right? Because this is long-term stuff that they're going to be chasing. So I don't think anything is going to pop up, you know, that we can talk about on the call until probably next year, Linda.

Okay. Thank you. I'll jump back in the queue.

Thank you. Your next question comes from the line of Robert Kwan from RBC Capital Markets. Please go ahead.

Good morning. Just in terms of your optimism around the growth plan, whether that's the high end or potentially exceeding it, can you just talk about the nature of the opportunities? You obviously talked here about the tankage, but just generally, is this an acceleration of projects that you thought might fall into 24 that's now in 23? Is it things that you probability risked and they're becoming more real? Or do you see some kind of brand-new opportunities popping up that you didn't anticipate when you formed the plan?

Yeah, thank you, Robert. I would say just, you know, the commercial opportunities are starting to firm up. And, you know, talking with their engineering, they think they can deploy more capital within the year than we expected.

And then is there anything that was not anticipated, whether that's on the M&A front or just kind of brand new projects, maybe outside of the footprint that you're looking at?

Thanks, Robert. Sean here. You know, I think directly to the guidance or the feedback we had in the call in around confidence to heighten the range, that's really things that were in scope at the start of the year. So as you noted, you know, potentially a bit of acceleration from 24 and or unrisking of projects. So directly to that, I mean, that being said, you know, we continue to work on a number of things, but, you know, directly to the commentary on the call of confidence around the high end of the range and, you know, hopefully or potentially exceeding it, that would be more directly related to unrisking of existing projects and or acceleration into this year.

Got it. Okay. If I can just finish on artistry and the rail side of things, I guess kind of two parts here. Just on the DRU side, you talked about speaking with more than one counterparty. I think previously it sounded like you were starting to focus in on only one counterparty. So I'm just wondering if the nature of the discussions have changed on that front. And then just for the non-DRU rail side of things, is there anything we need to be mindful of just on contracts whether there's step-downs or contract expirations. And then how does that play out for you given the way the capital is deployed? I think your exposure was really just on the pipeline. Just those two. Thanks.

I'll take the first part of that question, and I'll hand it over to Sean for the second part of the question. So the first part is the new customer that we're starting to talk to. It's been a customer we've been talking to for off and on for, you know, numerous years, and they have just shown increased interest over the last quarter or so, I would still say, you know, those conversations are still quite preliminary.

Yeah, and then on the second part of the question, you're absolutely right. I mean, if you look at the performance of that business and if you look at USDA partners' results, you would see there has been a step down over time as contracts have rolled off. You know, that's been reflected. It's something we've been able to absorb within our infrastructure business over time. You know, there's nothing really all that material upcoming. We expect that we will still be able to absorb that within our infrastructure business. So not a real update there. I mean, it also speaks to the real benefit of the DRU, though, as well as we sanction additional phases. That's obviously additional volume that moves through HERC. And then with respect to, you know, contractual profile or how it works, you are right. We own the pipe. They actually own the facility and it's a bit of a revenue share between the two, but it's largely fungible from an economic perspective. So, you know, the contracts follow each other from a modeling perspective there. But again, I mean, the step downs have happened over time and it's been something that's been absorbed through the infrastructure business and growth in other parts of the business.

Right. And Sean, just to be – when you say it's fungible, your exposure, though, is really just the return on the relatively small amount of capital that you put out for the pipe, right?

Yep, that would be correct. So, I mean, the way it actually technically works is – or I guess technicals. The high-level way it works is it's a revenue share based on capital deployed between the actual rail facility and the pipe into the rail facility. Now, when the expansion happened, we did top up our capital to keep up for a ride of share, but that's absolutely right, Robert. Okay, that's great.

Thank you. Thank you.

Thank you. Your next question comes from the line of Robert Cattelier from CIBC Capital Markets. Please go ahead.

Hey, good morning, everyone. I noticed that we've seen some consolidation in the oil sands industry in recent years. Specifically, now we're seeing some asset consolidation. So I'm wondering if the ConocoPhillips, if they were to exercise a rofer on Sermont, what does that mean for the likelihood of sanctioning additional phases of the DRU?

Yeah.

Good morning, Robert. I'm going to turn that over to Kyle.

Good morning, Robert. Yeah. I mean, I think it would be just overall a net positive, right? The more your customers are getting additional supply, should they choose to exercise that, you know, they're going to be looking for other egress options. That customer in particular is, you know, really, really pursued having adequate egress for all of their productions. So should they get more? I think that would be really be a net benefit for the conversations that we're already having with them on the DRU.

Okay. And then what progress can you disclose in terms of exploring opportunities around energy transition? Are there any particular areas that you find more attractive in general terms?

You know, probably, we're kind of liquid experts, right? That's what we do. So, especially on the termling side. So, if we can find opportunities around that, that would probably be our first focus. And then secondary, you know, we did look at the renewable diesel opportunity. We do have the small Mooshaw facility, and we have the DRU, so we understand operations and processes. So, I would think it'd be in the renewable diesel realm or SAF. And I would think that, you know, we would be glad to partner with somebody and continue to look for opportunities around partnering around SAF or HRD.

Okay. And then the last one from me is just, I wonder what you're experiencing in terms of G&A trends in particular. Can you Is there a way to roughly characterize it or quantify it, the increases between just the general level of activity returning to normal versus inflationary pressure?

So G&A specifically, if I heard that correctly? Yeah. Our G&A was probably a million dollars in our run rate this quarter. I mean, that was more specific to inflation. some projects that we implemented in the quarter. You know, going forward, we'd expect the run rate to be sort of tested in that $11 million range, which would be reflective of sort of inflationary pressures, being back in the office, investing in some technology. But so, in general, we would expect, you know, this quarter was slightly above where we would expect it to be going forward. It was budgeted, but... I mean, inflationary pressures, I think, are well captured within that. And then if you think about our G&A in the grand scheme of things or in the totality of the company, it's actually quite small.

Yeah. Okay. Thanks for that. And just wanted to comment on your good work on the safety front.

Thank you, Robert. Thank you. Thank you.

Thank you. Your next question comes from the line of Rob Post from Scotiabank. Please go ahead.

Morning everyone. Just taking a look at the strong cash flows coming out of the business as well as the relatively low leverage, any additional thoughts on potentially how M&A could add another leg of growth to this story?

Yeah, no, I'll take that, Rob. No, thanks for that. I mean, absolutely pleased with cash flows in the quarter, pleased with financial position as we sit here. You know, 56% payout ratio, 2.4 times leverage. You know, certainly we would think best in class. Reflective of that in a more immediate basis, you know, you would have seen that we doubled the buyback for the second quarter, you know, and upped the buyback for the year by a commensurate amount. which, again, we think is somewhat notable and also reflective of the discipline that we have in around a capital allocation framework. You know, we continue to look at M&A. We continue to look actively. And really not much has changed in the sense that we're going to continue to be disciplined. You know, we're looking for opportunities that are on strategy. So think, you know, highly contracted investment grade counterparties, infrastructure assets. And, you know, assets like that are just not always readily available or for sale. So we certainly continue to look. But in the interim, we're going to maintain, you know, this financial position. We're going to return capital shareholders to the buyback. The other thing I would highlight, and we did, you know, have it in our prepared remarks, you know, 2.4 times levered. You know, certainly would seem to be well, well below the bottom end of our range. But we've also got to remember that that's also partly driven by a number of very strong quarters from our marketing business right now. So as always, we also look at our leverage on an infrastructure only basis. And we'd be closer to the three and a half times. on an infrastructure-only basis relative to our target of four. So I think as you think about our, you know, capital structure, you've got to remember that as well. But, you know, overall, absolutely continue to look at M&A, but have remained disciplined around it and are happy to buy back shares until we find that right opportunity.

And then maybe circling back just on the energy transition commentary from before, Does the recent federal budget or even kind of the Alberta plans kind of alter or make some projects more attractive in your mind that you could evaluate?

Rob, I'm going to turn it over to our head of ESG and Sean Wilson.

Yeah, great, great question. I mean, when you take a look at what came out in the federal budget in March, we were hoping that probably there was a little bit more with respect to energy transition versus the IRA down in the U.S., so it does matter. We continue to look, both Canada and the U.S., and the IRAs have made it very attractive to continue to look in the U.S., but there are a few of the projects that we look at here in Canada that could get helped by some of the things we heard.

Thank you. Your next question comes from the line of Andrew Kuski from Credit Suisse. Please go ahead.

Thanks. Good morning. The questions about the marketing business and the number of barrels that you had in that segment, roughly the same as last year, obviously more profitable this time around. Were there opportunities to engage in more activity and really extend more capital into that business to maybe capture even greater profitability?

Andrew, it's Kyle here. You know, I would just think about it in terms of just the opportunities we saw in the quarter, right? If you look back, you had differentials very wide based on an outage, Keystone Pipeline outage, and sort of that continued on through the quarter. But you also saw the quarter move in $10 a barrel. And so our storage was probably more valuable than we would have thought going into the quarter. And I would say that that's We haven't seen that in quite some time, so a large driver there. And then, as Sean and Steve said, our refined products business benefited from that as well. So, you know, we're always looking to take advantage of the opportunities when they're there, and, you know, we'll take capital consideration into that as well. But there's nothing limiting us to doing within our asset base when the opportunities are there, and so that's what we did. So I'm not sure that it's, I hope that answers your question, but it was really around storage and those opportunities that kind of came in throughout the quarter and the volatility that we ended up with at the end of March.

That's helpful. And I guess it speaks to just overall risk management culture of the firm and maybe just extending on that. We saw another quarter of pretty volatile power pricing. How do you think about just the risk management on Whether we think power, carbon pricing, a whole array of things is probably more of a question for Sean.

Yeah, I mean, our total power, we certainly look at that, and we did experience increased power costs last year, so... You know, that would have been reflected in results, you know, vis-a-vis what we would have budgeted. I mean, in the grand scheme of things, our power costs are actually not that high if you look at it in totality. I mean, we have considered this something that we should manage. We've elected not to. As we've talked about previously, we are considering entering into PPAs. We think of it as still two emissions. uh slightly different answer but i mean that would actually lock in some of the power costs as you move forward but um you know so hedging power is something we have considered we have elected not to uh you know partly because if you think of our power costs and the totality of the company it's actually relatively small and then if i can just sneak in one final one it just sort of builds upon the power side of it does that um you know hedging or entering a ppa

Does that sort of sway that way in part because of sustainability targets in the future?

The PPA, absolutely. I mean, we have a net zero commitment by 2050. And as part of that, there's an interim step to have a limited scope to emissions and definitely part of the strategy in eliminating our scope to emissions. is entering into PPA. So absolutely, the answer is there. It is driven at least partially, if not primarily, through our carbon reduction initiatives.

And it is at H2, right? Okay, that's great. Thank you.

Thank you. Your next question comes from the line of Ben Pham from BMO. Please go ahead.

I may want to start on the growth of France and your commentary around the tanks and negotiations. Are you at the stage where you've somewhat pinned down returns and maybe even the main structure of the contract and it's really more of a function of in-service solidification of the TMX project?

Yeah, I would say, you know, on the cost estimates side, since we've been pushing this project a long time, we've had the cost estimates for quite a bit of time, and they've been adjusted over time. And as the scopes change, overprices have fluctuated. And then I would say on the contract side, I would say we're very close. All major terms have been agreed to, so we understand the economics quite well. And I would say TMX in service states is not an issue right now in the negotiations. Interesting. Okay.

And maybe on the DRU side of things, is there anything other than net costs of, you know, rare or less, the condi taken out versus the toll that's going to drive potential sanctioning?

There's so many variables in that.

So, Ben, I would say that, you know, condi pricing in Canada and also condi pricing down south, you know, to back blend into to make a dill bit once it's landed. You know, those are two of the biggest driving forces in the economics. And then I think the other You know, WCS and WTI spread is generally not a big driver. But I would say also the customers just, you know, TMX coming online in the future, quite a bit more certainty around that. And so just overall, you know, what is the need, right? And so a lot of them are going to – some of them are waiting to see just how TMX does impact the market long term.

Maybe lastly, you had a couple of good commentary on marketing and direction. How do you think about the annual marketing versus that run rate guidance? Just think about the first half. It seems you're already tracking the lower end of that range.

Thanks, Ben. I mean, as always, we're giving a view towards next quarter. So, I mean, if you just look at first quarter performance and second quarter guide, that's within the low end of the range. So call it circa $85 million. I think it's a bit of early days now. I think we expect to see continued strength and refined products. And we'll see what we see in the crude marketing business, which is certainly, you know, some parts readable, but some parts very opportunity driven. You know, I hate to give a chalk answer, but I mean, simple math tells you that if we're in the range for the second half of the year, it would tell you somewhere between 125 and 145 for the year. And that simply assumes it's 20 to 30, and we'll update quarter by quarter as we move through the year.

Okay, great. Thanks a lot.

Thank you. There are no further questions at this time. I would now like to hand the call back to Mark for any closing remarks.

Thank you for joining us for our 2023 first quarter conference call. Again, we'd like to note that we've made certain supplementary information available on our website at gibsonenergy.com. Given it's the first quarter, I'd also like to remind everyone that we will be holding our annual general meeting both in person and virtually later today at 10 a.m. Mountain Time. Details are on our website, so I hope you're able to join us. As always, if you have any further questions, please reach out to us at investor.relations at giftsandenergy.com. Thank you. Have a great day, and thanks for your continued support of Gifts and Energy.

Thank you, sir. Thank you so much, presenters. 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.