Gibson Energy Inc.

Good morning, everyone, and welcome to the Gibson Energy first quarter 2024 conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Beth Pollack, Vice President, Capital Markets and Risk. Ms. Pollack, please go ahead.

Thank you, Operator.

Good morning and thank you for joining us on this conference call discussing our first quarter 2024 operational and financial results. Joining me on the call this morning 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 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 and pro forma financial information, which 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 CDAR+. Now, I would like to turn the call over to Steve.

Thanks, Beth. Good morning, everyone, and thank you for joining us today. We're excited to announce another great quarter, demonstrating the strength and stability of our Canadian and U.S. infrastructure assets. including our recently acquired Gateway Terminal, as well as the earnings power of our marketing business. In our infrastructure segment, we reported $151 million of adjusted EBITDA in the first quarter of 2024, which is in line with the high water mark set last quarter. In addition, marketing adjusted EBITDA of $34 million was above our long-term run rate for the quarter. and above the greater than $30 million guidance we provided on our Q4 call. On a consolidated basis, adjusted EBITDA of $170 million is consistent with last quarter's record. Distributable cash flow of $114 million was in line with our previous record of $115 million. The strong performance was driven by the addition of the Gateway last year, as well as continued solid results from our Canadian infrastructure business and our marketing segment's ability to capture opportunities. We also maintained a robust financial position, and leverage of 3.2 times was well within our target range of 3 to 3.5 times, with adjusting for the full year of Gateway's adjusted EBITDA. Our payout ratio of 63% was below the bottom end of our 70 to 80% target range. Looking ahead to the rest of 2024, we continue to anticipate deploying $150 million in growth capital, with $125 million of that at our Canadian infrastructure assets, primarily at Edmonton, and the remaining $25 million at our Gateway Terminal. Construction of the two new tanks at our Edmonton terminal remain on schedule, and we expect to place these tanks into service late this year. These tanks represent 870,000 barrels of new tankage and are underpinned by a 15-year take-or-pay agreement with Synovus. This will further increase our high-quality, long-term infrastructure revenues and support our customer shipments on TMX pipelines. We also continue to maintain an active dialogue with our customers to see how we can best support them during this exciting time for Canadian energy. With respect to Gateway, we continue to perform in line or above our expectations from when we acquired the facility. With record volumes through the facility in the quarter, we also maintain our optimistic commercial outlook around entering into contracts with new or existing customers at or above the existing rates. Discussions with customers are progressing and we still expect to have news to announce either in advance or with our second quarter results. In terms of safety and ESG more broadly, we completed 2023 with a trip ratio of 0.22, the lowest employee trip ratio result in our company's 70-year history and zero lost time injuries and zero reportable vehicle incidents and zero reportable spills. Our employees and contractors have now worked over 7.6 million hours since our last lost time injury. Despite these successes, we will not become complacent in our mission zero goal of no harm to people, environment, and the asset remains front of mind. In addition, during the quarter, we are proud to have been recognized by Globe and Mail as one of 30 Canadian companies with strong management leading the journey down the road to net zero. The acknowledgement further reinforces our leadership when it comes to ESG. In closing, The business delivered another solid quarter, which marked another great start to the year. Canadian infrastructure continues to perform well across all our assets. And the Gateway Terminal is performing ahead of our initial expectations, with contracting news expected by our Q2 earnings call. Our marketing segment delivered strong results in line with our previous guidance. with full year results expected to be within that $80 to $120 million run rate. I'll now pass it on to Sean, who will walk us through our financial results in more detail. Sean. Thank you, Steve.

As Steve mentioned, we had another solid quarter to start the year. Infrastructure adjusted EBITDA of $151 million in the first quarter of 2024 was $43 million higher than the same quarter last year. driven primarily by the contribution from our gateway terminal, as well as continued strong financial performance from our Canadian infrastructure businesses, which included a second consecutive quarter with the new TMX tank in Edmonton in service. Q1 2024 infrastructure results were also consistent with Q4 2023 results. Turning to the marketing segment, adjusted EBITDA of $34 million was a $6 million increase over the fourth quarter of 2023. Ahead of the outlook we provided on our last quarterly call of over $30 million and also above the high end of our long-term run rate on a quarterly basis. The strong quarter was driven by outside storage opportunities, which allowed our crude marketing group to realize higher than expected earnings. Looking forward for marketing based on the current environment, we'd expect adjusted EBITDA of $20 million or greater in the second quarter, keeping us within our long-term guidance of $80 to $120 million annually. In the second quarter, crude margins are expected to be driven primarily by time-based opportunities, while refined products performance should benefit from strengthening asphalt prices, which are anticipated to offset the impact of tighter heavy differentials in Western Canada. However, We will be well positioned to benefit if other opportunities arise. To complete the discussion of results for this quarter, let me briefly discuss a couple of items impacting distributable cash flow. The first quarter result of $114 million was a $7 million increase from the first quarter of 2023 and a $12 million increase from the Q4 2023 results. When comparing to the first quarter of 2023, The primary driver of the increase was increased cash flows from the Gateway Terminal and to a lesser extent, lower current income tax, which was partially offset by higher financing costs relating to leverage incurred to finance the Gateway Terminal acquisition. Turning to our financial position, our strong performance has allowed us to maintain a conservative balance sheet. With pro forma net debt to adjusted EBITDA of 3.2 times, within our target range of 3 to 3.5 times, and a well-covered dividend with our payout ratio of 63%, well below the bottom end of our 70% to 80% target range. Looking at our ratios on an infrastructure-only basis, our payout ratio is approximately 75%, well below our target of 100%, and pro forma leverage of 3.5 times is also well below our target of four times when accounting for a full year of Gateway adjusted EBITDA contribution. In terms of our liquidity and debt maturity profile, subsequent to the quarter, we enhanced our financial flexibility by extending the maturity of our $1 billion sustainably linked revolving credit facility to 2029 with full support from our lending syndicate. This further optimizes our staggered debt maturity profile. In summary, we are pleased to have started 2024 off with a strong quarter. Infrastructure results were in line with record contributions in Q4 2023. Marketing adjusted EBITDA of $34 million was ahead of our previous guidance of greater than $30 million, with the Q2 outlook within our $80 to $120 million run rate, And we continue to progress commercial discussions at Gateway and expect to have news in advance of or when we announce our Q2 results.

I will now turn the call over to the operator to open it up for questions.

Thank you.

If you would like to ask a question, please press star 11 on your telephone and wait for your name to be announced. to withdraw your question, please press star 11 again. One minute while we compile the Q&A roster. And today, our first question, it will be coming from Jeremy, JRM of JPMorgan Securities. Your line is open.

Morning, this is Eli Johnson on for Jeremy. Just maybe wanted to start on gateway, circling back to previous comments about organic growth opportunities at the asset. Can you walk us through how you get to some of those 10% or more organic growth opportunities and what you might be doing with loading windows or otherwise? And then how do you kind of see this evolving from a timing perspective?

Sure.

We're actively negotiating currently to fill the windows up to 28, which is about a 10% increase in our utilization. Those negotiations are going quite well with numerous customers. And that drives itself almost a 10% increase in the revenue. And then other things that we've really seen is really larger vessels coming into the facility. Most of our MVCs or all of our MVCs currently are set on AfriMax size. So when the higher utilization of VLCCs come in, you go from a 750,000 barrel vessel to a 1.3 million barrel vessel. And so that incremental increase throughput fee is a substantial income into the facility. And we've seen really a steady rise over the last six months in utilization by the VLCCs. Those are some of the just non-capital driven opportunities that we've seen really starting to materialize.

Got it. Yeah, that's helpful color. And then maybe if we could pivot a little bit to capital allocation. So, you know, obviously we see leverage beginning to decline inside of the target range. How should we think about equity shareholder return priorities in the second half of 2024? You know, recognized marketing performance likely plays a role in your decisions. But if we were to kind of see stable performance near the $80 to $120 million guide, As you mentioned already, what kind of upside is there for buybacks this year?

Yeah, thanks, Eli. It's Sean here. You know, no real change in messaging from our year-end call previously. We certainly see potential for buybacks as we move into the back end of the year, but we really need to see how the business plays out. I mean, principally for us, as always. You know, the key factors driving that will be how does marketing perform as we move into the back half of the year? And then the other one is where does growth capital actually settle out? You know, we've got currently a guide of $150 million with $125 of that sanction, another $25 that we expect to sanction. But it also, that is part of the calculus as well as we think about potential. But I mean, really no change in messaging whatsoever. Buybacks are definitely part of our capital allocation philosophy to the extent that we have excess cash flow, but we really need to see how the year plays out. We did just finish the first quarter.

Fair enough. I'll leave it there. Thanks. Thank you.

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from Robert Hope of Scotiabank. Your line is open.

Good morning, everyone. I want to stick with South Texas. So you commented on kind of the capital light opportunities there. Maybe pivoting over to the ability to invest some capital there, how has your thinking evolved on the ability to add storage there? any opportunity related to that, as well as dredging and getting some incremental barrels out of the asset?

Yeah, I think really all three of those, there's three opportunities to expend capital that we're currently pursuing. A connection into the Cactus pipeline, which will provide access to almost a million barrels a day of supply to our customers. And we also are progressing with the cost estimates and negotiations cost estimates around deepening the terminal to allow us to fully load Suez Max and to load up to 1.4 million barrels of production or product onto the VLCCs. And we're actually actively negotiating with one of our contract extensions to add additional tank, an additional 430,000 barrel tank.

Thanks for that.

And then moving north of the border, Trans Mountain looks like it's starting to flow now. Over the last little while, have your conversations with your Canadian customers altered in terms of their needs and the potential for additional tankage or any other infrastructure there?

At Edmonton, I think it's a wait and see, right, at Edmonton. We have the ability to build two more tanks there. I was out there a couple weeks ago. The tanks are fully erected, and they're starting to build the infrastructure to raise the roofs. So they're progressing very well. Of course, the one tank was placed in service in the fourth quarter of last year, and that tank actually made nominations into the pipeline last week.

Thank you.

Thank you for your question. One moment for the next question. Our next question will be coming from Robert Cotelier of CIBC Capital Markets. Please go ahead.

Maybe I'll just continue with TMX. How do you foresee TMX being placed on the service impacting strategy and the available of opportunities in the marketing segment?

You know, they're doing line fill right now. We expect ships to start loading out of the facility in May. So as far as opportunities in the marketing segment, I mean, I think we've seen the forward curve tighten, you know, to around $11.5 to $12 on the WCS to WTI. Of course, you know, as you tighten that, that itself kind of kind of reduces marketing opportunities, because you you really squeeze all of the opportunities together. But we also anytime you start up a new asset, generally, you'll have some blips and in the operation. And so that that could lead to opportunities in the market that will be well positioned to take take advantage of rubber.

Yeah, that makes sense. Just on Gateway, how does the enterprise product spot deepwater port license impact the recontracting outlook? And the same question for the Enbridge acquisition of the neighboring Flint Hills terminal. Has that changed the nature of the conversation either with respect to term rate or anything else?

You know, Robert, I was down there two weeks ago and spent a whole week, you know, talking to our customers. And not one of them talked about Spot as somebody that they were leveraging against us in any form or fashion. They were all driving forward with extending, you know, the contracts that they have. And those negotiations are progressing quite well. And also, we probably have a list of four new customers that want into the facility currently. So we are talking with them. We may sign a short-term agreement with one of them within the next couple weeks. As far as SPOT goes, it comes in on the pipelines that go into the Houston Ship Channel, which which I think our facility, from what I've been able, from what I heard, is probably, is more economical than the spot opportunity for our customers. So I think spot, if it goes, would be if the Permian Basin really starts to ramp up in production, additional production. As far as Enbridge expansion on buying Flint Hills, you know, we have, That has not really impacted us at all as far as our existing conversations with our customers. Our customers, you know, we have six customers currently. We're talking to four potential new customers. We don't see it as a real threat at the current time.

Okay, great. And then last one from me for Sean Brown on just on the amendments to the credit facility. I think the language in the MD&A talks about other amendments. Is there anything noteworthy there, or are those just all normal course?

No, purely legalese. I think it was maybe crossed the T slightly differently, and because that is technically another amendment, we are forced to. I mean, the way to think of it is just a plain vanilla extension of a year to a new five-year term with the full support of all of our banks.

Right, so nothing in there that encumbers your assets or reduces flexibility to solve or anything like that, right? Okay, perfect. Thanks.

Yeah, you bet.

Thank you.

Thank you. One moment while we prepare for the next question. And our next question will be coming from Ben, excuse me, Fram. of BMW. I'm sorry, BMO, your line is open.

Thanks. Good morning. Maybe the first question on a marketing segment and just think about the quarter-over-quarter potential change in marketing. Are you able to provide maybe a sensitivity of where marketing EBITDA could go or in a range relative to where you see differentials could land?

Yeah, I think we've always been consistent, Ben, that we think we're going to be within that 80 to 120 range for the year. We had a nice print this quarter. We believe we'll have a nice second quarter. We never really give any forward forecast beyond the quarter in front of us. We always kind of stay in our 80 to 120. We believe there'll be opportunities that develop across the year that we will capture. So as far as marketing goes, we still believe it'll be between that 80 to 120. And we've given you our second quarter kind of forecast, which we're very confident in. And we believe in the third and fourth quarter, there'll be opportunities that materialize that we'll be able to capture.

Yeah, the challenge to you, Ben, is, as you know, it's not just differentials that drives performance within the marketing business. I mean, we've got a couple strategies employing the crude marketing side, which is not entirely differential-driven, and then refined products as well, as we said in our prepared remarks. You know, though tighter differentials would impact that business we do expect to see some offset of that through strengthening asphalt markets so it's really difficult to just isolate and say if you know differentials go down a dollar what does it mean generically across the entire marketing business and generally that that spread the wcs the wti actual spread as far as taking advantage of this spread is uh

Not one of our main trading opportunities that we're able to capture is we don't have mainline capacity on Enbridge or Trans Mountain.

Okay, got it. And maybe to continue some of the questions on Gateway, recontracting specifically. I know you had some timing on when you expect a development there. And it sounds like with record volumes... the tone and the ability to recontract looks pretty good. Uh, can you comment down just, I know you put out timing. Is there anything where it is macro or competitive that, that might drive a slippage and, and your ability to announce something by, by Q2 results?

Yeah. I mean, Ben, I, you know, I'm fairly confident in the two contracts on the, on the extension of the two existing contracts. Um, Those negotiations are going quite well, and I don't see any reason why we wouldn't be able to announce that by at least the second quarter earnings call.

Okay, and just to clarify, by Q2, are you expecting to announce all your targeted earnings? potential contracts, or it could be more of a situation where it's more partial and piecemeal and you lock up the rest later on?

Well, I mean, we've got six customers at the facility right now, and I think the messaging that we've had, Ben, is that, you know, we're in active discussions with basically all of them as we would be, but I mean, where, you know, our expectation right now based on the status of those discussions is that, you know, two of them More specifically, we would hope to have an update in the second quarter. And that is absolutely consistent. But I mean, once that update happens, we continue to work. So with respect to the two or even the potentially new customers that Steve talked about, that would certainly be nearer term. But discussions continue continuously with all of our customers. So I think with respect to the guidance we've previously given around what we expected to update people on, We still remain very consistent with that, but we'll still talk to all of our customers as we would at any of our facilities as we move through this year and next year.

Okay, got it. Okay, appreciate it. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment for the next question. And our next question will be coming from Robert Kwan. of RBC Capital Markets. Your line is open.

Good morning. If I can just start and ask about the dynamics between the new and the existing customers. You noted that there might be a new customer coming in short term. Is that just selling the spot windows or put differently, are there any renewal rights or options for your existing customers that stops you from layering in a contract and behind them if if they're not advancing the way you'd like on an extension?

Yeah, I mean, it's selling some of the windows that aren't firm today on a spot basis. And there is nothing that prevents us from fully contracting the terminal up, Robert, which is that we say 28 windows.

Okay, but is there anything that stops you from, if somebody was willing to take a contract three years out, to layer it in behind somebody else?

No, no. A lot of the rights, that's definitely one of our contract strategies, is to develop some additional customers to layer on as some of these contracts may expire to ensure that we have long-term contracts.

Okay. Just coming back to, I think it's a bit of a slight change in timing. I just want to know if there's anything to read into it. You're talking now potentially out to the Q2 call, which would be August. I think previously the messaging was by the end of the second quarter. Is that just negotiations take time?

No, we are really exactly where we've always thought we would be. So we're quite confident, but you never know, Robert, in negotiations. I mean, we're trading paper with these counterparties. We feel confident we'll be able to execute it, but you never know exactly on time.

Okay. If I can just finish one for Sean here on the buybacks. You commented that there's no change in the strategy. Certainly doesn't sound like there is, but that you need to see how the rest of the year plays out and how with a lot of the buybacks tied to excess marketing, you had the good first quarter, but now you're guiding to that $20 million for Q2. So is there something specific to Q2 that you think could rebound in the second half of the year, or is that Q2 number kind of where you think the indicative level is post-TMX until we start to fill up the pipes?

No, not necessarily. I mean, Q2, that guide, we're basically at where we budgeted going into the year. And as Steve talked about, we do think that there could be some opportunities as it relates to our marketing group with the TMX startups. So it's really, do those opportunities arise? How does marketing actually manifest itself by the end of the year? It does not necessarily mean that if we hit budget that there is not going to be any buybacks. We're not looking for massive outsized opportunities. With TMX coming on, there is some uncertainty there. or probably less certainty around that business. So we just want to see how it plays out because for things like capital allocation, we have typically been fairly conservative in our messaging and wouldn't veer off that right now. Okay, that's great. Thank you very much. Thanks, Robert.

Thank you for your question. There are no more questions in the queue, and I would now like to turn the call back over to Beth. Please go ahead.

Thank you for joining us for our 2024 first quarter and full year conference call. We have also made available certain supplementary information on our website, getsomeenergy.com.

Thank you.

Thank you all for joining today's conference call. This concludes today's meeting. You may all disconnect.