June 22, 2023
Gibson Energy Inc.
Everything is bigger in Texas (including Gibson)
Our view: On the whole, we positively view the US$1.1 billion South Texas Gateway Terminal (STGT) acquisition as it increases Gibson Energy's proportion of segment profit from Infrastructure and take-or-pay contracts, while delivering meaningful forecast DCF/share accretion and a further reduction in the payout ratio. That being said, our enthusiasm is tempered by the relatively short remaining contract life, and we believe the market will respond favourably if the company is able to execute contract extensions without a material change in EBITDA.
Key points:
Patience pays off. Gibson Energy has talked about its pursuit of M&A for years, but the company has struggled to find an asset with a high degree of take-or-pay contracting that can deliver expected returns in the ballpark of Gibson Energy's historical returns (i.e., 5-8x EBITDA build multiple). With the South Texas Gateway Terminal (STGT), Gibson Energy has ticked the boxes at a high level.
Attractive financial attributes paired with qualitative benefits. The company noted that pro forma the STGT acquisition, it expects its segment profit from Infrastructure to increase to 85% (up from 80%) with Infrastructure revenue from take-or-pay contracts increasing to 80% (up from 75%). Further, based on Gibson Energy's guidance for "mid-teens" DCF/share accretion, we expect the dividend payout ratio to be below the company's 70-80% target of DCF. Qualitatively, the STGT acquisition increases the company's scale and asset diversity.
Short contract duration, although Permian growth and more VLCCs could support nearer-term recontracting. We believe investors' biggest concern relates to the STGT's remaining average contract life being a little over three years. We favourably view Permian supply fundamentals, which should lead to higher Gulf Coast exports (i.e., a rising tide as opposed to a zero sum game for competing oil export terminals). Further, STGT has experienced growing volumes due to higher loading of Very Large Crude Carriers (VLCCs) versus smaller Aframax tankers, which could provide support for contract extensions.
Increasing our estimates to reflect the STGT acquisition, which the company expects to close in Q3/23. Our new 2023 and 2024 EBITDA estimates are $571 million and $683 million, respectively (up from $533 million and $515 million, respectively), with DCF/share moving up to $2.57 and $2.72, respectively (up from $2.52 and $2.49, respectively). Of note, our 2024 DCF/share estimate increase is below management's guidance for "mid-teens" accretion primarily as we have also removed our previous forecast for accretive share buybacks through the end of 2024. Valuation- wise, we view the acquisition as being accretive by roughly $1/share, but this is partly offset by the removal of accretive share buybacks.