EQUITY RESEARCH
June 22, 2023 Rating Change - Upgrade
GIBSON ENERGY INC.
South Texas Gateway Terminal Enhances Growth; Upgrading
To Outperformer
Our Conclusion
We are resuming coverage following the close of the subscription receipt
offering to help fund the South Texas Gateway Terminal (“STGT”)
acquisition. We view the facility as a high-quality asset, providing substantial
accretion and adding a more substantial growth element to the investment
proposition. These positive attributes offset the higher leverage and F/X
exposure. We are upgrading our rating to Outperformer from Neutral and
increasing our DCF-based price target to $27 from $25.
Key Points
The South Texas Gateway Terminal (“STGT”) is a competitively positioned
crude oil export facility in the USGC, operating a deep-water, open access
marine terminal in Ingleside, Texas at the mouth of the Corpus Christi Bay.
The terminal is one of only two terminals with the ability to load very large
crude carriers (VLCCs) and is the second-largest terminal in the USGC by
export capacity (1MMBbl/d). Closing of the transaction is expected for Q3/23,
subject to customary closing conditions.
Fully Funded Transaction: To fund the U.S.$1.1B cost, the company has
committed bridge financing facilities, while permanent financing includes a
$403MM subscription receipts bought deal (including the over-allotment),
$900MM of various senior unsecured medium-term notes, and $200MM of
hybrid debt securities. The company is also upsizing its existing $750MM
sustainability-linked revolving credit facility to $1B. The subscription receipts
will see the issuance of ~22.6MM shares at an issue price of $20.15 per
share upon closing of the acquisition.
Financials And Valuation: The acquisition multiple of less than 9x the
projected forward adjusted EBITDA (without synergies) and use of leverage
results in immediate DCF/share accretion of about 15%. Proforma the
transaction, net debt to adjusted EBITDA increases to ~3.2x, within the
targeted 3.0x to 3.5x range. Gibson’s proportion of segment profit from
infrastructure also increases to ~85% from 80%, with take-or-pay contracts
now 80% of infrastructure revenues. The transaction was also structured to
maintain investment grade ratings; however, we expect the company to
moderate share repurchases for a period in order to reduce leverage.
More Growth Potential: The acquisition enhances the organic growth profile
and is a good fit, in our view, given the company’s liquids experience. We
expect the F/X risk to be managed prudently, but see some re-contracting
risk in light of the 3.3 year weighted average contract term.