Post by
hawk35 on Feb 22, 2024 12:27am
RBC Comments After Conference Call
Based on the comments below, it appears RBC expects the share price to rise significanly by the end of Q2 when Gibson will announce new / renewed contracts for Gateway. They are very upbeat on this stock and it looks like the upside scenario target of 33.00 is quite realistic.
February 21, 2024
Gibson Energy Inc.
Let this dark horse run
Outperform
Price Target CAD 27.00
Our view: Heading into 2024, we highlighted Gibson Energy's shares as our "dark horse" pick for the year, largely due to what we saw as an overlooked stock with a potentially significant positive catalyst in the form of contract extensions for the Gateway terminal. The strong Q4/23 results and favourable outlook for Gibson Energy's legacy Infrastructure and Marketing assets form a solid foundation with upside if the company can deliver contract extensions at Gateway (potentially in Q2/24).
Key points:
Gateway contract extensions and growth beyond the base case looks promising. Gibson Energy remains constructive on its ability to enter into new contracts and extend existing contracts at or above the current rates at Gateway, with initial announcements potentially occurring as soon as Q2/24. Further, with Gateway loading a growing number of Very Large Crude Carriers (VLCCs) versus smaller Aframax vessels, the company sees rising throughput that should help the contracting process with the possibility of ultimately increasing Gateway's EBITDA by 15-20% over the medium-term versus the company's initial EBITDA guidance when it acquired the facility.
Steve Spaulding to retire as CEO and the conference call reinforced our view that there is nothing to read into it. We do not think there are any read throughs on Gateway's performance and/or outlook, particularly as the prepared remarks on the conference call included very similar commentary on Gateway's outlook for contracting to its prior messaging. The Board of Directors will engage a search firm to evaluate internal and external candidates with a focus on a Canadian candidate. Steve will continue as President and CEO and will remain on the Board of Directors until a successor has been identified and appointed.
Solid Q4/23 results; dividend increased by 5%. EBITDA of $170 million was ahead of our $160 million estimate (consensus was $165 million), thanks to stronger segment profit from both the Infrastructure and Marketing businesses. DCF/share of $0.64 was largely in line with our $0.65 estimate, mainly due to a higher-than-anticipated replacement capex. The company increased its dividend to a new annualized rate of $1.64/share (up from $1.56/share), with the magnitude and timing of the increase being consistent with our expectations.
Slight increase in our estimates. We have increased our EBITDA estimates in 2024 and 2025 to $675 million and $677 million, respectively (up from $665 million and $668 million, respectively), with the changes reflecting stronger forecast results in the Infrastructure segment and the company’s guidance for Marketing in Q1/24 to be “over $30 million”. For DCF/share, we have increased our estimates to $2.74 and $2.72, respectively (up from $2.65 and $2.67, respectively), with the changes primarily reflecting our higher forecast EBITDA.
Prospects at Gateway Terminal look promising
· Contract extension negotiations remain a focus, with an update possible in Q2/24. With the market remaining focused on Gibson Energy’s progress on the negotiations, the company noted that discussions with customers are ongoing and Gibson Energy remains constructive on its ability to enter into new contracts and extend existing contracts, at or above the current rates, with initial announcements that could come as early as Q2/24. On the conference call, management commented that the company stands ready to execute on the contracts “now”, and is working with its customers on multiple fronts, including embedding options relating to increasing future loading windows for the customers, the alignment of the customers’ upstream and downstream contracts, and the length of contract term (e.g., 5 to 7-year contract lengths, but leaning towards the higher[1]end of the range).
· Higher throughput in Q1/24 helps set up the base business to perform at, or better than, the forecast that underpinned the acquisition of the terminal. Looking forward, the company’s focus is on optimizing the facility, with the goal of increasing contracted loading windows, increasing throughput and minimum volume commitments (MVC), and extending existing contracts. From a throughput perspective, Gibson Energy expects a record quarter for Gateway in Q1/24 (with March setting up to potentially be a record month), helped partly by higher loadings of Very Large Crude Carriers or VLCCs (in December 2023, 16-17 VLCCs were loaded). Absent of expansion projects, management sees the potential for EBITDA at the terminal to gradually grow organically by 15-20% over the medium-term.
· Additional growth projects offer further upside. As the company looks to increase its firm contracts at the facility, we see the potential for a corresponding build-out of tankage (as customers may need additional storage capacity to match incremental firm contracting), additional dredging activity to accommodate the ability to load more crude onto the VLCCs (which may occur later in 2024 at roughly 3-4x EBITDA build multiples, pending the permitting process), and incremental pipeline connection capacity (e.g., direct connectivity to the Cactus pipeline). If additional contracting materializes, we would look for clarity on the amount of capital required, as well as the contractually based return on the invested capital.
Valuation
Our $27.00/share price target is based on an 11x 2025E EV/ EBITDA multiple, which consists of 12x EBITDA for the legacy Infrastructure segment, 9-10x EBITDA for the South Texas Gateway Terminal, and 7x EBITDA for the Marketing segment, consistent with the multiples we use for midstream peers with comparable assets and cash flow streams. We believe that the risk-adjusted expected total return to our price target supports our Outperform rating on the shares.
Upside scenario
Our upside scenario of $33.00 per share is based on our pre[1]downturn valuation of 12.5x applied to our one-year forward EBITDA. This valuation could be achieved if growth accelerates either via the build-out of 2-4 tanks per year in Western Canada and/or the ability to lever off the Gateway footprint to generate new projects.
Downside scenario
Our downside scenario of $15.00 is based on the 2020 trough valuation for the shares of roughly 6.5x “headline” EBITDA or 8x EBITDA (adjusted for IFRS 16) applied to our 2025 EBITDA estimate.
Investment summary
We expect Gibson’s shares to outperform its peer group for the following reasons:
• Strong defensive financial positioning. Gibson ended Q4/23 with a company-adjusted debt/EBITDA (pro forma for Gateway) of 3.1x (versus its 3.0–3.5x target range) and a 61% trailing 12-month payout ratio of DCF (versus its 70– 80% target).
• Making the right moves on capital allocation. The company has an attractive return-of-capital strategy that is blending a growing dividend stream (5% increase announced in February 2024; we expect a similar increase in February 2025) and prior to the Gateway acquisition, share buybacks under the normal course issuer bid.
• Gateway delivers immediate expected accretion and a platform for potential growth. We expect the South Texas Gateway Terminal to deliver meaningful DCF/share accretion. Further, we believe the acquisition provides Gibson with another avenue for potential future growth, which could include an expansion at Gateway and/or related infrastructure.
• Potential catalysts: (1) new Infrastructure project announcements underpinned by long-term take-or-pay contracts; (2) wide commodity spreads positively impacting Marketing cash flows; and (3) a material improvement in oil prices (and associated investor sentiment).
Risks to rating and price target
Risks to our rating and price target include: commodity price and demand-related impacts including lower customer activity, narrower margins at Moose Jaw, and reduced Marketing opportunities; ability to recontract Gateway at levels that maintain EBITDA; acquisitions and growth projects that fail to gain the confidence of investors; the level of commodity price spreads and impact on Marketing; the impact of long-term interest rates on valuation; and the execution of the internal initiatives to reduce costs and enhance the cash flows from the existing assets