TD Waterhouse comments after conference callTHE TD COWEN INSIGHT
GEI's Q1/24 results were operationally slightly below our expectations. GEI's targets related to the contractedness of operating cash flows, creditworthiness of counterparties, financial flexibility, capital funding strategy, and sustainable payout ratio, when combined with the returns implied by our target price inform our BUY rating.
Event
Gibson Energy Inc. (GEI) reported Q1/24 AFFO/share of $0.71, slightly below our estimate of $0.72, above the recent consensus of $0.67, and below the Q1/23 AFFO/share of $0.75.
Impact: NEUTRAL
Q1/24 Results: Q1/24 results were slightly below our expectations, driven primarily by weaker-than-forecast performance in Infrastructure, as well as higher-than-forecasted G&A and other expenses, partially offset by slightly lower interest expense, replacement capital, and cash taxes. Note that certain items were added back to arrive at our AFFO/ share figure, including ~$7mm of executive transition costs. GEI's Infrastructure business benefited from incremental contribution from assets acquired as part of the South Texas Gateway Terminal transaction, earnings from the first Trans Mountain pipeline expansion tank at the Edmonton Terminal, as well as higher volumes at the Hardisty Terminal. While Marketing Adjusted EBITDA of ~$34mm was consistent with management's outlook of $30mm or more of Adjusted EBITDA communicated during the Q4/23 earnings conference call, segment performance was lower y/y resulting from reduced opportunities in both the refined products and crude marketing businesses.
CEO Search Process On-Going: The search for a replacement CEO and President continues to progress and a search firm has been engaged to evaluate internal and external candidates. Given that Mr. Spaulding will remain in his role until a successor is appointed, we anticipate a relatively smooth transition.
Financial Forecasts Updated: We have updated our financial forecasts, largely to reflect the Q1/24 results and when combined with our updated outlook, results in no changes to our $25.00 target price.
Outlook
STGT Growth Drivers: GEI highlighted multiple areas to drive growth for STGT. Capital light opportunities include re-contracting with existing customers and addition of new customers, increasing usage of loading windows, and incremental income from loading VLCCs instead of afromax vessels. Management noted that these capital light initiatives including negotiations to fill up loading windows and re-contracting discussions could drive almost a 10% increase in revenues. Growth opportunities requiring capital include additional tankage, developing a connection to the Cactus pipeline system to add access to ~1mmbbl/d of supply, as well as pursuing dock deepening projects to accommodate suezmax and VLCC vessels. The company noted that contracting discussions continue to progress with six existing customers and four potential new customers. Management expressed confidence in recontracting two existing customers and noted that the company expects to provide a recontracting update by the Q2/24 earnings conference call. GEI indicated that competitive alternatives to STGT including EPD's SPOT project and ENB's Ingleside facility have not impacted re-contracting discussions.
Marketing Outlook: In Q2/24, GEI expects to earn over $20mm in adjusted EBITDA from its Marketing business, driven by time-based opportunities in its crude marketing operations and strengthening fundamentals in the asphalt business, partially offset by expected tightening in heavy differentials. On the conference call, management noted that the in-servicing of TMX is anticipated to impact WCSB differentials and introduce volatility throughout the year, which translates to opportunities for the Marketing business. The company highlighted the ability to add two more tanks at its Edmonton facility to serve increased demand arising from the in-servicing of the TMX expansion project.
Share Repurchases: Management reiterated that share repurchase decisions will depend on Marketing performance and level of capital spending for the year. GEI continues to guide towards a 2024 capital spending budget of $150mm, consisting of $125mm and $25mm of sanctioned and unsanctioned capital, respectively, as well as an $80-120mm range for Marketing adjusted EBITDA in 2024.
Valuation
GEI is trading at 11.7% 2024E AFFO Yield, a discount to its historical five-year average of 9.8%, which we believe is unwarranted given the company's relatively strong balance sheet and stable cashflows as well as growth potential at STGT.