Comments from RBCOctober 30, 2024
Gibson Energy Inc.
More to come
Price Target: 28.00
Our view: As the Q3/24 results and related disclosures will likely lead to a Marketing-driven moderation of near-term consensus estimates (with the Infrastructure segment remaining solid), we anticipate the market will take a wait-and-see approach with Gibson Energy's stock in the near-term, as it looks for updates at Gateway that demonstrate the value of the terminal to the company's long-term infrastructure cash flow growth, and for details on the new CEO's growth strategy moving forward. In the meantime, we continue to favourably view the company's attractive dividend, solid balance sheet, and stock valuation on a relative basis.
Key points:
New CEO: Looking to realize the growth potential surrounding the existing asset base. Taking cue from Curtis Philippon's prior success in profitably growing Certarus and his comments on the conference call, we anticipate the growth strategy to be unveiled by the new CEO (perhaps at a yet to-be-announced Investor Day) will focus on Gibson Energy's organic growth opportunities, particularly centering on Gateway. Longer-term, we wouldn't rule out M&A, particularly if Gibson Energy looks to add another platform to its portfolio and/or diversify into non-crude oil infrastructure.
Gateway: Seeking to expand capacity, connections and long-term committed volumes. While there were no material updates relating to Gateway, we highlight that: (1) management's confidence in extending a second contract is unchanged, with it continuing to achieve its previously communicated commercial objectives; (2) the engineering work on the dredging project is progressing, with an aim to increase the depth of the channel and allow higher loading volumes; and (3) the company is seeing customer demand for increased Eagle Ford basin exposure (note, the terminal will have up to 3.0 million b/d of pipeline connectivity when the Cactus II pipeline connection completes in Q3/25).
Unwavering commitment to the financial governing principles. Besides being supported by a healthy balance sheet (with a debt/EBITDA of 3.2x as of Q3/24), we see the company's financial governing principles as guiding how Gibson Energy approaches its growth strategy under the new CEO, including having more than 80% of Infrastructure revenues from take-or-pay and fee-for-service contracts, and having more than 85% of Infrastructure exposures under long-term contracts with investment grade counter-parties. Of note, management does not foresee buybacks in Q4/24 in light of the 2024 capex program and financial results/outlook (particularly for Marketing), and normalizing for inventory levels.
Slight estimate changes. Following the weaker-than-expected Q3/24 results (page 2) and reflecting a moderated Marketing outlook, we have revised our EBITDA estimate to $632 million in 2024 (down from $653 million) and to $650 million in 2025 (down from $673 million), while maintaining our 2026 estimate of $695 million.
More to come
· Focused on “disciplined” growth, with an unwavering commitment to its financial governing principles. While we wait for the new CEO to unveil a detailed growth strategy (possibly at a yet-to-be-announced Investor Day), we highlight that the company messaged that it is focused on realizing growth opportunities around its asset base, with platforms for growth in both Canada (e.g., Edmonton and Hardisty Terminals) and the U.S. (e.g. Gateway). Longer-term, we believe that the company could also look to M&A as a way to add another growth platform (including as it relates to energy transition-driven businesses) or diversify into non-crude oil infrastructure. Importantly, besides being supported by a healthy balance sheet (with a debt/EBITDA in the low-end of its target range of 3.0-3.5x), we see the company's financial governing principles as guiding how Gibson Energy approaches its growth strategy under the new CEO, including having more than 80% of Infrastructure revenues from take-or-pay and fee-for-service contracts, and having more than 85% of Infrastructure exposures under long-term contracts with investment grade counter-parties.
· Continuing to progress growth projects at Gateway. On the conference call, management reiterated the potential of delivering 15-20% upside to Gateway’s EBITDA through capital and non-capital improvements. In particular, Gibson Energy is continuing its engineering work related to the yet-to-be-sanctioned dredging project at Gateway, which not only would allow the facility to load additional volumes on VLCCs, but could also support the company’s re-contracting efforts that ultimately drive incremental throughput at the facility. In addition, during the quarter, the company started work on a connection to the Cactus II Pipeline at Gateway, which would provide customers access to 700,000 b/d of incremental supply, with this project scheduled to complete in Q3/25.
· Marketing EBITDA in 2024 is now expected to be at or below the $80-120 million annual run-rate EBITDA target. Gibson Energy now expects its 2024 full-year Marketing results to be at or below its $80-120 million annual EBITDA guidance range, which suggests more moderate results in Q4/24 (i.e., to meet the low-end of the range, the implied EBITDA for the segment is approximately $12 million in Q4/24). Importantly, the company remains comfortable with the $80-120 million long-term EBITDA run-rate range.
· Financial metrics remain healthy. Gibson Energy ended Q3/24 at 3.2x net debt/EBITDA, which was within the company’s 3.0-3.5x target range. Also, we note that the trailing 12 month DCF payout ratio was 65% versus Gibson Energy’s long-term payout ratio target of 70-80% of DCF. On an Infrastructure-only basis, the net debt/EBITDA is 3.4x, which was below the company’s target of 4.0x, while its payout ratio is approximately 71%, below the company’s target of 100%. Of note, management does not foresee share buybacks in Q4/24, reflecting the level of its 2024 capex program, its year-to-date financial results, outlook for Q4/24 (including for Marketing), and the normalizing of its inventory levels.
Target/Upside/Downside Scenarios
Gibson Energy Inc.
Valuation
Our $28.00/share price target is based on a 10.5x 2026E EV/ EBITDA multiple, which consists of 11.5x 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 $37.00 per share is based on our pre 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
Potential catalysts: (1) Gateway contract extensions; (2) new Infrastructure project announcements underpinned by long-term take-or-pay contracts; (3) wide commodity spreads positively impacting Marketing cash flows; and (4) a material improvement in oil prices (and associated investor sentiment)