RBC Comments After Conference CallApril 30, 2024
Gibson Energy Inc.
Holding out for a contract extension
Our view: We continue to believe that material contract extensions at Gateway could result in EBITDA upside and a positive re-rating for the shares, and we look for an update by Q2/24 results, if not sooner. With a 7.0-7.5% dividend yield, a conservative payout ratio in the 60-65% range, and relatively low leverage that sits within the company's 3.0-3.5x debt/ EBITDA target range, we think Gateway contract extensions in the average 5-7 year duration range should put the stock on the radar for investors looking for a well-covered, and growing, dividend stream.
Key points:
Gateway's strong performance should help underpin contract extensions. With record volumes through the facility in March 2024, management maintained its optimistic outlook with respect to entering into contracts with new or existing customers at, or above, the existing rates. Management is aiming to provide an update on its contract discussions with at least two of its six existing customers in advance of, or concurrent with, its Q2/24 results.
Stronger Marketing results in the coming quarters could lead to share buybacks in H2/24. Following a solid $34 million of Marketing EBITDA in the first quarter, Gibson Energy reiterated its $80-120 million run-rate annual EBITDA guidance for the segment. Consistent with its prior practices, management provided a Marketing EBITDA outlook for the upcoming quarter, which was "$20 million or greater" in Q2/24. While still in its annual run-rate range on an annualized basis, we believe the company may be taking a conservative approach to its guidance given the pending start-up of the Trans Mountain pipeline expansion (i.e., tighter oil differentials).
No update on the CEO search. We continue to await further messaging around the company's CEO transition, which was announced with the Q4/23 results in late February. As previously disclosed, Steve Spaulding will continue to serve as CEO and remain on the Board until a successor has been identified and appointed.
Results in Q1/24 were in line with our estimate and consensus. In Q1/24, Gibson Energy's adjusted EBITDA was $170 million versus our estimate of $174 million and consensus of $168 million (12 estimates; range of $159-175 million). Gibson Energy's DCF/share was $0.71 in Q1/24 versus our forecast of $0.70 and $0.75 in Q1/23.
Modest estimate changes. We have revised our EBITDA estimates to $663 million for 2024 (down from $675 million) and $673 million for 2025 (down from $677 million) primarily based on the Q1/24 results and the associated readthrough for the underlying assets. These EBITDA changes largely lead to our revised DCF/share estimates of $2.64 for 2024 (down from $2.74) and $2.68 for 2025 (down from $2.72).
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 Q1/24 with a company-adjusted debt/EBITDA (pro forma for Gateway) of 3.2x (versus its 3.0–3.5x target range) and a 63% 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) 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).
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.