Gibson Energy Inc T.GEI

Scotia comments after conference

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A Bright Outlook for South Texas

OUR TAKE: Slight Positive. Overall, we have a favourable view on the quarter as we believe it highlights a number of core themes that support our recent upgrade to Sector Outperform (link). Specifically, these include Gibson’s (1) strong balance sheet and easy-to-execute funding plan, (2) low payout ratio and very secure ~7.4% dividend yield, and (3) improved growth outlook. We are surprised by the weakness in the shares following the results and view it as a buying opportunity. Management spoke very confidently about the growth outlook for its new South Texas Gateway Terminal (STGT) and very favourably about contracting discussions with new and existing customers. Our cash flow estimates move up to reflect the better-than-expected Q3 and lower cash taxes moving forward. Our $25.00 target price implies a ~9.5x EV / 2025E EBITDA multiple, implying some valuation expansion versus 2024E trading levels of 8.9x. This also assumes that Gibson narrows its valuation discount to Keyera (9.7x EV / 2024E EBITDA) and Pembina (10.1x EV / 2024E EBITDA), which we believe is warranted.

KEY POINTS

STGT contracting discussions proceeding well. Management spoke favourably on STGT re-contracting discussions during the conference call, with overall interest being stronger than expected and the progression further along than anticipated. The company is in negotiations with three existing customers of the terminal (of six) to extend their contracts while also adding capacity and storage. With this, higher contracted rates are being proposed. The company is also in discussion with other parties, some of which buy product from the facility, regarding new contracts at the terminal. Benefiting EBITDA moving forward could be a shift to contracting on the assumption of 50% VLCC loadings (1.2 million-1.25 million bbls) and 50% Aframax (0.75 million bbls), which would drive both volumes and revenue higher. The existing contracts are based on Aframax loadings. There are also some spot capacity windows that could be contracted. Management hopes to have one or two new contracts signed in Q2/24. We note that re-contracting STGT and extending the average term beyond the existing ~3 years is a key focus for investors.

STGT upside could be higher than we expected. While not disclosed during the quarter, we assume STGT generated ~$25m of EBITDA in the two months it was owned (~$150m annualized). This is based on comments that the legacy non-marine infrastructure business outperformed its base level by less than 5% (we assume $115m during the quarter). As a reminder, Gibson believes that on a go-forward basis (we assume 2024) STGT was purchased at a ~9x EV / EBITDA multiple, implying ~$165m of EBITDA. On the call, management noted they could grow the STGT business by 10%-15% by lengthening the contract mix and adding tankage and pipeline connections. This implies STGT EBITDA of ~$180m-$190m, which would be ahead of our 2025 estimate of $175m.