Gibson Energy Inc T.GEI

RBC Upgrade ($28.00 from $24.00)

[hawk35]

December 5, 2024
 
Gibson Energy Inc.
 
Silent moves, loud results
 
Our view: We favourably view the collection of announcements made by Gibson Energy, which we believe solidifies not only its initial investment thesis on Gateway that support EBITDA growth in the coming year, but also its commitment to exhibit disciplined approaches to capital allocation and operational efficiency (i.e., fully funded growth with debt/EBITDA within 3.0-3.5x; selective customer-driven growth capex; negative FID on waste to-energy project; cost focus campaign initiated). With seemingly more growth initiatives to come that are guided by its sound financial governing principles, we position Gibson Energy's stock as our "dark horse" Canadian Midstream pick for 2025.
 
Key points:

•Second contract extension announced. Gibson Energy has extended and amended a long-term contract at Gateway with an existing customer that: (1) refreshes the initial 5-7 year contract term (with further renewal options), thereby improving the terminal's average remaining contract term by a year; (2) includes contracting additional loading windows and increasing the contracted capacity per loading window; and (3) increases fixed Gateway revenue from the customer by approximately 40%. •Sanctioning the Gateway dredging project. The project will enable customers to load over 10% more volume directly on VLCCs and Suezmax vessels, resulting in potentially higher loading volume and revenue growth moving forward. The project is scheduled to commence and complete in H1/25.

•More likely to come at Gateway. With these two announcements, Gibson Energy believes it has accomplished its previously-communicated objectives, which also include welcoming new customers and adding pipeline connectivity, allowing it to achieve its 15-20% EBITDA growth target on a run-rate basis by the end of 2025. That said, we sense that there are still growth initiatives that it may embark on at the terminal and discuss at a yet-to-be-announced Investor Day.
•Capital allocation: Up to $200 million in growth capital and share buybacks in 2025. Gibson Energy has earmarked $100-150 million in growth capex, with $100 million being mainly deployed at Gateway (e.g., dredging, Cactus II connection), plus up to $50 million for projects that are yet-to-be sanctioned. To this end, it anticipates share repurchases being in the range of $50-100 million in 2025.

•Cost focus campaign initiated. Gibson Energy has commenced a cost focus campaign to decrease costs on a run-rate basis by the end of 2025 by greater than $25 million. To date, approximately $5 million of savings have already been realized.

•Modest estimate changes. We have updated our 2025 and 2026 DCF/share estimates to mainly reflect: (1) higher maintenance capital (including the $60 million of newly disclosed guidance for 2025); (2) lower financing costs, particularly following the company's recent refinancing activity; and (3) a lower share count based on the bottom end of the company's 2025 share repurchase capital range.
 
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.
 
Investment summary
We expect Gibson’s shares to outperform its peer group for the following reasons:
 
•Strong defensive financial positioning. Gibson ended Q3/24 with a company-adjusted debt/EBITDA of 3.2x (versus its 3.0–3.5x target range) and a 65% 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 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).

[downwithdotcom1]

Thank you to those that posted the clearly well received analyst commentary...happy days ahead...dwdc