Gibson Energy Inc. (GEI) Earnings Call Transcript & Summary

Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Gibson Energy Q4 2021 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President, Strategies, Planning and Investor Relations. Mr. Chyc-Cies, you may begin your conference.

Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our fourth quarter and full year 2021 operational and financial results. On the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive Officer, and Sean Brown, Chief Financial Officer. Listeners are reminded that today's call refers to non-GAAP measures and forward-looking information. Descriptions and qualifications of such measures and information are set out in our continuous disclosure documents available on SEDAR. Now I'd like to turn the call over to Steve.

Thanks, Mark, and good morning, everyone. Thank you for joining us today. I'm pleased to say we delivered another solid quarter, capping what we see is a strong year, especially from our Infrastructure segment. As such, we are in position to continue a consistent annual dividend growth with the increase this year of $0.02 per share per quarter to $0.37 per quarter per share or an annual amount of $1.48 per share. As important, we saw the restart of commercial discussions on a pause brought on by the onset of COVID which led to the sanctions of several new projects during the year and the development of projects we expect to sanction in 2022. Also, we made some big strides in advancing ESG and sustainability at Gibson. Looking briefly at our financial results. Infrastructure adjusted EBITDA of $436 million for the year is a very strong result. That's $63 million or 17% increase over 2020. Also notable is, if you look at the Infrastructure growth over the past 5 years, you see a CAGR of the same amount of 17% which truly reflects our ability to deploy capital in what we think are the highest quality projects in our sector. On the Marketing side, adjusted EBITDA of $43 million was reflective of a challenging environment. We continue to see Marketing as an opportunity-driven business, but we won't stretch or take additional risk just to hit a number. Relative to 2020, our adjusted EBITDA stayed flat, but the decrease in Marketing numbers was offset by higher quality, long-term cash flows from Infrastructure. In fact, Infrastructure represents now 91% of our adjusted EBITDA. Despite that challenging marketing environment, our payout ratio of 70% remains near the bottom of our target range of 70% to 80%, and leverage of 3.2x is within our 3x to 3.5x target range. Given our solid financial position, we also want to make sure we continue to adhere to our capital allocation philosophy. Our priority remains Infrastructure growth capital focused on high-quality cash flows and targeting that 5x to 7x build multiple. At the same time, we also recognize that many investors would also like to see increased return on capital from the sector as a whole. As I mentioned, we increased our dividend more than any of the past years, and Sean will discuss a stock buyback strategy. On the operational front, during the year we completed the construction of the DRU on schedule and within our initial capital range. ConocoPhillips has now been moving neat bitumen to the U.S. Gulf Coast for roughly 6 months now and they're seeing a strong market development for their products. Also, refinery customers are seeing meaningful improvement in refinery runs versus dilbit, all of which further demonstrates that DRU competes if not beats pipelines on a head-to-head basis, which is helping us advance discussions for additional phases. On the tankage front, we were very pleased to announce the sanction of a new tank in Edmonton during the third quarter. With this tank, we welcome a new investment-grade customer for Edmonton Terminal and we continue to be in discussions with potential Edmonton customers, including TMX shippers. We believe Gibson is well positioned to support shippers on TMX, optimize their crude netbacks, and meet the stream requirements. At the Edmonton Terminal, one of the commercial achievements in 2021 was the signing of an MSA with Suncor, our principal customer at the terminal. The agreement simplified several contracts into one contract and extended their aggregate terms. As part of the agreement, we announced the sanction of a biofuels blending project which was roughly equivalent to 1, 1.5 tanks in terms of capital and is ESG positive and aligned with energy transition. One of the things I really like is that 25-year term. The execution of the agreement and the sanction of the biofuels project demonstrates the long-term need of our Edmonton Terminal by one of the most prominent integrated producers in Canadian energy. We believe we'll continue to build out additional infrastructure to support their needs in energy transition fuels over the coming years. We're dedicated to present energy transition infrastructure opportunities. We put together an energy transition team to identify and develop opportunities in this space. Most notable is the potential renewable diesel facility that we continue to advance. If we're successful, we expect to generate very attractive risk-adjusted returns for our shareholders and likely push us back to about $300 million in growth capital per year we were at prior to COVID. This is a very interesting opportunity. There's still a lot of work to be done. We continue to look for M&A opportunities that fit our strategy and provide consistent and quality cash flow. It's tough to find that match where it fits your strategy, your cash flow quality and evaluation with a willing seller. Shifting to ESG, this is another part of our business that we meaningfully advanced in 2021. We set on each of the E, S and G fronts with deliverables in 2025 and 2030, as we believe it is important that we have credible near-term targets to drive change today. And as part of that, 35% of our short-term compensation is tied to ESG and safety metrics. We were the first public energy company in North America to fully transition its principal syndicated revolving credit facility to a sustainability-linked facility. On the E side, in terms of the highlights, we are targeting reducing our overall emissions intensity by 20% and eliminating our Scope 2 emissions by 2030. We've made a net-zero commitment by 2050. A key focus for us is setting each of our targets with a credible path to get there. On the S and G front, we've made some real progress over the past 12 months. We're well on our way with over 45% of our vice presidents and up being women or ethnic representation. Our target is for women to comprise at least 43% of the overall workforce by 2030. We continue our focus on communities in which we operate. We seek to give at least $5 million in community initiatives through 2025 and at least $1 million per year, which is really pretty good when you think of our relative size. I'm most proud of our employees, how they're contributing and participating in community investments. We had over 95% participation by our employees. That's really outstanding. On the safety front, we achieved a TRIF score in 2021 of 0.43, which is the lowest score in our company's history and puts Gibson in the top quartile of our U.S. and Canadian industrial peers. Given all these efforts, we're very pleased that our work is recognized by third-party rating agencies which provided external confirmation that we're meeting our overall goal of being an ESG leader in our sector. For example, towards the end of the year, MSCI upgraded our rating to AAA. This is their highest rating in our sector, and we are the only company in North America to receive this leadership rating. We were also awarded the Bronze Class distinction in S&P Global 2022 Sustainability Yearbook, where only 4 other companies globally received this medal of distinction within the oil and gas storage and transportation industrial. We believe we have well positioned Gibson as a great fit for the ESG-minded investor. We have the lowest carbon intensity among our peers and the steps we've been taking have earned us very strong ratings from the major agencies. Again, we feel we've had another strong quarter, contributing to a good year and remain very well positioned going forward. Our Infrastructure business remains strong, and our run rate increasingly notable from the start-up of the DRU. We will continue to have growth opportunities around our traditional assets. I am excited about the new growth opportunities around the DRU and in the energy transition space and potentially some M&A opportunities that fit us. It's nice to be recognized as one of the top ESG companies in our space. I'll now pass it over to Sean who will walk us through our financial results in more detail. Sean?

Thanks, Steve. As Steve mentioned, another solid quarter that helped cap a strong year, especially for our Infrastructure segment. Very much a year that proved we don't rely on our variable cash flows to move our business forward, especially with leverage in the bottom half of our target range and our payout ratio right at the bottom of our 70% to 80% target range. For the fourth quarter, Infrastructure adjusted EBITDA of $106 million was slightly ahead of our expectations when taking into account that we were at $104 million in the third quarter with what was pretty close to a full quarter contribution from the DRU. Both the Hardisty and Edmonton terminals were up very slightly from the third quarter as a result of increased throughput volumes. The U.S. business was also up slightly as we continue to see increased throughput on both our gathering systems and the Gibson Wink terminal. Partially offsetting these factors was Moose Jaw, where we were slightly lower in the fourth quarter than in the third quarter due to some maintenance work and higher utility costs. For the full year, Infrastructure adjusted EBITDA was $436 million, a $63 million or 17% increase from 2020. That was very much above the internal budget that we set at the start of the year and was driven by outperformance at both the Hardisty and Edmonton terminals. While there were some onetime items at both Hardisty and Edmonton on a net basis, those would account for less than half of the outperformance versus our budget outlook. Relative to 2020, the main drivers of the $63 million increase would have included a full year contribution from the 3 tanks we placed into service in the fourth quarter of 2020 at Hardisty, the outperformance of our expectations for Hardisty and Edmonton due to higher throughput revenues and slightly lower operating costs, the partial contribution from the DRU this year, and the net benefit of the one-time items, so that would be less than 1/3 of the increase year-over-year. In the Marketing segment, adjusted EBITDA in the fourth quarter of $6 million was within our outlook range. As we spoke to on the third quarter call, this fourth quarter was impacted by unrealized losses on financial instruments that needed to be realized. And while there were some smaller opportunities we were able to realize around volatility from egress outages, the asphalt market for refined products is weak as expected, so tops and drilling fluids were not as strong as anticipated. For the full year 2021, Marketing adjusted EBITDA was $43 million. That is a decrease of $61 million from the $104 million earned in 2020. Putting that difference into context though, in the second quarter of 2020, when there was significant volatility in the crude market with the onset of COVID, Marketing made $64 million in just that 1 quarter. This also highlights both how Marketing is an opportunity-driven business and that we haven't realized any outsized opportunities for 6 quarters in a row. We can't predict when that quarter will come, but as you can see, it makes a big difference. In terms of our outlook for Marketing, we would expect Q1 to come in at between $15 million and $20 million in adjusted EBITDA, which is somewhat in line with where Q4 came in before the impact of financial instruments. Finishing up the discussion of the results, let me quickly work down to distributable cash flow for the fourth quarter relative to the third quarter of this year. Interest and replacement capital were in line and current income tax expense was slightly lower. Lease payments were $2 million lower, though this was offset by other items including noncash adjustments for equity accounted items. For the full year 2021, distributable cash flow of $290 million, $291 million, was $8 million lower than the $299 million earned in 2020 despite the same adjusted EBITDA in both years. In terms of key drivers, lease payments were $8 million lower in 2021 as we continued to reduce our railcar fleet and had reduced rates on cars we renewed. Income tax was $5 million higher, reflecting lower one-time offsets that were available. Other items decreased a net $16 million, where in the first quarter of 2020 we had an outsized positive impact of $14 million, largely from adjustments from our equity investment and foreign exchange changes. And on a trailing 12-month basis, for the second consecutive quarter, both adjusted EBITDA and distributable cash flow increased relative to the prior quarter as we again posted a stronger quarter in both the Infrastructure and Marketing segments than we rolled off. As a result, our payout ratio decreased to 70%, which is at the bottom end of our 70% to 80% target range. Our debt to adjusted EBITDA remained flat at 3.2x, which is in the bottom half of our 3x to 3.5x target. On an Infrastructure-only basis, our leverage would be 3.6x and our payout ratio would be approximately 66%, where we seek to be below 4x and 100%, respectively, under our financial governing principles. And it was very much those metrics, in addition to the 17% 5-year CAGR in Infrastructure growth Steve spoke to earlier that gave our Board the confidence to increase the dividend by $0.02 per share per quarter or 6% to $0.37 per share per quarter or an annual rate of $1.48 per share. And speaking further to our financial position, we continue to maintain a fully funded position for all our capital with ample cushion for additional projects. Between our credit facilities and cash on hand, we had over $650 million of available liquidity as at December 31. Given that level of liquidity and our strong leverage metrics, especially on an Infrastructure-only basis, we are very much positioned to also consider returning capital to shareholders via our buyback in 2022. We don't seek to be formulaic or prescriptive in terms of timing or size of potential buyback. However, we fully appreciate that the market will likely judge companies on execution rather than intention. In summary, a solid quarter and a very strong year. Results from the Infrastructure segment were strong to the point where this offset the challenging environment faced by the Marketing segment. From a financial perspective, we remain in a very strong position, being within both our leverage and payout target ranges, remaining fully funded with ample cushion, and with significant available liquidity. And we continue to be of the view that our business offers a strong total return proposition to investors with visibility to continued growth in our high-quality Infrastructure cash flows and attractive dividend that we've now grown for 3 straight years and with the potential for buybacks in the future, all while maintaining a very strong balance sheet and financial position. At this point, I will turn the call over to the Operator to open it up for questions.

[Operator Instructions] Your first question comes from Rob Hope with Scotiabank.

First question is just on discussions on tankage. Has the slippage in the TransMountain date altered any conversations there? Or is the expectation that you're still going to have to get contracts signed this year for any tankage to meet TransMountain?

Thank you for the question, Rob. This is Steve. I would say it has pushed it back a little bit as far as just the pure urgency. The delay, right? But it does actually help us on the DRU. Back was it several years ago when the decision around TransMountain was being made by the government, we had said that we win either way. One way we build more tanks. The other way it really adds to our DRU competitive advantage.

And then just maybe shifting over, M&A got a little bit more commentary in your prepared remarks there. As you're taking a look at the landscape, what are the attributes that you're looking for in an M&A target? Is this more asset-based? Is this more platform-based? Could we see a new geography? Can you just kind of walk us through what you're looking for in a potential investment?

The #1 thing that we would look at is something that looks a lot like us. Something in our space that we're good at. But we're not opposed to a new platform. It's not probably our highest priority, but really a platform of the oil infrastructure business and something that we are experts at.

And geographies?

We're probably going to stay in Canada. It's probably our main focus. There may be some U.S. assets that fit us, but our main focus will be in Canada.

Your next question comes from Jeremy Tonet with JPMorgan.

Maybe rounding out that last line of questions there, just thinking about it the other way, is there any set of circumstances where Gibson might be a seller if the market doesn't realize the right valuation? Just kind of curious in general your thoughts on that. We've seen some other activity in Canada in the recent past year.

Yes. I don't think we're looking to sell any assets within Canada or the U.S. So that's not really in our strategy right now. We cleaned the business up in 2018 and 2019, so we're not looking to really sell any assets, Jeremy.

Or even the company as a whole, I guess, if growth opportunities proved less than expected?

We're here to execute our strategy. We're pretty excited about the DRU and the renewable diesel. We think that's going to give us a new platform for growth. I think Sean and I and our Chairman have always said that we're here to do what's best for the shareholders. We're not a trench management team, and we want to do what's best for the shareholders, Jeremy.

Got it. That makes sense. That's helpful there. And then maybe pivoting to a smaller part of the business, and recognize the Permian is a smaller portion here, but just wondering any updated thoughts you could provide around that part of your footprint. Especially West Texas drilling activity has really picked up and wondering what that means in your neck of the woods.

Well, I mean, yes, we're starting to see light there. Sean talked about we increased earnings year-on-year and the budgets definitely [ outdid what we expected ]. One of the wells, one of our area dedications, they recently completed a 3-well pad, came in at 4,000 barrels a day. It's been flowing that for 4 months, so that's a good sign. And we expect drilling to pick up and earnings to continue to grow there, Jeremy.

Got it. But as it attracts capital I guess, no change on that front?

I think we used to say $25 million to $50 million. And I think last year, we said it was going to be kind of south of $25 million. And I would say we'll continue to be probably below $25 million in the basin for the near future.

Your next question comes from Robert Kwan with RBC Capital Markets.

If I could start with capital allocation, and Sean, I know you said you didn't want to be formulaic around the buyback parameters. But if you think about capital allocation you've delivered, the larger dividend increase, and set that baseline -- but on share buybacks, what are the key considerations around this? Is it share price driven? Is it the availability of cash flows from the Marketing that we're going to need to see? Or is it CapEx? And if it's CapEx, is there then a timing bias to the second half of the year?

Thanks, Robert. Good question. I think you touched upon a lot of parts of our capital allocation philosophy there. First and foremost, we fundamentally are going to remain fully funded, so we're going to allocate growth capital. To the extent that it's at that typical investment parameters we have, the extent that we have excess cash flow or we're delivering on it, we have always said that we buy annual dividend increases, and that's what you saw with the 6% increase this year. That was on the back of a 17% CAGR in Infrastructure growth capital over the past 5 years, and dividend hasn't grown at that same amount. With respect to buybacks, and you touched upon it exactly, and it does get to the timing somewhat, it's really the 2 factors where we had indicated as part of our capital allocation philosophy, we would think about buybacks was if we see a significant recovery in Marketing, and/or we see a capital that's somewhat below our fully funded number. We haven't seen that recovery in Marketing, but we have seen a capital number, certainly with that $150 million target this year, that would be below our fully funded number. And that's where we've now indicated an intention to execute on buybacks this year. The formulaic part is probably as much about the quantum as opposed to the timing. What I would say is that we do have an intention to do buybacks this year. It is not dependent necessarily on timing of capital. If you think of the total quantum of buybacks, that could be somewhat dependent. As we move through the year, if we start to sanction some of these larger projects, and Steve touched on them, thinking of additional phases of the DRU and/or the renewable diesel project, that could have an impact on the quantum. But not necessarily the timing as we do have an intention to buy back throughout the year. And then just as a point of reference from a quantum as a whole, we aren't intending to be formulaic, but as well, as we think about our intention right now and we think about it relative to some of the at least publicly stated programs of our peers, we do think it will be somewhat notable. So not pure transparency, but hopefully that answers your question.

I appreciate that, Sean. If I can just ask about the Marketing, you've given us the first quarter guidance. Is there anything unusual that you see in the first quarter? Or is this kind of this relatively narrow spreads lower end of your long-term range? And that's what, at least as it stands right here right now, what the rest of the year might look like? Or is there something kind of embedded in Q1 that's either helping or hurting the quarter?

I think some of the volatility in December actually carried over and helped us in the first quarter, Robert. As far as what the rest of the year brings, it's always very difficult to define and predict what the year will bring. We can't call the market.

But it sounds like Q1 though has been aided by just that carryover in Q4 and absent any changes in the market, the subsequent quarters of the year probably a little bit lower than what you're guiding to for Q1?

Well, as you -- I think we've always said, the Moose Jaw margins, because of our asphalt business, we don't make the money in the fourth and the first quarter because the asphalt demand drops, so we store that product. And so that really generally weakens our fourth and first quarters. We think -- but we have stronger, Moose Jaw has stronger second and third quarters, so that does offset that we believe, Robert.

Your next question comes from Matt Taylor with Tudor, Pickering, Holt & Co.

I wanted to hit the renewable diesel project if I may. Can you outline what you need to see there maybe on both from a federal and provincial basis from the regulators? And then if you'd be willing to bring on other partners like indigenous groups or maybe other capital providers?

Yes, we've definitely been working with local, the provincial governments and with federal for assistance and funding of the project. And we have seen some of those come through for us already. And I would say we're definitely looking for partners in this project. I would say that's probably where our main focus is right now is developing those partnerships.

Thanks, Steve. Should the market be looking for LCFS manners that the federal government rolled out or even Saskatchewan? Or what's the gating factors that we should be looking at in terms of getting capital from regulators? Or just in terms of what environment is constructive for continuing to push the project along?

Right now, federal would obviously give a big boost with new federal fuel standards. But currently, just with the BC standards alone, the project looks good.

One more, if I may, talking about another DRU expansion. Last time you had been referencing this as sometime in the first half you were expecting. Are you still targeting that time frame, given what you've seen so far with the DRU now being in operation for a couple of months? Or what's the status of commercial discussions?

Well, they're definitely ongoing, but we're going to really ramp it up. We would like to see something in the first half if possible. And that would allow us to really start to deploy some capital this year too.

And it's still those 4 customers you're talking to? Or has that widened now? You mentioned TMX delay may be accelerating discussions there.

No. I think there's probably 4 or 5 customers that we're talking to now. We want to widen that spread, so we want to get down to Houston as soon as possible and really start to market this with those big integrated refiners.

Your next question comes from Ben Pham with BMO.

I wanted to go back to the capital allocation topic. And I'm wondering, the increase in the dividend of 6% up from the last 2 years, was that driven at all around the TMX delay in that some of these Edmonton tanks might not get sanctioned? And where do you want to sit on your target payout range?

Thanks, Ben. I'll take that. As you know, we had our Board meeting and discussed this yesterday. There's a tremendous amount of work that goes into preparing it and coming up with a recommendation. We had the recommendation for the 6% increase well ahead of the TMX news coming out late last week, so absolutely no impact at all on that. We increased the dividend by 6% because we very firmly believe an annual dividend increase is something that makes sense for a business like Gibson given our stability of cash flows and given the Infrastructure growth that we've seen and just the absolute strength in our business. That's what the 6% is reflective of. And we think that that also does differentiate us somewhat from our peers. In short, it really had nothing to do with the TMX announcement. And I mean, to be candid, the TMX announcement wasn't a complete surprise I don't think to the market anyways. With respect to payout ratio range, we're comfortable within that 70% to 80%. If you think about it, and it was in our prepared remarks, we exited last year with an Infrastructure business that was over 90% of the total business with the target leverage range of 3x to 3.5x and a payout ratio range of 70% to 80%. I think with the stability of our Infrastructure business, if anything, that could be considered conservative. We're really comfortable anywhere within that 70% to 80%.

And maybe on the share buybacks, I think most folks know some of the benefits from that. But is there anything like on the negative ledger that you consider as you run through that allocation process?

The only very, very modest negative, and I think it's far outweighed by the benefits, would be just reduction in liquidity. Where, if anything, we'd like to see a bit more liquidity in our stock. But absent that, I struggle with any real negatives with a buyback. What I like is that in a period when growth capital is perhaps a bit lighter than it has been historically, it allows us an avenue to remain very disciplined as we deploy that capital. It's sufficient means, it's economic, and it returns capital to shareholders. The only very, very modest negative, which again I would think is far outweighed by the positives, would be slight reduction in liquidity. And again, that's on the margin.

That's great. Maybe one more from me is, how should we think about the tank guidance now? Is that maybe somewhat irrelevant at this point in that maybe you're moving more towards CapEx deployment? You mentioned the biofuel is 1 to 1.5 tanks, DRU is probably 2 tanks. Like is that more relevant messaging now than just saying 2 to 4 tanks a year?

We haven't really changed our official guidance. We did lower it down to 1 to 2 tanks a year. But as I look forward, we're going to build out our Edmonton terminal and build out that footprint there over the next several years with or without TMX, with another 3 or 4 tanks. I would say we're on the lower end of 1 to 2 right now without TMX moving forward, but it's still around Edmonton. And I would say the majority of our capital is probably going to be in the DRU and energy transition moving forward.

Okay. Just to clarify, you view more the DRU and biofuels than anything else, that's on top of the tanks and that's how you get to that $150 million CapEx?

Yes. Well, as far as this year. Then I said we hope to get back to that $300 million a year again with what we're chasing.

Your next question comes from Robert Catellier with CIBC Capital Markets.

You've answered most of my questions, but I just wanted to follow up on the M&A here. Is there any size of M&A that you view as being in the sweet spot? And under what circumstances would it make sense to issue shares for M&A?

The size, I mean we're pretty small, so that does limit our size of M&A, Robert. Being a $5 billion enterprise in size. I would say we're not absolutely limited on size, but we are -- there are some certain sweet spots. I'll let Sean really kind of talk about the issuance. Sean?

Yes, absolutely. Clearly, Rob, it would need to be an accretive transaction to issue shares. I think there is -- the size question is a good one, and there are sizes that certainly would necessitate potentially the issuance of equity. I mean obviously, that's something we'd like to avoid. We are looking to buy back shares, not issue shares, so it would be somewhat counter to that. But again, if an opportunity presented itself and necessitated that, that's certainly a possibility. I mean to the extent we needed equity capital, though, there's other avenues that that can be achieved. If we had a transaction that was of a size that it did require equity, we could bring in an equity partner. We could bring it in at the asset level. There's some numerous different avenues we could do or execute on outside of a simple issuance of shares to the extent that was required. But I mean, just at very base principles, it would absolutely need to be accretive for us even to consider issuing equity.

Right, so not a preference, but not necessarily a limiting factor either?

No. I mean I think it'd be foolish to have it to be an absolute limiting factor to the extent that we had an opportunity that was so absolutely strategic to the company. It's definitely something that we would need to consider.

Yes. Just a couple of follow-up finance questions, more housekeeping related. But the lease payments have come down recently. Are we now seeing the run rate level of lease payments you would expect if you rightsized the rail fleet?

Yes. I think that's probably a pretty safe assumption.

And then the last one is on just working capital. Obviously, as commodity prices increase, the working capital requirements for the Marketing business go up for the same level of activity. So how are you viewing the working capital investment you're making in Marketing? Do they have access to the funds they need, or is the higher price going to limit activity at all?

What I would say is, they do have access to the funds that they need. I mean we still have ample liquidity to support that business, so there's no limiting factor there. But I mean, at the same time, it's something that we actively monitor. And as the Marketing business executes on their strategies, it's definitely criteria that they utilize in making decision about whether or not they execute certain items. They absolutely have access to the liquidity and the working capital, but at the same time, it's not just a blanket amount that they can access at any point. It is part of the decision-making criteria for them when they actually look to execute on transactions.

And then, Rob, to go back to your lease question, Sir, I was just looking at it. If anything, I'd say we would expect leases, they could even go down probably slightly from where they are today, just looking at our forecast. Run rate right now is probably not terrible, but forecast would be they could potentially even go down slightly more.

Your next question comes from Andrew Kuske with Credit Suisse.

I guess the first question is probably for Sean and it just relates to your longer-term contracts on really the Infrastructure business. If you could just give us a bit more clarity and the view on revenue escalators that you have really that drives the inflation protections within your contracts on a longer-term basis?

Yes. No, thanks for that, Andrew. I think there's no perfectly generic answer. I think every contract is slightly different. But in general, there are escalator protection or inflation protection within the contract, and it would change by contract by contract. Some of them would be more tied to a CPI type thing and others would just simply be call it a 2% or 2.5% escalator. Tough to completely generalize across the portfolio, but I would say the vast, vast majority of our contracts do have inflation projection through some form of escalator.

Okay. That's helpful. And then just on wage pressures, I think in your financials, you're pretty flattish on wages and benefits year-on-year. But if you could maybe give us a boots-on-the-ground view of just what you're seeing, whether it be for construction projects or just run of the mill operations of the business and just what you're seeing on wage pressures?

Steve, do you want to take that or do you want me to take it?

Yes. I mean we haven't seen a giant impact on wage pressures yet, but I do believe it's coming. But Sean, do you have a better -- I know the biggest impact we've kind of seen, even though it's relatively small to everybody else in the industry, is just power cost. But relative to everybody else in the industry, I mean, it was up -- power cost last year was up $3 million above budget, which is not a big thing, but that's probably the largest thing we've seen as a pure impact to date. Obviously, steel is up and that increases cost of tanks or any project. But, Sean?

Yes. No. I mean we just haven't seen -- and Steve hit it on the nose, certainly relative to others, I mean just it's not a huge factor for us if you look across our business. I mean we're not incredibly labor-intensive. Even on the steel side, to the extent we execute on a project, we basically order the steel once we sanction the project, so that's built into the economics. And as Steve said, sort of the biggest unknown going into the year would be the power side. Which again, in totality for us is not all that material, especially relative to some of the inflationary pressures that some of our peers may or may not see.

That's helpful color and context. And then maybe if I can just sneak in one final one, and it relates to the power side of things. You've talked in past calls about doing some solar. Various parts of the portfolio that obviously benefit the power side, but also tick the ESG box to a certain degree. And then from a Canada standpoint, should it be in Canada, maybe generate offsets, I guess. How do you sort of think about the overall management of that side of the business, because it is multifaceted, as the impact it has for Gibson?

We took a hard look at that last year. And it's hard to build economical small-scale solar power units. That is definitely something that we're going to look at to meet our goals in 2025 and 2030. And especially with power costs accelerating, I think those opportunities, either by ourselves or partnerships or just power purchase agreements with renewable diesel, I mean with renewable power in the future are going to be available.

Your next question comes from Linda Ezergailis with TD Securities.

I'm wondering, for your renewable diesel opportunities, what ownership range you would consider? Do you need to retain a majority interest? What would you look for in a partner beyond financing capacity? Would it be potentially customers wanting to participate? And how would you kind of mitigate any sort of complexity around governance and reporting as you consider these partnerships versus what simple structure you currently have in your reporting and governance?

We want strategic partners probably more than financial partners, Linda. And so that would either be on the upstream or the downstream side, which is the ag side, or your downstream marketing, the demand side itself. We think we have a first-mover advantage with how far we are along in our engineering, and we think that's probably 12 to 16 months in front of somebody that's just now starting to look at it. And so as far as ownership, that really depends just on how the partnership is set up. We definitely don't have to have a governing, a majority ownership in what we're doing. But we'd like to have equal share. As far as pure governance, I mean, partnerships, we do have partnerships today. I don't see that as an unusual thing, Linda, working within a partnership. We have our DRU, our HURC, our Hardisty West. We have numerous partnerships today.

Okay. Yes. I guess the reporting of that is key and appreciate the simplicity of your reporting. Maybe also just as a follow-up, as you look to mitigate any sort of inflationary pressures and continue to kind of stabilize your cash flows and focus on your Infrastructure business, might there be more opportunities to revisit some of your tank agreements in terms of potentially deterioration or reassessing appropriate inflationary provisions within those agreements? And maybe you can talk about any sort of contracts coming up for renewal soon, or more broadly, any sort of statistic around your current average weighted duration of agreements on your tanks?

That's a lot of questions there, Linda. Just talking about -- we've talked about -- I think Sean talked about the inflationary parts of our contracts, and those are sufficient to handle the inflation that's going on right now, Linda. Again, whether it's CPI or whether it's just a general inflation percentage that's in the contract, we're not a high energy user at all on the power side. We don't have mainline pumps. Our pumps just -- our pumps feed mainline pumps of Enbridge and TransCanada. We just don't have a huge power demand. Inflation doesn't directly impact us as much as other companies. As far as contract life, I would say tanks coming up, we have relatively, we talked about that just yesterday actually, there's relatively few tanks coming up over the next 2 years for renewal. We do start to see tanks start to come up for renewal 2024 and on. But over the next 2 years, we don't really see hardly any tanks. There's some, but it's relatively small tankage contracts that are coming to term over the next couple of years. Sean, do you want to add?

No, I think you nailed it. Average contract life, I think that was your other question, Linda, I mean it's probably somewhere in the 8-ish or so range right now. So still fairly long. I think as we've always talked about, I mean as tanks roll over, given that it's all for operational production, our expectation is that they'll get renewed. And something like that also wouldn't take into account something like the biofuels blending project that we are going to put into service later this year, which as a reminder is on a 25-year term. I guess that's all I'd add to that.

That's helpful. And just as a follow-up on some of your M&A aspirations commentary, as it relates to crude oil, how interested might you be in extending your value chain reach into refined products substantially? And are the opportunities that you're seeing related to assets currently owned by producers in Canada?

As far as refined products goes, I would say we may reach into refined products, but the part of the refined products that we'll reach into is really on the renewable side, not on -- not any more than what we already have at Edmonton. As far as producer assets up for sale, there's always -- there's a couple of assets that we think fit us well. It's just a matter of are they a willing seller? And are the valuations correct? Can we come to an adequate evaluation?

Your next question comes from Patrick Kenny with National Bank.

Just a quick follow-up on the DRU Phase II opportunity. I guess this ties into the inflation conversation. But can you just speak to any upward pressures there might be out there today on freight rates with the rail companies? I'm just thinking about that in terms of at the same time, we could see potentially pipeline tolls come down I guess slightly depending on the outcome of the mainline contracting process. I'm just curious if you had an update on the relative economics of railing DRUbit to market versus moving dilbit to the Gulf by pipeline?

I would say -- thank you for the question, Pat. I would say probably the biggest impact is just the cost of diesel, so the fuel cost itself. That's probably the only pressure we've seen on current rates. I would say what's kind of the driving force there, I would say just it is condensate pricing is what really drives the economics around this. And if you look at -- if you look at Mont Belvieu C5 or natural gasoline prices, that's traded 95% to 100% of WTI. And then you've got to transport that up here to blend in with our bitumen to make dilbit. So that economics alone really drives us well below what the rates on pipeline are today, Pat.

Okay. I appreciate that. And then maybe for Sean, just to go back and clarify on the dividend growth outlook, and I appreciate it's a year-by-year decision process here, but would you say that the 6% is somewhat of a target here if you can continue to hit say the high end of your fully funded secured growth target? If it is that $300 million? And maybe a more muted 3% dividend growth rate would be more tied to say like this year having the target at $150 million?

Yes. No, I mean I wouldn't say -- a couple of things there, Pat. As you know, first, the dividend is a decision of the Board that we do annually in February. That's what I'd open with. But I mean, no, I wouldn't say that 6% is necessarily a new normal. I mean there's going to be a lot of factors that go into it, and those are a couple of them. How has our Infrastructure grown in the previous year? We felt that 6% made sense given a number of factors, but also a big one being that our Infrastructure has grown 17% on a CAGR basis over the last 5, and our dividend hasn't grown at that same level. It made sense to us. Our Infrastructure-only leverage ratios are certainly well below what the target is, so just a number of factors there. If you look forward, you're absolutely right. I mean, factors that will go into it will be what was our Infrastructure growth or what's our prospective Infrastructure growth, what does our capital look like? A number of other factors. As you noted, lighter capital program doesn't necessarily mean dividend growth because our hope is that that capital program will increase the following year, so you probably don't want to underwrite a dividend increase on the back of that. In that basis, as I talked to in one of my earlier responses, we'd probably bias share buybacks. I wouldn't say it's necessarily the new run rate. A lot of factors will go into the decision we'll make at this time next year.

There are no further questions. I would now like to hand the call back over to Mark. Please go ahead.

Well, thanks, everyone, for joining us for our 2021 fourth quarter and full year conference call. Again, I'd like to note that we've made certain supplementary information available on our website as well as an updated corporate presentation. So please see gibsonenergy.com for those. If you have any further questions, please do reach out to us at [email protected]. Thank you again, and thanks for your support of Gibson Energy. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.