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

Good afternoon, everyone. Welcome to the Gibson Energy Investor Call. Please be advised that this call is being recorded and will not include the question-and-answer period. I would now like to turn the call over to Ms. Beth Pollock, Vice President and Treasurer. Ms. Pollock, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today on this conference call to discuss Gibson's acquisition of the South Texas Gateway Terminal, located in Ingleside, Texas at the port of Corpus Christi. On the call from Gibson Energy are Steven Spaulding, President and Chief Executive Officer; and Sean Brown, Senior Vice President and Chief Financial Officer. During the call, we will walk through a selection of slides within a management presentation, which summarizes the details of our announcement this afternoon. The full management presentation is available for download through the webcast link or on our website at gibsonenergy.com. Listeners are reminded 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 would like to turn the call over to Steve.

Thank you, Beth. Good morning, everyone, and thank you for joining us today for this exciting announcement, which is a significant milestone in the 70-year history of our company. I'm very excited to have the opportunity to speak to you about our acquisition of the South Texas Gateway Terminal. This is a world-class crude oil export terminal located in Ingleside, Texas at the port of Corpus Christi, one of only two terminals with the ability to load very large crude carriers, also known as VLCCs and the second largest export terminal on the Texas Gulf Coast. To start with our transaction highlights detailed on Slide 3, since establishing Gibson as a leading liquids infrastructure company, we have been exploring numerous opportunities with a clear goal of finding one that is a strategic fit while also enhancing our diversity and scale. We have consistently communicated any opportunity would need to be on strategy, support the quality of our cash flows through take-or-pay contracts with high credit quality customers and create a new platform for growth or be complementary to our existing asset base. This transaction meets all those objectives. It's on strategy and will add nearly 1 million barrels per day of export capacity in 9 million barrels of crude storage. This is our core business and is extremely advantaged location and is tied to the prolific Permian basin. Pro forma the transaction, the favorable quality of cash flow is further strengthened with over 95% of the Texas Gateway revenue from take-or-pay contracts with investment-grade or large, well-established global counterparties. The transaction also furthers our momentum in growing Gibson's infrastructure base, while providing a platform for future growth. We have long-standing relationships with all the current South Texas Gateway customers. Additionally, all this cash flow fully financial transaction is immediately accretive to distributable cash flow per share, thereby supporting continued dividend growth in the future and is aligned with our key financial governing principles. The financing has been structured to maintain our investment-grade ratings and outlooks. Sean Brown will elaborate further on the financial structure in his remarks. But to touch on Slide 4, the transaction is expected to be funded through a combination of a bought deal subscription receipt, Equity Offering, which has launched concurrent with this announcement, medium-term notes and hybrid debt securities. As referenced on Slide 5, this transaction further solidifies Gibson's position as a leading North American liquids infrastructure company. With the addition of the South Texas Gateway, our terminal storage capacity will be over 25 million barrels, inclusive of the 3 Edmonton tanks, which are now currently under construction. It's important to note the stability of our business increases with the segment profit from the infrastructure and revenues from the take-or-pay of these contracts growing by 5% to 85% and 80%, respectively. The acquisition will deliver immediate mid-teens distributable cash flow per share accretion, keep us firmly within our target ranges. This transaction also further enhances our ESG leadership position with the expectation it will reduce our overall carbon intensity by almost 10%. As can be seen on Slide 6, it's clear the South Texas Gateway is a strategic fit with our portfolio. The acquisition of this world-class Gulf Coast terminal is complementary to our terminals in Hardisty and Edmonton, giving us three strategically located terminal platforms across key North America energy hubs and driving value for our shareholders. Jumping to Slide 9, I will share with you a little more about the Permian Basin, a world-class basin, which is expected to drive growth in demand for South Texas Gateway services. Forecast from EIA and other prominent sources indicate permian production will continue to grow approximately 1 million barrels a day to 6.5 million barrels by 2027. At the same time, refinery capacity in the U.S. Gulf Coast is expected to decline. Asia and Europe are also becoming more dependent on U.S. crude oil, for reasons which include heightened focus on energy security. We are confident this market dynamics will continue to drive demand for the infrastructure, allowing Permian production to have access to global markets. Finally, on Slide 10, you will see the [ Southwest ] Texas Gateway is strategically located and positioned to meet needs of the Permian producers. This location in Ingleside on the Corpus Christi Bay, makes it one of the most competitive export facilities in North America due to its advantaged outer harbor location. This is the premier location for the crude oil exports in the U.S. Gulf Coast as it provides the lowest cost to shippers, driven by shorter transit times to access those global markets. Further, it is less congested [ port ] and the flexibility to load multiple vessel sizes from [ Aframaxs ] to VLCCs, offering more flexibility for shippers looking to access a variety of global markets. For this reason, Ingleside captures approximately 2/3 of the incremental Corpus Christi Permian barrels. The [ Southwest ] Gateway Terminal also has direct pipeline connections to low-cost, long-term resource supply through it's connections to two newly built permian pipelines and a third connection in progress as well as connections into the Eagle Ford basin. The pipelines from the Permian Basin to the Corpus Christi expected to continue to be near [ pool ] utilization, including any potential pipeline expansions. We expect long-term demand at Ingleside and at the South Texas Gateway. We are also confident the South Texas Gateway Terminal will serve as a platform for long-term growth for Gibson, and we can expand upon and meet the growing needs for both our new and existing customers, as well as explore opportunities to increase storage, capacity and other throughput. Before I pass the call over to Sean, I'd like to thank our shareholders, employees and communities for their ongoing support. Over to you, Sean.

Thanks, Steve, and good afternoon, everyone. I would like to echo Steve's comments. The acquisition of South Texas Gateway is a very exciting opportunity for Gibson and provides us with an excellent platform upon which we can create long-term growth and value for all our stakeholders. This acquisition not only delivers double-digit accretion to our distributable cash flow per share, but is also accretive to our quality of cash flows and overall credit profile. As highlighted on Slide 11, you can see this acquisition increases our segment profit from Infrastructure by an additional 5% to 85% of total company segment profit. To put this into context, this 85% has been achieved through absolute growth of our Infrastructure segment of 91% since '17 before taking into consideration this acquisition, or 158% when including it, further enhancing the strength and stability of our cash flows. Proforma the acquisition, approximately 80% of infrastructure revenues are take-or-pay, with that number jumping to 95% when including our stable fee-based revenues. This acquisition provides a third terminal platform for growth and significantly enhances Gibson's scale and diversity. Turning to the financing structure detailed on Slide 12. The USD 1.1 billion all-cash purchase price is fully financed through the following: A bought subscription receipt offering of CAD 350 million before overallotment, which we launched concurrent with this announcement; and fully committed USD 1.1 billion in debt facilities, which we expect to be refinanced with the bought subscription receipt offering as well as a combination of senior unsecured medium-term notes and hybrid debt securities in the near term. Proforma the financing, we expect our debt-to-adjusted EBITDA to be 3.2x, comfortably within our 3 to 3.5x target. The financing plan was also carefully structured working with both DBRS and S&P to ensure our investment-grade credit ratings and outlooks would be maintained. I understand both DBRS and S&P have or soon will publish reports regarding this transaction and would encourage listeners to read those as they also speak to the positive credit attributes of the transaction. Finally, I would like to further emphasize, as you can see on Slide 12, Gibson remains firmly committed to its financial governing principles. The acquisition of South Texas Gateway strengthens the quality of Gibson's cash flows as it increases the proportion of take-or-pay and fee-for-service revenues and cash flows from investment-grade counterparties. It enhances our financial flexibility, as leverage is maintained within our target range and our investment-grade credit ratings of BBB low and BBB- with DBRS and S&P, both reiterated and following the sub-receipt financing, we will also maintain a sustainable payout ratio well below our target ranges. To close, I would like to reiterate, on behalf of our company, how excited we are about Gibson's acquisition of South Texas Gateway. This is a world-class infrastructure asset strategically located to provide customers with access to global markets and connected to a prolific basin, which provides Gibson with a new platform for growth. Further, the acquisition enhances Gibson's quality of cash flows by increasing take-or-pay and fee-for-service revenues from high-quality counterparties. Since the introduction of our liquids infrastructure focused strategy in 2018, we have shown consistent discipline and commitment to delivering results. We look forward to continuing to do so as we integrate South Texas Gateway into our business. I will hand it back to Beth to conclude our call.

Thank you, Sean, and thank you all for taking the time to join our investor call today. Again, today's management presentation is available on our website at gibsonenergy.com. I will be available for any further follow-up you may have or please reach out to [email protected].

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.