Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gibson Energy Q4 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Thank you. I would now like to turn the meeting over to Ms. Beth Pollock, Vice President, Capital Markets and Risk. Ms. Pollock, please go ahead.
Thank you, Lara. Good morning, and thank you for joining us on this conference call discussing our fourth quarter and full year 2023 operational and financial results. Joining me on the call today from Gibson Energy are Steve Spaulding, President and Chief Executive Officer, and Sean Brown, Senior Vice President and Chief Financial Officer. We also have the rest of the senior management team in the room to help with questions and answers as required. Listeners are reminded that today's call refers to non-GAAP measures, forward-looking information, and pro forma financial information. Pro forma financial information is derived in part from historical financial information of South Texas Gateway Terminal, LLC, and is subject to certain assumptions and adjustments, and may not be indicative of actual results.
Descriptions and qualifications of such measures and information are set out in our investor presentation, available on our website, and our continuous disclosure documents available on SEDAR+. Now, I would like to turn the call over to Steve.
Thanks, Beth. Good morning, everyone, and thank you for joining us today. First, I'd like to touch on the highlights from our last year. As is customary, Sean will speak in more detail regarding our financial results and financial position, and before we conclude the call, I'll provide some brief remarks regarding the announcement of my retirement. In 2023, we advanced our infrastructure growth strategy through the acquisition of the Gateway Terminal and continued to deliver strong and consistent financial results. In our infrastructure segment, with the benefit of a full quarter of contribution from the Gateway Terminal, which closed August first, we set a record for the company, with segment EBITDA CAD 494 million. This breaks the previous record of CAD 442 million, which was set the previous year, and speaks to the growth and stability of our infrastructure business.
We are proud of the rate at which our infrastructure segment continues to grow, which equates to a compounded annual growth rate of 16% since 2017, pro forma the Gateway acquisition. On a consolidated basis, adjusted EBITDA and distributable cash flow of CAD 594 million and CAD 386 million, respectively, are also high water marks. Both were driven by the addition of the Gateway in August. Consistent growth performance from our legacy infrastructure business and our marketing segment's ability to generate cash flow in an operating environment, in really any operating environment. For the year, our marketing segment achieved adjusted EBITDA of CAD 145 million, well above our long-term run rate of 80-120. In terms of the balance sheet, Gibson remains a solid financial position.
Pro forma the Gateway acquisition, we exited 2023 with a leverage ratio of 3.1x, at the low end of our 3-3.5x target range. We also had a sustainable payout ratio of 61%, below the low end of our target range of 70%-80%. Given our financial performance and increased contribution from our infrastructure segment, we increased our quarterly dividend by CAD 0.02, or 5%, or CAD 0.41 per share, which equates to an annual amount of CAD 1.64 per share. As always, we continue to see significant value in offering our shareholders consistent dividend growth and believe this increase reflects the continued growth of our long-term, stable infrastructure business.
Speaking to a few of our milestones, construction on the two new tanks at Edmonton Terminal are on schedule, and they are expected to be placed in service in late 2024. These tanks, which are underpinned by a 15-year take-or-pay agreement with Cenovus, represent 870,000 barrels of new tankage, and when combined with the previously announced tank, which was placed in service in the fourth quarter of last year, result in a total of 1.3 million barrels constructed to support TMX shippers. These tanks will further increase our high-quality, long-term infrastructure revenues and support our customer shipments on the TMX pipeline. With respect to Gateway, we are very pleased with our performance so far, which is ahead of our initial expectations and tracking well in line of that nine times forward-looking multiple we disclosed at announcement.
As we look forward, our focus is on optimizing the facility with the goal of increasing contracted loading windows, increasing the throughput and minimum volume commitments, and extending existing contracts. Discussions with customers are ongoing, and we remain very constructive around our ability to enter into new contracts and extend existing contracts at or above the current rates by the end of the second quarter. Looking ahead, we announced our 2024 capital budget, which includes a target growth expenditure of CAD 150 million. Of that amount, CAD 125 million is focused primarily on Edmonton, Hardisty, and Moose Jaw, with the incremental CAD 25 million of capital expenditure to be deployed at Gateway.
From an ESG perspective, last year, we released our 2022 Sustainability Report, which outlines some notable milestones, which take us a step closer to achieving our 2025 and 2030 targets. This included maintaining top-quartile safety performance among our North American peers, announcing a 15-year renewable power purchase agreement with Capstone Infrastructure and Sawridge First Nation, and maintaining a first-in-class position in employee participation in our community giving program with a rate of 95%. Gibson was also acknowledged by the key global recognized ESG rating agencies for its performance, transparency, and management of ESG issues, reaffirming its position as a global leader in sustainability. This included a fourth consecutive A- in a row from CDP, the Carbon Disclosure Project, and a AA A rating from MSCI.
As a forward-thinking industrial leader, Gibson will remain resolute in its sustainability journey and further leverage its world-class asset base and growth opportunities to contribute to a more secure and resilient energy future. In summary, the business delivered another solid quarter, which marked the end of another solid year. Infrastructure reached a new high, partially attributable to the benefit of the Gateway acquisition, but also driven by that continued strong and stable performance of our legacy infrastructure assets. The Gateway acquisition is ahead of initial expectations, and we are optimistic about our ability to optimize the facility by increasing contracted loading windows and extending existing contracts at similar or higher rates.
The marketing segment outperformed our long-term run rate for the full year, and as a result of our continued solid financial results and the strength and stability of our business, we are pleased to announce the increase of our dividend by 5%. I will now pass the call over to Sean, who will walk us through our financial results in detail. Sean?
Thank you, Steve. As Steve mentioned, 2023 was truly a significant year for our company. Infrastructure adjusted EBITDA of CAD 153 million in the fourth quarter was CAD 13 million higher than the third quarter, and also ahead of the first two quarters of the year. This was driven, in part, by a full quarter of contribution from Gateway, as well as continued strong financial performance from our legacy infrastructure businesses, which reflected a full quarter with the new tank in Edmonton. These same factors also contributed to a CAD 42 million quarter-over-quarter increase when comparing this quarter to the fourth quarter of 2022. Turning to the marketing segment, adjusted EBITDA of CAD 28 million was CAD 4 million higher than the third quarter and ahead of the outlook we provided on our last quarterly call of approximately CAD 25 million.
This difference is attributable to incremental storage and location-based opportunities during the quarter, which allowed our crude marketing group to realize higher-than-expected earnings. Looking forward for marketing, the environment for crude marketing remains positive, and we expect to realize storage and location-based opportunities within the quarter. Additionally, refined products continues to see strength in our drilling fluids business. Based on market conditions at this time, we'd expect Adjusted EBITDA of over CAD 13 million in the first quarter. To complete the discussion around our fourth quarter results, I would like to quickly work down to Distributable Cash Flow. For the fourth quarter, we reported Distributable Cash Flow of CAD 103 million, which was a CAD 10 million increase from the third quarter of this year and a CAD 14 million increase from the fourth quarter of 2022.
Consistent with previous commentary, the majority of the increase is attributable to a full quarter of cash flow from the Gateway Terminal, but smaller drivers contributing to the increase include lower taxes in the fourth quarter, which was partially offset by the impact of marginally higher replacement capital and interest expense. As the fourth quarter concluded 2023, I would also like to compare year-over-year results. As previously mentioned, on an annual basis, the infrastructure segment set another record. Adjusted EBITDA was a $52 million increase from 2022 before adjusting for the impact of the one-time environmental provision in Q2 of this year. Excluding that provision, adjusted EBITDA increased by approximately $69 million. At the same time, marketing-adjusted EBITDA increased from $118 million in 2022 to $145 million in 2023, a $27 million increase.
The largest driver of this increase was an improvement in our crude marketing business, which was partially offset by a year-over-year reduction from refined products. As such, on a consolidated basis, 2023 Adjusted EBITDA increased by CAD $69 million to CAD $589 million, setting a new high-water mark for the company for the second consecutive year. These results contributed to distributable cash flow of CAD $386 million in 2023, an increase of CAD $30 million relative to 2022, a new record for Gibson. Our strong financial performance allowed us to maintain our conservative financial position. Exiting the year, our payout ratio of 61% is well below the bottom end of our 70%-80% target range.
Our debt to Adjusted EBITDA, pro forma, the Gateway acquisition, is 3.1x , at the low end of our 3-3.5 times target and flat to last quarter. Looking at our ratios on an infrastructure-only basis, our payout ratio is approximately 77%, while our pro forma leverage is 3.6 times, both well below our targets of 100% and 4.0 times, respectively. From a financial flexibility perspective, following the Gateway acquisition, we continue to be well-positioned with a staggered debt maturity profile, with no maturities until 2025, and ample liquidity, with the benefit of our upsized, sustainability- linked, revolving credit facility, which was increased from CAD 750 million to CAD 1 billion following the Gateway acquisition, and which does not mature until 2028. Certainly, a very strong financial position.
In summary, we are very pleased with both our fourth quarter and full-year results in 2023. Infrastructure results in the fourth quarter and for the full year represented new high-water marks for the company, largely driven by the successful acquisition of the Gateway Terminal, as well as continued consistent results from the legacy infrastructure assets. Marketing ended the year well above our long-term run rate of $80-$120 million, with a constructive environment, providing some momentum as we move into 2024. With the Gateway acquisition, we now have exposure to all key North American oil-producing basins, with a portfolio of assets that generate stable cash flows, all with a competitive advantage that would be prohibitive to replicate.
With this portfolio of assets and our strong and conservative financial position, we continue to present investors with an attractive value proposition, which includes being well-positioned to continue to return capital to shareholders through a safe, growing dividend and the potential for share buybacks in the future. Before we turn the call back to Steve for some remarks regarding the announcement of his retirement today, I did want to thank him on behalf of not only myself, but also all Gibson employees, for seven years of great leadership. Over to you, Steve.
You know, thanks, Sean. I'd like to provide some brief remarks regarding my intention to retire this year. It has been a true privilege to lead Gibson's talented employees over these last seven years. Together, we built a strong operational and financial foundation, extended our infrastructure platform, and created peer-leading value for our shareholders, and positioned the company for future growth. With the company operating from a position of strength, now is the right time for me to retire and for the next phase of leadership to commence. I am confident in the team's ability to build off this momentum and drive further long-term growth and value creation. I look forward to remaining on as President and CEO until my successor is named. Over to you, operator, for any question.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any keys. Our first question comes from the line of Rob Hope from Scotiabank. Please go ahead.
Good morning, everyone, and congratulations on the upcoming retirement, Steve.
Thank you, Rob.
Two questions on South Texas. So specifically in Q4, and I guess, you know, through 2023, it appears that the contribution from South Texas exceeded expectations. Can you maybe, you know, give a little bit more color on the key drivers there? Was it largely, you know, more of the VLCCs? Was it incremental spot barrels? And as we look into 2024, you know, is there an expectation that we could see some continued outperformance versus the base plan?
Yeah, it was kind of driven by two things, Rob. The first one was, it was incremental throughput or spot barrels from existing customers, and it, that, that happened two different ways. First is, several of our customers used additional windows in their loading, which drove additional volumes. And the second is, is the percent of VLCCs loaded greatly increased, where I think, in the, in the fourth quarter, I believe 80% of the vessels we loaded were VLCCs. And so how that actually increases versus our projections, where most of our projections were done on an Aframax in a loading window, which is at 750,000 barrels, versus the 1.2-1.25 million barrels we can put on a VLCC.
So you get that incremental volume and additional throughput fee, Rob, and that's kind of what's driven that. And so when you look into the first quarter, it looks like it's gonna be kind of a record quarter for the asset. Both in January and February look really good. And we think March, when we look forward into March, March right now is setting up to be a record, a record month ever for the terminal, as far as throughput goes.
All right. Good to hear. And then maybe just turning over to the recontracting efforts at South Texas. You know, appreciate the updated language there. However, when you're in discussions with customers, you know, what are the key sticking points? Is it term, the level of the toll, you know, an understanding of where the barrels are, and, or is it kind of being put on a VLCC versus Aframax basis?
Yeah, it's really none of that, actually, Rob. I think, you know, we're, we've been pretty aligned really with our customers around that. It's really with them setting up their upstream and downstream contracts, Rob. So setting up, making sure that they got, they got firm volumes and transport coming into the facility, and making sure that they, they have a really good view and contracting portfolio for the vessels that they do sell. As far as actually our discussions with the existing, with the existing customers, you know, costs have been really at or above existing rates, and extending the contracts back out to new five and seven year agreements, probably leaning towards those seven year agreements, and additional loading windows.
Probably what the hang-up has been is probably just getting lined up existing capacity to get that volume into the terminal.
Appreciate the color. Thank you.
Our next question comes from the line of Linda Ezergailis from TD Securities. Please go ahead.
Thank you. I have to add my sincere congratulations, Steve, on a very successful career, and all the best in your retirement.
Thank you very much, Linda.
I don't know if you or Sean are aware of whether the CEO search has started and where the process is, and if the board has outlined any expectations as to what the bookends of duration might be, and any other context.
Yeah, I'll take that. I mean, obviously there's a lot of unknowns still, but the board is currently engaging an international search firm. They will look internally and externally. I believe, you know, their kind of number one focus would be a Canadian candidate, but they also want to look into the States, too, because at the end of the day, they want to pick the best candidate, whether or not that's internal or external. As far as timing, you know, these things take more time than anyone really expects. But, you know, probably four-six months, Linda, if I was to guess. But, you know, that is just an estimate.
Thank you. Now, maybe we could just get some update on some of the crude flow and pricing dynamics that you're starting to see evolving potentially as Trans Mountain expansion is coming into service. Are you starting to see any impact maybe of crude going into storage in anticipation or anything shifting in terms of pricing and flows? And also, I'm just wondering, in your infrastructure business, are you starting to see any sort of customer higher demand or lower demand for tank capacity, given that egress out of the basin will be de-bottlenecked, but there's not much storage at the terminus of Trans Mountain by the dock, so that might shift kind of how tanks get used in the basin as well.
Yeah, there was a lot of questions there, Linda. I'm gonna turn it over to Kyle, and then I'll kind of finish it off. Kyle's our, Chief of Commercial.
Linda. Yeah, I mean, on, on your pricing question first, I would say yes, that the, the market is anticipating an impact on WCS differentials when TMX comes in service. That is creating some storage opportunities. That's part of what our marketing group has been able to capitalize on, in Q4 and also Q1. And we see that as constructive going forward as well. You know, the other piece on, on sort of the flows, I think that what customers are looking at right now or what the market is looking at, is really a construction timing. TMX is saying Q2 still. You know, we'll see. From there, you'd, you'd look at line fill and operational wrap-up.
And then from there, really the development of the pricing at the dock and where the market is gonna be for the barrel. So that's a lot there, and so I think our view is that it's going to be volatile throughout the year. And that'll lend its hand to opportunities in our marketing business, but also for our customers. I think our customers want to get comfortable with the in-service date of TMX.
And they want to assess their long-term needs. I mean, we're still commercially talking to them about supporting their infrastructure needs from a tankage standpoint. And I just think at this point, they're looking for some certainty on the pipe being in service and how it's going to operate from the get-go. So, you know, hopefully that answers everything. But, you know, to your question, yes, the pricing is appreciated on anticipation of it, but there's a lot of variables to get through, and our customers are sort of watching that closely, as well as ourselves.
Yeah, and so at the end of the day, you know, with the, the potential of it coming online, you know, WCS has priced stronger into the future. And with that, it's given us some time-based opportunities in our storage at Hardisty, which lead to that CAD 30+ million-dollar opportunity that we've talked in marketing. Then you look at actually, you know, what's going on with TMX. You know, we heard in December we had customers starting to line up for linefill going into January. That got pushed back. That got pushed back. And then they were going to push it back to March. And then just recently, on the last kind of announcement, that got pushed back further.
You know, they're saying April, but I think this is kind of indefinite right now until they are able to solve the bore issue and the pullback.
Thank you. We have our next question coming from the line of Jeremy Tonet from JP Morgan. Please go ahead.
Hi, good morning.
Good morning, Jeremy.
Steve, just want to offer congratulations as well on a success at Gibson, and we'll miss you going forward. You know, just building off, I guess, the transition process and questions here. You know, just wondering if does this introduce any kind of broader questions on Gibson, you know, strategic outlook going forward at this point? Does it change Gibson's role, I guess, thoughts in industry consolidation going forward?
Yeah, I think it's business as usual, right? We had a meeting with the board. We're going to continue to develop and execute our strategy and start to develop five-and-10-year type strategies as we go forward. I think it's business as usual. I'll be here for the next, you know, four to whatever, however long it will take to actually bring in a chairman, and then I'll be here as a consultant to work with the board as they need for the several months after that. But I think it's very much business as usual on a go-forward basis when we look at strategy. And I wouldn't read anything into my retirement at all.
Got it. Thank you for that. And maybe just kind of shifting gears towards capital allocation here. Just curious, I guess, is there a point with dividend growth, where the stock price, where it is, where it doesn't feel like necessarily the market is rewarding a level of—a certain level of dividend growth going forward, or does that impact the rate of what dividend growth makes sense? And does pivoting towards buybacks a little bit more make sense in any scenario if the market doesn't respond to a certain level of dividend growth?
Yeah, thanks for that, Jeremy. I mean, as we've always said, we think steady annual modest dividend increases are important. It's a big part of the value proposition for our investors. I think you've heard me say it before, you know, if you respond simply to, you know, market reaction to things, I think it can become a bit self-fulfilling at some point. You know, you don't increase your dividend because, you know, the market at that point in time is saying maybe you're not valued appropriately, then, you know, you're probably going to get valued even worse. You know, our focus really here is on executing our plan, which we think is a long-term winner. We think we're going to see steady growth in our business, which is going to result in steady growth in our dividend.
We are 100% acutely aware of where our multiple is right now and our current valuation. We think we are undervalued, certainly relative to peers, and that's something we are looking to close the gap on. You know, if you speak to the dividend increase in particular, we exited the year at a 61% payout ratio. We executed a transaction that was, you know, close to 15% accretive to Distributable Cash Flow per share. You know, we made no dividend announcement at that time. We're very clear. We do that with our year-end results, every year, and we continue to do so. So we felt that this dividend increase was, you know, very much appropriate and reflective of our financial profile, and we'll keep that capital allocation moving forward.
Got it. Thank you for that. And just a quick last one for me. Just wanted to know, with regards to Gateway expansion opportunities, if you could talk a bit more about what capital opportunities you see there, particularly as it relates to Cactus interconnectivity.
Yeah. I mean, first off, I mean, I think there's. You know, when we, when we looked at this asset and as we look forward and the more VLCCs that we said, we see quite a bit of growth opportunities without any capital, right? So we're seeing, you know, that we believe we can grow this asset by 15% or maybe even more % without any capital. When it comes to capital projects, Cactus is a very important one for us. But, and it's mostly important for our customers because, you know, remember what I talked about earlier was access to supply is very critical to our customers. And so that's why the Cactus, the Cactus connection is important to us and really to our customers who are actually pushing this Cactus connection.
One of the customers that, you know, we're driving forward with right now is a big supporter of this Cactus connection, as they have quite a bit of production on that pipeline. The other one is probably the deepening project, which might occur later in the year. It takes a while to actually get all the permits in place to do the deepening project. But we're out right now getting bids on what does it take to deepen our dock, to allow us to load vessels up to 1.4 million barrels, which ensures that any kind of reverse lightering, even with a lightly loaded Aframax, they can fully load a VLCC with one lightering offshore. And really, that there are several ways that pays out.
You know, one is, you know, we're negotiating with our existing customers on increasing the MVC to help pay that out. But really where we see it is we actually load more volume on each vessel. We're seeing that today because we were able to raise the depth of one foot just through normal dredging that happened in December. And we're seeing us load more volume on the ships today. So we're very optimistic about that opportunity. The other opportunity is adding more storage, specifically around our existing customers or even potentially some of our new customers that we're chasing, want to bring in other grades of crude into the terminal. Right now, we have a very fungible system.
We have WTL and WTI on a fungible basis for our storage, which is a big advantage that we think in the for our customers. But, you know, additional storage will be driven by additional windows and additional grades of crude that may come into the terminal. We believe we can build out an additional three tankage, two-three tanks there, and maybe add almost 2 million barrels of additional storage with those three tanks.
That's very helpful. Thank you.
Our next question comes from the line of Patrick Kenny from National Bank. Please go ahead.
Thank you. Good morning. Just on the early termination of the O&M agreement with Buckeye. Just wondering if you had a bit more color on, you know, what gave you confidence to take over operatorship of the terminal. And I'm also just wondering if, you know, proving your operating capability of the terminal was a bit of a precursor to some of the contracting negotiations you're having right now.
I don't think it was an early termination of the O&M agreement. I think that was just normal transition of the O&M agreement. That was January first, but as far as confidence, I'll hand that over to Omar, Omar Saif, who is our COO. Omar?
Hi, good morning. Thanks, Steve. Thanks for the question. I think on the onset of the deal, we put a migration team together, commensurate with Buckeye, who were very helpful, and we mapped out a plan and set that timeline accordingly. Didn't do it too early, didn't do it too late, just set what was the appropriate time and when we could actively do that transition. Completed it seamlessly. Arguably, there was very, very minor hiccups, and was superbly handled by the team. We've been operating for well over a month and a half, and no issue. We put a lot of. Again, we put a lot of process, a lot of people focus on the people and then systems and managed that across the board.
Yeah, and Pat, just to the comment about the early cut over, I would say the intent always was to cut over as soon as we could. Like, not to get into the details of the M&A process, but, you know, as we got into the nitty-gritty, what was pretty clear is that, you know, a transition services agreement would take a bit of time to negotiate. So what we felt was best when we executed the deal was to execute the O&M agreement instead of a transition services agreement. Our intent always was to cut over as soon as we could, and quite frankly, you know, we would have had confidence in a transition services agreement as well.
So, you know, I, I think our messaging was conservative when we announced the deal, you know, that it was a operating agreement for, I believe, up to 12 months, which was cancelable upon 30 days, but our, our intent always was to cut over, really, as soon as we could. And so this would have been more in line with our expectations, certainly.
Got it. That, that makes sense. And then maybe, Sean, just on the leverage ratio here. So pro forma LTM debt-to-EBITDA, 3.1 times, kinda, you know, low end of your target range. Any update on, you know, when you might consider reinstating the NCIB or I guess, what leverage ratio should we be watching out for, before we might, you know, see you restart the buybacks?
Yeah, I mean, from a pure leverage ratio, Pat, we're probably right about there. But the one thing I'd remind you is that we had a really strong first quarter in marketing last year. You know, even with our CAD 30 million guide, we'll see some measure of reduction. So, you know, consistent with the messaging we had around our budget, you know, we think that certainly a buyback is a consideration near the tail end of the year. You know, the two factors that really are going to influence that is, you know, what's the actual level of capital we spend? We've got a CAD 150 million growth capital target. 125 of that is sanctioned, and is largely in Canada. The other 25 would be predominantly Gateway, and we fully expect to spend that.
You know, to the extent that that moves up or down, that would certainly be an influencing factor. And then the second one is, you know, how does the marketing business perform as we move through the year. So certainly something that we would see potential around. But even at that 3.1x, you know, let's see how marketing performs relative to last year, 'cause we could see a slight increase in our leverage ratio, even with what we would consider a very strong first quarter at 30 or greater. And so that's also something that influences it. But I mean, on an absolute basis, if you normalize marketing, I mean, at the low end of our leverage range is certainly where we consider restarting buybacks, depending on our view on capital spend.
Okay, that's great. I'll leave it there. Thanks, guys.
Thanks, Pat.
Our next question comes from the line of Robert Catellier from CIBC. Please go ahead.
Hey, good morning, and congratulations, Steve, on your retirement announcement, and in particular, your safety track record during your time at the company. I just had a follow-up question here on just how you're ensuring volumes at the terminal to give your customers the confidence they need to recontract. Is there anything other than the Cactus Pipeline that you're currently looking at to help develop the terminal and give the customers that level of comfort to recontract?
You know, we're connected to all the other pipelines, really, the EPIC, the Gray Oak, also another pipeline that goes into the Eagle Ford there. So I think the Cactus Pipeline is kind of that one missing link. We can get it through, you know, some exchanges through some of the other pipelines, but we need a kind of a direct terminal. And as far as us facilitating, it's just, you know, our customers need to go find, you know, the transport and bring that, and bring that volume in, and they're doing that actively. But we believe the Cactus Pipeline will really help them develop a secure supply of volume, right? Those pipelines coming out of the Permian Basin into Eagle Ford are full, or close to full.
And that's being driven by our terminal and the terminal next door to us there in Ingleside. Those two terminals provide the best netback for as far as anybody trying to export barrels out of the U.S., and so that's what's driven those two pipelines full. We do believe, you know, as the Inner Harbor contracts start to expire in 2025, that a lot of volume will free up for our customers, that's going out of those terminals today.
Okay, that's helpful. And then, I wondered if given any more thought to opportunities to enhance returns at Gateway through marketing expertise, and what needs to be done there to initiate that?
You know, we don't really have that U.S. expertise right now. And right now, you know, we have several of our customers are really large international traders. So we definitely don't wanna step on any of our customers' feet with marketing. And if we ever did trading in the terminal, it'd just be to help facilitate volumes coming into the terminal to facilitate their export activities, not really in the type of optimization around that we do currently at Hardisty or Edmonton.
Yeah, that makes a lot of sense. And, just the last one for me, I'm kind of spitballing here, but, recently, we've had a pause in LNG export authorizations. What's your sense of, stability in liquids exports? Or state another way, you're hearing anything about any restrictions on liquids exports?
You know, I don't think any existing terminals are in any real threat, Rob, but it may threaten some of these offshore terminals that, you know, are under discussion, right, or initial development, you know, because they're still going into federal waters there, so that makes it quite a bit riskier for them, as far as to get all their final permits.
Okay, that's helpful. Thank you.
We have our next question come from the line of Robert Kwan from RBC Capital Markets. Please go ahead.
Great. Thank you. Good morning. I just wanted to circle back with a couple questions here on Gateway. And Steve, you talked about, largely speaking, it sounds like the negotiations in terms of what you're controlling the customers is, you know, pretty well-defined, and you pointed to the upstream logistics and supply. So you mentioned Cactus. I guess just, you know, what other things can we look for in terms of third-party, you know, announcements or expansions? And just overall, what gives you confidence that these kind of things that are outside of your control will come together such that you can execute the contracts, you know, by the end of the second quarter?
Well, I think we can execute the contracts now. I think that's just. But we'll just have to. We need to embed some options in there to allow them to increase their window, their loading windows, and so that's probably where we'll push over the next month or two. But one of them. I mean, there's two pipelines that are looking to expand. One is EPIC. They're looking to expand, and they have pretty significant expansion opportunity, EPIC does. I've heard up to 400,000 barrels. And then the other one that can expand is obviously Red Oak, and they. And Red Oak is out there right now with an open season. And so that's probably coming to a conclusion very soon, and I think, I think that has layers of expansion across it. Those are, those are really the opportunities.
And that's, that's a great time for that.
Gray Oak was the first. Great, great.
That's great.
One of the other P 66 projects. I'm sorry about that.
All good. And then just on the gateway contracts themselves, you, you've talked about, you know, thinking that you can either keep the rates the same or potentially increase them, but there's a lot of moving pieces here. As you think about the extra loading windows, you think about that you're moving spot right now. I guess, just as you distill it down to what you think the EBITDA coming out of Gateway will be, when everything is extended, is it-- Are you still thinking it will be very similar? Do you think that there's a potential for an uptick? Or how should we just think about the total impact to EBITDA?
I mean, that's-- there's so many unknowns there as far as increasing. You know, I said, you know, even without any expansion, there's an opportunity-- without any real capital, besides maybe the Cactus connection, which is pretty minimal capital. I think we can grow that 15%-20% without any-- 15%-20% if we're successful, and I think there's even upside on top of that. But I would be-
Right.
You know, I wouldn't wanna be too optimistic this early on-
Got it.
Anything above 15%-20%.
Okay. And on the deepening project, should we think about that as a growth project, or are you just going to be looking at it as a capital recovery rider?
I think it's a growth project, right? We're gonna look to increase MVCs, which help backstop it, but we know they're gonna load more volume on those ships, and because that's a restraint right now, and so there's definitely a payoff for that project. It's probably in the three-four times type of payout.
Okay, that's great. I appreciate the commentary, and, Steve, all the best in retirement.
Thank you, Robert.
Ladies and gentlemen, just a reminder, should you have a question, please press star, followed by the number one on your touchtone phone. We have our next question coming from the line of Ben Pham from BMO. Please go ahead.
Hi. Thanks. Good morning. A couple of follow-up questions on that last topic of Gateway and recontracting. You've mentioned the potential 15%-20% increase in EBITDA, and I think that's what I heard. Do you expect that to happen starting Q2 2024? Is that your outlook in three years' time? And do you expect that from a starting point of your record volumes in March, or should we normalize for the strength and the spot volume side of things?
I think it'll be a gradual thing. I think we'll see some of it hopefully just through this increased volume throughput that I talked about in March, and hopefully that'll carry on through, you know, really the second quarter. And then I think we'll see an uptick in the second half. You know, I believe we'll see an uptick in the second half. And then I think it's on, really, on a quarterly basis, I believe we'll see growth in that EBITDA business, Ben.
Okay.
You know, I think I fly out Sunday to go down there and talk to some customers, so we're continuing to press forward with this opportunity.
Okay. It's mainly—it looks like it's a mix of replacing existing contracts, and it's not a situation where you-
It's adding additional throughput by, you know, adding additional load windows. So, loading more ships in a month on a contracted basis. And then one of the big surprises is that we're loading far more VLCCs, which gives us an incremental throughput volume on every ship that we do load. So, I believe we had a record in December where we loaded, I believe. How many VLCCs, Omar, in December? Was it 17?
Yeah, yeah.
16 or 17 VLCCs, which is, you know, we didn't have that in our forecast at all. So that's one of the things that's really kind of pressing us forward and being optimistic that we'll be able to, you know, meet that nine times or better as we move forward.
Okay. Got it. And maybe switching to the search process now and your announced retirement. You've mentioned in earlier comments, the board maybe preference for a Canadian candidate. Well, I guess we'll wait and see. I mean, is that suggesting post-Gateway recontracting, that there's maybe a suggestion of the Canadian business reinvigorating with growth? And can you remind us the U.S. side of things, how staffing has been involved and your lieutenants down there, since you've started in the Permian region again?
I wouldn't read a lot into, you know, the lean other than, you know, 75%-80% of our business is here in Canada, and so that's and you know, these relationships with our existing customers here very important. And I think that's probably the leaning force, why they would look for a Canadian first. And then as far as my staff down in the U.S., you know, we were able to recruit, you know, a very good commercial person that had been the commercial person for the terminal. And then we've added some existing commercial support to really beef that up. And so that commercial team is very focused on continuing to drive and develop opportunities around Gateway.
Hmm. Okay. And then maybe just a last one. DRU Phase II, how do you think about that project now of record volumes in Western Canada, rail picking up quite a bit as well?
That's a tough one, Ben. I, you know, would say that it's cooled. Our discussions around that have cooled, especially with TMX coming on, and our customers really wanting to understand how TMX impacts the market on a long-term basis. Also, you know, as upstream continues to develop these brownfield projects and as the Clearwater play continues to enlarge and develop, I do think long term that, you know, three-four years out, 2026 is probably the opportunity where we may be able to actually recontract, or not recontract, but add a DRU as the TMX pipeline fills up, and potentially even add storage four or five years down the road, too. So they're at Hardisty again. Yeah, we are optimistic in Canadian crude oil production.
Okay, that's great. Thanks, Steve. Thank you.
Thanks, Ben.
Thank you. There are no further questions at this time. I'd now like to turn the call back over to Miss Pollock for final closing comments.
Thank you, Lara, and thank you for joining us for 2023 F ourth Quarter and Full Year conference call. I'd like to remind you that there's supplementary information available on our website, gibsonenergy.com. If you have any further questions, please reach out at investor.relations@gibsonenergy.com. Thank you.
Thank you, ma'am. 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 lovely day.