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. 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'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press star then the number two. Thank you. I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President, Strategy, Planning and Investor Relations. Mr. Chyc-Cies, you may begin.
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, and thank you for joining us today. I'm pleased to say we delivered another solid quarter, capping what we see as a strong year, especially from our infrastructure segment. We are in position to continue a consistent annual dividend growth with the increase this year of CAD 0.02 per share per quarter to CAD 0.37 per share per quarter or an annual amount of CAD 1.48 per share. 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. We made some big strides in advancing ESG and Sustainability at Gibson.
Looking briefly at our financial results, infrastructure adjusted EBITDA of CAD 436 million for the year is a very strong result. That's CAD 63 million or 17% increase over 2020. Also notable is if you look at the infrastructure growth over the past five 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 CAD 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 risks 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%-80%. The leverage of 3.2x is within our 3x-3.5x target range. Given our solid financial position, we also wanna 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-7x EBITDA 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 six months now, and they're seeing a strong market development for their product. Also, refinery customers are seeing meaningful improvement in refinery runs versus DRUbit. All of which further demonstrates the 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 to our Edmonton Terminal. 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 of 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 term. As part of the agreement, we announced the sanction of a Biofuels Blending Project. It was roughly equivalent to 1 and 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 sanctioning 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 presenting 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 that CAD 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 prongs with deliverables in 2025 and 2030, as we believe it is important that we have a credible near-term targets to drive change today. 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 two emissions by 2030. We've made a Net Z ero 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 CAD 5 million in community initiatives through 2025 and at least CAD 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 in participating in community investments. You know, 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 was 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 four other companies globally received this medal of distinction within the Oil & Gas Storage and Transportation industry.
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 startup of the DRU. We will continue to have growth opportunities around our traditional assets. I'm 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%-80% target range. For the fourth quarter, Infrastructure adjusted EBITDA of CAD 106 million was slightly ahead of our expectations when taking into account that we are at CAD 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 are 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 CAD 436 million, a CAD 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 one-time 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 CAD 63 million increase would have included a full year contribution from the three 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 a third of the increase year-over-year. In the Marketing segment, adjusted EBITDA in the fourth quarter of CAD 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.
While there are some smaller opportunities we are able to realize around volatility from egress outages, the asphalt market for refined products was weak, as expected, so tops and drilling fluids were not as strong as anticipated. For the full year 2021, marketing adjusted EBITDA was CAD 43 million. That is a decrease of CAD 61 million from the CAD 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 CAD 64 million in just that one quarter. This also highlights both how marketing is an opportunity-driven business and that we haven't realized any outsized opportunities for six 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 CAD 15 million and CAD 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 CAD 2 million lower, though this was offset by other items, including non-cash adjustments for equity accounted items.
For the full year 2021, distributable cash flow of CAD 290 million dollars, CAD 291 million dollars was CAD 8 million lower than the CAD 299 million dollars earned in 2020, despite the same adjusted EBITDA on both years. In terms of key drivers, lease payments were CAD 8 million lower in 2021 as we continued to reduce our railcar fleet and had reduced rates on cars we renewed. Income tax was CAD 5 million higher, reflecting lower one-time offsets that were available. Other items decreased a net CAD 16 million, where in the first quarter of 2020, we had an outsized positive impact of CAD 14 million, largely from adjustments from our equity investment and foreign exchange changes.
On a trailing 12-month tbasis, 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 the bottom end of our 70%-80% target range. Our debt to adjusted EBITDA remains flat at 3.2x , which is in the bottom half of our 3x-3.5x target. On an infrastructure-only basis, our leverage would be 3.6 x, and our payout ratio would be approximately 66%, where we seek to be below 4 x and 100% respectively under our financial governing principles.
It was very much those metrics, in addition to the 17% five-year CAGR and infrastructure growth Steve spoke to earlier, that gave our board the confidence to increase the dividend by CAD 0.02 per share per quarter or 6% to CAD 0.37 per share per quarter for an annual rate of CAD 1.48 per share. 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 CAD 650 million of available liquidity as at December 31st. 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.
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 three 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.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press star followed by one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Rob Hope with Scotiabank. Please go ahead.
Good morning, everyone. First question, just on discussions on tankage. Has the slippage in the Trans Mountain date altered any conversations there, or is the expectation that you're still gonna have to get contracts signed this year for any tankage to meet Trans Mountain?
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? It does actually help us on the DRU. You know, was it several years ago when the decision around Trans Mountain was being made by the government? You know, we'd said that we win either way. One way we build more tanks, the other way it really adds to our DRU competitive advantage.
All right. Thanks for that. Just maybe shifting over, you know, M&A got a little bit more commentary in your prepared remarks there. You know, 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 number one thing that we would look at is something that looks a lot like us, right? 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, you know, the oil infrastructure business and something that we are experts at.
Geographies?
You know, we're probably gonna stay in Canada. It's probably our main focus. You know, there may be some U.S. assets that fit us, but I think our main focus will be in Canada.
Appreciate the color. Thank you.
Your next question comes from Jeremy Tonet with JP Morgan. Please go ahead.
Hi. Good morning.
Good morning, Jeremy.
Maybe rounding out that last line of our questions there, just thinking about 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.
Yeah. I don't think we're looking to sell any assets within Canada or the U.S. That's not really in our strategy right now. We, you know, we cleaned the business up in 2018 and 2019, so we're not looking to really sell any assets, Jeremy.
Even the company as a whole, I guess, if growth opportunities prove less than expected.
You know, we're here to execute our strategy. We're pretty excited about the DRU and the renewable diesel. We think that's gonna give us a new platform for growth. You know, I think Sean and I and our Chairman have always said that, you know, we're here to do what's best for the shareholders. You know, we're not an entrenched management team, and we wanna do what's best for the shareholders, Jeremy.
Got it. That makes sense. That's helpful there. 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. You know, especially West Texas drilling activity is really picked up and wondering what that means in your neck of the woods.
Well, I mean, yeah, we're starting to see life there. You know, Sean talked about, you know, we increased earnings year on year, and the budget's definitely updated. One of the wells that one of our area dedications, they recently completed three well pad coming in at 4,000 barrels a day. It's been flowing that for four months, so that's a good sign. We expect drilling to pick up and earnings to continue to grow there, Jeremy.
Got it. As it attracts capital, I guess, no change on that front.
You know, I think we used to say 25 million -50 million , and I think last year we said it was gonna 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.
Got it. I'll leave it there. Thank you.
Your next question comes from Robert Kwan with RBC Capital Markets. Please go ahead.
Good morning. If I could start with capital allocation, and Sean, I know you said you didn't wanna be formulaic around the buyback parameters. If you think about capital allocation, you've delivered, you know, the larger dividend increase and set that baseline. On share buybacks, what are the key considerations around this? Is it share price driven? Is it the availability of cash flow from the marketing that we're gonna 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?
Yeah. Thanks, Robert. Good question. I mean, I think you touched upon a lot of parts of our capital allocation philosophy there. You know, I mean, first and foremost, we fundamentally are gonna remain fully funded, so we're gonna allocate growth capital to the extent that, you know, it's that typical investment parameters we have. You know, the extent that we've excess cash flow or we're delivering on it, you know, we have always said that we'd buy annual dividend increases, and that's what you saw with the 6% increase this year. You know, that was on the back of, you know, a 17% CAGR in infrastructure growth capital over the past five years. You know, dividend hadn't grown at that same amount.
With respect to buybacks, you touched upon it exactly, and it does get to the timing somewhat. You know, really the two 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 capex that's somewhat below our fully funded number. You know, we haven't seen that recovery in marketing, but we have seen a capex number. Certainly with that CAD 150 million target this year, that would be below our fully funded number. That's where, you know, we've now indicated an intention to execute on buybacks this year. You know, 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's 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, you know, thinking of, you know, additional phase of the DRU and/or, the renewable diesel project, you know, 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.
Just as a point of reference from a quantum as a whole, you know, we aren't intending to be formulaic, but as well as we think about, you know, 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'll be somewhat notable. Not pure transparency, but hopefully that answers your question.
No, 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, you know, relatively narrow spreads, lower end of your long-term range, and that's what, you know, 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 find and predict what the year will bring. You know, we can't call the market.
Okay. It sounds like Q1, though, has been aided by just that carryover in Q4 in absence, you know, any changes in the market. The subsequent quarters of the year are probably a little bit lower than what you're guiding it for Q1.
I think we've always said, you know, we've the Moose Jaw margins because of our asphalt business, you know, we don't make the money in the fourth and the first quarter, you know, because the asphalt demand drops, and so we store that product. That really generally weakens our fourth and first quarters. We think that Moose Jaw has stronger second and third quarters, so that does offset that, we believe, Robert.
Okay. That's great. Thank you.
Your next question comes from Matthew Taylor with Tudor, Pickering, Holt & Co. Please go ahead.
Yeah. Thanks for taking my question here, guys. 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 a provincial basis from the regulators? 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, you know, the provincial governments and with federal for assistance and funding of the project. We have seen some of those come through for us already. I would say we're definitely looking for partners in this project. I would say that's probably where the bulk, you know, where our main focus is right now, developing those partnerships.
Thanks, Steve. Should the market be looking for LCFS mandates that the federal government rolls 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?
You know, right now, you know, federal would obviously give a big boost, you know, with new federal fuel standards. Currently, you know, just with the BC standards alone, the project looks good.
Okay. Thanks for that, Steve. Then one more, if I may, talking about another DRU expansion. Last time you had been referencing this was sometime in the first half you're expecting. Are you still targeting that timeframe given what you've seen so far with the DRU now been in operation for a couple of months or what's the status of commercial discussions?
Well, they're definitely ongoing, but we're gonna really ramp it up now. You know, we would like to see something in the first half if possible. That'll allow us to really start to deploy some capital this year too.
Okay. Thanks. It's still those four customers you're talking to or has that widened now? You mentioned TMX delay may be accelerating discussions there.
No. I think, you know, there's probably four or five customers that we're talking to now. We wanna widen that spread. We wanna get down to Houston as soon as possible and really start to market this with those big integrated refineries and widen our-
Okay. Great. Yeah. Thanks for taking my question.
Yes.
Oh, sorry. Yeah. Yeah. Thanks, Steve. Appreciate it.
Thank you.
Your next question comes from Ben Pham with BMO. Please go ahead.
Hi. Thanks. I wanted to go back to the capital allocation topic. I'm wondering if the increase in the dividend of 6% pop-up from the last two years was that driven at all around the TMX delay and that some of these Edmonton tanks might not get sanctioned? Where do you wanna sit on your target payout range?
Thanks, Ben. I'll take that. I mean, as you know, we had our Board Meeting to discuss this yesterday. I mean, there's a tremendous amount of work that goes into preparing it and coming up with recommendations. We had the recommendation for the 6% increase well ahead of the TMX news coming out late last week. Absolutely no impact at all on that. You know, we increased the dividend by 6% because, you know, 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. You know, that's what the 6% is reflective of. And we think that that also does differentiate us somewhat from our peers.
You know, in short, it really had nothing to do with the TMX announcement. 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, you know, we're comfortable within that 70%-80%. If you think about it was in our prepared remarks, I mean, we exited last year with an infrastructure business that was over 90% of the total business. You know, with the target leverage range of 3x-3.5 x and a payout ratio range of 70%-80%, I think with the stability of our infrastructure business, you know, if anything, that could be considered conservative. We're really comfortable anywhere within that 70%-80%.
Okay. Maybe on the share buyback thing, most folks know some of the benefits from that. Is there anything like on the negative ledger that you consider you run through that allocation process?
I mean, the only very, very modest negative, and I think it's far outweighed by the benefits, would be just the reduction in liquidity, where, you know, if anything, we'd like to see a bit more liquidity in our stock. You know, absent that, I struggle with any real negatives with a buyback. You know, what I like is that in a period when growth capital is perhaps a bit lighter than it has been historically, you know, it allows us an avenue to remain very disciplined as we deploy that capital. You know, it's efficient means. It's economic, and it returns capital to shareholders. You know, the only very, very modest negative, which again, I would think is far outweighed by the positives, would be, you know, slight reduction in liquidity. Again, that's on the margin.
Okay. 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 know, you mentioned the biofuels 1-1.5 tanks. DRU is probably two tanks. Like, is that more relevant messaging now than just saying two to four tanks a year?
You know, we haven't really changed our official guidance. You know, we didn't lower it down to one to two tanks a year. As I look forward, you know, we're gonna build out our Edmonton Terminal, and build out that footprint there over the next several years with or without TMX, with another three or four tanks. I would say we're on the lower end of one to two right now, without TMX moving forward. It's still around Edmonton. I would say the majority of our capital is probably going to be in the DRU and Energy Transition moving forward.
To clarify, you view more the DRU and biofuels or anything else that's on top of the tanks, and that's how you get to that CAD 150 million CapEx.
Yes. Well, as far as this year, right? I said, you know, we hope to get back to that CAD 300 a year again, then, with what we're chasing.
Okay. Understood. Okay. Thank you.
Your next question comes from Robert Catellier with CIBC Capital Markets. Please go ahead.
Hi. Good morning. 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? Under what circumstances would it make sense to issue shares for M&A?
Size. I mean, you know, we're pretty small. That does limit our size of M&A, Robert, being a CAD 5 billion enterprise value stock. I would say, you know, we're not absolutely limited on size, but, you know, we are, there are some certain sweet spots. I'll let Sean really kind of talk about the issuance. Sean?
Yeah, absolutely. I mean, clearly, Rob, it would need to be an accretive transaction. You know, to issue shares, I think, you know, there is. The size question is a good one, and there are sizes that certainly would, you know, necessitate potentially the issuance of equity. I mean, obviously that's something we'd like to avoid. We're looking to buy back shares, not issue shares. You know, so it would be somewhat counter to that. Again, if an opportunity presented itself and it necessitated that's certainly a possibility.
I mean, to the extent we needed equity capital, though, there's other avenues 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 numerous different avenues we could do or execute on, you know, outside of a simple issuance of shares to the extent that was required. I mean, just at very base principles, it would absolutely need to be accretive for us even to consider issuing equity.
Right. Not a preference, but, not necessarily a limiting factor either.
No. I mean, I think it'd be foolish to have it be an absolute limiting factor to the extent that we had an opportunity that was so absolutely strategic to the company. You know, it's definitely something that we would need to consider.
Yeah. Just a couple follow-up finance questions, more housekeeping related. The lease payments have come down recently. Are we now seeing the, you know, the run rate level of lease payments you would expect if you right-sized the rail fleet?
Yeah. I think that's probably a pretty safe assumption.
The last one is on just working capital. Obviously, as you know, commodity prices increase, the working capital requirements for the Marketing business go up for the same level of activity. How are you viewing the working capital investment you're making in marketing? Or do they have access to the funds they need, or is the higher price gonna limit activity at all?
You know what I would say is, I mean, they do have access to the funds that they need. I mean, we still have ample liquidity to support that business. There's no limiting factor there. I mean, at the same time, it's something that we actively monitor, and as the Marketing business executes on their strategies, you know, it's definitely a criteria that they utilize in, you know, making the 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, you know, at any point. It is part of the decision-making criteria for them when they actually look to execute on transactions.
Yeah. That's good color. Thanks very much.
Rob, to go back to your lease question, sorry, I was just looking at it. You know, if anything, I'd say, you know, we would expect leases. They could even go down probably slightly from where they are today, just looking at our forecast. You know, run rate right now is probably not terrible, but, you know, forecast would be they could potentially even go down slightly more.
Okay. Thank you very much.
Your next question comes from Andrew Kuske with Credit Suisse. Please go ahead.
Thank you. Good morning. 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 a view on revenue escalators that you have really in the drivers of inflation protections within your contracts on a longer term basis.
Yeah. No, thanks for that, Andrew. I think, you know, there's no perfectly generic answer. I think every contract is slightly different. In general, there are escalator protection or inflation protection within the contracts, and it would change by contract by contract. You know, some of them would be more tied to a CPI type thing, and others would just simply be, you know, call it a 2% or 2.5% escalator. Tough to completely generalize across the portfolio. I would say the vast majority of our contracts do have inflation protection, you know, through some form of escalator.
Okay. That's helpful. Just on wage pressures, I think in your financials, you're pretty flattish on wages and benefits year on year. 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, you know, 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 you want me to take it?
Yeah. I mean, we haven't seen a giant impact on wage pressures yet. You know, I do believe it's coming. 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. Relative to everybody else in the industry, I mean, power cost last year was up CAD 3 million above budget, so which is not a big thing, but that's probably the largest thing we've seen as a pure impact to date. Obviously, steel's up, and that increases cost of you know, tanks or any project. Sean?
Yeah. No, I mean, we just haven't seen, and I think Steve hit it on the note, 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. You know, even on the steel side, you know, the extent we execute on a project, we basically order the steel once we sanction the project. That's built into the economics, you know. 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, you know, some of the inflationary pressures that some of our peers may or may not see.
That's helpful color and context. 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, you know, doing some solar, various parts of the portfolio that would obviously benefit, you know, the power side, but also, you know, tick the ESG box to a certain degree. Then from a Canada standpoint, you know, 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?
You know, we took a hard look at that in last year. It's hard to build, you know, economical small scale solar power units. That is definitely something that we're gonna look at, you know, to meet our goals in 2025 and 2030. Especially with power costs accelerating, I think those opportunities, either by ourselves or partnerships or just Power Purchase Agreements with renewable power in the future, you know, are gonna be available.
Okay. That's great. Thank you very much.
Your next question comes from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. 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? 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?
You know, we want strategic partners probably more than financial partners, Linda. That would either be on the upstream or the downstream side. Which is the ag side or, you know, your downstream marketing, the demand side itself. You know, we think we have a first mover advantage with how far we are along in our engineering, and we think that's probably 12-16 months in front of, you know, somebody that's just now starting to look at. As far as ownership, you know, that really depends just on, you know, how the partnership's set up.
You know, we definitely don't have to have a governing, you know, 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. You know, we have our DRU, our HET, our Hardisty West. We have numerous partnerships today.
Okay. Yeah, 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 duration or reassessing appropriate inflationary provisions within those agreements? 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. Let's just talk about the, w e've talked about, I think Sean talked about, the inflationary parts of our contract and those are sufficient to handle the inflation that's going on right now, Linda. Again, you know, 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 feed mainline pumps of Enbridge and TransCanada. We just don't have a huge power demand, so inflation doesn't directly impact us as much as other companies.
As far as contract life, I would say, you know, tanks coming up, we have relatively, you know, we talked about that just yesterday, actually. There's relatively few tanks coming up over the next two years for renewal. Now, we do start to see tanks start to come up for renewal, you know, 2024 and on. Over the next two 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 years. Sean, do you wanna add?
No, I think you nailed it. Then, I mean, average contract life, I think that was your other question, Linda. I mean, it's probably somewhere in the eight-ish or so range, right now. Still fairly long. I think as we've always talked about, I mean, as tanks roll over, you know, given that it's all for operational production, you know, our expectation is that they'll get renewed. Something like that also wouldn't take into account something like, the Biofuels Blending Project that we are gonna put into service later this year, which, you know, as a reminder, is on a 25-year term. I guess that's all I'd add to that.
That's helpful. 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? Are the opportunities that you're seeing related to assets currently owned by producers in Canada?
As far as refined products goes, you know, 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, you know, not any more than what we already have at Edmonton. As far as, you know, producer assets up for sale, there's always a couple of assets that we think fit us well. It's just a matter of, are they a willing seller, and are their valuations correct? You know, can we come to an adequate valuation?
That's helpful context. Thank you. I'll jump back in the queue.
Your next question comes from Patrick Kenny with National Bank. Please go ahead.
Good morning, guys. Just a quick follow-up on the DRU phase two opportunity, and I guess this ties into the inflation conversation. 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, you know, 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.
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's condensate pricing is what really drives the economics around this. If you look at Mont Belvieu C5 or Natural Gasoline prices, and it's traded 95%-100% of WTI. Then you've got to transport that up here to blend with our bitumen to make DilBit. That economics alone really drives us well below what the rates on pipeline are today, Pat.
Okay. I appreciate that. Thanks, Steve. Maybe for Sean, just to go back and clarify on the dividend growth outlook. You know, 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 CAD 300 million? You know, maybe a more muted 3% dividend growth rate would be more tied to, say, like, this year, having the target at CAD 150 million.
No, I mean, I wouldn't say. A couple of things there, Pat. As you know, first, you know, the dividend's a decision of the board that we do annually in February. That's what I'd open with. I mean, no, I wouldn't say that 6% is necessarily a new normal. I mean, there's gonna be a lot of factors that go into it and, you know, those are a couple of them. You know, how has their infrastructure grown in the previous year? You know, we felt that 6% made sense, given a number of factors, but also a big one being that, you know, our infrastructure's grown 17%, on a CAGR basis over the last five, and our dividend hasn't grown at that same level. It made sense to us.
Our you know infrastructure-only leverage ratios are you know certainly well below what the target is. 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 their infrastructure growth or what's their prospective infrastructure growth? What does their capital look like? You know a number of other factors.
You know as you noted you know a lighter capital program doesn't necessarily mean dividend growth because our hope is that capital program will increase the following year. You probably don't wanna underwrite a dividend increase on the back of that. You know on that basis as I talked to in one of my earlier responses we'd probably do share buybacks. I wouldn't say it's necessarily the new run rate, and a lot of factors will go into, you know, the decision we'll make at this time next year.
Okay, that's great. I appreciate that additional color. Thanks, Sean.
You bet.
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. Please see gibsonenergy.com for those. If you have any further questions, please do reach out to us at investor.relations@gibsonenergy.com. 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.