Good morning, ladies and gentlemen. Welcome to Gibson Energy's First Quarter 2021 Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President of Strategy, Planning, and Investor Relations. Mr. Chyc-Cies, please go ahead.
Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our first quarter 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. Good morning, everyone, thank you for joining us today. I'm pleased to say that we had a solid start to 2021 in terms of our financial results in the first quarter, advancements on the commercial front, and the development of our ESG and sustainability practices, each of which I will speak to in our prepared remarks today. Looking at the first quarter financial results, infrastructure Adjusted EBITDA of CAD 109 million was well above our target. After normalizing some items that Sean will speak to, it was right at our run rate outlook of CAD 100 million per quarter. While we seem to speak to this each quarter, including every quarter in 2020, it's hard to overstate the resilience of our infrastructure segment.
Though our marketing margins have been well below our long-term run rate across the last three quarters, our payout ratio of 72% remains at the bottom end of our target of 70% to 80%. Also, leverage at 3.1 x is at the bottom end of our 3x-3.5 x target range. Our balance sheet remains very strong, including being fully funded for all capital. Marketing-Adjusted EBITDA of CAD 3 million came in slightly above our break-even outlook. So far, 2021 is shaping up consistent with our comments on our last earnings call. The challenging environment from 2020 has persisted. However, second quarter marketing conditions are improving, and we continue to expect marketing performance to improve through the balance of the year. Marketing outperformance tends to be very lumpy, with a few number of events driving a good portion of the year's P&L.
As we mentioned on our last call, one area where we've seen a noticeable improvement coming into 2021 is in our commercial discussions. Right at the end of the first quarter, we announced a long-term terminal service agreement with Suncor, our principal customer at our Edmonton terminal. The agreement specifies several contracts into one agreement and also extended their aggregate term. As part of the agreement, we announced the sanction of a biofuels blending project which brings us to having sanctioned about two-thirds of our capital target of CAD 200 million in capital for this year. This project is ESG positive as it aligns with energy transition, I really like the 25-year term. The execution of the agreement and the sanctioning of the biofuels project demonstrates the long-term need for our Edmonton terminal by one of the most prominent counterparties in Canadian energy.
We're also pleased to say that other commercial discussions continue to advance. On the tankage front, we're in numerous conversations with customers for tankage at both Edmonton and Hardisty. The key drivers for tankage at Edmonton are to support shippers on TMX, optimize producer netbacks to meet stream requirements, and to optimize our customers' crude oil between Edmonton and Hardisty without having to physically move that barrel. At Hardisty, we leased out the marketing tank to a third party. We believe this will turn into a long-term lease, and we continue to progress talks with numerous customers with storage needs at the Hardisty facility. At the DRU, we have interest from multiple producers and refiners. With the first phase coming into service in less than three months, and given it's a new product, customers would like to see how that market develops.
We continue to see this as a complicated set of agreements, and our timeline for a second customer remains for late 2021 or early 2022. Shifting to ESG, we took a major step forward during the quarter by setting ESG and sustainability targets. We put a lot of thought into making sure these targets were impactful to Gibson, and they were ambitious yet achievable. On the emissions front, we believe our carbon footprint is best in class in the Canadian midstream space on both an emissions per dollar revenue basis and per barrel throughput basis. We build on this by reducing our GHG intensity at our facilities by 30% by 2025 and 40% by 2030. We will cut our Scope 2 emissions in half by 2025 and eliminate them entirely by 2030. Importantly, we know how to achieve these targets. Diversity and inclusion is a major focus at Gibson.
Today, our board is one-third women. By 2025, we want to reach at least 40%, and with at least one member providing racial, ethnic minority, or indigenous representation. Women already comprise 37% of the workforce and 30% of management. Our target is for women to comprise 43% to 45% of the workforce by 2030, with a milestone of 40% to 42% by 2025. We want to reach 40% to 45% women in leadership by 2030, with a 2025 goal of 33% to 40%. We already have the programs in place to attract women to Gibson and to ensure equal representation throughout the recruitment process. We will remain a merit-based organization that will treat all employees fairly. With our very low employee turnover rate, we feel these are ambitious goals. We also continue to focus on the communities in which we operate.
We expect to give at least CAD 5 million to community initiatives through 2025, with a minimum of at least CAD 1 million each year. We also want our employees to engage and give back to our communities. Over the next five years, our goal is to maintain our leadership in employee giving by continuing to average at least 80% participation from our employees. The last target I'd like to mention is on health and safety. In 2020, we launched our Mission Zero program to focus on safety. We want to be best in class, and that's why our target on the safety front is for us to be the top quartile amongst peers. As you know, one of our overarching goals is to remain a leader in sustainability and ESG.
On the back of our targets announcement, MSCI increased their ratings to double A, which would be the highest rating among any of our North American peers. Looking across the broader suite of rating agencies, we are the leader relative to all peers in our industry. Sean will speak to this in greater detail, but a couple of weeks ago, we became the first public energy company in North America to transition our principal credit facility to a sustainability-linked structure. By integrating our credit facility and capital structure with our ESG targets, this demonstrates a clear commitment to achieving these goals. We believe our progress on ESG and sustainability demonstrates our ability to deliver in a meaningful way when we make something a strategic priority. It was only a year ago when we released our first sustainability report, and we're somewhat proud of how far we've come.
At the same time, we're also very humbled by the journey that is still in front of us. To remain a leader, we're going to have to continue to push hard going forward. We feel we had a very strong start to 2021. We delivered financial results in line with our expectations and advanced on commercial and ESG initiatives. Just as important is that we remain very well positioned going forward. Our infrastructure business remains solid. It's at that CAD 100 million per quarter run rate, and will increase again when we put the DRU in service in the coming months. We feel very comfortable in our ability to deploy CAD 150 million to CAD 200 million per year without sacrificing returns.
We just completed a comprehensive look back, with roughly CAD 1 billion in capital we've deployed over the last few years, we've certainly been at that 5x to 7x EBITDA build multiple. Marketing conditions are improving, we continue to expect marketing performance to improve through the balance of the year. Our balance sheet is very strong, and we're fully funded, and our dividend remains very well underpinned by our stable long-term infrastructure cash flows. We will remain conservative in our approach to our business. I will now pass the call over to Sean, who will walk us through our financial results in more detail. Sean?
Thanks, Steve. Before I jump into the results, I wanted to quickly speak to the improvements we made to the presentation of our financial results this quarter. There's more detail available in the press release, MD&A, and supplementary materials, including presentation of prior quarters, though I would characterize the changes as straightforward and intuitive in terms of how most would look at our business. As we alluded to on our last call, the key change is that we're going to focus on a single metric for marketing, Adjusted EBITDA. We'll still report segment profit. We're not going to focus on the unrealized gains and losses, as that's temporal, and it's the realized cash margin that's reflected by Adjusted EBITDA that the business is most focused on. For consistency, we're going to mirror that change in the infrastructure side, though the impact is much smaller there.
The greatest impact will be that depreciation from our equity accounted investments will not be deducted, nor will Adjusted EBITDA be impacted by other non-cash gains or losses that can arise from time to time. That makes getting down to consolidated Adjusted EBITDA far more straightforward, as it will simply be infrastructure Adjusted EBITDA plus marketing Adjusted EBITDA less G&A. I would stress that there will be no change to DCF, as we'll still look to report a fully burdened cash flow for the period after maintenance capital, but before payment of dividends and investment of growth capital. With that, on to the results. As Steve mentioned, we had a solid start to the year from a financial perspective.
Infrastructure Adjusted EBITDA of CAD 109 million was very much in line with our CAD 100 million run rate outlook after normalizing for the reversal of an accrual made in a prior period and other smaller non-recurring items. This was the first quarter in which we had a full contribution from the three tanks placed into service in the fourth quarter at the Top of the Hill, which was the largest driver of the sequential increase. Marketing-Adjusted EBITDA of CAD 3 million was slightly above our break-even outlook. As Steve mentioned, the quarter materialized very much as we expected, where opportunities on the crude marketing side were limited while we continued to build inventories at Moose Jaw.
I would remind everyone on the call that to the extent that marketing is not performing at levels that it has historically, it is reflective of the fact that the opportunities that they were able to find were not sufficient to achieve previous profitability while still fulfilling the fixed commitments that they have in place, rather than because we made the wrong market calls or took on high-risk positions that went sideways. In terms of our outlook for marketing, based on the current environment, including some gradual improvement that we are seeing, we would expect second quarter Adjusted EBITDA to be approximately CAD 10 million to CAD 15 million. This expectation would include some of the benefit of our previously discussed strategy to build seasonal inventories.
For the full year, our outlook has not changed, and we continue to expect that absent a meaningful shift in the environment relatively soon to be at the lower end or potentially even below our run rate range. As we've always said, we could certainly see a couple of events that get us comfortably back into that range quite quickly, and that's certainly what history has shown us. That's fine, as we don't rely on marketing to deliver our strategy. Finishing up the discussion of the results, let me quickly work down to distributable cash flow. Interest costs were CAD 13 million relative to CAD 15 million in the first quarter of 2020. Refinancing our debt over the past 18 months has been a major focus.
In total, reducing our run rate interest cost by nearly CAD 25 million per year and leaving Gibson with, by far, the lowest weighted average coupon within our Canadian mid-size peer group at just over 3%, while at the same time having the second longest weighted average tenor. Replacement capital of CAD 2 million in 2021 was below the CAD 6 million in the first quarter of 2020, though we'd very much expect to be in the CAD 25 million-CAD 30 million range for the full year, especially given some work was deferred last year due to the onset of COVID. Taxes of CAD 9 million this quarter were slightly below the first quarter of 2020, in part due to lower marketing earnings.
Lease payments were slightly lower in the current quarter relative to the first quarter of last year, as we continue to actively reduce the number of leased rail cars in our marketing segment. On a trailing 12-month basis, rolling off a stronger quarter with the first quarter of 2020 having been CAD 22 million higher than the first quarter of 2021 due to weaker contribution from marketing in the current quarter, our payout ratio increased modestly to 72%, but is still at the bottom end of our 70%-80% target range. Similarly, our debt to Adjusted EBITDA was up slightly to 3.1 times, which remains at the bottom end of our 3 to 3.5 times target.
Speaking to our financial position, despite the somewhat bullish sentiment in the markets lately, our approach will continue to be in favor of remaining conservative, including maintaining a fully funded position for all our capital and being proactive in having significant available committed liquidity. At the end of the quarter, we are CAD 118 million drawn on our CAD 750 million credit facility with CAD 56 million of cash on the balance sheet. We also have CAD 115 million of unutilized capacity on our CAD 150 million bilateral demand facilities, implying roughly three quarters of a billion CAD in available liquidity relative to a CAD 200 million capital program. In that sense, very much years of running room. In terms of being proactive, which you can see is always our bias, we again extended our credit facility to a full five-year term, now maturing in April 2026.
As Steve mentioned, we are particularly proud to have been the first company, not only in our sector in Canada, but across all of North America, to move our principal credit facility to sustainably linked terms. From a finance perspective, this will in no way limit our access to capital, though we very much like that our interest rate will move up or down with our performance on our ESG-linked metrics. In summary, a solid quarter with a positive bias throughout the balance of the year. Results from the infrastructure segment were dead on target, and we look forward to that run rate increasing with a partial contribution for the DRU in the third quarter. In the marketing segment, the environment remains challenging but is slowly improving.
Perhaps most importantly, we very much believe that our business continues to offer a strong total return proposition to investors with visibility to continued high-quality investment opportunities in our infrastructure segment, resulting in attractive distributable cash flow per share growth, which supports a meaningful growing dividend, 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.
Goodbye.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Jeremy Tonet at JPMorgan. Please go ahead.
Hi. Good morning.
Good morning, Jeremy.
It seems like Gibson has been quite active on the ESG front, as you noted there. Just wondering if you could update us, I guess, what feedback you've gotten in the marketplace. Has this kind of enhanced investor conversations or brought new investor interest into the story?
Sean, why don't you take that?
Yep, absolutely. Thanks for that, Jeremy. No, I would say for sure. The ESG is certainly a journey for all of us. Quite a bit of progress this last quarter with us announcing our ESG targets and then announcing on the back of that our sustainability-linked loan tied to those targets. Certainly, we have. I think the feedback we've gotten is very positive on the ESG progress we've made. You see that through investor meetings, but also through third-party rating agencies. From an incremental capital perspective, we certainly have seen some momentum there. Again, I'd say it's early days in the ESG journey, certainly. All in all, I'd say very positive.
The momentum we have on the ESG side, I think we've demonstrated that we are a leader, and we've got a commitment to being a leader, and we are seeing that momentum in investor discussions.
That's helpful. Thanks. I just wanted to pick up on the biofuel side of things, the new announcement there, and just wondering if you could frame for us how deep this opportunity set could be in your mind, or how big is the addressable market that Gibson could serve?
Jeremy, that specific opportunity is with Suncor at our Edmonton terminal. I think we made in that announcement, when we did the terminal services agreement with Suncor. In it is a mechanism to spend up to over CAD 300 million on terminal projects for Suncor over the next couple of years. It's specific to that. Then we're actually starting to really look across our assets and see how and if there are opportunities for that at our assets like Moose Jaw and other assets. Where can we get involved in the renewable market? I would say we're in the very early stages, Jeremy, on that.
Got it. That makes sense. Maybe just the last one for me as it comes to capital allocation, if you could just walk us through a bit more, I guess, how you think about hitting CapEx, if you still expect to hit your target for the next several years, and how would that compete for capital versus buybacks or other uses that you might have, such as increasing the dividend?
Sean, why don't you take that?
Yep. No, absolutely. We have been out, Jeremy. As you know, we've got a CAD 200 million capital target this year with the sanction of the Suncor project this quarter. Roughly two-thirds or so of that is now fully sanctioned. We still remain confident in our ability to get up and around that CAD 200 this year. I think in Steve's prepared remarks, either this call or last, we still remain confident in our ability, even beyond this year, and that sort of CAD 150 million to CAD 200 million per year as we sit here today. From a capital allocation perspective, really nothing has changed. To the extent that we continue to generate high-quality projects that we've shown that we've an ability to do so think of those being very similar to the Suncor project, long-term contracts with investment-grade counterparties at very attractive returns.
That is absolutely going to be our priority from a capital allocation perspective. To the extent that we have excess cash flow, that certainly would be the case if we're spending that CAD 150 to CAD 200 in future years, then it really depends on the source of that excess cash flow. If the excess cash flow is predominantly from our infrastructure business, think ratable cash flows over time, given the contractual nature of the projects backstopping that, then we will continue to favor modest dividend growth over time. To the extent that it's predominantly from our marketing business, we would buy a share buybacks.
Steve, anything you want to add on the future capital side or?
I think we should get a couple of questions really about how our projects are going at potential growth at Edmonton Terminal, the DRU. Those talks continue at Edmonton. Those talks continue very consistent to our last call as far as progressing with counterparties to build out our footprint there at Edmonton. Very positive there. Feel comfortable that we will be able to build out our footprint over the next couple of years at Edmonton. On the DRU front, really exactly like our last call. Progressing forward, the project itself is again on budget and on schedule really for sometime during July startup. I would say as far as progressing talks with customers, they continue to progress forward. Probably our number one customer opportunity there is looking to see how it operates and how do these products sell and move into the market, and how do they price.
With that, we feel pretty comfortable that we will execute another DRU agreement, whether or not it's this year or early next year. We feel positive in the DRU front. Jeremy.
That's very helpful. I'll leave it there. Thank you.
Thank you. The next question comes from Robert Catellier from CIBC Capital Markets. Please go ahead.
Hi, good morning. Robert Catellier from CIBC. First of all, congratulations on the sustainability linked loan. I was just wondering if you could address the potential to sell power through renewables. I've seen a couple of your peers come out with that type of agreement, and what role that might play in your strategy to reduce your Scope 2 emissions.
That is an option. We're actually looking for opportunities in which we can invest in ourselves, potentially even in our U.S. assets, and around our Moose Jaw facility. We have a team set up specifically for building out renewable power opportunities, and potentially Scope 1 reduction opportunities. We have a whole team set up now, Robert, to do that. I would say we're still in the early phases. We hope to really have some things going and approved and moving forward by the end of the year, and definitely have some opportunities that we're pretty happy about in the early stages. As far as doing PPAs, that is certainly an option. We're a midstream company. We like to invest our own capital.
Just for clarification, Steve, are you talking about being a co-investor or would you be a lead developer in terms of developing renewable projects?
That's kind of in our phase II. Once we determine what project we want to develop, do we have the expertise or should we bring in expertise? Right now we're in the determination phase exactly what projects we want to do, Robert. The partnership opportunity is kind of as we start to really develop out that, we'll determine that.
Okay. Another question from me is just on your experience with U.S. marketing. You haven't been at it all that long. What's the relative contribution you're seeing on the marketing side from U.S. assets and how big a piece of it grow?
I would say it's very temporal, very small right now. Our whole conventional pipeline business, both in the States and in Canada, is less than 5% of our overall business. We do have marketing around that to drive volumes through it, but that's really on the producer services side. It's not a high margin business. I would not say our marketing in the U.S. is going to ever really move the dial, Robert. The marketing there is really just to drive volumes across our assets.
Yeah, that's the answer I was hoping for. Thanks.
The next question comes from Ben Pham at BMO. Please go ahead.
Hi. Thank you. Morning. My first question is on the quarter on infrastructure. You mentioned you hit your run rate on EBITDA. Can you comment, Jeremy, on the volume sensitive assets that you own? Are the volumes back to pre-COVID or to your initial expectations?
I would say our U.S. assets, they're probably above our pre-COVID in the U.S. I would say our Canadian conventional pipeline assets are still down probably 30%. Last quarter was really a record quarter for Hardisty as far as moving barrels through Hardisty. A lot of that is with the additional tankage that went in service in the fourth quarter. Some of that bump and the beat really, the small beat in infrastructure really came from record volumes at Hardisty.
Okay, great. I know a couple of questions on energy transition, and you had a paragraph on that in your package as well. My question, I'm curious, you mentioned you're looking at renewables early stage, and you've done a good job of diversifying outside of tankage such as the biofuels and DRU. What are your thoughts now? How broad do you think you can go here? I mean, is there a carbon pipeline storage opportunity for you? Can you move up the stream more on biofuels, like actually get into the facility itself rather than supporting it? What are energy transition opportunities you're looking at right now?
Well, we're going to try to always focus on in and around our assets, and leverage our existing assets. I would say, just renewable opportunities would be probably the number one, potentially with solar opportunities in Saskatchewan and around our Link terminal. The other opportunities that we may be looking at are potential geothermal opportunities in Saskatchewan or around our Moose Jaw facility to help reduce Scope 1. Then, we are not going to shy away from looking at opportunities around Moose Jaw and the energy transition opportunities. What energy transition opportunities could the Moose Jaw facility be involved in?
Okay, that's great. Thank you.
Thank you. The next question comes from Robert Kwan at RBC Capital Markets. Please go ahead.
Thank you. Good morning. If I can come back to the commentary, Steve, you gave on the DRU that you've got a leading party that really just wants to see it up and running but it sounds like there's some other parties in behind it discussing things with you. Do you see the likelihood of contract signing being paced amongst those parties? Would the first party take down all of the next phase or is there some tension here about who's going to be able to come in first for you?
I would say there's two leading parties, potentially three leading parties. They're looking for that entire value chain there. The big U.S. Gulf Coast refiners, they're certainly interested in what this neat bitumen looks like. With that, getting the DRU up and running and getting that neat bitumen in for them to run it is going to be important to finding out what the value is for those refineries. That, really across really the whole Gulf Coast, there's numerous large refiners there are very interested in what this neat bitumen will look like when they bring it into their facilities and run it versus Dilbit. Because you take out that 30% to 40% condensate, and it really has a lot more value to them in how they blend it into the refinery runs.
So Steve, are you comfortable or just the size that they're looking at, do you think you can accommodate all these potential customers at the same time?
Well, yeah. It was built to expand up to 250,000 barrels a day. The only reason we limit to 250,000 barrels a day is that's what the three-unit trains can move out in one day. Is about 250,000 of gross feed. We can move out a little over 200,000 barrels a day of neat bitumen. That kind of limits us to that 250,000 barrels a day kind of threshold. We can obviously expand the DRU with further expansions of the unit train facility. Probably when I think of the DRU, we are now currently looking at potentially what does it look like to build 100,000-barrel DRU versus a 50,000 because we think there's significant savings on the capital front if we can build a 100,000-barrel a day unit versus a 50,000. Of course, you have to have the customer to do that.
Right. Okay. If I can just turn to the marketing guidance and specifically Moose Jaw. How is any recovery there factoring into your thoughts on how the year is shaping up and specifically the economically sensitive parts of the business, the cyclical products, as well as Roofing Flux, just given what we're seeing on housing starts?
It was certainly good to not saying giving a forecast of at or near zero. We're pretty excited about that. We think we've kind of turned the corner now on that CAD 10 million to CAD 15 million. I would say Roofing Flux is red hot right now because it's kind of part of the building industry across North America. Roofing Flux margins are really as high as we've seen. Generally, Roofing Flux doesn't trade as a premium as road asphalt. The road asphalt season has just really kind of started up. I know in the U.S., the infrastructure spending that Biden has moved forward with, some of that does include kind of repaving federal highways, and that would definitely be a boost to the asphalt business and asphalt margins across North America.
Similarly, if Canada moves forward with major infrastructure spending, we could see higher asphalt margins than we've seen in the past. I would say, one of the things we are starting to see is improvement in our drilling fluids margins. The third quarter right now definitely appears to be back in our normal range. When we look at a third quarter, we feel the third quarter will be back to that normal range that we've seen in the past.
That's great. If I can just finish the question on ESG. Clearly it's an emphasis for you. You've addressed the financial side with the new credit facility and highlighting your targets and work on the ES and the G front. At a minimum, at least optics-wise, the assets are pretty heavily geared to crude oil-related infrastructure. Economically, you've got the visible runway for oil sands demand that gives you that base. Just as part of the transition, do you see it being more gradual and capitalizing on your footprint as it comes to you, like the biofuels lending infrastructure or do you see opportunities to more quickly transition your footprint? If so, what types of new platforms are you seeing as most appropriate for the company?
I would say, we've always been pretty conservative in our approach. I think it's building in and around our assets, how do we fit, right? When I think of carbon capture, we're not a compression business, so that's not an expertise that we have. I would say, looking at other opportunities in and around our assets to reduce our Scope 2, definitely some of the projects that we're looking at in the U.S. actually have good rates of return, which is what we're going to invest in, right? We're not going to just invest money with no rate of return. We're going to want it to at least hit our cost of capital or earn better than our cost of capital on these projects as far as reduction of Scope 1 and Scope 2. As far as renewables, we're in the very early stages there.
We are going to look at what we can do around our Moose Jaw asset first as far as a new set of business lines.
Great. Thank you.
The next question comes from Linda Ezergailis at TD Securities. Please go ahead.
Thank you. I don't want to belabor the point too much but further to Robert's question around any ways to kind of accelerate, I'm wondering if tuck-in acquisitions might be an opportunity to both bring potential skills in-house as it relates to your renewable and ESG and energy transition investments in a slightly accelerated way to also migrate from development to actual execution in the later stages. What are the thoughts around the possibilities around that?
Again, we're in the very early stages developing this strategy, but that would definitely be one of the segments of the strategy that we would review. If opportunities come up that we feel fit that strategy, we would definitely review them, Linda. Yeah. We've always been a little leery of M&A, but when you can do something that actually kind of step changes you as far as your organizational capability, we can see a strategy around that.
Thank you. With all the change going on in the industry, I'm just wondering how we might think of any sort of structural changes potentially in the industry that might shift the run rate of marketing contributions over time, either up or down, as it relates to the, I guess, growing supply of biofuels over time, versus maybe even narrowing some locational differentials if your DRU expands significantly, for example.
Years ago when we laid out that CAD 60 to CAD 80, then we were performing at much higher rates when the markets got dislocated. We always said, Linda, that really, these were temporal, think of CAD 60 to CAD 80 as our long-term run rate. I think we're still in that boat. Obviously, there are things that do impact it. As far as feedstock pricing to Moose Jaw, the WCS to WTI has an impact on that. If that margin widens or narrows, that increases or decreases the feedstock price to Moose Jaw. That's probably one of the bigger levers. Then obviously, structural changes, that's probably the one major long-term structural change that impacts our business. Again, that floats anywhere from CAD 8 to CAD 24, depending on the time of the year and what's going on with the reliability of the pipelines leaving the basin.
Hey, Steve, just to clarify, I think you had said CAD 60 to CAD 80 there? Yeah. I just want to clarify.
Oh, I meant 80 to 120. I'm sorry.
Yep. Sorry. I just wanted to make sure we verified that.
Thank you. Maybe another just follow-up question. We're hearing that there's some supply chain disruptions, some bigger than others, and that there's inflationary pressures coming. I'm wondering how you're thinking about or whether you're starting to see that in your capital budgets or operating budgets, and how that might be mitigated by your cost savings. There's some puts and takes, including how your cost structure might shift a little bit as you reopen into a new normal eventually this year.
That's a great question, Linda. Steel is probably the main thing that would impact that steel price. I don't know that labor in Canada is on a major ramp-up, but I think steel prices would probably be the biggest issue. I don't know that my SVP of engineering and ops has really pointed that out as a major concern yet. That could potentially increase some of our capital, but I wouldn't say substantively, potentially a 5% or a 10% increase in our capital. That's not a major driver, and it's something that all our competitors would have, too, so it would be reflective in the market price of our offer.
Thank you. That is very helpful. I will jump off in the queue.
The next question comes from Patrick Kenny at National Bank Financial. Please go ahead.
Yeah. Good morning, guys. Just on the DRU, I guess specific to CP potentially extending the reach of their network. Curious to hear your thoughts as to whether or not they are successful in their bid for Kansas City Southern, whether or not that might impact the customer's willingness to commit to the next DRU phase, just in that given how tight differentials are, saving a buck or two on transportation to the Gulf Coast could actually make the difference?
It's hard for me to weigh in on that, but other than that I know that obviously CP and Kansas City Southern were major partners in getting the DRU across the finish line. Them working together was instrumental to the ConocoPhillips transaction. That's probably what drove that thinking. I don't know. You'd have to talk to the CEOs of those two companies. Definitely you always see synergies when one company can operate this, and I know that this is a high-profile project really for both of those rail companies into the future. We'll see, right? I know Kansas City Southern is the delivery point that ConocoPhillips used to deliver down into Port Arthur. I don't know. This is interesting to watch.
Absolutely. Thanks for that. Just maybe to circle back on the conversation around looking at capital allocation more through an ESG lens, or at least in parallel to financial metrics. Just given you're still very much in the early innings with respect to building out your U.S. footprint, while at the same time biofuels and your renewables opportunities are still very much in the early stages. Just curious if the U.S. strategy has been bumped down the priority list from a capital allocation standpoint or do you see the U.S. opportunities competing head-on with some of these emerging ESG opportunities North of the border?
I don't think it's a capital allocation issue. I think it's just a capital opportunity issue in the U.S. versus some of the opportunities that we have in Canada. We don't have a limited amount of capital. We just really have a limited amount of opportunities right now in the U.S. I don't know. Sean, would you have any extra feedback on that?
I think that's absolutely right, Steve. As you would've seen, Pat, certainly the ability to fund CAD 300 or more of capital as the business continues to grow. As Steve notes, it's not necessarily one or the other. It's just remaining disciplined as we allocate capital to ensure that it remains on strategy and that it achieves the investment characteristics that we typically have in around returns, counterparties, and contract length.
Okay. That's great. Maybe last cleanup question here, guys. I think you touched on it, just on the CAD 10 million to CAD 15 million guidance for Q2 marketing, it looks like forward differentials are still very much in the CAD 11 to CAD 12 range break up obviously here in Q2, so pipeline egress should remain more than sufficient. The CAD 10 million pickup over Q1 is mainly asphalt sales at Moose Jaw coming into the P&L, or are you seeing other factors driving the more normalized outlook?
I would say the majority of it is really kind of the improvement in the margins, which is the sales side of the margins or the product demand for Moose Jaw, which is really kind of all the products, Pat. Asphalt is going to start to pick up and we're going to start to move some asphalt out of inventory. Roofing Flux margins are strong. We have demand. Our demand for those products is definitely picking up in the second quarter, and we're moving some of that out of inventory. You're right. I mean, the feedstock is still going to be relatively expensive at that CAD 12 margin.
Compared to historical.
That's very helpful.
Yeah.
Thanks, guys.
Thank you. The next question comes from Andrew Kuske at Credit Suisse. Please go ahead.
Thanks. Good morning. I guess looking back last year, and obviously it was a very challenging year, but you managed to build your core infrastructure business in a pretty resilient fashion. Where you stand now, and Steve, I think you mentioned volumes at Hardisty sort of down 30% from peak. You had an interesting situation where you've got a lot of interest on the DRU expansion. You've got volumes that should return to normal and potentially grow from there at Hardisty. Do you think about building preemptively at Hardisty to get ahead of competition and to better position yourselves given the attractive build multiples that you have?
We've never did the field of dreams there in Hardisty. We really want to have a customer if we're going to build a tank. We did build a tank for our marketing organization because our marketing organization felt they needed a tank to really maximize their opportunities. We subsequently, after we placed in service, did find really a core producer in Canada wanted that tank, and so we did move it over to that core producer. We believe that'll become a long-term agreement. I would say maybe we felt at, like, 25%. Maybe we lost 25% of the volume at Hardisty for one month, and then it bounced right back. Most of the quarter, we moved 1.1 million barrels a day across the facility, which is almost 100,000 barrels a day higher than any really previous quarter.
We're starting to see a lot of volume move across it and that's with limited rail movement out on Hardisty. Seeing a lot of activity across our terminal. I do not see us building spec tanks at Hardisty. We definitely have the ability to be extremely capital efficient in building another 1.5 million barrels of tankage at Hardisty, which is building out the rest of our top of the hill project. As I've explained many times, we always say that five to seven times multiple on building this tankage. When we're building out the final phases of these platforms, that we can be very competitive on a per barrel basis. We feel that if tankage needs to be built, it would be difficult really for any of the other operators to build that tankage as cost effective as we can.
That's very helpful and a great clarification. Then you mentioned about renewable potential at Moose Jaw, but do you see any kind of renewable potential, in particular solar, at Hardisty and perhaps at the infield at Hardisty?
You always want to put it in the very best sun, right? So our best spot as far as where we own property in Canada, our best spot is Moose Jaw, kind of in the plains of Saskatchewan there. To put it in perspective, it's in the top 90-something percent of Canada, right, as far as solar goes. If you compare that to Wink, it only produces 75% of the solar power that's available at Wink. So we'll definitely going to look at solar opportunities. Potentially at Moose Jaw, there might be a geothermal opportunity that may be better than a solar opportunity for us.
Yeah. That's very helpful. Thank you.
Thank you. There are no further questions. I would now like to hand the call back to Mark.
Thank you for joining us for our 2021 first quarter conference call. Again, I'd like to note that we have made certain information available on our website, gibsonenergy.com. If you have any further questions, please do reach out to us at investor.relations@gibsonenergy.com. Lastly, I'd like to also remind everyone that we will be holding our virtual annual general meeting later today at 10:00 A.M. Mountain Time. Details are also available on our website and participants are encouraged to register for the live audio broadcast at least 10 minutes prior to the presentation start time. Hope you're able to join us. Thanks for joining our call, and thank you for your continued support of Gibson Energy. Have a great day. Bye.
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