Good morning, ladies and gentlemen. Welcome to Gibson Energy's fourth quarter and full year 2020 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, Strategy, Planning & 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 fourth quarter and full year 2020 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. In a very challenging year for our industry, I believe our strategy, which is built around our core terminals on high-quality cash flows and maintaining a very strong balance sheet, proved resilient. As you can see from our 2020 financial results, Infrastructure segment profit, $374 million, was in the upper half of the outlook range we gave in 2019. That was pre-COVID, which speaks to the stability and visibility we have in our business. The 2020 Infrastructure segment profit was a $60 million increase from 2019 on a comparable basis. 20% growth year-over-year. With the tanks we placed in service at the end of 2020, the DRU expected to enter service on budget and on schedules mid-year, we have the visibility to further growth this year.
It's the strength of our infrastructure business that makes our dividends so solid. Our payout of 66% was below our target range of 70%-80%. Perhaps more importantly, our infrastructure-only payout was 75%. The board and management see the value of modest, stable dividend growth. In a year where many North American mid-streamers cut or paused dividend growth, we were very pleased to again increase our dividend by 1%, $ 0.01 per share per quarter, or about 3%. On the marketing side of the business, we were in the middle of our $ 80 million-$120 million run rate. That said, it was a tale of two halves. In the first half of the year, we saw significant volatility. Our marketing organization was able to move decisively and lock in very meaningful gains. In the second half, it was a very challenging environment.
It looks like 2021 is shaping up to be the inverse. The challenging environment has persisted, with very few opportunities available today. I can't tell you when or where the market is going to shift. Looking back over just the last few years, we can see how quickly it can change. Also, marketing outperformance tends to be quite lumpy, with a small number of events driving a good portion of the year's P&L. In that context, we expect marketing performance to improve at some point through the year. As we always say, delivering our strategy is not dependent on marketing earnings. One area where we've seen noticeable improvement coming into 2021 is on our commercial discussions. On the tankage front, we are in numerous conversations with customers for tankage at both Hardisty and Edmonton. One of the drivers for tankage at Edmonton is TMX.
Discussions on the DRU have also moved forward. Clarity on KXL has helped. We're currently talking to multiple producers and multiple refiners. That said, it's a complicated set of agreements and will take time. Shifting gears to another area where we made significant progress in 2020, advancing our sustainability and ESG initiatives. ESG is very important to Gibson. We want to ensure that we embed ESG into all areas of our business and position ourselves as a sustainability and ESG leader. It's both the right thing to do and the smart thing to do. While the core values of ESG have always been a part of Gibson, we started our formal ESG journey in 2020 with the release of our inaugural sustainability report. We also made our first submission to the CDP climate change questionnaire, we were very pleased to receive an A- score.
We are one of seven oil and gas companies in North America to receive this distinction, and also ranked in the top 10 globally. For any initiative to be successful, you need to have the right governance in place to ingrain it into your existing business practices. Our board established a dedicated sustainability and ESG committee. It is chaired by Judy Cotte, an expert on ESG and responsible investment, and we have benefited greatly from her experience on our ESG journey thus far. We've also ingrained sustainability and ESG in our strategy process and in evaluating all of our commercial projects. We've made ourselves accountable with a meaningful proportion of our short-term incentives tied to ESG-related metrics. On the environmental side, clearly a major focus is on emissions. We believe our carbon footprint is already best in class in the North American midstream space.
This is both on an emissions per dollar revenue basis and a per barrel throughput basis. We continue to advance opportunities to reduce our emissions footprint. For example, at Moose Jaw in 2019, we expanded the facility by 30%. By utilizing new heat exchangers, we reduced emission intensity by about 25%, and we've identified additional projects that could reduce our emissions. Within the social pillar, our efforts to date have been concentrated on community giving and diversity and inclusion. In 2020, Gibson made a real commitment to a cause I personally feel very strongly about. With a five-year partnership with Trellis and the donation of $1 million, we are very much making a difference in the mental health of youth in our communities. This is the largest financial donation in Gibson's history, and Gibson employees have committed to dedicating a significant number of volunteer hours.
On diversity and inclusion, women currently comprise 37% of the workforce and 30% of employees at the vice president level and higher. Our board is 1/3 women. We took positive steps in 2020. This would include the addition of two women to our board and putting programs in place to attract and retain women to Gibson and to ensure equal representation through the recruitment process. In 2021, expect to see us continue our ESG journey. Our near-term focus will be set on sustainability and ESG targets, which we are in the latter stages of formatting. We will also continue to expand our disclosure, and we'll publish a TCFD-aligned report during the year. Sustainability and ESG continues to evolve very rapidly, and we will very much seek to maintain our existing leadership position. Let me conclude by returning where we see the business today.
I would stress that our strategy was designed to succeed in any environment. That strategy has not changed, and its effectiveness was proven again in 2020. Our infrastructure business demonstrated its resilience. Despite the impact of COVID, infrastructure grew 20% in 2020, and it will grow again this year and into the future. Discussions for tankage at the DRU have advanced. We feel very comfortable in our ability to deploy $150 million-$ 200 million per year without sacrificing returns. Our balance sheet is very strong. We are 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. As Steve mentioned, our business had a strong year. Notwithstanding COVID, we were still above our budget for the year on both an adjusted EBITDA and distributable cash flow basis. One of the main drivers was our infrastructure segment, which was in the top half of our outlook range. Segment profit for the year was $374 million, including $ 93 million in the fourth quarter. I would note that the annual figure is a $60 million or nearly 20% increase on a comparable basis. This was largely driven by a full-year contribution from the four tanks or 2 million bbl we brought into service in late 2019 at the top of the hill, but also by our ability to add some incremental revenues at Hardisty through the year.
This is despite weakness from the relatively small variable component of our infrastructure segment, our conventional pipelines and small terminals in Canada and the U.S. These businesses were certainly impacted by COVID and have yet to recover, remaining roughly 40% below where we initially thought they would be. Comparing the fourth quarter to the third quarter of 2020, we are very much in line. The three tanks or 1.5 million bbl we brought into service in the fourth quarter provided only a partial contribution. We'll see their full benefit in the first quarter of 2021. We still very much expect to be right at or around the $100 million per quarter run rate for infrastructure we had previously discussed coming into 2021.
Marketing adjusted EBITDA of $104 million and segment profit of $95 million for the full year put us in the middle of our long-term run rate. As Steve mentioned, that was driven by a strong start and then a very challenging environment towards the end of the year. In the fourth quarter, adjusted EBITDA was - $4 million, and segment profit was - $9 million. The strong start to the year was in part due to the volatility we saw during the onset of COVID, with one of the largest factors being the availability of time-based opportunities, given the steep contango in the futures curve. Whereas opportunities in the crude marketing business were very limited in the back half of the year.
On the refined product side, road asphalt had a fairly strong year, in line with 2019, though other key products such as roofing flux and distillates had positive margin, but were down year-over-year. In response to the current environment, where drilling fluid demand remains fairly weak and asphalt demand is seasonally lower, we are also looking to capture seasonal opportunities on certain refined products. In any year within our refined products business, seasonal optimization opportunities may exist, and we, at times, participate in these by storing some of our products in the winter months and selling in the summer months. This year will be no different, and the impact of this is to push out some revenues from the fourth quarter of 2020 and the first quarter of 2021 into the second and perhaps third quarters of 2021, albeit for higher margins.
In characterizing our fourth quarter results, I think it's also very important to note that to the extent that marketing is not performing at levels that it has historically, it's reflective of the fact that the opportunities that they were able to find were not sufficient to fully offset the ICP commitments they have in place, rather than because we made the wrong market calls or took on high-risk positions that went sideways. These ICPs are generally flat through the year, where earnings can be lumpy or seasonal. We also very much recognize the noise created by having both a segment profit and adjusted EBITDA measure. We've been looking at reporting a single measure to be accountable to, though we think it makes the most sense to start reporting that with the first quarter rather than making the adjustment in the fourth quarter.
In reviewing peer disclosures and thinking about what is most appropriate for our business, we are leaning to something akin to adjusted EBITDA, as that removes the noise created by unrealized hedging gains and losses and focuses on the economic value generated in the period. I would caution that it's something we are still working through with a formal decision to be made in conjunction with our Q1 2021 results. Shifting to our outlook for marketing, as Steve said, it remains a very challenging environment. Absent a change in that environment, it will be a fairly challenging quarter for the crude marketing business, given the very limited opportunities. Combine that with our outlook for refined products, where we continue to see reduced product demand due to the pandemic, our outlook on an Adjusted EBITDA basis for the quarter is around break even.
That being said, we do expect to see a recovery throughout the year, especially on the refined product side, as end use normalizes with a more fulsome economic recovery given the role of the vaccine. Though differentials are likely to stay narrow on a historical basis. As has always been our approach, if we are setting reasonable expectations, then we need to consider that absent a meaningful change in the environment relatively soon, there's certainly the potential to be at the low end or potentially even below our $ 80 million-$120 million run rate in 2021. As Steve said, marketing is lumpy. We could certainly see a couple events that get us comfortably back into that range quite quickly, and that's certainly what history has shown us. But at this time, we can't say we have clear line of sight to that.
To speak to what weakness in our marketing business could mean for our strategy, I said it on the last call, but I think it is very much worth repeating. I could not be more clear than to say that we do not rely on our marketing business to fund our capital, fund our dividend or support our leverage. We are very deliberate in designing a framework that anticipated eventual volatility in the variable part of our business. For that reason, in addition to our overall leverage target being conservative relative to peers, despite the cash flows from our infrastructure business being amongst the highest quality, our financial governing principles include measures for maintaining infrastructure only leverage at or below four times, as well as not paying out more than 100% of our infrastructure-only cash flows.
We currently are and very much see ourselves continuing to remain within both measures, with quite a bit of headroom on our infrastructure-only payout. Obviously, corporate level measures matter, but it's really the infrastructure-only measures that we fundamentally run our business around, given the variability in the marketing business is not within our control. As a result, very much by design, even with the moderation and contribution from our marketing business, we remain in a very strong financial position, including being fully funded for all of our anticipated capital. Given the strategy we have in place and our conservative financial governing principles, we are comfortable living at the lower end or even below our long-term marketing run rate, in no way will change our marketing strategy or risk tolerance to chase earnings. Finishing up the discussion of the results, let me quickly work down to distributable cash flow.
G&A of $33 million in 2020 was below our normalized run rate, largely due to COVID-related items, with the fourth quarter very much in line with the third quarter. Lower interest costs were one of the key wins in 2020, with a decrease of $10 million from 2019. Refinancing our debt over the past 18 months has been a major focus, reducing our run rate interest costs by over $20 million per year. For context, that represents about 7% of distributable cash flow and our weighted average coupon on our notes would be by far the lowest within our Canadian mid-sized peer group at just over 3%, while at the same time having the second longest weighted average tenure.
Replacement capital of $23 million in 2020 was slightly below 2019 as a result of deferring certain discretionary work to this year, given the impact of COVID and a focus on cost. Taxes in 2020 were comparable to 2019, with a recovery in the current quarter related to an adjustment booked for the Alberta Job Creation Tax Cut. Lease payments were slightly lower in 2020 than 2019. We've been very much looking to reduce our lease costs and would expect that in 2021, these lease costs could decrease further. These factors resulted in distributable cash flow in 2020 being fairly comparable to 2019. The largest dynamic here is the growth in infrastructure largely offset the decrease in marketing, and the interest savings and lower lease costs also helped to close the gap.
The fourth quarter was $11 million lower than the third quarter of 2020 due to the decrease in marketing contribution. On a trailing 12-month basis, rolling off a stronger quarter, with the fourth quarter of 2019 having been $22 million higher than the fourth quarter of 2020 due to the weaker contribution from marketing in the current quarter. Our payout ratio increased modestly to 66%, but is still well below our 70%-80% target range. Similarly, our debt to Adjusted EBITDA was relatively flat at 2.8 times, which remains below our 3-3.5 times target. Speaking to our financial position, 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 year, we are only $60 million drawn on our $750 million credit facility with about $54 million of cash on the balance sheet, or effectively undrawn on a net basis. We also have $115 million of unutilized capacity on our $150 million bilateral demand facilities, so very significant liquidity, with years of running room given our 66% payout ratio and $200 million capital program. In terms of being proactive, in 2020, we completed our transition to a fully investment-grade capital structure with the issuance of a $250 million hybrid to fund the redemption of our $100 million convertible debentures. We are very pleased to be able to replace a potentially dilutive convert with a non-dilutive, longer tenor hybrid while maintaining the same 5.25% coupon.
Also, we're able to ensure that the redemption was non-dilutive through the limited use of our NCIB in December.
With these actions, we came into 2021 with significant available liquidity. As our upsizing our credit facility in February 2020 showed, you can never be too proactive in maintaining liquidity. It's when you need it that the price goes up and availability goes down, as many issuers saw during the onset of COVID. In summary, the business had a good year in a very challenging environment. Our infrastructure segment had a very strong year, and marketing was within our long-term run rate expectation. The current environment for marketing is challenging. While that will change in time, the more important point is that we simply don't rely on it in order to execute on our strategy.
We very much believe that our business offers 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.
Thank you. Ladies and gentlemen, to ask a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Please stand by while we compile an attendee roster. Our first question comes from Jeremy Tonet with JPMorgan. Your line is open.
Morning, Jeremy.
Just wanted to start off with regards to marketing outlook and how that impacts, I guess, capital allocation philosophy as you guys see it right now. Does the softer marketing outlook right now kind of impact how you think about buybacks, the pace of buybacks? Or is that really kind of more tied to growth CapEx, in general and, just the level of money you're spending, the balance of it would be put towards buybacks. Just wondering the whole capital allocation philosophy between buybacks, growth CapEx, and dividend growth as it works out right now.
Sean, can you take that?
Yeah, absolutely. Thanks, Jeremy. Our capital allocation philosophy really hasn't changed. As a refresher for everyone on the call, bias towards funding growth capital to the extent that we're deploying it at that five to seven build multiple under long-term contracts with investment-grade counterparties. That will absolutely remain our priority. Also remaining fully funded and within our financial governing principles. To the extent that there's excess cash flow, and you would've seen it in conjunction with the results here, and that's primarily from infrastructure, then we certainly have a bias towards modest annual dividend increases over time. With infrastructure segment profit going up 20% on a year-over-year basis again, you saw that with the modest dividend increase that we announced this year. Notwithstanding a challenging environment because of COVID.
We have been clear that to the extent that we have excess cash flow and it's primarily from marketing, then we would very much buy share buybacks. So, Jeremy, you're absolutely right. The marketing outlook does impact our ability or our desire to do share buybacks in the first half of the year, certainly. We would like to see some measure of recovery in that marketing business before we look at that more fulsomely, as we think of it the back half of the year. The other part is all the factors you mentioned aren't necessarily mutually exclusive. If you think about the capital spend we have, it is more front-end loaded this year. Again, we'd like to get through the bulk of that capital spend in the first half of the year as well, and see some measure of recovery in the marketing business.
I think you would see us look at a buyback program or reinstituting a buyback program more fully, probably closer to the back half of the year.
Got it. Understood. That's helpful. Thanks. Pivoting over to the DRU here, the potential for expansion. I was just wondering, granted it's a very complicated contract structure there that you all can assign, but any thoughts you could provide on when this might kind of come to fruition, potential expansions? Is this kind of a this year or next year event or later, [inaudible] Just trying to get more feeling on when you think that could come together.
Yeah. Thank you, Jeremy. We're very excited about our phase one with Cenovus. That first 50,000 is underpinned by a 10-year take or pay. This is really the first commercial DRU in Canada, and we think it's a real opportunity. I think clarity around KXL certainly helps, and discussions have picked up as we continue to talk to multiple producers and refiners. So, you have the U.S. pool, now that KXL has kind of cleared up, the feedstocks coming from Venezuela and Mexico continue to decline. Those U.S. refiners need that heavy crude oil produced by Canada. Likewise, the Canadian producers want that U.S. market. We think that this is a real opportunity for them. Discussions continue to heat up.
I would say it would be later in the year, probably, I would say, a late third or fourth quarter, if we're able to do it this year, Jeremy.
Got it. That's helpful. Just one last one, if I could. I think at points in the past you discussed two tanks to four tanks is something that you guys would target in the long term. I'm just wondering how you think about that right now, given everything we've gone through with COVID and the cycle. Do you see that rate still achievable or just any updated thoughts there would be helpful.
Well, I would say COVID kind of put a pause on things. As the year started this year, commercial negotiations have really heated up, both at Edmonton and at Hardisty. In fact, at Hardisty, we did sign a short-term agreement with one of the oil sands producers. We are going to actually move our first marketing tank that we leased to marketing. We're going to lease that to that producer. We see several other opportunities. We have probably four different customers that are wanting tanks at Hardisty. At Edmonton, we're getting very close to signing agreements to start doing initial engineering work on building tanks there. Those discussions are really starting to pick up. They're associated with TMX and other opportunities at Edmonton, Jeremy. I would say that two tanks to four tanks a year is still very viable.
We see pretty good line of sight over that over the next three years to four years.
Thank you. Our next question comes from Benjamin Pham with BMO. Your line is open.
Hi. Thanks. Good morning. I wanted to follow up on the Edmonton opportunity in particular, and you mentioned TMX is a driver. You mentioned other opportunities. Can you expand on these other opportunities? Then on Trans Mountain, is the expectation that in the past you've seen producers wanting the storage ahead of time, and you lease it on a spot basis before the pipeline's actually in service?
Yeah. On tanks at Edmonton, obviously TMX is driving that. We have a mainline connection into Trans Mountain. There are several customers there. The other driver is really what producers are seeing as synergies between those two markets, in Edmonton and Hardisty, the ability for them to swap barrels back and forth and optimize their netbacks is really driving some of the other talks, Ben. As far as handling early, I don't know that we need to build anything early. I think timing-wise, to have tanks ready, we'll need to contract them later this year to have tanks ready on the current timeline for TMX.
We should think about the in-service of potential tanks, more aligned with that late 2022 service. In the past, the spot revenues, that sounds like it was more just you completed tanks early than expected.
Correct. Yeah. You're only talking one month or two months, generally, Ben. When we do that.
Okay. Maybe switching to marketing side of things, and can appreciate the language around not relying on it and there's opportunity to buy back stock in the second half to potentially see a recovery. What are your thoughts about the discipline looking at overall exposure, strategically moving it lower? The 20% EBITDA today, are you open to moving it to 10%, whether it's less fixed commitments, selling Moose Jaw? I know you're probably not going to get a great price on that today. You haven't been against selling assets at the right times. You've done it in the past. Any sort of context on where you want marketing to be long term, if there's any thought, any changes there?
I think when we came out on our strategy in 2018, at that time, we came out with a $60 million-$80 million kind of run rate on a long-term run rate. There was quite a bit of volatility in the market over the last couple of years, and we moved that, I think, to $80 million-$120 million. Last year, we came right in the mid-range. If things continue to tighten up on the differential between WCS and WTI on a long-term basis, that does increase our feedstock at Moose Jaw and reduce our crack spread. We may, in the long term, have to move that down some, but we're always going to make maybe to $60 million-$100 million on the long term, but we don't know yet.
Right now, we're still at that $ 80 million-$ 120 million, and we feel comfortable over the next couple of years in that $ 80 million-$ 120 million, Ben.
Hey, Ben, the only thing I'd add to that, too, is that if you structurally move down your ability to generate margin out of that business, that not only impacts in more challenging times like right now, but that would also impact our ability to achieve outsized results in both 2018 and 2019. I think that's something to remember, that if you structurally change the business, in the periods when the market presents opportunities like we certainly have seen up until recently, then you permanently probably impair your ability to get those outsized results, at least to the same quantum. That's also the offset to a strategic decision, as you would note there.
Okay. All right. Thanks very much.
Thank you. Our next question comes from Robert Hope with Scotiabank. Your line is open.
Morning, everyone. Two questions. The first one's just on the 2021 outlook for infrastructure. Good to see that you reiterated that $100 million a quarter until the DRU shows up. Can we delve a little bit further to what that assumes on the other infrastructure side? Does that assume that the U.S. pipes kind of stay where they were at in Q4? Does that assume a pickup back to more budgeted levels?
Sean?
Thanks, Rob. It would assume a very modest pickup. I think it's important to highlight that really the core of our infrastructure business is truly our tankage business. That's going to drive the vast majority of that, and that's what's driving our confidence in reiterating the $100 million. It really is having a full quarter contribution from the three tanks or 1.5 million bbl that we have in service. It does assume a very modest improvement over Q4 levels at both the U.S. and in Canada. Again, very modest, and overall, I wouldn't say that's a significant swing factor.
All right. Thanks for that. Can we maybe discuss a little bit further the commentary on the short-term tankage contract that you have with the oil sands customer in Hardisty? How long of a contract is that right now? Could you also see just you leasing out that marketing tank to the customer on a longer-term basis and then build another marketing tank?
We never really go into exact details of contracts. But we feel comfortable that that will become a long-term tank to that customer. We actually feel that customer we'll build several tanks for that customer over the next couple of years with their plans, as they've discussed. We're feeling pretty comfortable at Hardisty to continue to build tankage going out into the future.
Thank you.
Thank you. Our next question comes from Patrick Kenny with National Bank Financial. Your line is open.
Yeah. Good morning, guys. Just as we think about refinery utilization levels here continuing to recover throughout the year, I guess on the one hand, it might increase throughput at terminals. On the other hand, it might keep demand for Canadian crude and differentials quite narrow. Just wondering if you could help triangulate a net headwind or a net tailwind for your overall business as refinery runs continue to normalize.
One of the things that refinery runs do continue to normalize that will increase distillate pricing, and as U.S. drilling starts to pick up now that we're over $60 crude, we do think the U.S. will start drilling. So with that higher distillate price and higher crack spread across distillate, we think our drilling fluid market will pick up across the year. That's probably the biggest driver. The other thing is, what's going to happen with DAPL? What's going to happen with Line 5? Those could have impacts on the differentials between WCS and WTI and thus have an impact on our feedstock price into the facility.
Okay. Thanks for that, Steve. My next question just here on the broader theme of industry consolidation, both on the upstream front and also more recently in the midstream space. I guess as a way to crystallize value here in a low-growth environment, does this flattish production trend change the way you think at all about delivering total return to shareholders in the form of steady organic growth, as opposed to pursuing more strategic partnerships with other midstreamers or perhaps even looking more at M&A, even if it's on a financially neutral basis, but just to increase the overall size of the company?
This year we've announced that we're going to spend another up to $200 million in capital, which will allow us to continue to deploy and continue to grow our infrastructure earnings. Last year, we had a 20% growth in infrastructure earnings. We're going to put on three tanks. We put on three tanks in November. The DRU is coming on. We're feeling comfortable continuing just the growth in the business, and the status quo is a good strategy. Obviously, we'll look for opportunities to improve the total return to our shareholders, because at the end of the day, that's the most important thing is that total return to our shareholders. Sean, you want to comment any more on that?
No, I think you hit it, Steve. I think, yeah, Pat, as Steve said, we still very much have conviction in our strategy. We have visibility to growth. We feel confident with our financial position. As we've always said, something like M&A is something we're not necessarily averse to, but the bar is so incredibly high given the visibility that we have. There's just nothing that has cleared that hurdle. We certainly don't see a need for M&A. As Steve said, we've got confidence in our strategy and the visibility we have around it.
Okay. That's great. Thanks, guys.
Thank you. Our next question comes from Robert Catellier with CIBC Capital Markets. Your line is open.
Hi, good morning, and thank you for your comments this morning. I'll just start by saying that I would be supportive of your change to reporting adjusted EBITDA in an effort to remove the hedging noise. At this point, most of my questions have been answered, but maybe just one on the carbon tax front. If carbon taxes are in fact raised as envisioned, how would you account for this item in project economics? Because it does have a bit of controversy and could be subject to change. And with that, does it make any projects more or less likely to reach FID, in your opinion?
We're certainly putting it in our project economics, Robert. What is the height of that? We don't really know. We're definitely putting that carbon tax in our economics. Most of our business, as you know, is the tankage business, where we really don't have any carbon. One of the things when we released our CDP report is our company is by far best in class when it comes to CO2 emissions on a per-barrel basis or even on a per-revenue basis. That's because of just the tankage business itself. The two places we do have carbon tax, one is at Moose Jaw, and that would certainly increase our expenses at Moose Jaw. The other is on the DRU itself. That would certainly impact the economics of a DRU to our customers.
But at Moose Jaw, we're excited about a project there that we think will reduce our carbon emissions by about 25% there. That has a very positive rate of return, and we're looking to move forward with that project very soon.
Okay, that's helpful. I just want to offer an opportunity, if you have any updates too, volunteer on what the Cenovus Husky merger might mean for the Hardisty position and contract renewal. Thanks.
Cenovus is a very important customer of ours. We think this is a great opportunity for them in synergies. We think what we can provide a lot of that synergy. We have best-in-class connectivity, probably far better than any of the other terminals, and we have the ability to really provide them blending opportunities to capture some of those synergies that they have out there, Robert. Right now, Hardisty, the Husky terminal is full. Economics to probably build new tankage and take from us would be very challenging.
Okay. Thanks, guys.
Thank you. Our next question comes from Linda Ezergailis with TD Securities.
Apologies. Recognizing that the weather is sometimes even more challenging to predict than the capital markets, I'm wondering if you can just give us a sense of what you think the potential implications for the unfortunate cold snap is in the Southern U.S. Is there any effect on your business? How might that change how you approach that business prospectively, either capturing more connectivity opportunities, adding resilience to your business for your customers, or might that create some challenges that might make you rethink the opportunities there long term?
Yeah, the cold snap in the U.S. Obviously, in the Permian Basin, it almost shut in all that production for about five days. I was talking to my U.S. ops person yesterday, and all that production's back online. It was a five-day event for the U.S. production. So, I don't know that it has any real long-term impact to our strategy in the U.S. which is a very small piece of our business. Right now, there's very little drilling activity, but talking to our producers, that's about to start pick up as the year goes on. Right now in the U.S., I would say we've pulled back on what we're going to spend in the U.S. until things really fundamentally change in the Delaware Basin there.
Okay. Maybe just as a follow-up, in terms of capital allocation, again, a strategic question on some of the consolidation we're seeing with maybe just a bit more thought if we can get from you on, as producers consolidate and midstreamers consolidate, how important do you think scale is and bundled services as well in your offerings to your customers? Might producers want to seek more bundled services from mistreamers, and how might that influence your competitive positioning versus some of the more discrete services that you provide currently?
As far as bundled services, probably that's one of those opportunities that we're talking about there at Edmonton as far as building a tank is really starting to bundle the service in between Hardisty and Edmonton and those two major hubs in Canada. How do we use the two facilities to really help enhance our producer net back, especially as they consolidate and they get new streams? How do we work together to help them maximize their net backs on their crude oil? I'll let Sean talk about just pure size and the other question. Sean?
Yep. Thanks, Steve. Yeah, no, Linda, I think we've been always very clear. I understand the benefits of being larger. Pre us getting investment grade, that probably would have been, at least from a capital markets perspective, one of the more important, because size is certainly a criteria for the rating agencies. With our current size from a capital markets perspective, as we've always said, what we're very focused on is delivering a total return to our shareholders. Think of that as being growth for us yield over time. The challenge is you get larger and larger, it's more difficult to achieve that growth. I think Steve spoke about our confidence in being able to deliver on the growth. Certainly over the next three years to five years here, consistent with what we have historically.
To the extent that we were to get larger just for the sake of getting larger, that would make that more difficult. Given our focus on delivering total return to shareholders, and certainly on a per share basis, again, getting bigger just for the sake of being bigger is not necessarily a focus for us. Now, if there is something strategic or we got bigger through something directly on strategy, such as building additional tanks or phases of DRU, that's absolutely something that we would be interested in. Again, just getting bigger for the sake of getting bigger is not a real focus for us.
Thank you.
Thank you. Our next question comes from Robert Kwan with RBC Capital Markets. Your line is open.
Hey, good morning. I'd like to come back to some comments you made earlier on the call around capital allocation and specifically if things improve, maybe you look at share buybacks in the second half. You also talked about what sounds like a pretty significant ramp up in commercial discussions around new growth that may come together later this year. When you think about your funding, and your funding slide shows, I think, the ability to self-fund in the $ 300 million-$350 million range per year. Do you see that then as being kind of the optimistic case for capital spending for 2022 if you're thinking about putting money out the door in the second half around buybacks?
I can start on the buyback one, and then maybe, Steve, you can touch upon the growth outlook for next year. That buyback comment I made, Robert, was in the context of our current capital plan for this year, and assuming a consistent capital plan for next year. Obviously, and as I think the start of the question I gave, mentioned that our focus from a capital allocation will always be on growth capital to the extent that growth capital is being deployed towards projects that have characteristics like we typically deploy.
To the extent that our capital gets flexed up to the back half of this year and we have visibility to having higher capital through next year, then absolutely, that would be the focus from a capital allocation perspective above share buybacks, just given the return we see that and the long-term value we see that delivering to our shareholders. Steve, do you want to touch on the sort of growth aspect of that?
Yeah. On the capital side, obviously, since we haven't signed any agreements, we kind of know our funding plan through the mid-year. If we are able to sign agreements, that would be back- half weighted, the new capital. I would say, right now we're kind of in that $150 million-$ 200 million range, if we get a DRU, if we sign a DRU, it pushes us up into that right around $300 million range, if we're able to sign a DRU, Robert. We could definitely see that progressing over the next three to five years.
That makes sense. Just to break down the CapEx, you noted that roughly half, if I'm reading it right, of this year's CapEx, you're putting in the bucket of beneficial to ESG. Are you considering the DRU as being in that? Can you just talk about that? Or if it's not, just can you talk and elaborate on what the nature of some of the other projects are?
Yeah. I will talk a little bit about that. First, the DRU. We've done quite extensive research on just how is this negative or positive. One of the things is the DRU is separating the condensate from the crude oil. That exact thing will happen on the U.S. Gulf Coast as it was refined out. With that, you got to think that's kind of net neutral, the actual CO2 there. With removing that 30% - 35% condensate, you're not having to transport that on pipe down, and you're not having to transport that going down to the States, but you're also saving that barrel coming back up. We see that as actually the savings is twice about 150% more than the actual CO2 footprint of the DRU itself.
On a North American basis, we see that in phase one and phase two emissions, probably about 150% savings on a North American basis. It does have a significance. The other one is at Moose Jaw, I kind of talked about that project. There's others that we're looking at. At Edmonton, we're looking at a pretty significant spend that's really in that renewable space.
Got it. Okay. If I can just finish. Question of your tanks and contracting. I know you got a lot of newer tanks, but have you had any recontracts expire? Can you talk about what re-contracting pricing trends have been? Not you, but others had expressed that given some of those tanks were built in the past, and if you think about it from an avoided cost pricing, there actually was upward pressure on rates. Is that something you're seeing or expecting with future tank contract rollovers?
We've only had one contract expire really over the last year and a half. That contract just rolled into a evergreen kind of contract. We've got a couple of contracts coming up in the latter part of this year, and we're currently in contract negotiations there. Right now, it appears that the re-contracting will be right at or maybe even a little bit above the existing rates for those tanks, Robert.
I'm just wondering because if you're talking about signing additional commercial agreements or maybe is this just how you're dealing with existing customers and trying to favor them, but if you've got others who want new tanks who are willing to pay returns based on today's capital costs, shouldn't that provide reasonable uplift then on pricing?
We've got more and more capital efficient at building tanks. I think some of the labor costs have went down for tankage. I would say, I don't think steel costs went up, but so I would say it's still in that as these expiring, we're seeing some of the rates go up. Some of these were five-year agreements, Robert, and then those five-year agreements, there hadn't been a significant change across there. Obviously, when the 10-year agreements start to expire, there will be a potential to raise some rates. All of our tanks have an escalator on them. That's one of the reasons why you're not seeing the rates go up any kind of significant amount, is because they all have annual escalators on them.
Got it. Okay. Thank you very much.
Thank you. Our next question comes from Andrew Kuske with Credit Suisse. Your line is open.
Thanks. Good morning. I guess as a broader question as it relates to the market environment, when we see Trans Mountain done and Line 3 gets done, does that play right into your wheelhouse with tank positioning? I ask the question in part is, do you see the market environment becoming a bit more dynamic with additional egress?
I don't know about dynamic. I think that we see a lot more interplay between our Edmonton and our Hardisty assets. The dynamics between those, as you get a greater market pull to the Pacific, where everything else in the past had been just drawn into the U.S. Gulf Coast and Midwest. I think that creates potentially some excess capacity, which really generally reduces volatility in the market. [crosstalk] Yeah, go ahead.
No, sorry. Sorry. Sorry, continue.
No, I'm good.
I guess just a different question. When you think about just the DRU economics right now, with egress issues looking to be ending, what's the tone of conversations? I ask the question in part because there's clearly the benefit of higher commodity prices, but then there's also the detriment of higher commodity prices as it relates to WCS costs.
With the DRU, the U.S. refiners are still a little leery because that crack spread is still pretty tight in the U.S. Their economics have been pretty challenged over a year. They're pretty leery in the U.S. to enter any really long-term contracts right now. Then, with the producers, I think there's a couple things going on there. One is, they want to see it run. They want to see the DRU run. They want to see and prove it out that it does work. The other piece there is their balance sheets have been weakened by COVID. They're strengthening now, but their balance sheets were weakened by COVID. I think it's just an overall strengthening of our customers will help with it, and I think proving out the actual operation will help.
As far as condensate pricing, as long as we're still importing from the U.S., there's still going to be a pretty good size differential between Canadian condensate pricing and condensate on the U.S. Gulf Coast. That diff is going to remain wide.
Thank you. Our next question comes from Matt Portillo with Tudor, Pickering, Holt & Co. Your line is open.
Yeah, just a quick one for me here. It's on the gathering pipes. It looks like revenue and volumes dropped quarter-over-quarter. I was just wondering if there's any competitive pressures you're seeing there or I would have expected it to be slowly trending up, so any color there would be helpful.
Yeah, I don't think there was any competitive pressure there. I think that was just people aren't drilling for crude oil right now, the drill rigs had stopped, you're just seeing decline. Just kind of natural decline month-on-month. As the producers do start to deploy those drilling rigs again, we'll see that reverse.
Great. That's helpful. Thanks, Steve. That's it for me.
Thank you. Our next question comes from Chris Todd with Barclays.
Hi, guys. Good morning. Thanks for taking my call. Most of my questions have been asked by this point. I guess maybe just one quick one if I could. Sort of retrospectively, I appreciate the comments around your buyback philosophy, particularly as it relates to performance in the marketing business. If I could just look at the fourth quarter of 2020, I think you guys did close to about $20 million in buybacks. That was obviously not the strongest quarter there for marketing. Just trying to kind of marry the decision-making process last quarter with sort of what you're anticipating moving forward, if you could help us sort of sort that out.
Yep. Thanks, Chris. The buyback in December was very much in conjunction with the early redemption of our convertible debentures. As a reminder, we had those convertible debentures for an extended period of time. Those are trading well into the money. Given our absolute focus on per-share metrics here, we'd investigated different options where we could try and mitigate the dilution from those convertible debentures. With some of the pressure we saw at the end of the year, our shares began to trade in around that conversion price. We opportunistically called those debentures for early redemption in an effort to try, given our liquidity, and in an effort to try and mitigate the dilution. It's a 30-day call period. During that period, the shares sort of vacillated in around the conversion price.
What that NCIB really executed on there was to try, to the extent that those shares actually did convert into equity as opposed to being cash-settled, we wanted to try and mitigate some of the dilution there, because over time, we would've wanted to have bought back those shares. What actually ended up playing out is of our just under $100 million of notional amount, about 95% of it cash-settled. Call it $4 million actually equity settled. The buyback at that time was in anticipation of potentially a bit more of that than that actually being equity settled. Really the buyback activities there were more in relation to the early redemption of our convertible debentures as opposed to a longer-term call on our capital allocation vis-a-vis marketing performance.
Okay. Yeah, that's helpful, and I appreciate the color then. Basically something more, not technical, I guess, but certainly not something that you would think would repeat this year.
Nope. That's absolutely right. I mean, as I spoke to in my prepared remarks, thankfully, we now have a much more simple capital structure, fully investment grade. Opportunities like that and the refinancing of our notes that we've done over the past 18 months have largely been done. No, I wouldn't expect that. I would expect, as I said earlier, that to the extent that we utilize the NCIB, that will be in conjunction with an improvement in our outlook for marketing and somewhat dependent on our outlook for growth capital. Again, if debt flexes up, that could impact our ability to utilize it, as I indicated in one of the answers previously.
Okay. That's it for me. Thanks.
Thank you. There are no further questions, so I would like to hand the call back to Mark.
Thanks, operator. Let me take this opportunity to thank everybody for joining us for our 2020 fourth quarter and full year conference call. I'd like to note that we have made certain supplementary information available on our website, gibsonenergy.com. If you have any further questions, please reach out at investor.relations@gibsonenergy.com. Thanks for joining us. Thanks for your support of Gibson. Have a great day. Thanks. Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.