Good morning, ladies and gentlemen. Welcome to Gibson Energy's third quarter 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 and Investor Relations. Mr. Chyc-Cies , please go ahead.
Thank you, Josh. Good morning, and thank you for joining us on this conference call discussing our third quarter 2020 operational and financial results. On this 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, and thank you for joining us today. It's been nearly nine months since the outbreak of COVID in North America. In this tough environment, we've continued to focus our strategy around our core terminals on high-quality cash flows and maintaining a strong balance sheet. The strategy has continued to position us well in this environment. The performance of our infrastructure segment has been particularly resilient. Third quarter segment profit of CAD 93 million was a CAD 3 million increase over the second quarter of this year.
With segment profit over the first nine months of CAD 28 million, we expect to be on the high end of our range for infrastructure. That's a target we set pre-COVID. In terms of what drives this resilience, there are several factors to point out. First, most of our tankage is operational storage, and the tankage is a critical piece of infrastructure to ensure the reliable offtake of crude oil and allow our upstream customers to maximize the value of their production. Oil sands projects produce for decades.
As a result, we have a lot of comfort around the need of these assets and a strong line of sight of why our terminal assets keep getting recontracted. Our services that we provide our customers the ability to maximize their net backs of their crude oil production. That is why we've been so successful in building 7.5 million barrels of new tankage at Hardisty over the last four years. Our focus on the oil sands leads to 60% of our total company cash flow being take or pay, and 80% being stable fee base.
That's a key reason why our earnings have been so stable this year. Our customers tend to think very long term, enabling 10, 15, and even 20-year take or pay commitments. The last aspect of this resilience I wanted to cover is our ability to grow our infrastructure cash flows. This quarter's infrastructure segment profit grew 14% over third quarter of last year. In the fourth quarter of this year, we expect to continue to increase our infrastructure segment profit as additional assets are placed in service.
The largest driver will be the 1.5 million barrels of new tankage we place in service at Hardisty before the end of the year. Also, in the U.S., we've seen an increase in throughput volumes and revenue each month despite the slowdown in drilling. We recently placed two 50,000 bbl tanks in service at the Wink terminal, which is now operational. We continue to advance connections to new producers and third-party gathering systems in the major egress pipelines out of Wink to the Gulf Coast.
The DRU continues to progress very nicely, and we are on budget and on schedule for a mid 2021 startup. We also expect to add to that growth, and we will come out with our formal budget for 2021 in December. We expect that infrastructure growth capital in 2021 to be at least CAD 200 million. We continue to expect to sanction two to four tanks per year, but likely on the low end. The tankage for this year has slipped into 2021 due to pauses in negotiations during COVID. If we see continued progress in TMX, we expect our customers will need to secure their corresponding tankage at Edmonton sometime later next year.
We have room for about 2 million barrels at our Edmonton terminal, and we feel we're very well positioned to compete to build that tankage. At Hardisty, we continue to be in discussions for additional phases of the DRU. In the U.S., we'll be in that CAD 25 million-CAD 50 million capital spend range. To the extent we sanction third-party tanks, we'll be on the upper end of that range. Returning to our strategy. Our conservative approach of seeking to capture opportunities through our marketing organization, but not depending on it to maintain our financial position, has served us very well.
In the first half of the year, the significant volatility, and particularly the opportunities created by crude near zero and a steep contango, led to outperformance in the marketing segment. Since then, the environment has been very challenging. Volatility has been limited, crude's been range around $40 since June. Differentials have tightened, reducing margins at Moose Jaw, which has also decreased the demand for certain products, namely our drilling fluids. Combined with the compression from low absolute prices, narrow differentials have also limited location and storage-based opportunities.
The futures curve is flat, preventing time-based positions. In that context, I believe that CAD 23 million in segment profit from our marketing segment in a difficult environment is a very strong result. We have a very talented marketing organization. Whether the market's been up or down, they've done a great job. A sideways market is tough. I have every confidence that if there's opportunities in the market, they will capitalize on it. Due to the tough marketing conditions, I believe the marketing segment could be close to breakeven in the fourth quarter.
That would put us in our CAD 80 million-CAD 120 million range for the full year. Shifting gears to another lens through which we manage our business. We've continued to advance our sustainability and ESG initiatives on several fronts. In August, we made our first submission to CDP. We believe our carbon footprint is best in class in the Canadian midstream space on both an emissions per dollar revenue basis and barrel throughput basis. Managing climate change risk is very important to us, and we continue to explore additional opportunities to further reduce our impact and improve our resiliency as a company.
Also, in August, our board established a standalone sustainability and ESG committee. It is chaired by Judy Cotte, an expert on ESG and responsible investment. I would tell you that we have very much benefited from her expertise on our ESG journey thus far. We're also pleased to have Peggy Montana join the board. She brings significant experience, particularly in safety and operations side of the business from her time at one of the super majors. With her addition, three of our nine directors are female.
At the start of October, Gibson made a real commitment to a cause I personally feel very strong about. With a donation of CAD 1 million in a five-year partnership with Trellis, we are very much making a difference in the mental health of youth in our community. This is the largest financial donation in Gibson's history, and Gibson employees have also committed to dedicating a significant number of volunteer hours. It's certainly a challenging environment for our company right now. This is exactly the time that communities need our support the most, and I'm very pleased we could make this happen.
In summary, we're continuing to hear and execute on our strategy. Our business remains in a strong position with a bright future. The contribution from marketing in the fourth quarter is expected to be lower than our last few quarters, yet we remain fully funded with both our payout and leverage below target levels. Our infrastructure business is very resilient, and our existing cash flows providing a very strong base for decades to come. We continue to expect to grow that cash flow. We'll deploy nearly CAD 300 million this year and expect to sanction at least CAD 200 million next year.
Our balance sheet is very strong, and we will remain conservative in our approach to our business. I will now pass it over to Sean, who will walk us through our third quarter results in more detail. Sean?
Thanks, Steve. As Steve mentioned, our infrastructure business remained strong in the third quarter. With respect to the different components driving the CAD 93 million in infrastructure segment profit, I would note our terminals were up slightly relative to the second quarter. This was from a roughly equal mix of higher terminalling-related revenues and operating costs being slightly lower. Recall, roughly 85% of infrastructure segment profit would be from our terminals at Hardisty and Edmonton . Contribution from our Canadian small terminals and pipelines was in line with the second quarter and about 40% below pre-COVID levels.
In the U.S., volumes continued to increase, with September throughput on the Pyote system having increased by over 60% since January of this year. Moose Jaw contribution was up slightly. As we talked about last quarter, the turnaround was completed below expected cost, so the increase was fairly small this quarter. Marketing segment profit of CAD 23 million was very much within our target range, as Steve mentioned, a good result in a challenging environment. Refined products had a fairly strong quarter, supported by attractive road asphalt, roofing flux, and tops margins, with volumes comparable to last year.
On the Crude Marketing side, opportunities were very limited, with contribution mostly driven by time-based positions brought into the quarter. In terms of our outlook for the fourth quarter, as Steve said, absent a change in the environment, it will be a fairly challenging quarter for Marketing, as this sideways market doesn't present a lot of opportunities for the Crude Marketing business.
In refined products, with the paving season largely complete, limited drilling expected for the balance of the year, and weakening margins on our roofing flux sales due to narrowing differentials putting downward pressure on our crude index base term contracts, the fourth quarter will almost certainly be the weakest of the year. Given the crude marketing business specifically is very much an opportunity-driven business, there certainly could be upside to our break-even outlook for the segment. As Steve said, we're not going to in any way change our risk tolerance to achieve that upside.
For perspective, marketing segment profit through the first nine months of the year has been CAD 103 million. At worst, we are still going to be well within the long-term run rate for the year, with the potential for that to improve if the environment changes or some opportunities arrive. In terms of developing our financial strategy and the long-term expectations we message to the market, and recognizing we would find ourselves in this situation at some point, we are very deliberate in designing a framework that anticipated eventual volatility in the variable parts 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 4 x, as well as not paying out more than 100% of our infrastructure-only cash flows. As a result, by design, even with an expected moderation of contribution from our marketing business in the fourth quarter, we remain in a very strong financial position, including being fully funded for all our anticipated capital.
Returning to the third quarter results, there is definitely some noise from unrealized gains and losses between this quarter and the second quarter. Recall that last quarter, we had CAD 20 million in unrealized losses that we added back to segment profit as to increase adjusted EBITDA. Recall also that at the time, we very much looked through that increase in our discussion of the results, as we knew that it was temporal and it would even out in time. This quarter, we had a CAD 11 million unrealized gain. G&A and the other items between segment profit and adjusted EBITDA were nearly identical in the last two quarters.
The difference between this quarter and the second quarter is about two-fifths the change in marketing segment profit and about three-fifths the impact of financial instruments, with infrastructure up slightly. Quickly working down to distributable cash flow on a sequential basis. Replacement capital of CAD 3 million in the third quarter was CAD 4 million lower than in the second quarter. With lower taxable income this quarter, current tax expense decreased by CAD 10 million to only CAD 2 million, and interest and lease payments were also slightly lower than in the second quarter.
This resulted in distributable cash flow this quarter being CAD 7 million lower than the third quarter of last year, resulting in our payout ratio remaining relatively flat at 62%, still well below our 70%-80% target range. Similarly, our debt to adjusted EBITDA remained relatively flat at 2.7x, which remains below our 3x - 3.5x target. Our bias continues to be towards maintaining a conservative financial position, including remaining fully funded for all our capital and maintaining access to significant liquidity.
At the end of the quarter, we are only CAD 95 million drawn on our CAD 750 million credit facility, with about CAD 45 million of cash on the balance sheet, implying we have access to a net CAD 700 million through our credit facility, as well as to over CAD 100 million in unutilized capacity on our CAD 150 million bilateral demand facilities. Given our outlook for capital in 2020 of about CAD 300 million, we will carry out some funding capacity into 2021, meaning we have clear line of sight to funding the 2021 capital program, with cushion on top of that.
During the quarter, we also took further steps to continue to move from a high yield to an investment-grade capital structure. In July, we completed the refinancing of our 5.25% 2024 notes with two tranches bearing an average coupon of 2.65%, cutting our annual interest costs on that CAD 600 million almost in half, while also extending the average maturity by two years. Through this refinancing, as well as the one completed in September of last year, the weighted average coupon on our notes would be by far the lowest within our Canadian mid-size peer group at just over 3%.
At the same time having the second longest weighted average tenor. In total, these steps have reduced our interest cost by over CAD 20 million per year, meaningfully improving our conversion of EBITDA into distributable cash flow. At the end of August, we put in place an NCIB. I think that this very much speaks to the strength of our financial position, where not only is our capital fully funded without the need for a DRIP or discrete equity issuance, but we are also one of the very few midstream companies in North America in a credible position to return capital to shareholders via buyback over the next year.
That said, we expect our use of the buyback to be fairly modest, if at all, throughout the balance of the year. It is our intention to provide additional visibility on how we will utilize our NCIB as part of our 2021 capital outlook in December. Though, given our conservative bias and stated policy of buybacks being a mechanism to return excess cash from marketing outperformance to shareholders, I suspect that our willingness to begin a meaningful share buyback will be somewhat limited until the outlook for marketing improves.
In summary, the business had another good quarter. Our infrastructure segment had a very strong quarter, and marketing was within our long-term run rate expectation. We don't count on marketing outperformance; hence, we very much remain on plan, in a position to continue to execute our strategy. We remain well-positioned with a resilient business. We have market-leading quality of cash flows, a strong balance sheet, and are more than fully funded. At this point, I will turn the call over to the operator to open it up for questions.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Jeremy Tonet with JP Morgan. You may proceed with your question.
Hi. Good morning.
Good morning, Jeremy.
Just wanted to start off, there's been some M&A in the industry so far, notably Cenovus, Husky. I think there's been some debate in the marketplace in how this could impact Gibson. Just wondering if you might be able to comment on that a bit.
As far as Cenovus and Husky, when we look at our terminal, and I think I talked about it in our remarks, we think that we provide the greatest synergies in netbacks to any producer at Hardisty. We're confident in any business that we have with those two companies will remain, and we'll continue to improve their netbacks and optimize their crude streams into the future.
Got it. Could you, I guess, just refresh us on your weighted average contract duration for Hardisty as it stands right now?
Yeah, I don't have that number. Do you have that number?
Yeah. Jeremy, it'd be just under 10 years. We don't really distinguish between Hardisty and Edmonton in general, but if you think about it, circuits sort of nine-ish years would be the weighted average across both terminals. Reflective of the tankage that we've put on even more recently and just the absolute longer duration of the contract that we're able to achieve.
Got it. It seems like nothing could change for a long time anyways, regardless. That's helpful. Thanks. Separately, kind of pivoting towards capital allocation here. You talked about it in the prepared remarks, but hoping for a bit more here, and how you evaluate dividend increases versus buybacks versus increased CapEx in 2021, seeing that you have this financial flexibility here. Really, how does leverage fit in? Do you worry that carrying such low leverage could lead Gibson to being a takeout target at kind of depressed equity levels?
Yeah. Why don't I take that? Our capital allocation philosophy has been very consistent. We first introduced it at our January of 2018 Investor Day. First and foremost, to the extent that we have capital growth opportunities that are very much in line with what we typically invest. Think 5x-7x build multiples, long-term contracts with investment-grade counterparties. That's going to be absolutely our capital allocation priority. If beyond that, we have excess cash flow, and that, by definition for us is outside of our target leverage ranges, then really the capital allocation philosophy is dependent on where that excess cash flow is coming from.
We talked about it a bit in our prepared remarks, to the extent that that excess cash flow is coming from our infrastructure segment, then we would bias dividend increases over time. We had our first dividend increase since 2016 last year. To the extent that excess cash flow would continue to come from that, we would bias annual dividend increases. Of course, that is very much a board decision and one that we only discuss annually on the back of our year-end results in February.
To the extent that that excess cash flow comes from our marketing business, then we would bias a share buyback . Really nothing has changed from a capital allocation philosophy. You also asked about leverage. Perhaps I'll start on that answer and then Steve can finish it off. We remain firmly committed to our leverage targets that we've put out. Again, these have not changed since our January 2018 Investor Day. As a reminder for everybody listening, that's three to three and a half times on a consolidated basis, four times or less on a infrastructure-only basis. As we sit here right now, you're absolutely right, 2.7 x, well below the consolidated target.
The question about whether or not lower leverage makes us the target, at the end of the day, we're here for our ultimate shareholders. We think having this conservative leverage profile is absolutely the right thing for the company and for all of our stakeholders. Something like that is not something that we take into real consideration as we think about what the appropriate targets might be. I don't know, Steve, do you want to comment on the second half of that, just in around potential for takeout or whether or not we're worried about our vulnerability?
At the end of the day, probably one of the most precious assets that we have here at Gibson is our balance sheet. That strong balance sheet has served us well. We're going to continue to have our conservative view when it comes to balance sheet.
Got it. That makes sense. I'll stop there. Thank you.
Thanks, Jeremy.
Thank you. Our next question comes from Patrick Kenny with National Bank Financial. You may proceed with your your question.
Hey, good morning. I'll start with marketing as well, and I appreciate the transparency into Q4. Perhaps looking into 2021, based on what looks to be similar modest contango environments, pipeline egress filling up and still relatively tight differentials, would you say you have a bias to the lower end of that CAD 80-CAD 120 annual guidance? Or are you seeing other factors, again, as we sit here today, supporting confidence in still being able to achieve or exceed the midpoint of the guidance range?
The CAD 80 million–CAD120 million , we've put that out there for a while now. It's difficult to say where we'll land, because next year is a full year. This year, we're going to be on the top half of that CAD 80 million–CAD120 million at the end of the year. Next year is hard to say, right? All I know is that we'll be poised to capture opportunities as they develop, and excited about the recovery for crude oil, for refined products sometime next year. As that recovery starts, our margins across Moose Jaw will gain steam.
We think the differentials between WTI and WCS will become more normalized across the year, which continues to drive revenue at our Moose Jaw facility. Sean, why don't you answer that last? There's another piece on the adjusted EBITDA .
Yeah. Again, what Steve's talking about there is very much on an as-reported basis. I guess, just to summarize that, I'd say we very much, if somebody asked me where should we be next year, I'd say CAD 80 million–CAD120 million absolutely. We've got confidence in that like we do always. This is a business where we've got an extremely talented team that's able to find opportunities. I certainly wouldn't point to bias to being at the lower end as we sit here right now, Pat. The second part, I think maybe just to address it.
Steve had talked about being at the higher end, we did have some noise this quarter in around the unrealized gains or losses that we see there. Just to address that. I said it in my prepared remarks, but this is something we very much, we'd expect to even out over the course of the year, and we've largely seen it. Though we had an unrealized gain of CAD 11 million this quarter, which we saw in some notes, people were calling it a realized marketing segment profit. We would highlight that we had a CAD 20 million loss we looked through last quarter as well.
For us, this is absolutely normal course of the business and how we run it and would expect that it normalizes over the year, which it largely has as we sit here today.
Okay, thanks. That's great color. Then just zoning in on the export pipelines, again, filling up out of Hardisty. Wondering if there is a Biden victory tonight and assuming he does follow through and take back the presidential permit for KXL, if you would expect an increase in the level of discussions that you're having around a second phase for the DRU, say over the next few months. If third-party demand isn't there right away, would you guys consider building a second phase for your own proprietary use and increase your opportunities around locational arbitrage on the marketing side?
Yes, Pat. I would say, if there's a Biden victory, he's made some pretty strong statements about KXL and the KXL expansion. I would say that is more positive towards the DRU. Overall, we would love to see the KXL move forward. Because we think long term, over the next 10 years, that we're going to build a lot of tanks to help support KXL into the future. In the short term, you're probably correct. That's going to drive more interest in the DRU, especially the U.S. refiners.
As those crack spreads start to return, their demand for that Canadian crude continues to get stronger as the Venezuelan and the Maya Mexico crude continue to decline. A lot of the interest that we had pre-COVID was driven by those big U.S. refiners that wanted that neat bitumen to maximize the refinery runs. We think as that normalizes back on refined products demand in the U.S., we're going to see that interest rematerialize next year.
Just to confirm, not much of an appetite to build the second phase for your own marketing group?
No. I don't think we haven't even considered doing anything on spec like that. Yeah.
Got it. Okay. Just last one from me, guys, if I could. On the ESG front, you made quite a bit of progress here in just a few months. Can you maybe just walk us through some of your top priorities between now and, say, the end of next year, either on the disclosure front, setting new environmental targets? On the back of that, maybe just given the tough crowd out there for oil-related investments in general, just how are you guys thinking about shifting that narrative around your asset base being tied to the oil sands and instead being viewed as more of an ESG accretive holding for investors?
A great question. First, just on the disclosure front, we did submit our first CDP disclosure this year. We should be getting our ratings back probably early next year. Our main emitter is Moose Jaw. We continue to look for opportunities to reduce our carbon footprint at Moose Jaw, and we've come up with a couple of projects that have that better than five times payout and reduce our hydrocarbon footprint there. We continue to look for opportunities to reduce that carbon footprint. If you look at us overall to other midstreamers, we don't run the compression, and we don't have the big, large mainline pumps.
Our phase I and phase II is extremely low on a per revenue basis and on a per barrel throughput basis. I think it's very difficult for really anyone in North America to compete with us on a midstream basis in our sector just because of the type of business that we have. As far as looking at other opportunities, we will look for other opportunities to spend into that sector. As we develop our strategy, that's one of the items in the strategy that we will take a look at, but we've made no decision on how we'll do that.
Okay. That's great. Thanks, Steve. Thanks, Sean. I'll leave it there.
Thanks, Pat.
Thank you. Our next question comes from Robert Kwan with RBC Capital Markets. You may proceed with your question.
Good morning. Just wondering whether it is comments as it relates to discussions for new infrastructure or your outlook for marketing to 2021, is there anything that you see in terms of the lifting of the curtailments that could be helpful to you?
Well, the lifting of the curtailments, I think, was about 75,000 bpd . Also, we've had significant outage in the Oil Sands. As those come online, along with the lifting of the production restrictions, That's where I was saying WCS to WTI tightening across the year as that occurs. I mean, widening across the year as that occurs. Which will help really our Moose Jaw facility in driving that margin from the refined product sales, which is based really on a U.S. kind of Gulf Coast refined products pricing and the WCS or heavy crude pricing coming from Canada.
Got it.
That's one of the reasons we're more positive in staying within that CAD 80 million–CAD120 million next year, Robert.
Okay. If I can maybe just turn to capital allocation, you've talked about marketing outperformance being tied to the NCIB. Just wondering, though, if you see Western Canadian infrastructure investments coming in below your expectations, you also put out $25 million-$50 million in the U.S. infrastructure. What's the bias then? Would it be to put more money above that $50 into the U.S., or would you then look to the NCIB for excess capital?
Thanks, Robert. Maybe I'll start that, Steve can backfill as necessary. We are not going to chase capital based on our financial position. The visibility we have to the U.S. right now is the high-quality projects that are in front of us. We're going to remain very disciplined as we look to deploy that capital. We'll not chase it because we view ourselves as having excess capital. If additional projects surface, as I said earlier on my capital allocation answer, if additional projects surface that have the criteria that we typically are able to sanction, then absolutely we deploy it there.
We're not going to look to go above that just because we have that excess capital. That's what we really like about the NCIB. It does allow us to remain disciplined to the extent that we have excess capital above the growth capital projects that we see with the characteristics that we typically invest in. We'll either allocate that to the NCIB and/or dividend increase, depending on the source. We're certainly going to remain disciplined as we think about allocating that growth capital and are not going to look to chase it.
Yeah. If you just look at that capital outlook next year. We do have the $25 million and $50 million in the U.S., but we have the DRU spend, we have projects at Edmonton that are not tankage, that are pretty significant size, that we continue to progress. We do believe that we will sanction some tankage next year. In that, we'll have some capital spend from that tankage, with the majority of that tankage spend probably being really 2022.
Understood. If I can just finish then with marketing and trying to deconstruct Q3, but as well, just how that feeds into your Q4 guidance. On the second quarter call, though, you, I think, mentioned that you expected EBITDA to be fairly close to segment profit, and then a couple of things that can move it around would have been any commodity price movements, which didn't look like they occurred during the quarter, or if you just deferred crystallizing positions. You did end up with a very significant unrealized gain.
Can you just square up what you said in Q2, how that fed into Q3, and why Q4, then, we didn't see that spill over?
Yeah. Robert, when we exited Q2, we had pretty significant inventory that was hedged, and a lot of those hedges were hedged into the fourth quarter. We just brought those hedges forward and into the third quarter. That's the exact change of our expectation, is we just pulled those hedges forward. We did say, don't look at the adjusted EBITDA of that CAD 19.6 million, which we knew that we had these hedges out there. Some of them actually extended into 2021, we pulled all of those forward into this quarter.
I think too, Robert, just to clarify that. As we've liquidated all the positions. Our expectation is because we pulled those forward, that for Q4 segment profit and adjusted EBITDA will actually be very close. Again, as Steve said, because we pulled those forward from Q4 into this quarter. You're absolutely correct in your question, and Steve clarified why.
Okay. Did you anticipate pulling those forward when you had the call in Q2?
Nope. It was a strategic decision we made during the quarter to do that. On the Q2 call, you're absolutely right. We had indicated that we felt like segment profit and adjusted EBITDA would be very similar, which would imply that those would have stayed through to Q4, even into 2021, as Steve noted. As we moved through the quarter, for various reasons, we elected to move those forward into this quarter. That was not our expectation at the time, and it is a variance to what our messaging was last quarter.
If you pulled those realized gains forward and crystallized into Q3, doesn't that mean that the underlying in Q3 was even worse then?
No, the segment profit of CAD 23 million is really right where we expected. The unrealized gain, if you look across the year, just like Sean said, the unrealized gains and losses versus segment profit is virtually CAD ± 2 million or CAD 2 million or CAD 3 million. I think it's actually plus, and that's because we carried in some gains from last year.
That's great. Thank you.
Thanks, Robert.
Thank you. Our next question comes from Linda Ezergailis with TD Securities. You may proceed with your question.
Thank you. I have a question just to follow up on implications for Gibson on upstream producers and integrated consolidating. You touched on that your existing operations should remain strong and contracted, but I'm just wondering what sort of emerging opportunities and challenges there might be, not just as it relates to how larger consolidated producers might change their use of tanks and sanctioning of new tanks prospectively, but also, as it relates to opportunities that your marketing business might have with fewer producers and integrated, potentially, in the markets physically and I guess financially on the marketing side.
Also as it relates to, over the long term, your U.S. strategy and the potential merits for DRU being higher or lower for certain consolidated producers.
Thank you for the question, Linda. As producers consolidate, I think the demand doesn't change the overall demand for tankage. They still need that number of days of storage, and they still need the same blending services that we provide. I don't see it actually changing. Hardisty is not overbuilt, and so that's one of the reasons we're really remain confident on recontracting at Hardisty.
Actually there is some opportunities to continue to expand there as we move forward. If you look in the States, the consolidation in the States really has no impact whatsoever on us as the small producers consolidate there. I'll turn it over to Sean and see if you have any opinion t here.
No. I think consolidation in general is good for the sector. It's going to cut costs out of the sector, and having strong customers is good for everybody, certainly in Western Canada and across North America. So, we would be a fan of consolidation in general because it cuts costs out of the sector and creates stronger counterparties.
As Steve said, Hardisty is not overbuilt. Even a stronger counterparty are going to have the same amount of production, they're going to need the same amount of tankage. So, in general, we would view the consolidation trend that we're seeing as being marginally positive for us because it's going to create stronger counterparties for the company.
How might it affect your marketing operations over the long term and just the opportunities that present themselves in the markets for your marketing segment?
Yeah. I haven't seen that's going to impact our marketing business at all. If you look at our marketing business, the main focus is the refined products business there in Moose Jaw. There is marketing opportunities at Edmonton and at Hardisty around some tankage that we do have there. I don't see the consolidation playing a big factor in that on a go-forward basis. I have not heard that that is a concern at all coming out of our marketing organization.
Okay. Thank you for that context. Just as a follow-up, with regards to your capital allocation decisions, as the industry is in flux, some acquisitions might come up opportunistically for Gibson, whether it be tuck-in acquisitions or larger ones. For example, if producers that own assets or steel huggers decide to shed select assets or your competitors, how does Gibson evaluate the opportunities and the merits of acquisitions versus other priorities?
I think I talked about that earlier. Probably one of our most precious asset is that balance sheet and preserving that balance sheet. If there are opportunities that do develop, the balance sheet is probably going to be one of our number one drivers in any kind of decision. That quality of cash flow and that length of term and that counterparty risk is all going to be very important to continue to assure that we have that balance sheet. We continue to look like the type of investment that we are today.
Thank you.
Thank you. Our next question comes from Rob Hope with Scotiabank. You may proceed with your question.
Morning, everyone. Just one follow-up and clarification. Steve, in the prepared remarks, you made a comment about the lower end of the two to four tanks per year. Just a question there in terms of the timeframe you're looking at. Are you looking at 2020 there, or is the expectations that there'll be no tanks in Q4, and that will be at the lower end of the range in 2021?
Yeah. When I made that comment, the two to four tanks, I think that was really over a longer period of time. Right? Really over the next four to five years is when I made that comment. Because I said that really this year, that's gotten pushed into next year. These tanks do come lumpy. If you look at last year and the year before, they're pretty lumpy as far as when they're contracted. Really when I made that lower end of two to four, that's in a longer-term context. Really over the next four to five years.
Okay. Maybe just diving in that a little bit deeper. That implies that some expansion at Hardisty could be pushed into 2021, and then on top of that, you could get some TMX tanks towards the end of the year?
Exactly right.
All right. I appreciate that. Thank you.
Thank you. Our next question comes from Robert Catellier with CIBC Capital Markets. You may proceed with your question.
Hey, good morning. Most of my questions have been answered at this point. I did want to thank you for the transparency on the marketing business, in particular, your statement about not wanting to change your risk tolerance to chase opportunities in a weak market. I just want to make sure I understand both the Q4 and the long-term guidance as it relates to unrealized gains and losses. My understanding is that despite the unrealized gain that was recorded in Q3, the expectation is that segment profit and EBITDA in Q4 will be very similar, close to that breakeven point you mentioned?
Yep. That's absolutely correct, Rob.
The same thing for the CAD 80 million–CAD120 million long term. Obviously, some quarters you'll have gains and some you'll have losses, but is the overriding assumption there that the segment profit will be very similar to the EBITDA and that the gains and losses will fluctuate a bit, but those two numbers will be the same?
Yeah, that's absolutely right. That's really what we tried to get out in the prepared remarks, that over time, those are always going to be the same. I mean, just for example, if you look at last year, through the quarters, we had a gain or a loss in each individual quarter from the unrealized. Q1 was a CAD -3.4, Q2 CAD +6.7, Q3 CAD -12.2, Q4 CAD +6.3. You saw over the course of the year, the net impact was like CAD 2 million on a CAD 197 million marketing segment profit. Again, over time, our expectation, and they have to, they're going to be basically zero.
That's absolutely right.
That CAD 80 million–CAD120 million , it seems over the course of the year that segment profit will equal adjusted EBITDA on a marketing basis if we reported like that.
Yeah, that's what I thought. Just my last question here. You touched on the curtailments a bit. I'm just curious as to what you receive from producer behavior in terms of the volume outlook. On the one hand, the curtailments were looked at, but at 75,000 bbl , maybe not that impactful. At the same time, we still have pretty anemic prices. Did you get a sense on sort of direction of production from the producers?
I would just say that 75 coming on, I would say the conventional production in Canada is still kind of down that 20%-30%, conventional heavy and conventional light combined. In the oil sands projects, there are still several out there that are struggling to come back on to full production. As those oil sands projects come into full production and the restrictions are lifted, you're going to see inventory start to build again, and you're going to see the need for rail. We're already starting to see that at Hardisty.
From May through August, we did not load a rail car out of Hardisty. We loaded a couple out in September. We're going to load a couple more out in October, but those nominations continue to grow as this production starts to come back online. We saw record low inventories in Canada, and that was just as we had more egress capacity than we had production for a couple of months there.
Okay, that's helpful. Thank you.
Thanks, Rob.
Thank you. Our next question comes from Andrew Kuske with Credit Suisse. You may proceed with your question.
Thank you. Good morning. Probably first question's for Sean, and it just relates to what was a pretty noisy quarter in the upstream with things like the Polaris outage and just some other issues with the oil sands producers. If those things didn't happen, is there a way to get a sense of how your quarter would've looked either on the infrastructure side or the marketing side? Do you have a feel for that?
Specifically, no. It's a loaded question with respect to marketing, because what would have the impact been? I think Steve talked to about it. Right now it is a bit of a sideways market for marketing. There's not very much volatility. Differentials are relatively narrow. Flat price is low. Specific to Polaris, I don't see that making a huge difference. On the infrastructure side, we actually think we had a pretty good quarter, and that business continues to trend. I haven't put thought specifically to what would be the impact if Polaris hadn't come down.
I don't think it actually would've had an absolutely material impact if you think about sort of the specific factors within the quarter.
Okay, thank you. Just as a second question, could you just give an update on your land bank position, both in Alberta on the number of tanks that you think you can build over a longer period of time, and then also at Wink?
Yeah. I'll start it. We've talked about it often. At Edmonton, we've got the ability to add roughly 2 million barrels or just slightly over 2 million barrels. At Edmonton, we are space constrained. At Hardisty, we're not space constrained. We've got, directly south of our terminal, 240 contiguous acres connected to our terminal. Even after we finish the build-out of the top of the hill, think of that being circa 15 million barrels, we're confident that we could double that footprint directly contiguous to what we have.
Even if that got built out, we've got additional land out near the unit train facility that we would next tie into. From a Canadian perspective, Hardisty, basically unlimited land. Edmonton, we are constrained, we're constrained similar to everyone else there, we've been fairly open about that. I don't know, Steve, do you want to talk about our land position at Wink?
Yes. We own 320 acres there in Wink. We're really not limited in any facet at all. We can build over 12 million barrels of storage at Wink if need be. Just building on what Sean said, we still have room to add 1.5 million barrels in the top of the hill. What that means is that the very competitive, we always say five to seven. That means that most, if not all the infrastructure's kind of built for that. We can be very competitive if any additional tankage need to be built there at Hardisty.
Maybe just a final one, if I may. It relates to Wink. Just given the market dynamic we see in pockets in the U.S. and in particular in that sort of neck of the woods, would you be better off buying versus building at this stage in time?
Buying tankage at Wink? There is no real tankage at Wink, except for Wink's kind of the launching point for the EPIC, the Gray Oak, the big Exxon pipeline. That's the launching point out of the Delaware Basin into the U.S. Gulf Coast. The tankage being built there, we're the only ones really offering any real storage to the customers there. Our strategy was to connect to those pipelines, and we're continuing to move forward. We're already flowing on one. We'll be flowing on another one here in about a month and a half, and another one in the second quarter of next year.
With that, one of our philosophies was is those pipelines are going to be overbuilt, and in them being overbuilt, that the shippers are going to want. There's going to be a large sucking sound to try to get volumes onto those pipes. We wanted to provide that tankage and connectivity to allow those producers to connect with those marketers. That strategy continues to play out, and we think it'll be an effective strategy.
You can build out Hard.
Go ahead.
Sorry. You can build out Hardisty South effectively.
Yes. It's somewhat. Even in my prepared remarks, I said we're connecting to third-party gathering. We look to connect to two third-party gatherers by the end of the year. With that, we're just trying to drive liquidity and volume through our terminal and provide that kind of Hardisty type of opportunity for either the producer who's trying to find the depth of netback or an end-user shipper on the pipeline that needs supply to fill their commitment on that pipeline.
That's great. Thank you.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mark for any further remarks.
Thanks, Josh, and thanks to everyone for joining us on this third quarter conference call. Again, I'd like to note that we made certain supplementary information available on our website, gibsonenergy.com. If you have any further questions, please reach out to us at investor relations at investor.relations@gibsonenergy.com. Hope everyone has a great day, and thanks for joining us today.
Thank you, ladies and gentlemen. This concludes today's conference call. Thanks for participating. You may now disconnect.