Earnings Call: Q1 2020

May 5, 2020

Good morning, ladies and gentlemen. Welcome to Gibson Energy's First Quarter 2020 Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mark Hitzchess, Vice President, Strategy, Planning and Investor Relations. Mr. Hitzchess, please go ahead. Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our Q1 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, and thank you for joining us today. I hope everyone on the call and their families are healthy and doing well. It would have been very difficult to predict the changes across the world at our last earnings call in February. COVID turning into a global pandemic and largely shutting down major parts of the world economy. This has created undoubtedly the most challenging environment in my 30 years in the industry. Our first concern is protecting our employees and contractors, their families and the communities we're part of. At peak, we had 32 employees in self isolation, primarily due to travel. Currently, that number is 5. I'm pleased to say we have no confirmed COVID-nineteen cases within our organization today. And we continue to safely operate all our assets. We began the transition of operating the business remotely in 2nd week of March, and all office work was moved to people's homes on March 17. At our terminals, we split our control room staff into 2 separate groups and are operating from both our backup control room and primary control room to reduce interaction between staff. We put social distancing and other practices in place to ensure we can safely continue construction of the tankage at the top of the hill at Hardisty as well as begin civil work for the DRU. At Moose Jaw, we plan to begin our annual turnaround next week, which we delayed a month and extended the time to ensure a safer environment for our employees and contractors on-site. With the steps we've taken, we are confident in our ability to continue to operate our assets and our business. As a leadership team, our focus is not just business. As always, we are focused on the well-being of our employees. We have put an emphasis on communication and encouraging our employees to take care of themselves and their families. Overall, I believe the morale at Gibson remains very positive given the circumstances, and we're working well as a team. One example of just that was our U. S. Team that started a head shaving challenge for charity. It caught on through our internal chat and within a couple of days, we were able to raise over $150,000 for charity focused on COVID relief, including both our CFO, Mr. Sean Brown and our Chief Administrative Officer, Mr. Sean Wilson, both shaved their hair. This is a great reflection of our Gibson culture. From our business standpoint, Gibson today is a very resilient company. Through the changes we have made over the last 3 years, we've gone from bringing the most exposed to what I believe to be the best positioned within our peer group to weather this business environment. With our strategic shift to focus on crude oil infrastructure, we disposed of all of our commodity sensitive businesses. By transforming into an infrastructure company, heading into this downturn, our terminals were about 70% of our business and 80% of our cash flow were take or pay and stable fee based. Only about 5% were those more sensitive midstream gathering assets. These are our pipelines and our small terminals in Canada and the pilot system in the U. S. We're also very strong financial position. Coming into the downturn, we had the lowest leverage and payout in the peer group. The capital program is fully funded with a cushion. We have access to ample liquidity. And as I said before, this is a challenging time for our industry and our customers, but I have no doubt we have transformed this company to weather this storm. Though it might get lost in the focus on the present, the strength of our underlying business was visible in the Q1. We set a new high for distributable cash flow on a continuing basis. More importantly, it was driven by infrastructure, which has grown over 30% in the last year. Sean will provide more color on the Q1, our financial outlook and our financial position. I would like to go into more detail than normal, but what we're seeing in our business through this downturn. At Hardisty, we're seeing a reduction in throughput volumes. This includes volumes coming in from the oil sands as well as conventional volumes from our pipelines and our truck ramp. We continue to monitor our customers' plans around shut ins. Hardisty and Edmonton outperformed our expectations in the last quarter. However, we do expect the producer shut ins to impact margins across the next few quarters. When you combine the outperformance with the weakness, we expect to be right around what we've budgeted for, for the full year. We've done some sensitivity analysis around the impact of a reduction in 3rd party volume and believe the impact will be modest. We estimate a 20% a 25% decrease in oil sands receipts would equate to a $1,500,000 to $2,000,000 reduction in segment profit per quarter. I would note today at our terminals, we've not had any customers approach us regarding a force majeure. Given how valuable storage is right now, I would be very surprised if the customer wanted to go that route. We have had a lot of short term interest in storage. However, we are 100% leased. Based on our customers at our pipelines and small terminals, we do expect to see meaningful reductions in this part of the business. For context, this is about 5% of our EBITDA. Our Viking pipeline is underpinned by a percentage of take or pay contracts. Also, we see the Viking well is among the most economical in the basin. Hence, we currently expect shut ins to be limited on the Viking pipeline. That said, we don't expect to see much drilling activity and volumes will continue to decline from current levels until activities recover. On the small terminals, which really help us drive conventional volumes to our main Hardisty and Edmonton terminals, we've seen a decrease in volumes and expect further decrease based on nomination. There is a potential for volumes on these small terminals and pipelines in Canada to be down as much as 50%. In the U. S, contributions from PiYo was limited in the Q1, and we expect volumes will increase over the balance of the year as several well and battery tie ins are completed. We currently don't expect major shut ins from our shippers. We do believe there will be weakness to the gathering business. However, it is expected that, that will be offset by the upside in the marketing business around our assets. At Moose Jaw, the current environment is challenging. Sales volumes have decreased and margins are compressed. And as I've mentioned earlier, we will be having the extended turnaround this year to reduce COVID related risk. As a result, we expect refined products to be especially weak in the Q2 and look for a recovery at some point in the second half. Given all the variables at play, it's very difficult to predict how and when markets for our products will normalize. Speaking to some of what we're seeing, many of our Roofing Plus customers have slowed down production under COVID-nineteen mitigation. Typically, roofing plugs is driven by weather in the U. S. And we would expect demand to normalize in the second half of the year. We still expect we will see paving season this year. One upside to our view would be if we saw stimulus through infrastructure spending. We expect demand for our light ends will be tied to distillate crack spread. In all this, this is a part of our business where we need to remain agile to what we see in the product market. Right now, we are running the facility all out ahead of the turnaround to take advantage of inexpensive crude and filling our tanks and tank car fleet with products. Looking out through the rest of 2020, we continue to expect refined products to remain profitable after all payments on its fixed costs, but the contribution to the marketing will be muted versus recent years. However, despite the expected contribution from refined products, we still anticipate the marketing segment to contribute over $100,000,000 in segment profit this year or the midpoint of our long term run rate. We had a strong start in the Q1. Importantly, because we run a flat book, we did not get caught by the substantial shift downward in WTI. With the compression of spreads, most of the location and quality based opportunities we saw in Q1 are no longer available. Instead, we're seeing opportunities created by significant volatility as well as steep contango and futures curve. With the tankage that marketing has available at Hardisty, Edmonton and Moose Jaw, we will be looking for opportunities in this environment. We believe there still needs to be more shut ins in North America to better align supply and demand as storage fills up. Our basis will be to remain conservative even in the context of our strong position today. On OpEx and G and A, we've taken a hard look at our across the organization. Activity will decrease because of the shut in on some of our assets, and we will delay certain work. In our review of G and A, we've identified certain costs as a result of savings as a result of working from home. Certainly, business travel has been impacted. We have identified around $10,000,000 to $15,000,000 in cost savings from OpEx and G and A. We also need to maintain the integrity and safety of our assets. We thoroughly review maintenance capital and we're able to reprioritize or defer a number of projects. Unfortunately, we have an unbudgeted project to replace a river crossing costing us $10,000,000 With these actions and the unbudgeted project, we still expect to be within our $20,000,000 to $25,000,000 target for the year. On the growth capital front, we remain fully funded with a cushion on top of that. We have liquidity to spend that capital within our governing financial principles. Still, we've sought to remove or delay effectively all discretionary spending. Given the highly contracted nature of our capital program, there was limited room to cut within the $300,000,000 budget. Most of the spend this year is on the DRU and the 3 tanks at Hardisty. As these projects are backstopped by high quality counterparties under long term contract terms at very attractive rates of return. And given the demand for tankage right now, that's the type of capital you would choose to cut only if you did not have the means to spend it, and we certainly do. In the U. S, our growth capital program was weighted in the front end of the year. GAAP capital spend from this point forward will strictly be to complete late stage projects and fulfill contractual commitments. In all, we expect growth capital to be around or slightly below that $300,000,000 figure. As far as the potential for sanctioning additional capital through the balance of the year, a number of commercial decisions and discussions have been really paused. The exception would be at our terminal. We continue to be in discussions for additional tankage and supporting infrastructure and are optimistic to announce those this year. These are long standing negotiations on detailed contract language. We're also getting interest in tankage at WIG. So these conversations are far more preliminary. In all, we still expect to be within that 2 to 4 tankage range. At the DRU, we are full go on the first 50,000 barrels a day with ConocoPhillips. The binding commercial agreements were finalized at the start of the year. We have all the regulatory approvals from the province and we started pre construction work at the site. Discussions to expand the initial phase to 100,000 barrels has paused in the current environment. Our expectation is those conversations will resume once we have visibility on how the recovery will look. That likely pushes the sanctioning of future phrases into 2020 one. We are very comfortable with the returns on the initial phase. That capital is being deployed within our 5 to 7 times EBITDA build multiple target and also locked in long term for both our HERC unit train facility and our tankage. Given our conservative approach, it's going to be very hard to deploy capital unless it's backstopped by investment grade counterparties under our long term take or pay contract. Perhaps we will find some high return projects, but overall, we expect very limited spend outside of our terminal unless activity recovers. One last thing I want to mention in my prepared remarks is our focus on ESG has not changed despite the downturn. ESG is a journey. And if you stop moving forward, we're going to keep up with the shift in social and market expectations. For this reason, we are very excited to issue our inaugural sustainability report. I would encourage everyone on this call to review the report to see the progress we've made. On this call, we're focusing on the operational and financial aspects of our business. But I hope you will join us in our virtual AGM later today where I will address sustainability in more detail. In summary, our first priority is to keep our people and their families safe and ensure the continued operation of our assets and our business. I'm very pleased with our response to COVID, especially the positive attitude and engagement we are seeing from our employees and contractors in this very difficult time. Our business is resilient. We certainly did not see this downturn coming, but as a result of the changes we've made to our business over the last 3 years, we are very well positioned. 70% of our EBITDA is from our Hardisty and Evanston terminals. These are primarily long term take or pay agreements with high quality investment grade counterparties. We remain confident that marketing will be over $100,000,000 for 2020. Moose Jaw is expected to be weak, but we have multiple strategies to drive profitability in our marketing business. Our financial position is very strong. We are fully funded and leverage and payout both remain below our long term targets. I will now pass the call over to Sean. Sean? Thanks, Steve. Similar to Steve, I will look to focus my comments on where we are today and what we are seeing. But I think reviewing the quarter briefly will help ground expectations for the business over the next few quarters. As Steve mentioned, we had a very strong first quarter, setting new high watermarks for both the infrastructure segment profit and distributable cash flow from continuing operations. Looking at infrastructure in a bit more detail, Segment profit of $98,000,000 was a bit ahead of our expectations. A small part of that was at Hardisty, where we typically don't see a lot of variance in our earnings due to volumes. But this quarter, we saw at least one customer move volumes well above normal levels, incurring additional throughput fees. We also saw some spot trains loaded at the HERC unit train facility. I would add that at our HERC unit train facility, we will continue to collect on our take or pay agreements in any environment, though we will likely see very minimal use of the facility until shut in volumes are back online. While a minor impact to the quarter, we certainly saw a contribution from our pipelines and other terminals decline into March. And as Steve mentioned, that will likely become more pronounced next quarter. We also had a positive noncash adjustment related to the accounting of 1 of our equity investments, resulting in a benefit of approximately $4,000,000 though I would note that could reverse in the future. Turning to our expectations for the Q2. When you take into account the items I just mentioned as well as the extended turnaround at Moose Jaw that Steve spoke to, our expectation for infrastructure to come in between $80,000,000 $85,000,000 If you think sequentially from the Q1 results of $98,000,000 and adjusted the $4,000,000 noncash adjustment, include a roughly $5,000,000 decrease at Moose Jaw due to the turnaround, up to a $5,000,000 decline at our pipelines and stall terminals and potentially a small reduction at our terminals that gets you to the $80,000,000 to $85,000,000 figure. I would note, though, that the Q2 will likely be the low point for infrastructure, and we would expect a somewhat steady recovery to the balance of the year. Overall, we expect infrastructure will be at or around $360,000,000 or modestly below that for the year. For context, that would put us at the low end of our original range of $360,000,000 to $380,000,000 in Infrastructure segment profit for the year. With the 3 tanks coming into service at the top of the hill in the Q4 and assuming a recovery in volumes, we continue to expect infrastructure would reach a quarterly run rate of approximately $100,000,000 exiting 2020 or $400,000,000 on an annual basis. The Marketing segment's 1st quarter results of $36,000,000 was very much in line with our expectation of the upper end of a $30,000,000 to $40,000,000 outlook. Most of the contribution was from the crude oil business as that group was able to take advantage of various opportunities both before and after the turn in crude prices. At Moose Jaw, we had a reasonable start to the year, but as Steve spoke to, we saw a meaningful impact from decreased refined product demand in March. In terms of our outlook for marketing, right now, based on April results and expectations for May June, we would expect to be at the upper end of our $20,000,000 to $30,000,000 range for the Q2 or potentially higher. To the extent that we move below the upper end of our range, it would be driven by timing where the benefit of some of our positions would not be reflected in segment profit until the 3rd or Q4. From a full year perspective, as we sit here today, we would estimate that we will be at or above $100,000,000 for the year, which would put us in the top half of our $80,000,000 to $120,000,000 long term run rate. We are witnessing some unprecedented events in the market, and with that kind of volatility, there's a much greater probability that something we didn't factor into into our outlook pushes us out of our range within a quarter. That said, we still want to provide as much visibility into our business as we can. When taking into account 1st quarter performance and combining both the updated infrastructure and marketing outlooks provided, you will see that we expect little to no impact to key metrics as a result of COVID-nineteen and the market downturn. This includes combined segment profit, adjusted EBITDA, distributable cash flow and implicitly our payout and leverage ratios. Infrastructure is expected to be at the bottom end of original range or modestly below, and marketing should come in at the upper end, resulting in little to no impact on a net basis. Returning to our results. G and A in the quarter was $9,000,000 which is effectively in line with our targeted $10,000,000 a quarter run rate. As Steve mentioned, we are looking at all costs, but it's too early to assume a lower rate as, while there are clearly savings on items like travel, there are also additional costs in the COVID environment to facilitate working from home. Quickly working down to distributable cash flow on a sequential basis, the first quarter was $10,000,000 above the Q4 of 2019. Replacement capital of $6,000,000 in the Q1 was $4,000,000 lower. This was offset by current taxes being $5,000,000 higher. We also had $7,000,000 of net noncash changes related to adjustments for our equity investment and for foreign exchange included within segment profit. Given our distributable cash flow this quarter was $3,000,000 above the Q1 of last year, the payout ratio remained flat to year end at 62%, which is also well below our 70% to 80% target range. Similarly, our debt to adjusted EBITDA remained at 2.7x, well below our 3x to 3.5x target. Based on our current outlook and consistent with our expectation of a minimal impact from the downturn, we anticipate that both payout and leverage will remain below or within our target ranges. Recall that as part of our financial governing principles, we want to keep our leverage on an infrastructure only basis at or below 4x, and we target the dividend payout being less than 100% on an infrastructure only basis. We expect to remain compliant with both of these governing financial principles through 2020. And based on sanctioned projects currently under construction, we'll add additional headroom in the 4th quarter when we place the 3 Phase 4 tanks into service at the top of the hill as well as in mid-twenty 21 when the DRU enters enters service. We also have access to significant liquidity that provides additional comfort in case the environment remains challenging much longer than currently expected. As the company continues to grow and given management's conservative nature, in February, we completed an upsizing of the capacity of our credit facility to $750,000,000 and extended the term into 2025. I would note that this increase was completed pre pandemic and as such was done at normal course terms and conditions and does not reflect the premium necessary for some of the liquidity facilities being completed in this market. At the end of the quarter, we are only $50,000,000 drawn on the facility with $55,000,000 in cash in the balance sheet. Effectively, we have the full $750,000,000 credit facility available to make sure we have ample liquidity and flexibility to fund our capital program without having to unduly rely on external capital at times that might not be optimal. In addition to our $750,000,000 credit facility, we have 2 bilateral demand letter of credit facilities totaling $150,000,000 At the end of the quarter, we had issued letters of credit totaling $35,000,000 implying that our total available liquidity, inclusive of these facilities, was closer to $900,000,000 Speaking to another of one of our financial governing principles, you've often heard me say that remaining fully funded is paramount to us. We came into 2020 with the ability to fund over $400,000,000 in growth capital, assuming the 80 $1,000,000 to $120,000,000 long term marketing run rate. Given our outlook for capital in 2020 of about $300,000,000 or lower, we'll likely carry out some funding capacity into 2021. While it may appear conservative only a few months ago, our focus on our balance sheet, our adherence to our governing financial principles and our discipline around capital allocation has positioned us very defensively coming into this downturn. We are very pleased to be in such a position, but it was a lot of hard work to get here. For that reason, we're going to be very prudent through this downturn. We often get the question of whether we will be looking for an opportunistic acquisition or to buy back stock. We believe that liquidity and financial flexibility are very valuable in this environment, and we will remain cautious. Another major benefit resulting from disposing of the non core businesses and with the terminals now being the vast majority of our cash flow is that we have dramatically improved our counterparty profile. Just 3 to 4 years ago, given our business mix at the time, we had much higher exposure to smaller non investment grade counterparties who, in general, are much more impacted infrastructure and more specifically our core terminals business, this counterparty profile has dramatically improved with fully 90% of our terminals' counterparties being investment grade. Even with that in mind, given the heightened risk environment, it's very important to be as proactive as possible to identify potential risks before they become a problem address them, whether that's by securing AR insurance, requesting LCs, requiring payment upfront or absent alternative, making the decision to not do business with the counterparty. Given our consistent focus on our balance sheet, we are also very pleased that DBRS confirmed our investment grade rating and stable outlook last week. As you would have read in the report, they pointed to the rating being supported by our stable, contracted cash flows from our infrastructure assets and our strong competitive position. In summary, we remain in a very solid financial position and are very well positioned to weather this market downturn. While many folks likely won't look into the Q1 results in detail, they do illustrate the strength of our underlying business. As we look into the Q2, we do expect weakness in some smaller parts of our business, but overall, we expect that the impact will be relatively modest. We expect that on a full year basis, there will be little to no impact to key metrics, including adjusted EBITDA, distributable cash flow, leverage and payout. We continue to check all the boxes on our governing financial principles, and we expect that to continue through 2020. Payout and leverage will remain below target levels, including our infrastructure only targets, and we remain fully funded for all our sanctioned capital. These are certainly difficult times for industry and our customers, and there remains a lot of uncertainty on how the next few months will play out. There are many unknowns we are still looking to better understand around parts of our business, but know that our focus will be continuing to be as transparent as we can with our investors and above all that, know that Gibson is on very solid footing. At this point, I will turn the call over to the operator to open it up for questions. Our first question comes from the line of Jeremy Tonet with JPMorgan. Your line is now open. Good morning. I just wanted to touch on the contango element to the market and wanted to see what benefits that could provide for Gibson. I think you noted that all of your storage is contracted, but I believe historically a certain amount was kept it was contracted internally with the marketing arm to be used for operational purposes when there's turnaround. So just wanted to get a sense for what that could look like if there's opportunity there or other opportunities in this market around these types of volatility? Good morning, Jeremy. This is Steve. Yes, when it comes to the contango opportunity, you get to look at Moose Jaw. I mean, Moose Jaw has product tanks and it actually has crude speed tanks. So there is probably 600,000 to 700,000 barrels of just product storage at Moose Jaw itself. And then we do have storage at Hardisty that is contracted to our market organization, but it is fairly minimal. But there certainly is and has been opportunities to collect some of that contango. And we expect that contango to kind of last really across the next couple of quarters. Got it. That's helpful. Thanks. And then just wanted to kind of turn towards the broader marketplace right now. And Steve, as you well know, in the recent past year, Buckeye was acquired by private equity at about 11.5x EV to EBITDA. And on street numbers that Pierce Gibson is trading well below that. And then if I think about Williams, who is concerned with regards to being approached and being acquired at what they viewed as depressed levels. And so that drove them to issue certain protective measures at that point. I was just wondering if you could comment on the dynamics that you see in the market right now, and especially with regards to those 2 data points? Jeremy, I'll comment at first and I'll turn it over to Sean. But I mean our job is to maximize our shareholder return. And in the end, right now, we think we're doing that with our stable cash flow, with our quality of customers. How the actual market looks at us. I mean, whether or not we're undervalued or valued, we're valued in where we are today. Sean? Yes. Thanks for that, Steve. I think I wouldn't really add all that much to that answer. I think if you think of both those data points, I mean, it's a question it's a we get asked that question on both sides. Are we worried about somebody being optimistic regarding us? Or would we potentially be optimistic given relative share price performance? And I guess, Steve said, the management team, our job is try and maximize value for shareholders and that's through executing on a strategy that we think that works. Right now, we don't have an intent to put in place a poison pill or anything like that. That's what you're referring to. But certainly, we'd view at share prices as we sit today that we are undervalued. But at the end of the day, our job is to maximize value to shareholders and that's through delivering our strategy. Our next question comes from Rob Hope with Scotiabank. Your line is now open. Good morning, everyone. First question is on the DRU. Just want to get a sense of how you're thinking about the longer term competitiveness of a DRU in Alberta, which could be having 3 new egress pipelines being Line 3, Keystone and Trans Mountain? So Rob, this is Steve. We've looked at the economics. And in a normal market when condensates trading atorabove WTI, the competitiveness as far as price is head to head with the pipeline transport fees. So it can be competitive. It is an alternative. If and it is a way to actually get neat bitumen to refineries, which is more valuable than a dill dip. And then you've got to think that if those lines do go forward, that's positive for us too, because then we build tankage. We'll build tankage at Edmonton if Trans Mountain moves forward, and we'll build tankage at Hardisty if KXL moves forward. All right. Thanks for that. And then maybe just a clarification on the Q2 other infrastructure outlook. If I understand correctly and if we're going to kind of walk from Q1 into Q2, you did $12,000,000 in Q1 then less a $5,000,000 outage at Moose Jaw, less the $4,000,000 onetime item and then less $5,000,000 of other infrastructure that would bring you into negative EBITDA though. So could we see, I guess, the costs of Moose Jaw outweigh the revenues there? And I guess, a lesser extent, does that bring you to almost breakeven on those smaller pipes? Overall, we'll make money on the smaller pipes. When it looks at Moose Jaw, I mean, it's going to be down 6 weeks in the quarter. And when we looked at it with the producer services and Moose Jaw itself, it is going to be positive for the quarter. Maybe Sean, you can go through the kind of the walking down on the EBITDA a little bit detail? Yes. So Rob, can you walk through, I think it was just sequentially on the infrastructure guide. Is that Yes. On the other, it seems like most of the weakness in the issue will be in other? Yes. I mean, if you look at it, I mean, Steve talked about it in his prepared remarks. If you walk down from the 98 we had in the Q1, you take out the 4,000,000 equity adjustment, which we highlighted, it gets you to $94,000,000 given the extended turnaround at Moose Jaw, the OpEx around that will be elevated this quarter. So take out roughly $5,000,000 for Moose Jaw, and so that would take you down to $89,000,000 And then Steve talked about on our Pure Terminals business, probably $1,500,000 to $2,000,000 impact. That takes you down to the circa call it 87, 88 and then the impact on the small terminals business would get you into that sort of $80,000,000 to $85,000,000 number. So if you assume, call it, a $3,000,000 impact there, you're in $83,000,000 $84,000,000 that sort of range. All right. Appreciate the color. Thank you. Our next question comes from Robert Kwan with RBC Capital Markets. Your line is now open. Great. Thank you. Maybe I can just drill down into marketing to start. So you had the $36,000,000 in Q1 and then if you just look at the guide for Q2, that kind of puts you somewhere in around the $65,000,000 $66,000,000 range for the first half. And then based on the annual guidance, I guess the lower end that that $100,000,000 would be in the mid-30s. So that would put the second half quarterly run rate, well, it's south of 20, somewhere $15,000,000 to $20,000,000 And I'm just wondering, can you talk about that range versus the low end of that $80,000,000 to $120,000,000 kind of long term, what are some of the movements why the second half would kind of put you in that or below the low end? Yes, Robert. This is Steve. We said 100 plus And that means that you would have the 20 in the following quarters or less than 20 in the following 3rd and 4th quarters. I think we're being conservative there. We haven't had a 20 quarter in a while, but this is a very volatile market. So we're trying to be conservative in our approach, which I believe we always have really in the out month quarters of our marketing business. So I guess maybe just Steve with that conservatism, I know this was before your time, but I'm just wondering, can you maybe just frame what you're seeing in the current environment and your current business your current marketing kind of organizational setup versus what we would have seen in 2016 2017 when those years on that IFRS adjusted basis was the lower end of that range? Yes. I mean, Robert, I really don't know exactly what we did in 2016 and before I showed up in 2017. I don't their marketing strategies considerably different than ours today. And the team was considerably different than where we are today. When you look at those strategies today, we've been able to make money as the market falls, as the market goes up, as spreads widen. So we really and I talked about it in my prepared remarks is that really we use multiple strategies, marketing strategies every quarter, sometimes. And I think we do a very good job of running a flat book, which means that we gave you kind of the estimate of $35,000,000 in the quarter. In December, market fell from $55 to the low teens and we still made that $35,000,000 So as you can see, we have a lot of discipline in what we did. So I guess maybe just to finish on marketing. If there isn't a material improvement in kind of the environment, you still have that confidence, say, if we look at 2021 or some sort of indicative 12 month period that the low end of that range or there's some confidence that that's very much an achievable number in the current environment? I mean, absolute price has an impact and it does do some compression in your spreads. But we believe refined products will respond first with demand and we believe there will be government sit seamless on infrastructure, which will drive demand for asphalt. And then if you do keep weak, there is always the internal optimist, which means that you do have the opportunity for contango clays. Got it. And then if I can just finish with Moose Jaw, just making sure I'm understanding all the different pieces. So you highlighted the $5,000,000 that's going to be booked into infrastructure in the second quarter. I think that's just the inter corporate transfer. But when you think about the extension of the outage, I'm not sure, can you are you able to quantify what extending that outage is going to cost, whether it's hard dollars or lost revenues? And just how do you see that playing out in terms of actual impact on marketing versus say budgets? Well, I mean, we're running it full out right now. So and we're actually filling up all of our storage right now at the facility. A lot of the product we're actually filling it up as extremely inexpensive crude oil. And that may have been that's because of some of the hedging that we did on the WCS, the WTI spread and also just locking in kind of the absolute price on the purchase. So we really like the price of the barrel that we put that we're putting in storage right now. And so we actually think we'll have a pretty strong Q3 as we start to move that product into the market. Got it. And if there's not a resumption or payback in demand on the refined product side, basically, just holding the cheap inventory and the sell through will happen, it spills into Q4, it spills into Q4. Is that kind of the way to think about it? Yes. And we don't have to run it all out. So we can pull it back some if we don't find the market for our products. We have very specialty products. So roofing blocks, which is not really impacted by COVID, that's weather driven. And then the asphalt, which is we believe will be driven by seamless bills and then our other is really kind of a distillate that we sell. The distillate probably will be weak the weaker of those three products. Okay, great. Thanks very much. Our next question comes from Linda Ezergailis with TD Securities. Your line is now open. Thank you. I'm wondering if you can help us understand some of the cost savings, Steve, that you have identified the $10,000,000 to $15,000,000 dollars I'm wondering how much of that might be permanent versus temporary. For example, I guess the travel costs could be quite significant and those would presumably come back next year. But can you comment on the nature of those cost savings? And again, how much is temporary versus a permanent reduction in costs? Yes, Linda. I would say almost all of it is on a temporal basis. Some of it is volume driven. So as volume reduces at our terminals or small pipelines, we have reduced power demand. The other would be we did talk about expenses and travel expenses. We were actually we looked at our April bill and it was down 80% versus the March bill. So the travel is obviously, but that is temporal. And many of the activities many of the cost savings that our ops group put together were bottom up from the field. But eventually, you need to make these eventually, you need to spend these dollars down the road sometime. But I do but it is somewhat temporal during the event, Brenda. Okay. Thank you. And you mentioned ESG, the process is a journey. Congratulations on your first report. I'm wondering how you might use your findings in launching this first report to evolve the business. Are there any opportunities to leverage your learnings to identify ways to do business differently or to save costs further? Or were there any surprises, positive and negative, that you found as you prepared this first report? Ken, it wasn't a journey. We're starting to see ESP throughout the organization. We're starting to see when we're doing capital projects, questions come from the Board concerning ESG. We're very excited about our diversity program. We hired 25 summer students this year. Those 25 summer students, I believe almost I believe 70% of the summer students were female. And that includes a real focus on operations and engineering where we're trying to increase our diversity. On our new hires in Austin Engineering, over 70% have been diverse candidates. So on the diversity side, we're really seeing a step change. And you can kind of see those in the numbers over the last 3 years. Then when you look at Moose Jaw, last year we put on the expansion at Moose Jaw where we expanded the facility 30%. And in that 30% expansion, we did that without any additional heat. And we will continue to look at Moose Jaw on how do we improve really our carbon footprint at Moose Jaw. And we think there's significant opportunities to continue to improve our per barrel carbon footprint there at Moose Jaw. And then on governance, we have to put a diversity policy in place with the Board, and we currently have 2 diversity representatives there on the Board. So and hopefully, we'll have more as we move forward, both in our assets and operations and across our organization. So we're excited about what's going on at Gibson Energy as far as ESG. Thank you. Our next question comes from Patrick Kenny with National Bank Financial. Your line is now open. Hey, good morning guys. Just starting on the marketing here, looks like there was a $25,700,000 write down of inventories in Q1. Can you just confirm that, that expense was included in your Q1 adjusted EBITDA number? And maybe how that inventory write down might be locking in your marketing guidance for Q2? I'm going to let Sean do that one because it has to do with accounting. So, but it definitely was taken into account. So go ahead, Sean. Yes. Thanks, Steve, and thanks, Pat. Yes, no, absolutely, that was in our number. I mean, it was given the volatility in the market, it was a bit of a higher write down than we would have seen in other quarters. But I think the one thing I would note on the write down that Steve talked about in his prepared remarks about us running a flat book, that was fully hedged inventory. So you have actually seen the offsetting financial hedges show up in segment profit within the marketing business in the quarter. And so I wouldn't really think about that. So we wrote down inventory. We had offsetting hedges for that inventory. And we'll move that forward. But that would have been any sort of mark to market we had would be incorporated in sort of our guidance that we provided that upper end of the 20 to 30 or higher for Q2. Okay, great. Thanks for that. And then on the terminals business, I appreciate the sensitivity to oil sands volumes. Also wondering, there was an article out yesterday just surrounding Enbridge looking to offer up more than, I think, 2,000,000 barrels of storage capacity on the mainline. Any thoughts on how this temporary form of storage on the mainline might further impact your terminals or marketing business, if at all? Yes, I'll address that. We see really no impact. I mean, this is great thing that Enbridge is doing to provide the storage to customers. When you look at our storage, it's really not built for the contango play. Most of our storage for our customers is operational storage. So these are those 10 year contracts, with 3 turns per month. They may have a little bit additional storage. If they cut 20%, they'll have a little bit more contango opportunity. But overall, our storage is not in that commodity based market. We don't have any storage to lease out. So we can't benefit additional from this opportunity other than extending contracts or building more tankage down the road. Okay. Thanks for that. And then, Sean, just on the debentures, I know it's still over a year out, but should the debentures not convert to equity when they mature next July? Would you look to refi the debentures or just put the $100,000,000 on your bank lines? And then maybe just an update on how the math is looking around potentially calling the 2024s anytime soon? Yes. Thanks for that, Pat. I mean, two questions there. I think, as you know, the conversion price in our debentures is, call it, 21 $1.65 or $21 change. And so I think certainly by the time that conversion comes up, our sincere hope is that we've come through some of this pandemic and those are in the money. And so it makes the actual conversion decision relatively easy because even if we call them, I suspect people would convert. To the extent that they're not in the money, my bias as we sit here today, given our ample liquidity, would be just to put it on our bank line. As we talked about in our prepared remarks, recently increased our bank facility to 750, from 560, dollars have 150,000,000 of buy lots, which I would highlight, and we didn't have this in the prepared remarks, but those buy lots are actually available for general corporate purposes as well. So that is true liquidity that we have. So to the extent that they're not in the money, I would likely look to put it on our bank facility just given the amount of liquidity we have. But still, we'll evaluate that as we move forward. With respect to the 2024 notes, we certainly would have been looking to potentially refi those pre pandemic, even with the make whole that would have been NPV positive with the company. Given what's happened to credit spreads post pandemic, that's no longer economic to do so. As hopefully, we return to a normal more normal environment here and coupons come back down to the extent that that does turn back into an MTD positive trade. That's something we'd love to explore certainly. But as we sit here today, we're still we still have a little bit of way to go before we see enough of a recovery in what coupons would be before that turns economic. Okay. That is perfect. And then just last one for me guys, housekeeping item. But looks like the $30,000,000 sale of the Edmonton field office to TriMas has been delayed here into Q2. Do you see any risk that this won't close at all now just given everything that's happened or at least continue to be pushed out until things get back to normal? Sean, why don't you take that one? Yes, yes. No, no, we actually do not. I mean, the initial intention, I think we had late Q1, it was actually in around April. Now it looks like it will be late Q2. But no, we've been in regular dialogue with TriMack around acquisition that field office. They've actually moved in. That's their new head office from a trucking perspective in Edmonton, still very much in their plans. And all dialogue and attention is that they will look to close that and we'd expect that late in the quarter. So absolutely no change in our view point and would expect that we receive those funds in the second quarter. Our next question comes from Andrew Kuske with Credit Suisse. Your line is now open. Thank you. Good morning. I think your comments throughout the call really echo how conservatively you're running the business. But with all the volatility we saw in the quarter and really for the year to date, could you just give us maybe a bit of color on how your risk management activities held up? Did you hit any limits? Was anything breached? Or did everything really perform as you expected? Andrew, good morning. I would say we reached some bar limits, but the bar limits that we reached were really generally on the positive side as our physicians hit on the positive upside of the VAR. Our VAR calculations are maybe a hair flaw, but we're looking into that. But overall, very tight control. And as you can see, what I explained really in the call and what we talked about really on the inventory, we had inventory in December of last year or 2019, priced at $50 $60 We wrote that down all the way down to the low teens, yet we still that was on the marketing books, yet we still have that $35,000,000 to $36,000,000 marketing earnings. And that just shows that discipline in our hedging policies. We really don't take a lot of risk. We weren't involved in the last 2 days of close because we always if we're rolling a position, we never roll a position on the last 2 days of the cycle. So that's just a rule of ours. So you can see we have multiple and I'm in constant conversations with our with our Head of Marketing really on a daily basis about where we are and what we're doing. Okay, that's great. I guess another element of conservative nature, and I think Sean, you touched upon this, just the value of the liquidity that you have and your liquidity position being really greater than what you see in a normal market environment. And I guess the implication of all of this is you value the liquidity more, but if you were to find something attractive in the market, the returns on any prospective acquisition or capital deployment would just have to be much greater than normal in a normal market. Is that true? Go ahead, Sean. Yes, sorry. I was on mute. Yes, I mean, again, I think our prepared remarks were fairly clear, and I think our messaging has been quite clear throughout. This environment, I think, for us, we have been confident by the fact that we can get on every call with investors and stakeholders and talk about the defensive characteristics we have. We're really not looking to do So I mean, as So I mean, as we sit here today, I wouldn't say that acquisitions are a significant focus of this management team. Remaining defensive and nimble in this environment really would be. I mean, to the extent that there's something absolutely optimistic, I mean, of course, we would always look at it. But again, I would probably refocus more on our focus on remaining defensive as we continue to move through this pandemic. Okay, that's great. Very much appreciated. Stay safe. Our next question comes from Ben Pham with BMO Capital Markets. Your line is now open. Okay, thanks. Good morning. I had a question on your customers' resident days at the tank. I'm wondering if you have a sense of where that will go once you add the 3 tanks late this year? Good morning, Ben. Can you restate that one more time? Yes, sure. Absolutely. I was wondering when you add the 3 tanks this year, if you have a sense of what the residence day is going to be relative to that 10 day average you've seen in the past? Yes. So on the tanks that we did the long term leases on, of course, one is marketing tank that will come on. And that was really one of the first marketing leases or builds that we've ever done. And then the other is with a large U. S. Refiner. And then another one is really a marketing organization. So I would say overall residence time will be those will not have the normal residence times that we've seen from the oil sands producers. So they'll be used probably potentially more it will be used differently than the operational storage. Okay. Sorry about that. I was thinking more the and maybe it's just not an easy quantification to get us. I was wondering more of the overall industry days on average that you're seeing because you look at the past couple of years, it seems to be more folks, the resident base have been underestimated in terms of what's needed in the market. So that's been driving a lot of the tank. So just trying to get a sense of where that's going relative to historical norms. Well, we I mean in this time, there is more because producers have cut. So on a go forward basis, I think, again, storage and the importance of storage becomes even more pronounced to our customers. And so there will be the opportunity to continue to discuss additional storage with numerous of our existing customers at the facility. Okay. And maybe my second question is maybe for Sean, some of the numbers around the infrastructure run rate. And I wanted to clarify, I believe there's an $80,000,000 number that was mentioned. Is that more of a worst case scenario that you're contemplating in that segment? It's Ben. I mean, I think we walked in one of the earlier calls, we walked it down. I mean, the challenge whenever you put out a range is how precise you want to be. So I'm not sure we felt like a range of like 83 to 87 made a lot of sense. But again, perhaps the easier way to answer that is to walk you down, as I did earlier, from the number. And I think if you listen to the remark I gave earlier, probably the 80% is not a number that we would necessarily expect. But I mean again, 98% Q1 Infrastructure segment profit, you take off 4% for the equity pickup. So that gets you to 94 on an recurring basis. Take out 5 from there for Couche Tard, the sort of OpEx that we normally see plus some additional OpEx from the turnaround that goes to 89. And then from there, you take off, call it, probably circa 5 from both the small terminals and that would be inclusive of the 1.5 to 2 that Steve talked about at our main terminal business and that gets you to sort of the high end of that 80 to 85. So I don't think we'd expect that 80 certainly. And if you walk down sequentially like I did, it would get you to the higher end of that 80 to 85. So I'm not sure if that answers your question. Okay. No, it absolutely does, Sean. And I'm sorry for having you have to repeat it 3 times. I wasn't asking that. It just sounded like the last commentary was 85 with the Moose Jaw outage. So then going to Q3, it should be going up, affected again $90,000,000 So I just wanted to square that plus $80,000,000 $85,000,000 plus Q1 doesn't really add up to $360,000,000 So I was just more getting an additional clarification on that. Yes. No, I mean, we also did say that we expect Q2 to be absolutely the low for the year. But I mean, even if you implicit in that, I think it is important that we did confirm that 360 because just pure math tells you if we had 98 in the 1st quarter, 85 in the 2nd quarter, To get to that 360, it assumes we're at 88.5 for both Q3 and Q4. So just implicit in the numbers we provided, we certainly expect some measure of recovery, not only from Moose Jaw, but I mean certainly that Moose Jaw turnaround won't extend into Q3. Okay. And then my last one, same topic. The $100,000,000 next year, does that include DRU contribution in second half? No, it would not. I mean, if you think about we had said that as we exit Q4, we expect to be run rating 100,000,000,000 dollars So really that would be taking sort of existing assets right now and adding the 3 tanks we're going to put into service in Q4. Okay. So this was likely if DAU comes in service on time, which is likely, your full year is likely more than $400,000,000 if everything goes to your budget. Yes. That makes sense. Okay. Great. Thanks very much guys. Our next question comes from Robert Catellier with CIBC Capital Markets. Your line is now open. Hey, good morning guys. Thanks for taking the time to go through this more detailed updates. In your infrastructure comments, I think of the MD and A on the presentation materials, I think there was a comment about in getting that 360, some type of volume recovery. So I'm wondering what you see in terms of pace of the recovery. And maybe on a related question, how long do you think it will take to get back to 2019 levels of oil demand? Thank you, Robert. Good morning. So when we did our forecasting, we looked really for we looked at the economies, the North American economy and the world economies to kind of restart on a June 1 time frame. And with that, we so we really kept the 2nd quarter as far as impacted by volumes in our facilities, still impacted in the second and the third quarter. And then in the Q4, we started to grow the volumes back as demand started to come back online. And kind of walking us back up is really important. So if we're at the 85 and you put the $5,000,000 on from Moose Jaw and then as you volume recovery come on and then as those 3 tanks come on, you have additional revenue that gets us to that $400,000,000 run rate in the Q4 on equity. As far as full recovery of crude oil, I don't know. I think that might still be 2 years out, probably 2 years out from full recovery up into where we were approaching almost $100,000,000 a day in total production. But during that time, we think we'll see significant decline. So we think refined products demand will ramp up quicker. But we think crude we believe crude will remain relatively depressed over the next year or 2 and then move up fairly quickly once you cross that supply and demand and you need that additional drilling to come on. So wherever that crossover is, you'll see a pretty quick spike in pricing because I don't think the U. S. Will respond as quickly this time. Okay. That's helpful. Throughout your commentary today, it obviously was a little bit conservative at times. But in the big picture, it sounds like you do have some excess funding capacity and you're being pragmatic about the progress on new growth projects adding to your capital spending roster. So with that, I'm wondering if there's an opportunity or an appetite to deploy more capital into the marketing segment, if you expect the pace of new projects to reflect their market reality and be a bit slower? I don't see that happening right now. Unless we see a real opportunity, When it comes to those higher volatile earnings, we do use a higher rate of return requirement. Generally, in the plus 20% rate of return for commodity based driven opportunities. We do some of those every year like the Moose Jaw expansion would have been one of those where it was a 1 to 3 times payback. There may be additional opportunities at Moose Jaw. There may be some small connections and small projects in Hardisty and Edmonton, but we're talking relatively small projects in the end, nothing that can actually drive up our total capital spend by any significance. Robert? Okay. And then just my final question here, might be early days, Phil, but what has the collection experience been recently? Any negative trends in bad debts, I think particularly in the U. S? I can address that, but also I'll let Sean kind of clean this up. But our credit committee, we've become quite active in early March as the event started to unfold. Bad debts, We've moved we really went it was really on the refined product side where we're selling to the smaller where we're selling to smaller players with potential credit issues. And with that, we went to AR insurance or prepays. So right now, we're in a very good position, really on those sales of our refined products. We feel very comfortable where we are. If a default did occur, we would be protected. But I'll turn it over to Sean. Yes. No, I think you covered the vast majority of it. I mean, we really haven't seen any increase in our aging. As Steve noted, we have taken an extremely close look at all receivables. I wouldn't say that's entirely abnormal. I think I'd be more concerned if we said that things have increased a ton. But I mean, in this environment, you can only be too safe. And we have reviewed everything multiple times and at a high level have really seen no increase in our aging or really in what we would think the risk thereof of our AR. Okay. Thanks, everyone. I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Hidtjes for closing remarks. Thanks, operator, and thanks everyone for joining us on our Q1 2020 conference call. Again, I would like to note we have made certain supplementary information available on our website atgibsonenergy.com. I would also remind everyone that we will be holding our virtual AGM today later at 10 am Mountain Time. The details are on our website and in the press release. And participants are encouraged to register for the live audio webcast at least 10 minutes prior to the presentation start time. Hope you're able to join us. Lastly, if you have any further questions, please do reach out to us at investor. Relationsgibsonenergy.com. Hope you have a great day and stay healthy. Bye. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.