Good day, and thank you for standing by. Welcome to the 2024 Q2 Gibson Energy earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Beth Pollock, Vice President of Capital Markets and Risk. Please go ahead.
Thank you, Marvin. Good morning, and thank you for joining us to discuss our Q2 2024 operational and financial results. Joining me on the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive Officer, and Sean Brown, Senior Vice President and Chief Financial Officer. We also have the rest of the senior management team in the room to help with questions and answers as required. Listeners are reminded that today's call refers to non-GAAP measures, forward-looking and pro forma financial information, which is derived in part from historical financial information of South Texas Gateway Terminal, LLC, and is subject to certain assumptions and adjustments and may not be indicative of actual results. Descriptions and qualifications of such measures and information are set out in our investor presentation, available on our website and on our continuous disclosure documents available on SEDAR+.
Now, I would like to turn the call over to Steve.
Thank you, Beth. Now, before I begin, I want to take a moment to thank really all the Gibson employees, both present and past, the board, and all our stakeholders for the opportunity to have led this organization for the past seven years. I'm proud of what we've accomplished and know I'm leaving the organization in a great spot and in good hands with Curtis. I've known Curtis personally for a number of years and have seen firsthand his ability to grow a business and create shareholder value. I look forward to the next chapter for Gibson, this time as just a shareholder. As Curtis continues to execute, enhance, and grow our successful infrastructure strategy. This quarter, Sean will speak to the financial results, and I will focus my remarks on the commercial developments around our assets.
On July 15th, we announced the extension of a long-term contract at our Gateway Terminal, underpinned by high-quality investment-grade counterparties. This development is the first step in demonstrating the value Gateway brings to our customers and aligning the high quality of cash flow at our Gateway Terminal with those of the Canadian infrastructure assets. In addition, we also announced the sanctioning of the Cactus II connection, which we expect to be in service in Q3 2025. This project will provide our customers with access to approximately 700,000 barrels a day of incremental Permian supply. As the company looks forward during the second half of 2024, we still expect to deploy approximately CAD 150 million in growth capital, with the majority directed towards our Canadian infrastructure assets, predominantly Edmonton, and the rest at Gateway.
Construction of the two tanks at our Edmonton Terminal continues to progress as planned, with completion expected to be in late 2024. These tanks will support Cenovus with their shipments on the TMX pipeline by providing them with 870,000 barrels of storage capacity. Construction is supported by a 15-year take-or-pay agreement. With TMX now operational, we remain in discussions with other customers on ways we can effectively support them during this pivotal period moving forward. With respect to Gateway, we continue to perform ahead of our expectations. Volumes remain near all-time highs, consistent with that Q1. Further, our contracting discussions culminated in the extension of our long-term contract with a valued partner at our facility, which met our previously communicated commercial objectives related to rate and tenure.
We still expect to be in a position to provide additional news on the second contract on a 5-7-year term, at or above existing rates in the relatively near term. On the ESG front, yesterday, we released our 2023 sustainability report, which highlights the progress we have made thus far towards our sustainability goals. Other achievements during the quarter that we are proud of include being recognized as one of Alberta's top 80 employers and Canada's Best Diversity Employers for the third year in a row. To conclude, Gibson has delivered another strong quarter. I will now pass the call over to Sean, who will walk us through our financial results in more detail. Sean?
Thank you, Steve. Before I jump into this quarter's financial results, I wanted to take a moment to thank you on behalf of the organization for your contributions to Gibson. I'm proud of what we've accomplished together and as a company, as we established and delivered on our infrastructure strategy.
... I'm also very excited about what is to come for Gibson. I recently had the pleasure of meeting Curtis, and I'm looking forward to working together as we continue to deliver on our infrastructure strategy, enhance and grow our business, and most importantly, create shareholder value. Now, turning to our results, we delivered another strong quarter to finish off the first half of 2024, with Adjusted EBITDA of CAD 159 million and Distributable Cash Flow of CAD 101 million. In our infrastructure segment, we reported CAD 153 million of Adjusted EBITDA in the Q2 of 2024, above our previous record set in Q4 of last year, and CAD 43 million higher than the Q2 of 2023, after normalizing for the impact of last year's CAD 17 million environmental remediation provision.
This infrastructure growth was driven primarily by the addition of our Gateway Terminal, which reported another strong quarter. Q2 2024 infrastructure segment results were also consistent with Q1 2024, demonstrating the strength and stability of our high-quality infrastructure cash flows. Turning to the marketing segment, Adjusted EBITDA of approximately CAD 20 million was in line with previous guidance, though it represents a CAD 15 million decrease relative to Q2 2023, and a CAD 14 million decrease relative to the Q1 of this year. These results were largely driven by fewer storage-based opportunities and tighter, heavy differentials impacting Moose Jaw feedstock pricing. Looking forward, as we sit here today, our expectation is that the environment for our marketing business will remain very similar to what was experienced in the Q2.
As such, we'd expect Q3 Adjusted EBITDA to be at or slightly below CAD 20 million. But are hopeful additional opportunities present themselves within the quarter, and we will be positioned to take advantage of them to the extent they do. With this guidance, we would also reiterate our long-term annual guidance of CAD 80 million-CAD 120 million for 2024. To complete the discussion of results for the quarter, let me briefly walk through a couple of items impacting Distributable Cash Flow. The Q2 2024 Distributable Cash Flow result of approximately CAD 100 million was a CAD 19 million increase from the Q2 of 2023, with the majority of the difference attributable to higher infrastructure EBITDA due to the gateway acquisition, which was only partially offset by higher finance costs.
We also maintained our commitment to our financial governing principles with leverage of 3.5 times within our target range of 3-3.5 times when adjusting for a full year of Gateway. Our payout ratio of 63% was well below our 70%-80% target range, demonstrating the sustainable nature of our dividend. Looking at our ratios on an infrastructure-only basis, our payout ratio is approximately 71%, well below our target of 100%, and leverage of 3.8 times is also below our target of 4 times when accounting for a full year of Gateway-adjusted EBITDA contribution. Our low leverage, ample liquidity, and staggered debt maturity profile continue to provide us with significant financial flexibility. In summary, Gibson delivered solid results in the Q2 of the year.
Record infrastructure results ahead of the previous high water mark achieved in Q4 of 2023, which demonstrates the strength and stability of our business. Marketing-adjusted EBITDA of approximately CAD 20 million was in line with our previous guidance and support full year contributions within our CAD 80 million-CAD 120 million run rate. Subsequent to the quarter, we announced a long-term contract extension at Gateway with a high-quality investment-grade counterparty, which further enhances the quality of our infrastructure cash flows, as well as the sanctioning of the Cactus II pipeline connection, which will expand supply available to our customers at the facility. I will now turn the call over to the operator to open it up for questions.
Thank you. At this time, we'll conduct a Q&A session. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Benjamin Pham of BMO. Your line is now open.
Hi, thanks, good morning. And then maybe first to start off on Gateway recontracting. Can you comment on potential timing of the second renegotiation? And then can you confirm your-- I know you mentioned the weighted average went up about half a year. Can you confirm where things are right now on an overall basis? Is it three and a half now?
So I'll start just on recontracting. We think we remain extremely positive with recontracting an additional party. Now, timing is always kind of in the customer's hands and in our hands, so exact timings, we're not going to provide that now. But we've remained very positive that in the near term, we will execute this agreement to extend, extend and add, potentially add additional volume in the future at the same rates.
... Yeah, Ben, with respect to, weighted average contract life at the facility, if you recall, when we purchased it, which was almost 1 year ago, exactly that it closed, we had about a 3.5-year average term. With the passage of 1 year, we would be naturally at about 2.5 years, and in conjunction with the release, you know, that, that contract extension that we announced moved it up by about half a year. So, you know, as we sit here today, we're about 3 years.
Okay. Got it. And with the Cactus II sanction and CapEx, does that in any way change your view on the share repurchases opportunity towards the end of the year?
No, no, it doesn't at all. I mean, we, if you recall, our capital guide for the year for growth capital was CAD 150 million. Of that, at the time, we talked about, you know, approximately CAD 125 million of that being in Canada and sanctioned, and the other 25 expected to occur south of the border, predominantly at Gateway, and that other 25 was really Cactus. So I mean, from a capital allocation messaging, this, this has been in the plan and budget for the entire year.
Okay, got it.
Okay, thank you, and, and all the best to you.
Thank you.
Thank you. One moment for your next question. Our next question comes from the line of Robert Kwan of RBC Capital Markets. Your line is now open.
Great, thanks. If I can just start back with Gateway again. In terms of the recently extended contract, was there anything unique to that deal such that it went, really just formed the basis for all of your future contract extensions?
I wouldn't say there was anything unique. It was kind of. You know, if you look back over at the beginning of time, I mean, bringing forward these contracts and extending these contracts two years prior, at the same prior to the contracts expiring, is really unusual in the commercial world. Generally, it's within a year. So to actually execute that contract, you know, probably a year and a half earlier than we anticipate and then, than is normal, is just shows the strength of the terminal, you know? And executing it at really the same exact terms, just adding term, I mean, existing term length. All of our contracts have a little bit different fees.
Okay.
Robert, all of our contracts have a little bit different fees. They're all not a cookie cutter. They're all not the exact same contract. They're kind of tailored to our customers.
Got it. You previously talked about some of the carrots of just getting people to extend the contracts early. Can you also just... Are there other things that maybe create a bit of tension or just the sticks to get deals over the goal line? Like, for example, do you need to get the Cactus II connection done so that there is at least the, you know, for lack of a better term, threat of additional supply trying to get into the terminal? And then do you have the ability to layer in a contract with a different customer after an existing one expires? And does that create tension for somebody to just extend term?
So when it comes to Cactus, yes, I think strategically, that's a very important connection to the terminal, especially for our customers. You know, we have, I think, currently 6 or 7 customers at the terminal. We continue to look for additional customers at the terminal, just to add liquidity and drive that competitive tension that I think you were talking about, there, Robert. But Cactus providing that extra supply to those customers is critical, as we go forward.
All right, if I can just finish with a quick one. Do you have any interest in owning additional rail exposure at Hardisty?
Go on.
Yeah, I mean, this is a fairly specific question, but I mean, at the end of the day, we're really happy with the rail-
Yeah.
But at the end of the day, we're actually really happy with the rail exposure we have. So we're very comfortable with that. We think the facility is a fantastic facility. You know, it's a necessary part of the DRU value chain, which we continue to think, you know, is incredibly positive for the company. So we are very fine in a status quo environment. At the same time, we do see, you know, the option value through a rail facility. So you know, anything like that would have to make absolute sense from an economic perspective, you know, and create real value for our shareholders. So I mean, we are very comfortable with our existing position.
We're comfortable, you know, as we move forward with that existing position and would have to consider options, you know, as they present themselves.
Okay. That's great. Thank you very much. Steve, all the best in your retirement.
Thank you, Robert.
Thank you. One moment for our next question. Our next question comes from the line of Robert Catellier of CIBC Capital Markets. Your line is now open.
Hey, good morning. I just wanted to dig into the marketing business a little bit here. Has there been any appreciable change to your long-term marketing outlook? I know you just reiterated those numbers for 2024, but I'm just wondering if TMX being placed into service has any impact on that long-term outlook?
You know, no, Robert, I mean, we've always been that CAD 80 million-CAD 120 million. And I think, you know, that's still a good number going forward. We haven't had anything really drive a major upsets in the market over the last, you know, Q2 or even in the Q3 going forward. So when there's not a disruption in the market and a lot of opportunities for the traders. You know, we can be in that CAD 80 million-CAD 120 million mark through a quarter, but as opportunities do develop, you know, we can pop into a CAD 30 million or CAD 35 million or a CAD 40 million in a quarter, and we see those opportunities moving forward. Robert?
Okay. Can you just spend a minute on the, you know, it, it is a rather minor variance to your previous CAD 20 million guidance, and certainly within the range of a normal forecast error for this type of business. But you were a little shy of the CAD 20 million guidance for the quarter, and you're carrying a little bit higher NGL and crude inventory at quarter end. Can you explain what's going on with those two dynamics?
Yeah, I would. You know, when you look at the market, you know, right at 20, we said 20 or above, we came in at $19.7, you know, that's 20. I would say, you know, we had expected most of the inventory to actually have sold off through the quarter. But what happened is the Q3 actually weakened in price, and as it weakened in price, this gave us an opportunity to do some tank rolls into the Q3. Not at really large margins, but it did give us some opportunity to do tank rolls into the quarter, which even though our inventory was down quarter-over-quarter, we did come in above on our inventory. Robert?
Okay, so that sounds like a question of timing. Just on the, the waste-to-energy feed study, is there anything you can update us on there? You know, how's that—what have you learned, and what are your expectations in terms of finalizing the feed? And, is FID still expected early 2025?
Yeah, Rob, Sean here. Robert, really no update on, you know, where we stand on that. We continue to progress the feed. You know, as I think we've talked about before, backstopped by long-term contracts. You know, we like the stability of cash flows we have from that. But, you know, from a timing or update perspective, really, you know, still relatively early stage. As we sit here today, we're gonna progress through the feed, progress through the year, make sure that it gets 100% commercially secured. We're about 80% right now. And then, you know, certainly hope that we'll have more of an update, on next quarter's call. But as we sit here today, you know, really, we continue to work on it. Not much of an update from previous.
Okay, last question for me. I just wonder, in light of the solid financial position, post Gateway and, you know, some of the recontracting starting to be finalized, is there any thought to being given to a higher payout ratio as opposed to share repurchases or pursuing projects that might be viewed as a bit of a step out?
No, no, I don't think so. I mean, we're comfortable. Our payout ratio range is, you know, our target range is 70%-80%. We've actually, as you know, lived probably closer to that 60% for a while. As we think about generating excess cash flow, you know, support growth capital, and, you know, not necessarily step out growth capital. I think we've been very disciplined as we've deployed growth capital, certainly through our history. So I mean, our focus continues to deploy growth capital on long-term contracted assets, backstopped by, you know, investment-grade counterparties. Really, nothing has changed there, and we'll continue to do that.
You know, at that sort of 60-ish% to 70-ish% payout ratio, I think, you know, creates the appropriate balance as we look at our cash flow waterfall, as we also balance the fact that, you know, we very much, and I think the board does as well, believe in steady annual dividend growth. So, no real plan or intent at this time to flex the payout ratio up. You know, we think it's appropriate for our business and as we look at sort of our overall cash flow waterfall and capital allocation priorities.
Okay. Thanks very much, and enjoy your retirement, Steve.
Thank you, Robert. I hope to.
Thank you. One moment for our next question. Our next question comes from the line of Robert Hope of Scotiabank. Your line is now open.
Good morning, everyone. Steve, on the Q4 call, you mentioned that you could grow EBITDA at South Texas by 15% without any capital. You know, can you just update us on where we are there, just given what you're seeing with, you know, the contracting environment, as well as some of the other initiatives at the terminal?
Yeah. So most of that growth is by adding additional windows. I think we've. Right now, you know, adding those additional windows, we expect to add some of that this next contract that's in current negotiations. We've also brought on some month-to-month type contracts just to provide some additional income coming into the terminal, and also bring in new customers in the terminal. Probably a couple of the new customers that we're targeting currently were buying FOB loaded out of our asset over the last several years, and they want to actually be involved in the terminal now. So we are starting to work with them to develop opportunities for long-term contracts in the future.
All right. That's helpful. And then, can you provide an update on the deepening project, where you are in the engineering and, you know, potential capital costs and when that could happen?
... Yep, that's a very-- I mean, that's an exciting project. It's a project that, we very much are doing the engineering work on right now. We do, we're getting close to understanding the costs there. And, you know, we believe that'll be, that'll, that'll really have two income streams. The first income stream really is, is some contracts actually adding additional MVC to those contracts. But, you know, as Beth-- I was talking to Beth yesterday, and she came up with a really great analogy on deepening the terminal. So what happens here is, you know, currently, we can load a little over 1.2 million barrels, million barrels onto a ship, and when we deepen the terminal, we'll be able to load over 1.4 million barrels on a VLCC.
So the way Beth explained it, and I loved it, was when you go to a gas station, do you just fill it up to three-quarters, or do you fill it up? Right? So what we've seen, you know, we did do a small deepening project, an additional foot, and what we've seen is they use that foot every time they load. So that incremental fifty thousand barrels, they use every time they fill, they load. And so we believe that the terminal, as far as loading VLCCs, will go from 1.2 to 1.4, and VLCCs are over 65% of our loading. So that's one of those ways that we really see income moving forward.
All right. Thank you, and all the best. Thank you, sir. Thank you.
Thank you, Robert.
Thank you. This concludes the Q&A session. I would now like to turn it back to Beth Pollack for closing remarks.
Thank you. Thank you, Marvin, and thanks everybody for joining us for our 2024 Q2 conference call. Again, I'd like to note that we've made available certain supplementary information on our website, gibsonenergy.com. If you have any further questions, please reach out to investor.relations@gibsonenergy.com. Thank you, and have a great day.
Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.