Earnings Call: Q4 2014

Mar 4, 2015

Good morning and welcome to the Gibson Energy 2014 fourth quarter and year-end results conference call. During today's call, forward-looking statements may be made. These statements relate to future events or the company's future performance and will use words such as expect, should, estimate, forecast, believe, or similar terms. Forward-looking statements speak only as of today's date, and undue reliance should not be placed on them as they are subject to risk and uncertainties, which could cause actual results to differ materially from those described in such statements. The company assumes no obligation to update any forward-looking statements made in today's call. Any reference during today's call to non-GAAP financial measures such as EBITDA, adjusted EBITDA, pro forma adjusted EBITDA, or distributable cash flow is a reference to financial measures excluding the effect of certain items that would impact comparability. For further information on forward-looking statements or non-GAAP financial measures used in Gibson, please refer to the 2014 fourth quarter and year-end management discussion and analysis issued yesterday by the company, and in particular, the sections entitled Forward-Looking Statements and Non-GAAP Financial Measures. All financial amounts mentioned in today's call are in Canadian dollars, unless otherwise stated. I will now turn the call over to Tammi Price, Vice President of Investor Relations and Corporate Development. Please go ahead. Thank you, Eric, and thanks everyone for joining us this morning. Joining me on the call today are Stu Hanlon, President and CEO, and Don Fallis, Chief Financial Officer. The format for the call will be that Stu will provide an overview of our results, and Don will highlight a few items regarding our financial position and capital spending. This will be followed by a question and answer session. Tam Deller, our Manager of Investor Relations, and I will be available after the call to answer analyst modeling questions. With that, I'll turn it over to Stu. Thanks, Tammi. Good morning, everyone. I am pleased with our strong fourth quarter results, which contributed another record year for Gibson in 2014, resulting in annual adjusted EBITDA of CAD 453.1 million. Highlights of the fourth quarter include a generation of record fourth quarter segment profit of CAD 129.5 million, and the successful completion and progression of several key growth initiatives. Key contributions to year-over-year segment profit growth in the fourth quarter were a 36% increase in terminals and pipelines, a 25% increase in environmental services, and a 9% increase in processing and wellsite fluids. I will now discuss the individual segment profits in more detail. We achieved record quarterly segment profit in our terminals and pipelines business with CAD 34 million generated in the fourth quarter. As I noted earlier, this achievement represents a 36% increase over the same period in 2013, and also represents an approximate 70% increase over the same period in 2012, when we initially began to expand storage capacity at our Hardisty terminal. A noticeable accomplishment in the quarter was the successful commissioning of the first two new tanks associated with a multi-year expansion of our eastern lands at Hardisty. Additionally, the Hardisty unit train facility achieved full run rate EBITDA levels in the fourth quarter, which benefited our financial performance as shipper commitments contributed take-or-pay cash flow to the segment. Assisted by these accomplishments, Hardisty terminal volumes increased by 38% in the fourth quarter over the same period in 2013 and achieved a company record averaging approximately 580,000 barrels per day. I am pleased to announce the successful commissioning of another 400,000-barrel tank at Hardisty, which was put into service in February 2015, subsequent to the fourth quarter. This development brings Gibson's total storage capacity at the Hardisty terminal to 5.5 million barrels. Total new storage capacity under development at the Hardisty terminal is now 1.6 million barrels, and we expect to commission our next 500,000-barrel tank in the coming weeks. Another accomplishment subsequent to the end of the fourth quarter was the successful completion of our project to enhance connectivity to the recently twinned Cold Lake pipeline at Hardisty. Both of these projects were delivered on time and on budget, and both are underpinned by long-term contracts with key creditworthy customers. Taking these developments into consideration, we expect to see strong segment profit growth in our terminals and pipelines business in 2015. Other projects underway in this segment include a single tank plus rail loading facility for Statoil at Edmonton and another connectivity enhancement project related to the twinning of the Athabasca pipeline at Hardisty, both of which are progressing according to plans. Our efforts to develop phase two of the Hardisty unit train project, which involves a doubling of loading capacity to 240,000 barrels a day, continue. Given the current level of crude oil prices, many of our customers have delayed decision-making on these types of commitments as they focus on near-term financial matters. Our environmental services business also achieved record fourth quarter segment profit, with CAD 28.1 million generated in the fourth quarter. These results represent a 25% year-over-year increase in segment profit and growth being driven by increased demand for fluid disposal services in key U.S. basins and by increased volumes being processed at our Canadian processing, recovery, and disposal, or PRD, facilities. A key accomplishment in the fourth quarter was the successful commissioning of our newest PRD facility located in Williston, North Dakota. This facility is well-located, offers modern processing technologies, and establishes Gibson as a full-service waste provider in the U.S. Bakken tight oil play. This facility is co-located with a licensed landfill, which we commissioned earlier in 2014. Both of these will continue and contribute to our efforts to shift the profile of our environmental services business toward more stable production-related revenue sources. With approximately 40% of segment profit currently exposed to drilling and development-related activities, which is largely weighted to our U.S. operations, our environmental services business can be expected to show some weakness if oil prices remain at today's levels. To offset this, we will continue to focus on the build-out of PRD infrastructure in Canada in 2015, with 4 projects underway relating to the expansion or upgrade of existing facilities. Additionally, we have approximately CAD 30 million of capital allocated in 2015 for similar facilities at new locations in the U.S. However, this capital is flexible, and we will be evaluating as the year progresses in light of expected decline in activity levels in the U.S. shale plays. Segment profit in truck transportation was CAD 22.7 million in the fourth quarter of 2014, contributing to an annual segment profit of CAD 83.2 million. Fourth quarter volumes declined by 6% over the same period in 2013, owing to reduced volumes in specific markets within our U.S. business. Despite the negative volume impact, segment profit remained healthy, with increased rates for spot hauling activities and increased service-related charges that drove a 14% gain in revenue per barrel. If current crude prices prevail for the remainder of 2015, and we begin to see production declines as a result of lower drilling activity, we can expect to see a modest reduction in segment profit for this business. Segment profit in our processing and wellsite fluids business was CAD 14.8 million in the fourth quarter, representing a 9% increase over the same period in 2013. Our fourth quarter results for this segment are highlighted by a 6% increase in volume throughput and 3% gain in gross margin per barrel, both of which reflect the flexible nature of our operations and the growth initiatives undertaken in the year. The expansion of the rail loading capacity at the facility is well underway and will be paid for by the transportation cost savings we expect to realize by displacing higher cost alternatives for certain of our products. The approximate CAD 15 million expansion for our processing capacity at this facility that is scheduled for later in 2015 is flexible capital, and we will be evaluating again in light of market conditions as we progress through the year. Our outlook for this segment incorporates an expectation for reduced wellsite fluid demand given the decline in active drilling rigs, which we have witnessed to date in 2015. Our propane and NGL marketing and distribution segment delivered CAD 15.5 million of segment profit in the fourth quarter, down approximately 33% over the same period in 2013. Notwithstanding the impact of unseasonably warm weather in Western Canada, we remain pleased with the contributions from the Cal-Gas and Stidco acquisitions we completed in 2014. These acquisitions enabled us to increase industrial propane volumes by 69% in the fourth quarter of 2014. Now, unfortunately, our wholesale propane business did not benefit from the similar volumetric tailwinds, and in a low-demand environment we witnessed in the fourth quarter, posted only modest segment profit contribution. Furthermore, our wholesale NGL business was negatively impacted in the quarter by unfavorable pricing conditions. With warmer than average weather in Western Canada continuing into the first quarter of 2015, we expect to see ongoing challenges. Our Marketing segment generated CAD 14.3 million in the fourth quarter, contributing to full-year results of CAD 65.2 million. Our fourth quarter Marketing results were roughly in line with the prior two quarters, reflecting the industry conditions that continued to be characterized by narrow and less volatile oil price differentials. Now, that being said, Marketing activities in the fourth quarter were highlighted by a 5% year-over-year volume growth, as this business successfully drove incremental crude oil and condensate volumes to the company's other business segments, thereby continuing our objective to maximize asset utilization. Looking into the first quarter of 2015, despite encountering muted market opportunities for margin enhancement, we remain committed to our internal asset optimization activities while seeking to provide effective netback solutions to our customers. Now, at this point, I'd like to turn our focus towards Gibson's capital expenditures in the fourth quarter. We spent CAD 101 million on growth capital and CAD 20 million on maintenance capital in the fourth quarter, contributing to annual 2014 growth spending of CAD 352 million and maintenance spending of CAD 59 million. Total growth capital was 94% of our original guidance, with the nominal shortfall being primarily due to the delay in the timeline of the Athabasca Pipeline Twinning project, resulting in a concurrent delay in our associated connectivity enhancements, coupled with the expenditure timing differences related to several minor projects in environmental services, which moved related capital from 2014 to 2015. Fourth quarter growth capital expenditures were primarily directed towards the following key initiatives. The storage tank expansion project on the east side of the Hardisty Terminal, the Cold Lake and Athabasca pipeline connectivity enhancement projects at Hardisty, the Edmonton Statoil tank and the expansion of related infrastructure, the Edmonton terminal storage optimization project, and the additional saltwater disposal and landfill facilities and the addition of new and the expansion of existing treating facilities in both Canada and the U.S. Owing to the relatively lengthy development timelines associated with these projects, a large portion of the growth capital spending for 2015, as well as a portion of the 2016 capital, is already underway. Of the CAD 435 million in growth spending capital planned for 2015, approximately 65% relates to projects that are currently underway, while 2016 capital plans incorporate 25% for projects under construction or committed under long-term contracts. We expect to have greater visibility to the remaining uncommitted capital spending as we progress further into 2015. While the recent oil price decline will no doubt have negative impacts on our customers' cash flows and reinvestment profiles, a majority of our current and planned capital projects are or will be underpinned by development projects that span multiple years into the future. Recent industry decisions to maintain spending on these types of projects provide us with an outlook that would indicate that plans are still intact for an additional 1.1 million barrels of production to come on stream from the oil sands between 2014 and 2019. In the interim, Gibson is relatively well insulated in this environment due to our ability to provide internal demand for many of the services we provide through our integrated business model. We also look forward to applying our entrepreneurial skills and infrastructure asset base to continue to solve logistics and midstream problems for our customers. In summary, the fourth quarter of 2014 was very successful and contributed to the strongest annual results in our company's history. Despite the headwinds related to the current oil price environment, we are well-positioned and are enthusiastic as we work to execute on our capital plans and operational plans for 2015. I'll now pass it over to Don, who will discuss our financial position. Mr. Powell? All right. Thanks, Stu. I'm pleased to report that Gibson retains a very healthy balance sheet with ample liquidity and relatively low leverage. We are well-positioned to capture opportunities that may come available during this cyclical downturn. At year-end, we had CAD 132 million of cash and CAD 442 million available under our CAD 500 million revolving credit facility. This facility carries an August 2019 renewal date. Our debt-to-debt plus capital ratio was 41%, our leverage ratio was 2.2 times, and our interest coverage ratio was 6.7 times. The company declared dividends of CAD 149 million in 2014, and distributable cash flow for the year was CAD 265 million, resulting in a gross dividend payout ratio of 56%. On a net cash basis, after considering our DRIP participation level, the net dividend payout ratio was only 42%. As announced yesterday, our board of directors approved a 7% increase in the company's quarterly dividend, raising it to CAD 0.32 per common share. This decision was based on our confidence in both the quantum and the composition of our estimated mid- to long-term future distributable cash flows. As Stu mentioned earlier, we continue to have good visibility with regard to capital spending levels in 2015. This is due to the large portion that relates to growth projects that are currently underway and are under long-term contract. Given the current environment, though, we will evaluate commencing capital projects with additional rigor. However, at this point, our previously announced capital guidance for 2015 is unchanged. In addition, at this time, we do not expect any significant delays or significant cost overruns for any of our announced infrastructure projects. We plan to provide a more detailed update to our capital spending guidance concurrent with the release of our second quarter results. That concludes my comments, so I will turn it back to Stu. Thanks very much, Don. In conclusion, 2014 was a year of record accomplishments for Gibson, having successfully commissioned 800,000 barrels of fee-earning storage assets, our Hardisty unit train facility, and our new Bakken PRD and landfill, as well as closing two meaningful propane acquisitions. These accomplishments have served to strengthen Gibson's cash flow profile, as illustrated by an increase in our fee-for-service revenue model, profiling at 66% versus 62% at the beginning of the year. We look forward to further strengthening our cash flow in 2015 and 2016 based on growth capital spending plans we have in place. Now, notwithstanding the extreme compression in oil prices over the past six months, our outlook for Gibson remains very positive. We remain confident in our ability to continue to provide customer solutions that also deliver long-term growth and attractive shareholder returns. That concludes our prepared comments. Operator, at this time, we'd like to open the call up for questions. Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making a selection. If you have a question, please press *1 on your telephone keypad. If at any time you wish to cancel your question, please press the # sign. Please press *1 at this time if you have a question. There will be a brief pause while the participants register for questions. We thank you for your patience. The first question is from Linda Ezergailis from TD Securities. Please go ahead, your line's open. Thank you. Good morning. Good morning. I have a quick question for Don on your taxes. Can you maybe give us a sense of what sort of cash tax rate or cash tax level you are thinking of or expect for 2015 and 2016? What we're looking at is really on an earnings before tax basis in 2015, somewhere between the 30%-35% zone. Similar to 2014, we don't anticipate any big increases in 2015. As we move forward into 2016 and 2017, we will see somewhat of a reduction in the overall current taxes in Canada, but that could be offset by an increase in current taxability in the United States. It should remain flat overall, though. That's very helpful. Thank you. Maybe this is a question for Stu. What sort of pricing concessions or pressure are you being approached for by your customers, and are you still standing pat, or do you see any changes to that dynamic over time? Really haven't seen a tremendous change in the dynamic versus what we were experiencing in the fourth quarter. The typical ask is for us somewhere in the 10%-15% range. We're not in a position where we have margins that are wide enough that we can just sort of roll over and do that. These requests take the form of an opportunity, really, that we see for engagement with our customers. We'll sit down with our customers and look for opportunities to expand the book of business that we have with them, either in an associated business line that we carry or maybe an expansion of the overall business activity within the business line that we're talking about. Let's say we get a customer, and they want a 15% reduction in a certain area for truck transportation. We'll look for opportunities then to maybe bring those barrels to our either dry terminals or PRD facilities. We'll look for an opportunity to maybe market those barrels to provide related propane services, that sort of thing. Overall, we expect to see some margin compression in our terminals business. We have seen some modest margin compression in our propane business. It's really not a sort of an acceleration of same over the levels that we were experiencing in the fourth quarter of 2014. No, that's helpful. Now, is there any silver lining to all of this? Are you seeing any cost relief either on the operating or the capital side? Or do you expect to see maybe a bit more assets being shed, or financial distress in smaller companies allowing for further consolidation? Yeah, certainly we're looking at all of those situations as being opportunities, Linda. We have taken the same approach to our service providers as our customers have taken with us, asking for concessions with respect to pricing and modifications in terms of service levels, that sort of thing. We expect that as we see costs come out of the industry, which is really what happens during these downtime cycles, we will be able to negotiate better pricing and probably more certainty around pricing for our large capital projects, which will be helpful. We haven't seen what I would call capitulation yet with respect to companies being willing to either shed assets or put themselves up for sale outright. Certainly, as we progress deeper into this cycle, those are opportunities that we can look forward to and take advantage of. As Don highlighted, we're in an extremely strong position with respect to our balance sheet and maintain a fair degree of financial flexibility. We certainly will be looking to take advantage. Thank you. Thank you. The next question is from David Noseworthy from CIBC. Please go ahead. Your line's open. Good morning. Maybe just one of the industry concerns regarding oil prices in North America is what seems to be the pending filling of Cushing. If Cushing were to fill up, can you provide us an idea of what the impact would be to your trucking business, environmental business, and potentially to your terminal business, if you expect any backup in pipeline flows? We don't have a lot of directly related activities around Cushing in that we don't have a storage position there, that sort of thing. I think to the extent that Cushing may start to fill up and some estimates have it to sort of a 90% capacity by perhaps mid-April, something like that. That obviously has an impact in terms of the level of contango in the forward curve which probably throws the market into some form of disarray. I think upstream of Cushing, and certainly both Edmonton and Hardisty are upstream of Cushing, then the value of tankers and the value of optionality becomes certainly enhanced. We would expect that we'll benefit because we can offer customers multiple avenues to get to different markets downstream of both of those areas at Hardisty and Edmonton including the unit train facility, that sort of thing. Impact on trucking will be de minimis because really, the trucking business is the first sort of form of transportation from the point of production to the initiating point in the major pipeline infrastructure within North America. We may see some barrels changing direction and moving away from pipes that they otherwise would have gone into and going into different pipes so they can get to different markets. We wouldn't expect that to be a diminishment in terms of pricing, in terms of our trucking business. Our propane business is completely unrelated to anything related to Cushing, so we wouldn't expect any impact there. Sorry, I was thinking in trucking, there might be an opportunity to get your trucks down there to get stuff out of Cushing. Is that not something that you'd be able to take advantage of? That typically wouldn't be the way the volumes would move. On a truck, they would move from, like I said, the point of production into either a gathering pipeline system or into a mainland pipeline system. The barrels upstream of Cushing would be moving in different directions. I can't foresee any large-scale movement of trucked barrels out of Cushing, no. Nothing like we saw a year or two ago when we saw volumes going between Cushing and the Gulf Coast? No. I wouldn't expect that in any material way. There's lots of pipeline connectivity ex-Cushing, and certainly if the barrels were wanting to move to the U.S. Gulf Coast, that's the way they would move. Okay. Maybe just turning to opportunities you're seeing for M&A in the environmental services segment. What are you seeing today? As I sort of mentioned to Linda, we haven't seen a huge level of capitulation at this point in time. We're really being pretty cautious in this environment with respect to wanting to make sure that we do time acquisitions, if any, relative to where we see the cycle and the duration of the cycle, I guess, is probably the best way to put it. We continue to have a number of smaller opportunities on our radar screen, as is our habit. We continue to make evaluations. We did pull the trigger on a small trucking acquisition in the fourth quarter of 2014. I would expect that we'd be probably in the latter part of the first or maybe into the second quarter before we would start to really take active consideration in terms of the M&A space. Okay. Can you comment on Tervita's recent sale of their U.S. operations? Is this the sort of asset Gibson's interested in, and what do you think of the valuation? Great question. We obviously would be interested in assets of that nature. Because we are in the industry, those are assets that we certainly would've had a look at. I thought the valuation was fair, but certainly reasonably robust, and I think that gives us certainly a lot more comfort around the value of the business that we have. I like our positioning and our asset base in the United States. To the extent that Tervita was able to sell those assets for the price that they did, I think that provides a very solid underpinning for the value of our business. Fair enough. Maybe just last, related to that, can you discuss your thinking regarding growth capital in light of potentially increased acquisition opportunities? Is there a situation where you might pull back on your organic growth in order to pursue more acquisitions? Or is there no need to ration capital and therefore everything that meets your hurdle rate you execute on? Certainly we would. As Don said, we're going to be approaching every investment opportunity with a certain amount of rigor, particularly in this environment. To date, we haven't talked about needing to ration capital or to keep our powder dry, so to speak, with respect to wanting to leave ourselves open to execute on an acquisition versus an organic growth opportunity. The organic growth opportunities that present themselves that we otherwise would invest in, we're going to invest in those opportunities. We have ample liquidity. We have ample room on our balance sheet to fund anything that we can reasonably foresee on the horizon. At this point in time, we're sort of open for business. Perfect. Thank you very much. Those are my questions. Thanks. Thank you. The next question is from Rob Hope from Macquarie. Please go ahead. Your line's open. Good morning. Maybe just as a follow-up, you had mentioned about compression that you were seeing on fees. Are you seeing any increased declines in volumes in any of your business yet? We're starting to see some small-scale reduction in some of the more high-cost areas, I guess, is probably the best way to put it. Nothing really material thus far, but we are hearing reports of certain companies shutting in certain wells where the water cut might be particularly high, that sort of thing. That's sort of following exactly the same pattern as we saw in 2008, 2009, and so it's not surprising. That's going to be the pattern as we go through probably the first two quarters. To the extent the industry consensus is correct and we start to see a return to more normal pricing levels as we go into the back half, then those wells will get put back onto production. Typically, what happens is customers will look at their higher cost to production and shut those wells in first. To the extent that you have a low economic well, if you will, that goes down, you're going to be more hesitant to put a service rig on it, that sort of thing. But like I said, so far we haven't seen anything that would have a material impact on us. All right, great. Maybe just as a follow-up, if I remember correctly, at your Investor Day, you said if oil was kind of low for longer, you could see a 10%-15% haircut in your margin for trucking and environmental services. Is that still the ballpark you're looking at? That's what our history would indicate. I think we said sort of 10%-15% for trucking. To the extent that our environmental services business is somewhat more exposed to the rig count, it may be in the 15%-plus range, that sort of thing. We'll see how the first couple of quarters play out. All right. Just one quick question. The Little Hawk acquisition is described as kind of a hydrovac business. Is this more trucking or are you looking to get into hydrovacs? Little Hawk is really a strategic opportunity for us. It's a business where we were actually one of the biggest customers for that company. This is an internalization of a fair bit of demand that we have for the business internally. It's a Southeastern Saskatchewan business, and it fits very nicely with the environmental services businesses that we have down there. Hydrovac trucks and pump trucks, that sort of thing, typically feed processing reclamation and disposal facilities. It's very synergistic for us in that respect. We wouldn't shy away from doing other investments of that nature. They'll be sort of similar in scope and scale, and will be in areas where we can take advantage of that synergy. All right, great. Thank you. Thank you. The next question is from Kyle Kurz from BMO Capital Markets. Please go ahead. Your line's open. Thank you. Good morning, everybody. Sure. Maybe sticking with the CapEx theme for a second, as we look at 2015, and I guess notwithstanding the CAD 435, we talked about 60% sort of under construction. We've generally been thinking about maybe downside risk to CAD 400, just simply on the two PRDs in the U.S. I guess, one, wanted to confirm that the downside risk is just really on the PRDs. Two, and granted it's early days, but as you mentioned, you had one kind of get commissioned here in December in the Bakken. I'm just curious how that's performing here in the early days, and if that's essentially the gating factor or if that's what you're looking at as far as whether or not you move forward on the next two? Good questions, Carl. Thanks. I think I indicated in the formal remarks that the CAD 30 million or so in the environmental services space that was earmarked for the two remaining PRDs in the U.S. is capital that we'll evaluate as we go through the year. I think I also mentioned that the capital related to the potential expansion of our Moose Jaw facility is, again, what we would call flexible capital. Those two areas are really where we would look at deferral if it makes some sense. With respect to the PRD in the Bakken specifically, it's performing exactly according to plan. We're very pleased with the construction, the commissioning of it, and the level of business that we're seeing there thus far. Not really a gating situation as much as just an indication that we did site the facility very carefully, and we thought fairly carefully about the overall level of business and sustainability thereof before we made the investment decision. That's really the lens and the filter through which we will put the investment decisions for the next two. Okay. No, that's helpful. Thank you. One other, just sort of trying to get more color on the propane performance in the fourth quarter. I guess what I'm trying to better tease out, and I'm not sure if this is something, a path you can go down or not, but if maybe we can look at how much did Cal-Gas and Stidco add to the fourth quarter. I was trying to get a sense of really what was the wholesale decline, for instance, year-over-year, and how much of that was due to, say, for instance, just the fourth quarter pricing environment versus, I don't want to necessarily say structural, but to the extent that you had a lot of retail propane guys get burned in the winter last year, went into winter much more stocked up, have supposedly learned their lesson, maybe less margins on wholesale going forward. Just trying to get a better sense of that. Yeah. Both the Cal-Gas and Stidco acquisitions gave us exactly the profitability that we had forecast at the time that we made the acquisitions. The miss had nothing to do with that. Obviously, we had a very warm fourth quarter, which did impact retail volumes to a certain extent. Having said that, the miss was almost entirely attributable to the wholesale propane business, and that was just strictly volumetric. I don't think you can read anything structural into it. We did see some switching activity in the fourth quarter of 2013 and first quarter of 2014. Again, not anything that would have had a material impact on us. We were also impacted somewhat with respect to wholesale margin compression as well. In a rapidly falling price environment as we saw in 2014, in the fourth quarter of 2014, our margins on the wholesale side did get compressed somewhat. For the most part, it was strictly volumetric. I think we were off 34% volumetrically, fourth quarter of 2013 over fourth quarter of 2014. Okay. Thank you. Sure. Thank you. The next question is from Robert Catellier from GMP Securities. Please go ahead. Your line's open. Hey, good morning. You've gotten to most of my questions, but I did want to drill down a little bit on the hydrovac business. It reminds me a little bit of what happened with the environmental services, where you started with a small investment in PowCo and then it turned into a much larger platform. I wondered if you can sort of talk to the possibility of your investment in hydrovac maybe increasing, what degree you can see there, and if it has any chance at all of developing into something the nature of the environmental services business. We have no intention of taking over the hydrovac world. I would suggest that like I said earlier, we wouldn't shy away from making similar investments in terms of scope and scale. Only in those areas where it would be complementary to our existing environmental services business. The hydrovac business is, like I said, the Little Hawk business, fit very nicely because it helps us because we can just internalize some of our own demand, and because it's particularly well situated around some existing PRDs within Canada. We would look for similar opportunities, but our intention is not to build out a very large platform similar to our environmental services business. Okay. Just with respect to your comments on the capital spending, as I would expect, you're going to remain prudent and vigilant with the money you are spending. The message we've had previously at the Investor Relations Day and other forums is you're still willing to invest capital in a countercyclical matter, maintaining usual discipline. Is that still the case then? Absolutely. We view this downturn as obviously something that's not comfortable for anybody in the business. It does present opportunities and one of the reasons that we have been so conservative with respect to the management of our balance sheet, our payout ratio, et cetera, is because we want to make sure that we are in a situation where we've got sufficient flexibility, liquidity and financial strength to take advantage. To the extent that opportunities present themselves in this marketplace, we're ready to go. Great. My final question here has to do with the maintenance capital spending. Some of the more capital-intensive businesses like trucking, for example, may experience a slowdown with industry activity. How would you describe the degree of flexibility you have with the maintenance capital spending budget? It's high. We're certainly not going to turn down our maintenance CapEx in any way that would harm the long-term viability of our business. You're exactly right, to the extent that we do see some decline in activity levels within our trucking business. That would include the rolling stock that services our environmental services business as well. We do have an opportunity to slow down the reinvestment in depleting assets, if you will, in that area. If we've got a CAD 75 million CapEx budget for 2015, we probably have flexibility around up to 20%-25% of that amount, to the extent that we want to defer things. Okay, thanks very much. All right. Thank you. The next question is from Robert Kwan from RBC Capital Markets. Please go ahead. Your line's open. Great. Good morning. Good morning. Just as you guys are looking out at the oil sands projects, there's a number that continue to be under construction over the next 2 to 3 years. Just wondering, do you have an estimate of future production volumes that don't have a home yet in terms of tankage or takeaway capacity as we think about what the discussions might evolve to on a rail expansion? Yeah. The way we think about that, and I think we mentioned this in the prepared remarks, is we're still looking at CAPP forecasts and others that would call for approximately 1 million, maybe 1.1 million a day in terms of future growth over the next 5-year timeframe coming out of the oil sands. That's related to the projects that are really under construction today. We haven't seen any major deferral or defunding decisions with respect to those projects. Absent a West Coast takeaway, so unless somehow Northern Gateway gets built or Kinder Morgan is successful with their TMX expansion, all those barrels need to come first to Edmonton, then to Hardisty or directly to Hardisty. To, in a roundabout way, answer your question, there will be the need and necessity to handle potentially up to 1 million barrels a day of incremental throughput at Hardisty over the next 5 years. I think I'd mentioned in the script, we did about 580,000 barrels a day through our infrastructure in the fourth quarter. That's really utilizing sort of 5.5 million barrels of tankage. If you think 10-to-1 is a ratio, that would sort of suggest that you're going to need another 10 million barrels of tankage within the Hardisty complex. I don't know that all those barrels don't have a home yet, but certainly some of those barrels don't have a home, and that certainly gives us the level of confidence that we have that we're going to continue to be able to invest very accretively over the long term at both Edmonton and Hardisty. Okay, thanks. I guess, would you hazard to guess what percentage of those 10 million barrels of tankage might not have a home? I guess I'm just trying to get a sense of, even though the commodity price has slowed down, there's probably a pretty good opportunity given the line of sight of just what is coming in in the near term and is under construction. Yeah. We certainly would agree that there is a tremendous opportunity suite in front of us still. The Hardisty complex is reasonably well utilized at this point in time, and so I would suggest that extra 10 million barrels of tankage over the next five years will need to get built at Hardisty. I'm certainly not going to sit here and say that we're going to be able to grab all of that business, but we think we've got a particularly advantaged business model there in terms of our connectivity and the optionality that we provide. We're still very confident that in the medium term, we're going to be reaching a funding decision with respect to the expansion of our rail facility. That will require the construction of additional tankage, et cetera. I guess, to follow on, I can say that we continue to have very constructive and fruitful discussions with shippers that are going to require additional infrastructure at the Hardisty complex and at Edmonton. We're very confident that we'll be making announcements in the future with respect to additional infrastructure. That's great. If I can maybe just then turn to the dividend. You've got a 50%-60% payout ratio target. Just wondering, was the new dividend sized to fit into that range? If there is a temporary kind of downturn here, i.e., what's your comfort of exceeding the high end of the range temporarily in a downside case/bottom of the cycle for some of your segments? Yeah. We have, I think, been fairly just sort of consistent in saying that the 50%-60% payout ratio range is over the medium term. Certainly to the extent that we do see a severe downturn in terms of activity levels, compressions and margins, et cetera. Would we be comfortable if we were outside of that range on a temporary basis? The answer is yes. Like I said, we've got a very strong balance sheet, and even to the extent we were above the 60% payout ratio range for a short period of time in 2015, that still is a very conservative payout ratio in our view. Allows us to retain the flexibility around continuing to invest in the business, that sort of thing. As Don mentioned, on a post-DRIP basis, our payout ratio is only 42% as well. On a cash-over-cash basis, we don't feel that the raise in the dividend is going to place us at any risk whatsoever. For sure. Great. Thank you very much. Thank you. The next question is from Stephen Paget from FirstEnergy Capital. Please go ahead. Your line's open. Stu, Don, Tammy, good morning. Good morning. We could see crude by rail grow rapidly as it seems to be needed to take the incremental barrels out of Western Canada. If pipelines are approved, crude by rail volumes could come back down quickly. Could Gibson make money off crude by rail growth without winding up with stranded assets if pipelines are built? Yeah. I think we've said before that we really like our positioning at Hardisty with respect to building our major crude by rail asset in that market. Our viewpoint is that, a barrel of crude oil on a rail car is just a long-haul version of a barrel of crude oil on a truck. To the extent that you've got every grade of crude oil that's produced in Western Canada showing up at Hardisty every day, there's always going to be a market open, that says that particular barrel wants to go to a specific market that you can't get to via pipe, at least, very easily. That's advantage number one. Those, we're not smart enough to know exactly what market's going to be open 3 years from today, but we are confident enough because of our history of moving specific barrels to specific markets over the last 4 or 5 decades. We're confident enough that those markets will exist. That's sort of rail advantage number one. Rail advantage number two is quality. Making sure that you don't have the degradation of quality of crude oils, as they move through the major export pipeline systems over tankage, breakout tankage downstream of Hardisty, as an example, having contamination and degradation at the interface between different commodity types, that sort of thing. That's an important consideration for certain refiners that want to have a specific quality of barrel, that they can run on a consistent basis through their facilities. The third value for crude by rail is time. Certainly, it's less of an advantage in a $50 crude oil environment. You can imagine the working capital that a major shipper would have tied up in terms of working stock in an export pipeline system. If you can get a barrel to market in 14 days versus 45 days, which is the advantage that you have, rail over pipe, that gives you a very significant working capital reduction as well. Which is important, and I think part of the value consideration that we have. All of those things say that you have to build your facilities very thoughtfully and in the right market locations. Certainly, we think that Hardisty is one of the most advantaged locations in North America. The very short answer to a very long answer is, no, we don't expect that we're going to have stranded facilities. Oh, excellent. Thank you, Stu. Sure. What are the factors that influence your cost of water disposal? Are power costs a material factor, and could Gibson hedge these? Any time you're running a pump, you're burning electricity. We have obviously a fairly high demand for power at our major crude oil facilities as well as in all of our PRDs. We do hedge our power, and try and match our forward costs to sort of our long-term plans. We don't expect any kind of volatility with respect to our operating costs. Thank you, Stu. Final question, if I may. At your Investor Day, you talked about getting in the condensate, you could call it the condensate trade or condensate terminaling in the Edmonton region, as many others have, and knowing that there's a lot of condensate moving. Have you made any further progress there? We continue to work with shippers that will have an interest in infrastructure around the Edmonton area. We do a fair bit of business in the condensate trade today. We're bringing in barrels from the United States and from elsewhere via rail car. We do move a significant amount of condensate around by truck. We obviously make condensate at our fractionation facility at Hardisty. Our reasonably good-sized footprint for condensate because of our blending activities at Hardisty and Edmonton and elsewhere. With respect to major investments in infrastructure, we're not at that stage yet. We continue to work towards that. Thank you, Stu. Those are my questions. Thanks, Stephen. Thank you. The next question is from Dirk Lever from AltaCorp. Please go ahead. Your line's open. Thank you very much, and good morning to you. Good morning. My first question is around the environmental services business. We've just had Noel say that they're looking to add a trucking fleet. I've got to believe that Republic will have the same type of thing. Is the industry changing, and how important is having the vertical integration of trucking in with the environmental services in that business area? Well, one of the reasons that we were as confident as we were, in making the significant investment that we have in the environmental services business is we believe very strongly in the vertical integration model. It's not only the trucks, it's the ability to source barrels by having the capability and the team that can buy emulsion barrels and dry crude barrels at the wellhead. It's also having the marketing expertise to take advantage of these facilities, which can be crude oil blending facilities as well. Between the trucks and the marketing capability, the environmental services capability, if you look at, like I'd mentioned, the acquisition of a small company like Little Hawk, all of those things fit together. I wouldn't be at all surprised to see others try and replicate that model. It works for us. At the end of the day, the environmental services business really is a real estate business. It comes down to making sure that you have the right facilities in the right locations, operating efficiently. Having the trucks is certainly an advantage there as well. Stewart, do you think that the dynamics of that industry are changing, and this is going to be required to maintain market share? That's very difficult to answer. The environmental services business has adequate access to trucks today. To the extent that a company like Newalta adds their own trucking fleet, that's going to displace smaller, independent truckers that are now bringing their barrels to those facilities. I wouldn't say it's changing the nature of the business for the environmental services companies. It's probably going to be a bit of a threat for independent truck transportation companies that have been providing services to companies like Newalta. Yeah. Presumably, they'd just be converted to a Newalta truck or somebody else, and therefore they can guarantee that the product is coming to their facilities as opposed to going to the next one. Yeah. The nature of that business is somewhat, the operators of these facilities, and more importantly, the operators of the producers, tend to be pretty independent with respect to the truckers that they want to use and the facilities that they want to access. Having trucks is an advantage, but it's not going to be a guarantee that you're going to attract all of those barrels to your own facilities. You have to bring other things to bear, certainly. Mm-hmm. Okay. When you look at your processing business, one has to assume that the frack side of the business is going down. With the lower commodity prices, would you see that demand for roofing flux and other products probably picks up? If I was going to be paving a driveway, I'd probably want to do it this summer. What you may lose on one side, you may pick up on the other. How do you see the processing business and the margins underlying it? You're correct. The drilling and completion fluids sales, we're going to see some negative impact there, both in terms of volume as well as in terms of margin. Roofing flux sales, that market is really independent of the energy business. We're selling a very high-quality straight run roofing flux to Owens Corning, to TAMKO, to GAF, others that are making roofing materials primarily in the United States. To the extent that we continue to see GDP uptick in the U.S., obviously, we're looking forward to that market remaining strong and perhaps even becoming stronger. With respect to the other asphalt product that we do sell, which is, of course, road asphalt. If you're paving a driveway, it probably isn't going to have a material impact on us. To the extent that the governments of Saskatchewan and potentially Alberta, get back into the paving business in a more material way in 2015 would impact us positively. Obviously, those governments are having revenue pressures of their own. It remains to be seen just how the tendering season goes and how robust the paving business is within Western Canada in the second and third quarters here. Do you see the two balancing off, or do you actually see a bit of volume knock on the processing side? I guess that's what I'm really getting at. Yeah. I don't think you'll see a volume knock. You'll probably see a margin compression. The drilling and completion fluids products that we do sell are very high-margin products. Roofing flux is a lower margin sales product. Road asphalt, to the extent that markets are robust, can have very positive margins, but probably not enough to offset. That business will be challenged as we go through the second and third quarters in particular. Thank you. Thank you once again. Please press star one on your telephone keypad if you have a question. We have a follow-up question from David Noseworthy from CIBC. Please go ahead. Your line's open. Thank you. Stewart, just wanting to better understand, with Polaris already having been expanded, where are the incremental barrels of condensate getting terminaled today, and at what point does that fill up and then create an opportunity? Certainly, we've seen an expansion of capability around terminals up in the Fort. Our view today is that a lot of those barrels are in the Industrial Heartland situation and area. We have competition from companies like Keyera in the Edmonton area. Certainly, they're moving incremental barrels as well. Really, our viewpoint in terms of condensate is over the next 5 years, that 1 million barrels a day of incremental oil sands production that I talked about is going to drive the need and necessity for another 200,000-300,000 barrels a day of condensate, which is essentially a doubling of the available supply within Western Canada today. Condensate for us, particularly at Edmonton, is a positive future story, but it hasn't had a tremendous year-over-year impact for us coming out of 2014 and into 2015. Can you remind us what your plans are for the land purchase in Strathcona County and the timing of those plans? We have multiple sort of opportunities under consideration with respect to the land. Really, we bought that land for strategic considerations and strategic future considerations. It's particularly well-suited and situated. Our view is that the Heartland is going to become an increasingly important hub within the energy industry, and we just wanted to make sure that we were positioned to take advantage of that. Obviously, with the multiple business lines that we've got around rail, around trucking, around propane, environmental services, et cetera, there's a number of different uses that we can put that land to. We continue to work on plans that will see us starting to exploit that land. Just stay tuned. There's probably more to come in the future. Okay. Thank you very much. Thank you. The next question is from Arshad Dutta from Platts. Please go ahead. Your line's open. Hi, Stu. Just a couple of quick questions. With regards to your crude-by-rail business, how much are you moving now? I probably don't want to go there in terms of how much is actually moving because we have a consideration with respect to confidentiality around the committed shippers to that facility. What I can tell you is that it's 100% contracted on a take-or-pay basis. To the extent that volumes don't move, we still get paid for them. The revenue that we are getting from that facility is based on full utilization, and that's irrespective of whether volumes move. Okay. Is it all primarily Access Western Blend? Again, I'm going to sort of not answer that question with respect to what's moving. Again, that would be up to the individual shippers to talk about. Okay. You had talked about a diluent recovery unit or a couple of them. Is that still on your radar? Yeah, absolutely. We continue to believe that moving dehydrated bitumen, if you will, out of Western Canada, particularly in a rail car, makes economic sense. We continue to progress our preliminary engineering around facilities both out of Hardisty and Edmonton. We continue to progress discussions with various and sundry potential customers around what level of backstopping would be required for us to proceed to a funding decision on a recovery, a DRU. Again, we're not in a position to announce anything today, but we certainly continue to work on that. Okay. One last question. Right at the start of this call, you had mentioned about commissioning a 500,000 condensate storage tank last month. Yes. Did I get that right? We commissioned a 400,000-barrel tank last month, and we're commissioning a 500,000-barrel tank this month. Okay. That would bring up your total capacity to? That would bring our capacity to 6 million barrels. Sorry. Those are crude tanks, not condensate tanks. Okay. They're crude tanks. Okay. That would bring your total capacity? To 6 million barrels at Hardisty. Okay. All right. Thanks. That's all that I had. Okay. Thank you. Thank you. There are no further questions. I would now like to hand the call back to Tammi Price. Thanks again for your interest in Gibson Energy. As mentioned earlier, Cam and I are available after the call if there are more questions. Have a good day, everyone. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. Once again, the conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.