Earnings Call: Q4 2013

Mar 5, 2014

Annual report

Good morning, and welcome to the Gibson Energy 2013 fourth quarter results conference call, in which management will review the financial results of the company for the 3 and 12 months ended December 31st, 2013. 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 risks 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 adjusted EBITDA, pro forma adjusted EBITDA, or distributable cash flow, is a reference to a financial measure excluding the effect of certain items that would impact comparably. For further information on forward-looking statements or non-GAAP financial measures used by Gibson, please refer to the 2013 fourth quarter management's discussion and analysis issued yesterday by the company. 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 Ken Hall, Vice President of Investor Relations and Communications. Please go ahead. Thank you, Wayne, and thanks, everyone, for joining us this morning. Joining me on the call today are Stewart Hanlon, President and CEO, and Donald Fowlis, Chief Financial Officer. The format for the call will be that Stu will provide a short overview of our results, and Don will highlight some key areas regarding our financial position and capital spending. This will be followed by a question and answer session. Tammi Price, our VP of Corporate Planning and Development, and I will be available after the call to answer analyst modeling questions. With that, I'll turn it over to Stu. Thanks, Ken. Good morning, everyone. I'm very pleased to report that our performance for 2013 resulted in a historical record for adjusted EBITDA profitability for both the fourth quarter and the full year. Adjusted EBITDA in the fourth quarter of 2013 was CAD 115 million, a 20% increase over the same period in 2012. While adjusted annual EBITDA for 2013 was CAD 427 million, an increase of 41% over the same period for 2012. The record fourth quarter performance was largely due to the impact of the OMNI acquisition we closed in October of 2012, strong margins in our Processing and Wellsite Fluids business segment, and the impact of growth capital invested at our Hardisty terminal. I will now discuss segment profitability in more detail. Segment profit in our Terminals and Pipelines business was CAD 25 million in the fourth quarter, a 23% increase over the same quarter in 2012. This performance was largely due to higher volumes through the company's terminals and additional profit from customers with dedicated tanks resulting from our continuing capital investment program. Segment profit in our Environmental Services business was CAD 23 million in the fourth quarter of 2013 as compared to CAD 11 million in the same quarter of 2012. Although part of the increase was due to the full quarter impact of the OMNI acquisition in the current quarter as compared to the same period in 2012, the increase was also due to improved performance in the business in both Canada and the United States. Our Environmental Services business across North America is performing as expected, reflecting robust activity across oil-producing basins. Now, typically, fourth and first-quarter profits in our U.S. locations in this business segment are slightly lower due to seasonality factors. The Processing and Wellsite Fluids business segment earned a segment profit of CAD 14 million in the fourth quarter of 2013. This was 34% higher than the same period last year, largely driven by higher margins earned on frac fluid and distillate sales, partially offset by lower margins on roofing flux, asphalt, and tops. The Propane and NGL Marketing and Distribution segment delivered a CAD 2 million increase in the segment profit in the fourth quarter versus last year. This increase was mainly due to higher margins from the wholesale business as a result of more favorable pricing conditions. I would like to point out that the recent increase in propane prices has not materially impacted the profitability in this business segment, since we price most of our services at a rack price plus a margin. Segment profit from our Truck Transportation and Marketing businesses were relatively unchanged in the fourth quarter versus last year. Now, looking forward at marketing profitability for the first quarter of 2014, we expect to see higher sequential earnings as blending opportunities appear to be more favorable. I'd like now to turn the focus to Gibson's many growth opportunities. The fourth quarter saw Gibson spend CAD 55 million on internal growth projects, bringing the total for 2013 to CAD 177 million. Now, this amount is lower than our original planned spending, and Donald Fowlis will discuss the reasons for the capital shortfall in a few minutes. 2013 expenditures were primarily directed towards the following key initiatives. The four-tank expansion on the east side of our Hardisty terminal, the Hardisty West construction, additional Hardisty storage tank connections, the pipeline connection to the unit train facility and related facilities near Hardisty, additional saltwater disposal wells and the addition of new and expansion of existing treating facilities in both Canada and the U.S., and other small growth projects across our business segments. The CAD 340 million growth capital for 2014 that we announced last December will progress several of those initiatives just mentioned, as well as several new initiatives. The unit train facility near Hardisty should be operational in the second quarter, and we expect two of the four large crude storage tanks under construction at Hardisty to be in service by the fourth quarter of 2014. In summary, based upon discussions with our customers, we expect the industry to be very active, increasing the demand for our integrated midstream solutions and allowing Gibson's business segments to continue to post strong results through 2014 and beyond. We hope to announce additional infrastructure projects as the year progresses. Now I'll pass it over to Don, who will discuss our financial position. Thanks, Stu. Due to strong cash flows from operations and the refinancing we completed last June, our financial position is secure with ample liquidity. At the end of the fourth quarter, we had CAD 97 million of cash on hand and CAD 443 million available under our revolving credit facility. Our debt to debt plus capital ratio was 33%. Our leverage ratio, net debt to trailing 12-month pro forma adjusted EBITDA, was 1.6 times, and our interest coverage ratio was 9.1 times. The company declared dividends of CAD 0.275 per common share in each of the four quarters of 2013, for a total declared dividends of CAD 134 million. Distributable cash flow was CAD 253 million for the year ended December 31, 2013, resulting in a dividend payout ratio of 53%. This was within our targeted payout ratio range of 50%-60%. Our board-approved dividend policy provides for a formal detailed review of the dividend after each fiscal year-end. The review primarily considers our estimate of future distributable cash flow and how this estimate aligns with our medium-term targeted payout ratio. Based on this year's review, yesterday, our board of directors approved a quarterly dividend of CAD 0.30 per common share to shareholders of record at the close of business on March 31, 2014. This represents a 9% increase from the existing quarterly rate and results in a new annualized dividend of CAD 1.20 per common share. Our next dividend is scheduled to be paid on April 17th, 2014. As Stu mentioned earlier, in 2013, we invested CAD 177 million on growth capital projects. This represents a 41% increase over organic growth spending in 2012. That being said, our 2013 capital investments were approximately 71% of the CAD 250 million that we expected to spend in the year. The main reason for the shortfall was delayed spending on our Edmonton terminal expansion projects. This resulted from slower progress than expected for regulatory approvals and delays in executing certain commercial agreements. Also, a land investment in the Edmonton area for the Truck Transportation segment that was expected to close in 2013 closed in 2014 instead. Because of these and other factors, more growth capital spending planned to occur in 2013 will instead be made in 2014. However, at this point, our previously announced capital guidance for 2014 is unchanged. In addition, we do not expect significant delays or significant cost overruns for our announced infrastructure projects. We'll provide a more detailed update to our capital spending guidance mid-year. That concludes my comments, so I'll turn it back to Stu. Thanks, Don. In closing, 2013 was another very successful year for Gibson Energy. We continue to see increased activity levels across all of the oily basins in which we participate. Therefore, shareholders can expect to see growing cash flow from the company and strong total returns in 2014 and beyond. 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 pick up your handset before making your selection. If you have a question, please press *1 on your telephone keypad. You may, at all times, cancel your question by pressing the # sign. Please press *1 at this time if you have a question. There will be a brief pause while participants register. Thank you for your patience. Our first question is from Rob Hope from TD Securities. Please go ahead. Good morning. Congrats on another good quarter. Thanks, Rob. Maybe just looking out to Q1, we've seen some challenging weather year to date. However, when we look back to Q1 2013 as well, that was challenging weather as well. I'm just wondering if you could maybe add some color if you're seeing weather being more of a hindrance on your results this year versus last year? I would say certainly not more 2014 over 2013. Q1 always presents weather challenges, particularly in Canada, in Montana, North Dakota. This year we have seen some fairly severe weather down throughout the typical areas which aren't impacted throughout the United States as well. I would say, it has had an impact. We don't expect the impact to be material. Sequentially Q1 of 2014 over Q1 of 2013 shouldn't show a relative impact strictly because of weather. Okay, great. Maybe just moving on to your propane business as well. Maybe two things there. We did see some weakness in your retail propane margins on a per unit basis. I'm just wondering, are you not fully able to push through rack plus there and you're seeing margins compress as propane prices increased? And I guess on that side, will you see a potential pickup as propane prices come down? Yeah. When you see a very rapid escalation of rack pricing, which we did see in the fourth quarter, we do have rack price plus pricing. I think I said that, right? Rack price plus pricing for our contract. When the price is going up daily or sometimes twice a day, you do have a little bit of a lag just logistically. We think we're very disciplined in that regard. The retail side of the business did perform very well in spite of the fact the rack prices did go up so rapidly. Your observation that when rack price falls, we have the opposite effect in that our margins expand somewhat is correct. What we've seen in the first quarter is we've seen very rapid escalation of pricing in January. We've seen a fairly rapid fall in pricing in February and beyond. Our expectation for the first quarter for the retail propane business is that it should be a good quarter. Okay. One last question, then I'll jump in the queue. On the wholesale side, were you able to capture some of the premium Conway pricing? Yeah, we have a pretty robust logistical capability on the wholesale side, and so we were able to bring that capability there. We did see good performance on the wholesale side and good margin performance as well as volume performance. We also have a fairly robust ability to move other LPG products around, such as butane, and pricing in those sectors was favorable as well. All right, great. Thanks. I'll jump back in the queue. Thank you. The following question is from Elaine Williams from FirstEnergy Capital. Please go ahead. Great. Thank you. Just one question this morning. In 2012, I think Gibson's closed around six acquisitions, but we didn't see any acquisition activity in 2013. Is this a function of a reduced number of opportunities in the market, or are things just looking expensive? It's more the latter than the former, Elaine. Okay. We did look at a lot of potentials in 2013, but really just didn't get to that intersection of due diligence comparative meets the valuation that we found compelling. Typically, we have grown our business through acquisitions on the trucking side, the propane side. We believe that there will be opportunities in Environmental Services to do that as well. Early days, 2014, we're starting to see more favorable pricing. We're looking at a lot of deal flow, and are modestly optimistic that we'll be able to conclude on some smaller sort of bolt-on acquisitions in 2014. Great. Thank you. Thank you. Once again, please press star one if you have a question. The following question is from Michelle Zuliani from RBC Capital Markets. Please go ahead. Hi, good morning. I was just wondering, it looks like Environmental Services is continuing to improve, and I was just wondering how are activity levels right now, and has your outlook changed from last quarter? On Omni specifically, how are you tracking to budget that underpins the original guidance you gave? I would say that with respect to Omni, in particular, the business is tracking more towards the expectations that we had when we made the original investments in 2012. Activity levels remain pretty robust throughout all of the oil basins in which we're operating. Particularly in Western Canada, we're seeing an uptick in activity over this time last year. We're pleased with the way the business is operating. There are some softer spots yet. The exports and support services business is still relatively soft. That's, however, a fairly minor part of the overall business. Our expectation is that what you saw in the first quarter, or sorry, in the fourth quarter of 2013, should spill over into early days in 2014. Our expectation for the year is for continued good performance. Okay, that's great. Thanks. One last question. How are you seeing pipeline projects such as Cochin and Southern Lights expansion and Norlite impacting your outlook for expansion at your Edmonton terminal? We view all of those projects as being very positive and very necessary. If you look at the expectation for heavy oil growth in Western Canada, the need and necessity to essentially double the condensate supply or the diluent supply over the next four or five years, all of those projects are going to be important as we move forward. We are constructing the capability to continue to grow our aggregation capabilities on the diluent condensate side, particularly at Edmonton. We're bullish about expansion possibilities there. We have previously indicated that Inter Pipeline is building their initiating station for Polaris, for instance, on the northern end of our Edmonton facility. We fully expect that that's going to lead to increased infrastructure requirements that we'll have to provide. Okay, great. Thank you very much. Thank you. The following question is from Robert Catellier, an independent analyst. Please go ahead. Thank you and good morning. My questions here are going to be follow-ups effectively. I'm curious as to the seemingly endless delays for Keystone XL and, I guess also the regulatory uncertainty on crude by rail, how that's affecting customer behavior at Hardisty, both with respect to the rail terminal expansion opportunity as well as new storage tankage opportunities? Yeah. Great questions. I wish you'd asked me some easy ones. With respect to XL, it's anybody's guess. Latest indications, I think, from the Americans is that a decision in one way, shape, or form will be stated in the next few months. We look forward to that. As we've stated previously, we're certainly very supportive of the XL project, and to the extent that it goes ahead, we think it would be very good for us because, of course, we would be the initiating point for a large portion of the volume that goes down that pipe. With respect to rail and regulatory uncertainties, we really haven't seen any impact thus far. Our unit train facility is fully contracted with firm service take-or-pay contracts for periods, like we said, of not less than five years. What I've seen thus far in terms of the impact of regulations or the increased regulations around crude by rail, I think is a very prudent and pragmatic response by the regulators. I think that they've largely got it right. The impact on Gibson Energy's will be minimal. The vast majority of our fleet is already compliant with new regulations. We expect that to the extent that these regulations make crude by rail and, in fact, the entire rail shipment business more safe, that can only be a positive thing. Stewart, if I can paraphrase then, you think it's possible that you can move forward and generate enough demand for an expansion of the rail terminal at Hardisty, even with the current regulatory uncertainty there? We have not seen nor have we heard of anybody talking about wanting less crude by rail. Yes, we are going to get this thing built and commissioned on budget and largely on time. Immediately subsequent to that, we'll go to work on the expansion. Okay. On the Environmental Services side, it appears to me that the Canadian portion of the operation seems to be gaining more traction and having a little bit more success than the U.S. What has to happen for the U.S. operation to sort of gain that traction and maybe accelerate its growth there? Is it a question of timing and just things take a little bit longer in the U.S. or is there some other operational or regulatory bottleneck there? I wouldn't characterize it as being operational or regulatory bottleneck. I think, if you look year over year at the results in our Environmental Services business, we've seen improvements on both sides of the border. We had, when we bought Omni, a fairly robust pipeline of development opportunities that we were executing on. We've continued to execute on those organic growth opportunities. In the last year, we have filled up the pipeline, so to speak, of organic growth opportunities on the U.S. side. We have very recently received regulatory approval on a full-service PRD, a processing reclamation disposal facility in North Dakota. We broke ground on the landfill last week, as a matter of fact, and we'll be building the process unit over the coming months. I think our expectation is that you will see an acceleration of organic growth capabilities throughout the Environmental Services business through 2014 and beyond. It really just sounds like timing. Yeah. It was basically, we bought Omni, we digested Omni, we got it integrated, and now we see the performance as expected in that business. We have a pretty good understanding of the marketplace in which we're operating. Our view of that market as being a very large market that's growing very rapidly, providing us with accretive opportunities to deploy capital, that hasn't changed. We're confident we're going to be taking advantage of that. Okay, thanks very much. Thank you. Once again, please press star one if you have a question. The following question is from Kyle Henderson from Precidis Advisors. Please go ahead. Good morning, and congratulations on a solid quarter. My questions on the proposed tank car regulations were addressed. Thank you. Thank you. Thank you. Our following question is from Lucas Michalowski from CIBC World Markets. Please go ahead. Hi, all. I'm calling in for David Norsworthy this morning. Congratulations on a good quarter and a strong finish to the year. Just wanted to kind of follow up on some of the CapEx numbers. Thanks for the color for some of the reasons why there was, I guess, a miss in 2013. Would you maybe be able to indicate whether some of those delays have been resolved already in Q1 or have those capital expenditures been pushed more into Q2? Yeah, we are in construction mode for 1.7 million barrels of tankage at Hardisty. We're in construction mode for the pipeline-related infrastructure to support our unit train facility at Hardisty. We continue to spend money. I would answer that question this way, I guess, Sam, the CapEx guidance that we gave for 2013, the CAD 250 million, and the CapEx guidance that we gave for 2014, CAD 340 million, those numbers are discrete. In total, that's our expectation of the capital that we will be able to deploy. We're deploying it as rapidly as is prudent. As an example, we talked about a land acquisition to support our truck transportation business, which we had expected to close in 2013. It actually closed in early 2014. There's just some timing, and there always is. The spillover of CapEx from one quarter to another or one year to another shouldn't be viewed as anything that's tremendously surprising. Okay, thanks. Maybe following up on that a little bit, you identified CAD 508 million worth of identifiable upgrades and replacement and growth expenditures over the next 12 to 24 months. Could you maybe provide a little more direction on how does that comport with the capital budget of CAD 560 million you have laid out for the next two years? Sure. That's an accounting number, so I'll let Ron answer. Yeah. CAD 660 million, the total for the two years, like you say, that's been our capital guidance. When the CAD 508 million specifically in the MD&A would be the projects that are underway right now. The CAD 660 million would include projects that we think will happen but have not gone for final board approval, nor have they gone through our formal AFE CapEx approval. Whereas the CAD 508 million are projects that are approved by the board, are AFE'd, and are underway. Okay. Thank you very much. Would you be able to provide us some color about your cash tax expectations for 2014? I think they'd be in line with 2013 on a percentage basis. We don't see the effective tax rate significantly changing in 2014. Okay. That's it for me for now. I'll get back in the queue. Thank you. Thank you. Once again, please press star one if you have a question. There are no further questions registered at this time. I would like to return the meeting to Mr. Hall. Thanks again, Wayne, and thanks everyone for your interest in Gibson Energy. As mentioned earlier, Tammi and I are available after the call if there are more questions. Have a good day, everyone. Thank you. That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.