Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gibson Energy Q2 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. Thank you. I would now like to turn the meeting over to Mr. Mark Chyc-Cies, Vice President, Strategy, Planning and Investor Relations. Mr. Chyc-Cies, please go ahead.
Thank you, operator. Good morning, and thank you for joining us on this conference call discussing our second quarter 2022 operational and financial results. On the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive Officer, and Sean Brown, Chief Financial Officer. Also in the room from the senior management team are Sean Wilson, Chief Administrative Officer and Sustainability Lead, and Kyle DeGruchy, Senior Vice President, Commercial. Listeners are reminded that today's call refers to non-GAAP measures and forward-looking information. Descriptions and qualifications of such measures and information are set out in our continuous disclosure documents available on SEDAR. Now I'd like to turn the call over to Steve.
Thanks, Mark Chyc-Cies. Good morning, everyone, and thank you for joining us today. I'm pleased to say we had another solid quarter, with both infrastructure and marketing segments in line with our expectations. We view our adjusted EBITDA of $ 114 million and distributable cash flow of $74 million as strong results and are very pleased with our solid financial position exhibited by leverage ratio of 3x, which is at the bottom end of our target range, and our payout ratio of 73%, which is also at the lower end of our 70%-80% target range. Given this solid financial position, we've been able to meaningfully add to the amount of capital we return to shareholders. So far this year, we've increased our dividend by 6%.
On top of that, we have already bought back $60 million in shares or 1.6% of our outstanding shares. In the back half of this year, we would expect to continue these repurchases, targeting that $100 million for the year. We're also seeing strengthening performance in our business. To the extent that this improving outlet materializes, we see the potential to increase this targeted amount. On the project execution side of our business, we've had several noticeable milestones. We successfully completed the Moose Jaw turnaround and used the downtime as an opportunity to perform required connections to complete our plant expansion and fuel switching project, where we capture the NGLs being used as fuel and replace them with less expensive natural gas.
It also increases our capacity of the plant by an additional 10% to give us just over 24,000 barrels per day. The project also has some pretty good significant savings in our fuel cost and a reduction in our emission intensity by 15% per barrel. At Edmonton, the biofuels blending project was placed in service at the start of the quarter. This project was delivered on schedule and on budget. It was sanctioned early last year under the MSA with Suncor, which is our principal customer at the terminal. Capital cost was roughly equivalent to 1.5 tanks, and it's under that 25-year term. You know, one of the really big benefits is it's ESG positive and aligned with energy transition. At Edmonton, we continue to progress construction of that TMX-related tank, and it's expected to be placed in service early next year.
Shifting to our outlook for next round of capital at Edmonton, we continue to hold discussions for additional tankage. We believe Gibson is very well positioned to support shippers on TMX, optimize crude netbacks, and meet stream requirements. We remain optimistic that we can sanction additional tankage over the next several quarters, with clear visibility of a TMX in-service date being important to several of our potential customers. We also believe we'll continue to build out additional infrastructure at Edmonton under the MSA. On the DRU at Hardisty, we continue to believe that the economics for the value chain will remain strong relative to pipelines well into the future. Discussions have advanced, and I'm very optimistic we will sanction a second 50,000 barrel a day facility under a long-term contract prior to the end of the year.
On our development opportunities for transitional energy, we continue to advance numerous discussions with partners on the development of a HRD or hydrotreated renewable diesel facility. We see it as an attractive opportunity in an energy transition aligned value chain. There is still significant work to be done here, and any sort of FID is likely gonna be mid-next year. If we do proceed, we will ensure that this project and its approximate size to our company are aligned, especially given the current inflationary environment. The returns that we will be very attractive on a risk-adjusted basis relative to our capital allocation opportunities, including share buybacks.
While renewable diesel is interesting opportunity, our core focus on the commercial side remains deploying $ 150 million-$ 200 million in growth capital each year in our existing value chain at those 5-7x build multiples, and under high quality long-term contracts with investment grade partners. For this year, recall that we set $ 150 million in growth capital range in December. It was contingent on timing of sanctioning additional projects through the balance of the year. As I discussed earlier, the tank and the DRU expansion opportunity has been pushed back to later in the year or next year. The lagging effects of the slowdown we saw in the sector during COVID has persisted longer than we expected and is reflected in the tepid increase in capital redeployment in the upstream sector.
We now expect to deploy $ 100 million-$ 125 million in growth capital this year, with where we end up in the range still dependent on sanctioning new projects and how much work we're able to complete by the end of the year. To close, we feel we had another strong quarter. Both our infrastructure and marketing businesses are in line with our expectations. We continue to execute operationally, successfully completing the Moose Jaw turnaround, bringing both the biofuels blending and the fuel switching projects into service. Our financial position is very strong, which has allowed us to return more capital to our shareholders. I will now pass the call over to Sean, who will walk us through our financial results in more detail. Sean?
Thanks, Steve. As Steve mentioned, another solid quarter as both our segments were in line with our initial expectations. Infrastructure adjusted EBITDA of $ 112 million was a $3 million increase from the first quarter of this year. However, the current quarter benefited from some one-time revenues related to a capital project that offset the roughly $5 million decrease we were expecting from the Moose Jaw turnaround, which, as a reminder, we perform every three years. Contributions from the Edmonton terminal increased, with the biofuels blending project coming into service at the start of the quarter, and volumes continued to increase on our Canadian pipelines, driving higher revenues.
Comparing this quarter to the second quarter of 2021, on a comparable basis, after normalizing both quarters, adjusted EBITDA increased by about $9 million despite the turnaround at Moose Jaw this quarter, as revenues at Edmonton benefited from additional infrastructure and service, as well as entering into the MSA. Hardisty benefited from the DRU being in service, and the contribution from Canadian pipelines roughly doubled. In the marketing segment, adjusted EBITDA of $12 million was within our outlook range. Though, I would note that our view of the actual performance was a bit stronger, with volatility in crude prices resulting in the timing of some gains being deferred into the second half of the year. Refined products was fairly strong in the quarter in terms of asphalt and drilling fluids.
Crude marketing did see opportunities from the increased volatility, but if you think of our core strategies, it still remains a somewhat challenging environment. The result this quarter was a decrease of $9 million from the first quarter of the year and a $6 million decrease from the comparable quarter last year. In both instances, contribution from refined products was higher this quarter and crude marketing was lower. In terms of our outlook for marketing, we see a very much improved environment for refined products, such that we would expect adjusted EBITDA of at least $30 million in the third quarter. If the current market environment persists, we are optimistic that adjusted EBITDA for the full year will be in or around $ 100 million or the midpoint of our long-term run rate range.
Finishing up the discussion of the results, let me quickly work down to distributable cash flow. For the second quarter, we reported distributable cash flow of $ 74 million, which was a $5 million decrease from the first quarter of this year and a $18 million decrease from the comparable quarter last year. On a normalized basis, the majority of the differences would be the factors I already spoke to when discussing the segment results. Smaller drivers would include higher replacement capital, in part due to the Moose Jaw turnaround, as well as slightly higher G&A, more as a result of higher technology spend than inflation impacted factors. In all, we continue to expect G&A to run around $9 or $10 million per quarter.
When looking at the comparable quarter last year, we also had the $20 million one-time item we realized, which would have rolled off this quarter, and even with a positive one-time item of $5 million this quarter, it is clearly driving a large part of the $18 million decrease. Cognizant that inflation is a focus for many right now, I would quickly say that we have seen some impact, though mostly on our operating side in items such as power and utilities as well as repairs and maintenance. We also have escalators on the majority of our tank contracts, and our operating costs as a % of revenue are low. We see the risk as limited relative to other business models. On the capital side, we have also seen cost escalations, but these so far have been contained within contingency amounts.
That being said, inflation is certainly a consideration as we review new capital sanctions, including the increase in funding costs for capital impacting required returns. In terms of our financial position, our payout ratio now sits at 73%, which is towards the bottom end of our 70%-80% target range. Our debt to adjusted EBITDA increased to 3x, which is at the bottom end of our 3-3.5x target. This increase in leverage from last quarter was driven by a normalization of working capital, as we discussed on our call last quarter. On an infrastructure-only basis, our leverage would be 3.6x, and our payout ratio would be approximately 71%, where we seek to be below 4x and 100% respectively under our financial governing principles.
Speaking further to our financial position, we continue to maintain a fully funded position with ample cushion. Between our credit facilities and cash on hand, we had approximately $ 600 million of available liquidity as at June 30. Also, as part of being proactive to maintain our financial flexibility, during the quarter, we extended our sustainability-linked credit facility to a full five years, now maturing in 2027. Taking into account our very strong financial position and consistent performance of our business, especially on the infrastructure side, we've continued to adhere to our capital allocation philosophy, having bought back $60 million in shares so far this year, including approximately $40 million in the second quarter.
This repurchase of 2.4 million shares thus far this year represents approximately 1.6% of shares outstanding, an amount we view as particularly notable relative to peers. As Steve mentioned, we are currently targeting buying back up to $ 100 million this year. To the extent that our share price remains around current levels, this would imply that we would repurchase just under 3% of outstanding shares within the year, with the potential for that to increase with continued strong performance from our business. In summary, it continues to be a good start to the year. Results from both the infrastructure and marketing segments were very much in line with our expectations.
From a financial perspective, we remain in a very strong position, being at the lower end of both our leverage and payout target ranges and remain fully funded with ample cushion, with significant available liquidity. We continue to be of the view that our business offers a strong total return proposition to investors, which we believe we have bolstered with our use of the buyback, both in terms of what we've executed on to date and our intention through the balance of the year. At this point, I will turn the call over to the operator to open it up for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. I'm wondering if you could give us some more context around, some of the outlook around your projects. How might we think of a 2023 and beyond, growth capital run rate absent some of the bigger projects like your HRD? Maybe within that context, can you just give us an update on the composition and potential timing of your project backlog, how it might have shifted a little bit in your outlook over the past quarter?
Yeah. Thank you for the question, Linda. Back in December, when we gave out the $ 150 million capital forecast, we expected at that time that probably in the third quarter, we've been able to move forward with the DRU. Which meant we would have capital spend in the third and fourth quarter. Now that's kinda been pushed back, we think, to probably later part of the fourth quarter, as far as sanctioning the project. Then on the tankage side, that $ 150 million, we did include some expenditure in tankage in the third quarter, and probably some steel costs in the fourth quarter. Building the rings out in the third quarter and steel costs in the fourth.
You know, as I said in my prepared remarks, that has been pushed back as TMX still, you know, the exact start-up date of TMX is still kind of uncertain. So those capital expenditures, you know, we will expect next year. One of the things that we're always good at is we spend probably $30 million-$40 million a year in projects in and around our existing assets. You know, they're not big enough projects for
Us to talk about on this call. There are the $5- and 10-million-dollar projects that normally have quite good payouts. You know, more like in the 4-5 range, Linda. When you look at 2023, I think we're still kind of confident in that $ 150 million range. You know, it's. Then when we look ahead, you know, we still have a business development team. We have good assets. And we're continuing to look for other opportunities besides you know our traditional expenditures going forward.
That's helpful context. Now maybe just a follow-up question, with respect to broader capital allocation. How might we think of the maximum buyback above $ 100 million this year if current expectations of your business performance are realized?
Linda, you know, I don't think—as we've talked about previously, we're not gonna be absolutely prescriptive in how we think about the buyback. You know, with what we've seen thus far this year, the performance we expect, we did come out with a bit more of a formal target this year of $ 100 million. As we noted in our prepared remarks, there's certainly a potential for that to increase. You know, I don't think really we wanna be in a position to be absolutely prescriptive on that. I mean, the other factor that certainly goes into that is that we have historically and will continue to have a conservative bias towards our capital structure. You know, you would have seen this quarter that we're at 3x or the low end of a 3-3.5 range target.
You know, that's a place that we're actually quite comfortable being as well. You know, balancing in, as Steve talked about, some of the timing with capital for next year, you know, performance of business through the end of the year, and that bias towards being at the lower end of the target range are all some of the factors we've put in there. I don't think, you know, we're in a position to be absolutely prescriptive on where that may go to this year.
Thank you. Just another contextual question around that. How might your decision whether or not to proceed with the HRD mid-next year influence buybacks beyond that or your dividend policy?
Yeah, I mean, that's capital next year. I think, you know, our view would be that to the extent you know, we're gonna adhere to our capital allocation philosophy, as we move through. I think, you know, to the dividend specifically, we definitely see a benefit in, you know, modest annual increases. We've been very clear on that messaging. I think, you know, sanctioning of something like the DRU, the HRD, would not change that. You know, quantum of capital for the HRD would be, you know, higher than some of our other projects. To the extent that that does get sanctioned, then certainly that would factor into, you know, things like our buyback. But again, you know, it's reasons like that we do have this conservative bias towards our balance sheet as well.
You know, if you think about our positioning as we move into a period of capital like that, it would be, you know, certainly what we would view as being, you know, best in class. You know, certainly consideration that we would take into account in and around the buyback. You know, as we've talked about, you know, the extent that we have excess cash flow and it's from marketing, we would likely allocate that to the buyback. You know, another factor is just our capital outlook going forward. Mid to late next year, potential sanctioning for the HRD. You know, we wouldn't wait for that to happen. In other words, we wouldn't wait through the year and not buy back shares because of it.
As you know, we came closer to the date and potentially saw that sanctioning happening, then you know, we'd have to consider what that means.
Thank you. I'll jump back in the queue.
Your next question comes from Jeremy Tonet with JPMorgan. Please go ahead.
Hi. Good morning.
Morning, Jeremy. How are you?
Good. Thanks. Just wanted to start off with Moose Jaw, if I could. You know, given the expansion that was just completed, does this impact, I guess, your long-term run rate guidance for the asset or for marketing in general?
It definitely helps. You know, the expansion, you know, giving us 10% extra capacity, you know, our OpEx on that is, you know, almost zero additional OpEx, right? Because we're not adding additional fuel. We continue to, you know, to reduce OpEx per barrel with this. The other really big thing on that that it really helps us on is we capture all the butane and light naphtha that we used to burn in the facility. Now we can sell those as purity products. That was almost like a crack spread across a straddle plant for us. That's a pretty, you know, in this I think it's like 600 barrels a day that we're capturing that we used to burn.
That's a pretty significant add back to the overall earnings. We think it's a cost savings, you know, 'cause we used to see it as a loss. We think it's a cost savings of potentially $7 million a year, Jeremy. You add on, you know, the 10% capacity add. You know, long term, that's probably a $10-12 million run rate add on a long-term basis. Whether that's in the marketing or in the infrastructure, you know, I would say the majority of that is gonna be in the marketing, Jeremy.
Got it. That's a nice little add there. Continuing with the marketing and refinery outlook. You talked about getting to 100 there. Just wondering if you could flesh out what things we should be watching are most beneficial at this point, be it crack or basis spreads. It seems like we're seeing quite elevated cracks out there, so are there any in particular that we should be looking at?
Yeah, Jeremy, I'm gonna hand this over to Kyle DeGruchy, and let Kyle answer that for us.
Yeah, sure. Thanks, Jeremy. Yeah, I mean, what I'd say the things to look for is, you know, as we've said, you know, refined products is looking healthy for the rest of the year. I mean, I think part of that is off of the lower differential that we've been seeing lately, but also the refining margins in general have stayed strong. I think crack spreads, you know, are a good indicator. Not all of our products are the same as some of the larger refiners, with diesel and gasoline really running their yields, but it's a good indicator. You know, I'd say on the weaker differential in the first half of the year, I mean, you really have to pay attention to the Gulf Coast to really see that reason why.
I think up here in Canada, we're very used to a wide differential based on a lack of pipeline egress. You know, I'd say the first half was really more the weakness in the Gulf Coast driving that price backwards. Going forward, though, I think you know, our view is that volumes in Canada will increase. We're coming out of upstream maintenance in the second quarter. That'll bring volumes to our assets, and I would think that that's also supportive of a wider differential, certainly as it relates to the first half. I'd pay attention to those things, and I think we'll see those opportunities in our crude marketing book as well, particularly on the location side.
We're optimistic that that wide differential is gonna stay there, you know, kind of for two different reasons. You know, one, first half being the Gulf Coast, and we'll certainly be paying attention to that. But also the outlook in Canada as we head into the winter and which is traditionally more of a volume season for us, especially when you think about diluent requirements, adding to that. Those are kind of a few of the things that at least we think about and hope to positively impact our business in the refined business and also the crude marketing side.
Got it. Maybe just to ask more directly, what would drive you towards the bottom half of the range? You talked about 100 there, 'cause the numbers we're seeing for cracks point to some pretty high numbers. Just wondering if there's any offsets that are holding it back, 'cause it seems like you guys could soar past 30 in a quarter here.
I mean, I think the 30 number really includes a lot of the things that I've talked about. I mean, there obviously can be some downsides, but you know, one being, let's just say the export market opens up and we see a real strengthening and pull on crude. Again, I wouldn't say that we see that as being a high likelihood, just given the fact that Canada is also going to be producing more into the second half of the year. Although I'd temper, you know, soaring above 30, I think that most of what I said would balance into that number.
Got it. Thanks. Just real quick, last one, if I could. A finer point on the buyback conversation. Just when you look at them and, you've talked about being opportunistic there, but is timing of buybacks more influenced by where leverage sits at a certain point in capacity for buybacks, or is it more driven by kind of stock price at a given point in time?
Good question, Jeremy. I mean, it's not influenced by stock price at a given time. It'd be more by, you know, funding position, capital allocation. We're always gonna think our share price is undervalued and is a good opportunity for buyback. You know, certainly we monitor buyback. With some of the weakness that we saw into the tail end of the quarter, we would have accelerated the buyback a bit to take advantage of that. You know, we are not stock pickers as it relates to the buyback. We commit to amount, and we execute on that amount.
Got it. That's helpful. I'll leave it there. Thanks.
Thanks, Jeremy.
Your next question comes from Robert Kwan with RBC Capital Markets. Please go ahead.
Hey, good morning. Steve, earlier on the call, you talked about opportunities beyond traditional expenditures, presumably the HRD is one of them. Can you talk about some of the other things that are kind of in the realm of possibilities for the company?
Well, I would say, you know, the DRU and expanding around the DRU value chain is probably some of our opportunities. You know, that's not a typical tank or tank add. Then I think the other one would be at Edmonton, where we have the MSA with Suncor and continue to advance additional transitional fuel terminal opportunities with them. Those are some of the-
Got it.
Those are a couple.
Okay. Largely, though, still what you're doing. Just around, though, your comment on the DRU, are you just talking about the expansion itself? Or you talked about in and around the value chain. Are you talking about downstream terminals or rail or what was in that comment?
Yeah, I think, you know, we like the DRU and the value chain around there. Potentially terminals around that are an option for us into the future.
Got it. As you think about the HRD and evaluating the growth, you've got traditional metrics like NPV and IRR, but how much do market valuations factor into your thinking? You know, for example, you've got a Canadian publicly traded comp. It's not very well valued right now. You know, how does that valuation, you know, factor into how you think about going forward with a project of your own?
It's a great question, Robert. I mean, it's Sean here. You know, I would say it's a bit dangerous to look, you know, at a Canadian publicly traded comp in isolation and just assume that that is a read-through for, you know, the multiple that any sort of asset would attract. I mean, to me, you know, multiples are garnered for many reasons. You know, one being leverage, two being quality of cash flows, three being growth profile. You know, a number of factors that you would be acutely aware of.
You know, I would say that, you know, for us, we would look less at, you know, something like a Canadian publicly traded comp and just, you know, ensure that any project that we execute on, you know, we're very aware of what the quality of cash flows are, what the quality of counterparties are, you know, what exposure it introduces or does not introduce, and how that fits into the overall Gibson portfolio in totality. That would be more of the balance that we would consider, as we look at sort of projects like this. That would be true of almost any project that we execute on.
Got it. I guess it's just easier with the storage, or the core storage as you've done it. I know we have talked about the Canadian comps. You look at U.S. comps, or is it really just lean on NPV, IRR, and your kind of long-term valuation work? If you've got to fight the market on valuation, you'll kind of fight that fight at that point. Is that the approach?
I'd say that would be more of the approach. Again, we need to remember, you know, what the overall quantum of this project is gonna be in relation to Gibson. You know, and I think we said, you know, not only in our prepared remarks but, you know, certainly in discussions, you know, that's something we're extremely cognizant of. You know, this is something that we think could potentially be exciting for the company. But at the same time, we're quite measured on, you know, what the overall size will be relative to our other assets. You know, it needs to fit into the portfolio, for sure. You know, if the economics make sense, the economics make sense.
At the same time, you know, it needs to be something that, you know, is an appropriate size in the context of everything else we do.
Understood. If I can just finish with just a question on cleaning up a few things just moving in the quarter. You mentioned that you had some deferred gains in marketing. I'm just wondering if you could quantify those. Then on infra, I don't know, is there any other color on the nature of the one-time fee as well as what looked like some unusual earnings booked down in Joliet?
You know, Joliet always has. I'll go sort of backwards here. Joliet always has some, you know, unusual. I wouldn't say unusual, it's just the way it gets booked in our, you know, it's non-cash. It's, you know, not really much to add there. You'll see a bit of lumpiness there but never really of any size. With respect to the nature of the sort of one-time revenue that we had in our infrastructure segment, you know, that was just part of a contractual arrangement. You know, those were revenues that we earned under that contractual arrangement. You know, it is not abnormal actually for something like this, you know, that we have potential for things like this in the future.
The other reason we really highlighted it as people started to look at the run rate for the business, we wanted to make sure that they didn't bake that in. You know, so really that offset, you know, the impact that we would have expected from Moose Jaw. Again, it was just something that contractually was built in and was just revenues earned as part of that contract at a point in time. From a marketing perspective, you know, I would say the quantum that we carried in, you know, wasn't all that significant in the grand scheme of things. You know, if you think about it, you know, as we move through the quarter, our expectation probably would have been that we would have been at the higher end, you know, if not slightly above our targeted range.
Think of that as being, you know, circa $ 50-ish million. You know, we came in at, you know, $ 12-12.5 million, you know, so the midpoint of the range. You know, so the quantum really was not all that significant in the grand scheme of things. You know, absent that, you know, we probably would have been at the high end or slightly above our range.
Great. Appreciate the color. Thank you.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from [Will gu] with CIBC Capital Markets. Please go ahead.
[No Transcript]
Thank you for the question. I think with respect to buybacks, you know, our target, earlier in the year that we provided in a call would have been $ 20 million-$25 million per quarter. You know, we did exceed that somewhat, through the first half of the year. I talked about that in a reply earlier, you know, where we saw some of the weakness in the share price, you know, in the back half of this past quarter, so we took advantage of it. You know, in the prepared remarks today, you know, we did indicate that we expect to buy back. The current target is buy back $ 100 million per year. You know, so that would imply, you know, if we spread it out evenly over the two quarters, you know, roughly $20 million a quarter.
You know, that's the guidance we're providing right now. As we also noted, there's certainly potential for that to increase as the year unfolds and we see how the business performs. Not gonna be totally prescriptive, as I said earlier. You know, target we have out there is $ 100 billion for the year. You know, at $60 right now, that'd imply $20 a quarter with, you know, potential for some upside to that.
Okay, thanks. Just one more. Any thoughts on the potential size of the renewable diesel project?
Would you consider M&A as a possibility in the space going forward?
Thank you, Will. This is Steve. When I think of the size of the renewable diesel project, we've been anywhere from a little over 6,000 barrels a day up to 15,000 barrels a day. I would say we're kind of looking at a 9,000-barrel-a-day range right now. We're still evaluating, you know, several opportunities in this space in Alberta and in Saskatchewan. But all of them will include partners. Just as Sean said earlier, we'll be quite measured in the size of our expenditure into this new space. As far as M&A, I mean, M&A is always a possibility. We always look for M&A opportunities. If one came in and fit what we want in our strategy, that is definitely an outlet. Thank you.
Thank you, Will.
Okay, thanks.
Your next question comes from Scott Taylor with Pembroke Management. Please go ahead.
Good morning. Relating to the DRU unit, is there much sensitivity to crude oil prices as far as the economics of that project are concerned? Meaning, $80 crude versus $120, is there a great variation? If not, are there any new variables that have come into the picture here in terms of a potential customer going through all the pluses and minuses in evaluating how the DR unit might fit a new person or a new company? Thank you.
Well, thank you, Scott. When I think of the DRU, absolute crude price is not a big driver, especially not in the short term. You know, in the long term it definitely impacts because that you know drives forward more growth in the oil sands, more brownfield expansions in the oil sands. Probably the two biggest drivers around the economics of the DRU. One is condensate price in Canada versus WTI or versus WCS. Then the other one is, you know, just as Kyle talked about earlier, the price of you know the value of the dilbit on the U.S. Gulf Coast is a driver. I don't think anything has really changed in those.
We still think that the DRU is better on a netback basis to ours versus pipelines. You know, there's nothing in the market that has changed recently that would drive us one way or the other on that. As far as additional customers, you know, we continue to talk to other upstream here in Canada and continue to talk to customers on the U.S. Gulf Coast, which are some of the large refiners there in that Port Arthur Beaumont area.
All right. Thank you.
Your next question comes from Ben Pham with BMO. Please go ahead.
Hi. Thanks. Good morning. I wanna go back to HRD. I'm wondering your thoughts on the Clean Fuel Standard. Are those supportive of your economics there? Did it create a bit more variables to your analysis?
You know, we discussed that yesterday. I would say it was consistent with where we thought it was gonna be. It's supportive of the project. You know, the potential of SAF going forward is even more positive for a project. You know, we think that on the long-term basis, SAF is going to give long-term terminal value to this project.
Okay, great. Maybe going back to some of your comments on share buybacks this year, and you also comment on your CapEx program next year being at $ 150 million or range. I'm curious, how do you, I mean, how do you weigh the share buyback versus delevering into CapEx rising and risk of equity issuance? Like, how do you, I know a bunch of moving parts, but how do you balance all of that?
Yeah, I mean, I think a good question, Ben. I don't think. You know, we're not looking to buy back shares to reissue them. I mean, our buyback target certainly would take into account where we think, you know, current and future capital is going to be. You know, if anything, if you look at, you know, sort of that $ 150, sort of that amount, that would be lighter than what we have spent previously, you know, on a fully funded basis. Even at $ 150, we would see certainly the ability to buy back shares above and beyond that, you know, on a fully funded leverage neutral basis. You know, I think a good question, but I mean, if you think about the setup we have, you know, right now we're at 3x levered.
You know, we'd expect to stay at or even probably slightly below that range even with the quantum buybacks we're talking about right now.
The setup going into next year will be equally as strong. We certainly see the ability to fund 150 or more, you know. For that, you know, at that quantum, we would see the ability to continue to buy back shares.
Okay. Got it. Thank you.
Your next question is a follow-up from Jeremy Tonet with JPMorgan. Please go ahead.
Hi. Thanks for squeezing me back in. Although admittedly a smaller piece of the puzzle, just wanted to touch base with regards to payout here, if there's anything worth discussing given the quantum of activity in the Permian these days.
Thank you for that question, Jeremy. You know, we have 250,000 acres dedicated to us there and about 100,000 of them with one producer. That's a mid-major producer. They came on with a three-well pad last year that flowed, you know, around 4,000 barrels a day, and 12 million cubic feet a day of gas. It was a really nice well. They're gonna come on with another four-well pad this year. With that, we think they'll go to 8,000 barrels a day on that four-well pad. Pre-COVID, you know, we kinda got what their depletion plan looked like, and it really depends on how many rigs they put on.
If they keep going to 4-well pad, obviously there's not a lot of real opportunity there. You know, with just a slow kind of increase. If they move to 1.5 rigs, we'll see pretty substantial gains in the revenue there. You know, if they stay at 1.5 rigs, it'll grow to maybe $30 million or $40 million a year.
Got it. That's helpful. I'll leave it there. Thanks.
Your next question comes from Matt Taylor with Tudor Pickering Holt. Please go ahead.
Hey, thanks, guys, for letting me slip in here. I just wanted to come back to Q2 marketing. When you set that $ 10 -$15 million guidance back in May, crack spreads were a lot lower. I was just wondering why that didn't translate to more of a Q2 EBITDA uplift from refined products. Is it just that margin got deferred or is it something else?
Well, we had the turnaround in the quarter, so you know, that took away more than a third of our revenue for the quarter with the turnaround. Because the turnaround lasted, you know, total downtime for the refinery was more than 30 days, you know, because you gotta cool it down, and then you gotta start it up and run. The biggest impact to refined products book was, you know, we missed a third of the business, right? If refined products would have been up, we would have pushed up in the 20-plus range if we'd have been up for the quarter.
The $5 million was the cost, but obviously opportunity cost there, right, of having volumes taken offline. And then one more on renewable diesel. Sean, you mentioned a couple different times that I think is important risk-adjusted returns. Maybe two quick questions. What's your appetite for commodity exposure there to balance that risk-adjusted return framework you're thinking of? Then you've talked about making sure the CapEx size is the right size for the company. What guidepost is driving that right size framework?
When we talk about risk-adjusted returns, I mean, this is, you know, the HRD right now is gonna be a commodity-based asset, similar to what we see with Moose Jaw. Obviously, government framework and incentives will drive that, along with, you know, the supply cost of the canola oil and price of diesel. There's so many variables there when we look at it. We'll continue to refine and gain a real knowledge of the business, right? We're gonna continue to hire experts to help us with that. You know, we like this business. We see it as a good fit for our long-term opportunities for us.
At the end of the day, we're gonna be quite measured in that. Now, we're not gonna get real prescriptive in what percentage that is, or what our risk-adjusted return is at this time. You know, at the end of the day, we are a fuel infrastructure company, and so we'll be quite measured as we step out of that business.
Okay. Thanks for taking my questions.
Matt.
Mr. Chyc-Cies, there are no further questions at this time. Please proceed.
Thanks, operator, and thanks everyone for joining us here for our 2022 second quarter conference call. Again, I'd like to note that we have made certain supplementary information available on our website. That's gibsonenergy.com. Also, if you have any further questions, please don't hesitate to reach out to us at investor.relations@gibsonenergy.com. Have a great day, and thanks for your continued support of Gibson.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.