Gibson Energy Inc (TSX: GEI) is a Canada based oil infrastructure company with its principal businesses consisting of the storage, optimization, processing, and gathering of crude oil and refined products. Headquartered in Calgary, Alberta, the Company’s operations are focused around its core terminal assets located at Hardisty and Edmonton, Alberta, and also include a crude oil processing facility in Moose Jaw, Saskatchewan (the “Moose Jaw Facility”) and an infrastructure position in the United States.

Revenue Mix

Product Mix                                                            Geographic Mix

                                                                                                             

Source: Annual Report

Investment rationale

• Insiders Remain Net Buyer: Shares of Gibson witnessed many ups and downs in 2020, because of the volatile oil market led by COVID-19 pandemic. However, shares have recovered approximately 96% from its year’s bottom and trading just 24% below its 52W high, thanks to the strong insider’s buying, recovery in oil price and demand recovery over last few months. Insiders remain net buyer in 2020 and utilized discounted price as an opportunity to accumulate shares. Usually, insiders’ buying provide confidence to both existing and potential shareholders. Also, recently in November, insiders have bought shares of the company, which implies that insiders are bullish on the future performance of the company near the current market price level.

Insiders Buying. Source: Refinitiv (Thomson Reuters)

• An Income Play: Amid low-interest-rate environment when there is a lot of liquidity coming from the central banks to help the economy recover from COVID-19 led setbacks, finding a risk-adjusted rate of return from money market and fixed income securities instruments is quite tough. In the current scenario, the money supply is quite high in the system, and central banks have brought down lending rates at around all-time lows with more than US$18billion bonds are yielding negative. Given the current environment, Gibson stock is a good bet for income-seeking investors, as it is offering a decent dividend yield of 6.35% that too with a proven track record of consistent dividend payment regardless of the business environment over the past 10-Years.

Divided History. Source: Refinitiv (Thomson Reuters)

• Strong Balance Sheet: The company maintains a strong balance sheet, with Net Debt / Adj. EBITDA at 2.7x, relative to 3.0x – 3.5x target, with internal funding capacity well into excess of 2020 and 2021 growth capital spend and Investment grade credit ratings from S&P: BBB– and DBRS: BBB (low). 

• Quality Cash Flows: The company’s 80% of EBITDA comes from stable, long-term take-or-pay or fee-for-service contracts. Further, ~90% of Terminals EBITDA comes from Investment Grade counterparties. Also, the company has a dominant market position at Hardisty and continue to target sanctioning 2 – 4 tanks per year on a run-rate basis, with bias currently to the lower end. 

• Ranked #1 ESG Score in Peer Group: The company is well positioned in ESG score relative to its peers despite being in the early phases of the ESG journey, with ~ 25% decrease in per barrel emission intensity at MJF.

Source: Company Presentation

• Strong Segment Profit Outlook: The company sees that Infrastructure to grow to ~80% of total segment profit by 2020E. The company expects significant growth in the core Infrastructure segment over time, with a ~20% CAGR between 2011 and 2020E. Infrastructure is expected to generate segment profit of CAD 360 – CAD 380mm in 2020E and a ~CAD 400mm annual run-rate by year-end 2020. The company is targeting long-term run rate for the Marketing segment profit of CAD 80 – CAD 120mn.

Source: Company Presentation

• Risk associated with the investment: the company’s marketing segment which contributes 95% to the group’s topline is exposed to commodity price fluctuations arising between the time contracted volumes are purchased and the time they are sold, as well as being exposed to pricing differentials between different geographic markets and/or hydrocarbon qualities.

Financial Highlights: Q3FY20

Source: Company Filing

• The group’s revenue from continuing operations for the quarter under review improved 72% from the previous quarter to CAD 1,364.2 million; however, plummeted 32% on a YoY basis. The lower YoY revenue was mainly because of 35% reduction in the company’s market segment revenue which contributes ~95% in the group’s top-line, however, partially offset by a 12% increase in the infrastructure segment revenue.
• The company reported a higher cash flow from operations before income taxes and working capital changes of CAD 364.2 million in the current nine-month period compared to CAD 336.6 million in the prior period primarily due to higher segment profit.
• Segment profit from continuing operations of CAD 116.7 million, decreased by CAD 14.5 million for the three months ended September 30, 2020, compared to CAD 131.2 million for the three months ended September 30, 2019. The decrease in the three-month comparative period was due to lower margins earned from the Marketing segment, partially offset by stronger performance from the Infrastructure segment.
• Segment profit for the Marketing segment of CAD 23.4 million, decreased by CAD 26.3 million for the three months ended September 30, 2020, compared to CAD 49.7 million. The decrease in the three-month comparative period was primarily due to lower margins earned from the Crude Marketing business.
• Segment profit for the Infrastructure segment of CAD 93.3 million, increased by CAD 11.8 million for the three months ended September 30, 2019 months ended September 30, 2020, compared to CAD 81.5 million for the three months ended September 30, 2019. The increase in the three-month comparative period was primarily due to additional tankage brought into service in the fourth quarter of 2019 under take-or-pay, stable fee-based contract.
• Cash provided by operating activities was CAD 106.1 million in the three months ended September 30, 2020, compared to CAD 231.3 million.
• As at September 30, 2020, the company had an available cash balance of CAD 45.7 million and had the ability to utilize borrowings under the Revolving Credit Facility of CAD 655.0 million.
• For the three months ended September 30, 2020, the Board has declared quarterly dividends of CAD 0.34 per share.

Top-10 Shareholders

Top-10 shareholders in the company held around 34.38% stake in the company. M & G Investment Management Ltd., The Vanguard Group, Inc., and BMO Asset Management Inc. are among the largest shareholder in the company and carrying an outstanding position of 19.1%, 9.99% and 9.82% respectively. The institutional ownership in stock stood at 52.56%, and ownership of the strategic entities stood at 0.49%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation

Gibson Energy has reported a decent performance on a sequential-quarter basis; however, the performance was lower on a YoY basis because of abnormal business environment emerged due to COVID-19 pandemic. Oil market hit hardest due to the virus outbreak, and oil registered large price swings in the past 9-months.

Oil prices and demand has recovered significantly over the past three months, led by improvement in general macro-economic activities and lifting of lockdown restrictions. Improved oil demand and prices would positively impact the group’s performance in the coming quarters.

Also, improvement can be seen in Gibson Energy shares, as prices have recovered approximately 95% from its year’s bottom and hovering above the crucial long-term and short-term support levels of 200-day and 50-day SMAs. Moreover, insiders buying also provides a lot of confidence to the existing and potential shareholders.

Also, its shares are offering a decent dividend yield of 6.35% with a proven track record of consistent dividend payment over the past 10-Years.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 21.43 on December 17, 2020.

1-Year Price Chart (as on December 17, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at December 18, 2020 price as well.

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Disclaimer

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