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 on 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

• Entered into Long-term Biofuels Blending Project with Suncor: Gibson recently announced that it has entered into a long-term agreement with Suncor Energy for services at the company’s Edmonton Terminal and the related sanction of an expansion to support the blending and loading of third-party biofuels for Suncor. As part of the agreement, all existing assets at the Edmonton Terminal currently contracted with Suncor would be combined into a single master services agreement (MSA). Under the MSA, Gibson would receive a fixed fee for the use of its assets, which currently represent the majority of third-party revenues at the Edmonton Terminal.   The MSA also contemplates the potential future sanction of additional infrastructure at the Edmonton Terminal on a similar fixed-fee basis under a 25-year term.

• Lucrative Dividend Yield: Gibson shares are yielding higher and offering a lucrative dividend yield of ~6.7%. The dividend yield is providing a strong margin of safety to investors to enter at the current market price as the yield is much higher than risk free rate on 10-Year Canadian Government Bond Yield of 1.525%. So, investors have higher headroom to hold this as long as they are paying dividend. Further, the company has a track record of consistent dividend payment over the past 8-years.

• Strong Balance Sheet: The company maintains a strong balance sheet. The Net Debt / Adj. EBITDA of 2.8x in FY2020 was lower than the 3.0x – 3.5x target, with Fully-funded for all sanctioned capital. Moreover, the internal funding capacity was well excess of 2020 and 2021 growth capital spend. Also, the company is having Investment grade credit ratings from S&P (BBB–) and DBRS (BBB low).

• Quality Cash Flows: The company generates ~ 80% of segment profit from take or pay and high-quality fee for service contracts. Also, more than 85% of the company’s exposure is under long term contracts with investment grade counterparties.

• Well Positioned Relative to Peers: The company is well positioned in ESG score relative to peers despite being in the early phases of the ESG journey, with ~ 25% decrease in Per Barrel Emission Intensity at MJF.

Source: Company Presentation

• Completely Repositioned its Business: The company has repositioned its business completely. The company is generating ~75% of EBITDA from terminals and pipeline in FY20 compared to ~25% in 2014. Also, the company generated ~60% of EBITDA from take or pay fee contracts in FY20 compared to ~30% in 2014.

Source: Company Presentation 

• Risk Associated with 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: FY20

Source: Company Filing

• During the full-year 2020, the group’s reported segment profit for the Infrastructure segment of CAD 374.4 million increased by CAD 75.3 million, as compared to CAD 299.1 million in FY19. This was largely driven by additional tankage brought into service in the fourth quarter of 2019 under take-or-pay, stable fee-based contracts, higher fees related to the expansion of the Moose Jaw Facility and a CAD 15.0 million future environmental remediation provision recorded in the second quarter of 2019.
• Also, in the year under consideration, the group’s reported profit for the Marketing segment was CAD 94.6 million, decreased by CAD 100.5 million as compared to CAD 195.1 million in FY19. The decrease was driven by reduced margins and lower sales volumes for Refined Products as well as limited locational and quality-based opportunities arising in 2020 for Crude Marketing, whereas 2019 benefited from a stronger market for Refined Products and higher earnings in the first quarter of 2019 because of the opportunities created by volatility in crude differentials.
• Moreover, segment profit from continuing operations of CAD 469.0 million decreased by CAD 25.3 million for the year ended December 31, 2020 compared to CAD 494.3 million for the year ended December 31, 2019. The decrease was primarily driven by a lower contribution from the Marketing segment, partly offset by stronger performance from the Infrastructure segment.
• Adjusted EBITDA from continuing operations of CAD 447.5 million decreased by CAD 11.7 million, for the year ended December 31, 2020 compared to CAD 459.2 million for the year ended December 31, 2019. This was mainly on account of lower segment profit, lower general and administrative expenses in the comparative period primarily due to the recognition of a CAD 10.8 million credit related to the amendment of the Company’s retirement benefits plan and the impact of net unrealized losses from financial instruments recorded in the current year compared to net unrealized gains from financial instruments recorded in the prior year.
• Distributable cash flow from continued operations of CAD 298.9 million decreased by CAD 2.6 million for the year ended December 31, 2020 compared to CAD 301.5 million for the year ended December 31, 2019 resulting in a payout ratio of approximately 66% for the year ended December 31, 2020.
• Net income from continuing operations of CAD 121.3 million decreased by CAD 55.0 million for the year ended December 31, 2020 compared to a net income of CAD 176.3 million for the year ended December 31, 2019.
• The Company declared quarterly dividends totaling CAD 1.36 per common share for the year ended December 31, 2020 compared to CAD 1.32 per common share for the year ended December 31, 2019. Total dividends declared for the year ended December 31, 2020 were CAD 198.7 million, and CAD 192.0 million for the year ended December 31, 2019.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 34.80% of the total shareholding. M & G Investment Management Ltd. is the entity holding maximum shares in the company at 19.55%. CIBC Asset Management Inc. is the second-largest shareholder, with a holding of 2.76%. The institutional ownership in the company stood at 49.68% and strategic ownership stood at 0.64%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation:

In the short-term, the effects from COVID-19 have had a profound impact on the global economy. Specific to the energy industry, COVID-19 has resulted in a significant decrease in demand for refined products which has resulted in a substantial decrease in crude oil prices as the current global supply of crude oil meaningfully exceeds crude oil consumption. While there has been a partial recovery in certain refined product demand and crude oil prices, the timing of a more fulsome recovery still remain uncertain notwithstanding vaccination programs now underway.

In FY20, the company reported decent performance with revenue at the Hardisty Terminal increased by CAD 5.5 million compared to previous comparable financial year. This was largely driven by the full year contribution of 2.0 million barrels of additional tankage being placed into service in the fourth quarter of 2019 and the expansion of the HURC Facility placed into service in the third quarter of 2019, both underpinned by long-term take-or-pay contracts.

The group generates approximately 80% segment profit from take-or-pay and high-quality fee-for-service contracts, and negligible counterparty risks led by Creditworthy Counterparties.

Further, the company is offering a very lucrative dividend yield amid low interest rate environment which is encouraging for income seeking investors. Also, the company has solid balance sheet with Net Debt / Adjusted EBITDA of 2.8x total and 3.7x Infrastructure only leverage in FY20.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 20.97 on April 22, 2021. 

1-Year Price Chart (as on April 22, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 23, 2021 price as well.

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Disclaimer

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