Gibson Energy Inc (TSX: GEI) is a Calgary, Canada-based Oil & Gas Refining and Marketing company. Its areas of operations include blending, processing, storage, marketing and distribution of crude oil, condensate, natural gas liquid, water, oilfield waste and refined products. The company transports energy products by utilizing its integrated network of terminals, pipelines, and storage tanks located throughout western Canada.

Revenue Mix

Source: Kalkine Group, Refinitiv (Thomson Reuters)

Investment Rationale

• An Income Play with Consistent Dividend Payment History: In stock market investing in high dividend-paying stocks like Gibson Energy tends to be popular within the investors' community, and for a good reason - some research work based on historical return suggests a significant amount of all stock market returns come from reinvested dividends. With Gibson Energy yielding 6.3% and having paid a dividend for over 10 years, many investors likely to find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Further, the current dividend yield is significantly higher than the TSX Composite Dividend Yield of 3.6%.

• Insiders are increasing their stake: Eight out of fourteen insiders have increased their stake in the company over the past six months. Insiders only increase their stake when they are bullish on the future performance of the company.

• Higher Free Cash Flow Yield: The higher free cash flow generation ability of the company reflects the strong financial health of the business and its ability to manage the business regardless of economic cycles. Free cash flow is basically a surplus cash a company can generate after meeting its capital expenditure, and free cash flow yield is free cash flow per share divide by the per-share market value of the company. GEI free cash flow yield stood at 9%, which is significantly higher amid a time when the average free cash flow yield of its peers is negative. Higher free cash flow yield provides a greater margin of safety to the existing as well as potential shareholders.

• Ample Liquidity: The Company has access to CAD 900M of liquidity, including the two bilateral demand letter of credit facilities. The company's short-term and long-term liquidity needs are met through cash flow from operations, the Revolving Credit Facility, and debt and equity financings. The current liquidity level seems to be enough to fund its ongoing capital expenditures, debt service requirements, dividend payments and working capital needs.

• Industry Leading Return on Equity (RoE): The group's RoE stood at 22.8% substantially higher than its peer's average RoE of 1.3%. A higher ROE suggests that a company's management team is more efficient when it comes to utilizing investment financing to grow their business and is more likely to provide better returns to investors. A higher ROE also indicates how well a company's management deploys shareholder capital.

• Significant improvement in margin profile: The group has improved its margin profile significantly and in the last quarter, outperformed the industry significantly.

• Outperformed the sector in last one year: In the last one year, the stock of GEI consistently outperformed the sector. The stock has outperformed the sector by ~47% in the last one year, ~35% on a YTD basis and ~13% in the last three months.

• Risk Associated to Investment: Despite lockdown restriction are easing across North America, recovery in oil demand is relatively slower than expected. Also, a fall in air travel due to coronavirus has impacted the demand for Jet fuels. Further, if the second wave of COVID-19 strikes, it would weigh on the oil demand significantly.

Q2FY20 Financial Highlights

Source: Company Presentation

• Adjusted EBITDA from continuing operations stood at CAD 142.7 million and increased by CAD 49.1 million for the three months ended June 30, 2020 compared to CAD 93.6 million in the previous corresponding period. The increase in the three-month comparative period was primarily due to higher segment profit earned as well as lower general and administrative expenses.
• During the quarter, distributable cash flow from combined operations came in at CAD 93.9 million, increased by CAD 14.1 million compared to CAD 79.8 million generated in the previous corresponding period.

Source: Company Presentation

• During the quarter, net income from continuing operations stood at CAD 41.3 million, which increased by CAD 6.6 million from a net income of CAD 34.7 million recorded in the three months ended on June 30, 2019.
• On August 4, 2020, the Board declared a quarterly dividend of CAD 0.34 per common share. The dividend is payable on October 16, 2020 to shareholders of record at the close of business on September 30, 2020.
• The Company continued to progress with the fourth phase of development at the Top of the Hill. Gibson has three tanks representing 1.5 million barrels of storage currently under construction which is expected to be placed into service by the end of 2020. Once the fourth phase of development at the Top of the Hill is placed into service Gibson will have approximately 13.5 million barrels of storage capacity at its Hardisty Terminal.
• Segment profit for the Infrastructure segment came in at CAD 89.8 million, reflecting an improvement of CAD 32.5 million from CAD 57.3 million recorded for the previous corresponding period. The increase was driven by additional tankage brought into service in 2019 under take-or-pay, stable fee-based contracts, the expansion of the Hardisty Unit Rail Facility and the Moose Jaw Facility.
• Segment profit for the Marketing segment stood at CAD 44.0 million, reflecting an increase of CAD 6.1 million compared to CAD 37.9 million recorded in 2QFY19. The increase in the three-month comparative period was due to higher margins and higher crude volumes.

Source: Company Presentation

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 35.72% of the total shareholding. M & G Investment Management Ltd. and The Vanguard Group, Inc. holds the maximum interests in the company at 19.11% and 2.89%, respectively. Institutional Ownership in the company stood at 52.07% and strategic ownership stood at 0.48%, respectively.

Price Performance

Source: Kalkine Group, Refinitiv (Thomson Reuters) 

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

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

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation:

The group reported a decent performance in the second quarter of FY20, with Adjusted EBITDA from continuing operation increased by CAD 49.1M on a YoY basis, Net income from continuing operations increased by CAD 6.6 million on a YoY basis, and Distributable cash flow from combined operations increased by CAD 14.1 million against a year over period. Moreover, the group’s RoE stood at 22.8% substantially higher than its peer’s average RoE of 1.3%. The company generates ~80% of its EBITDA through take or pay or stable fee-based contract, which provides stability.

Despite the challenging environment, the group continued to distribute dividend, which is encouraging from an income investor’s point of view. The group has a decent track record of dividend payment. At the last traded price, the stock was offering a lucrative dividend yield of 6.3%.

We expect demand for crude oil to recover gradually as the government across the globe had started to open the economy in a phased manner. Easing in lockdown restrictions resulted in the resumption of industrial and economic activities, which is driving the demand for crude oil and its derivative. Increasing oil demand is likely to impact the GEI’s financial performance positively.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 21.69 on October 1, 2020 with lower double-digit upside potential.

 

*Please be aware dividend is variable and not guaranteed.

*Recommendation is valid at October 2, 2020 price as well.

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