Gibson Energy Inc.

Gibson Energy Inc. (TSX: GEI) is an oil infrastructure company that collects, stores, and processes crude oil and refined products. The group deals with buying, selling, and optimizing crude oil, natural gas liquid, road asphalt, and oil-based mud product. Other than that, the group also provides infrastructural support to its clients, wherein it makes up a system of oil terminals, rail loading facilities, pipelines, and an oil processing facility. 

Key Highlights:

• An Income Play: The group has a solid history of dividend payment, backed by stable cash flows amidst economic cycles. Notably, the group reported total distribution of CAD 49.494 million in Q1FY21, slightly higher than CAD 48.073 million in pcp. Moreover, at the last traded price, the stock was offering a dividend yield of ~5.4%, which is lucrative considering the persisting interest rate scenario.

             Five years dividend history

• Gradual Shift to Stable Fee-Based/Take-or-Pay contracts: Over the years, the company has gradually shifted business model towards fixed pay business from commodity-oriented business (subjected to price volatility), which denotes stable profit generation and is a key positive. Notably, the company derived ~80% of its Adjusted EBITDA from the infrastructure segment in FY20 compared to ~30% and ~65% in 2014 and 2017, respectively.

Source: Company Presentation

• Ample Liquidity to support operations: As of March 31, 2021, the company reported a cash balance of CAD 55.7 million and has access to borrowings under the unsecured revolving credit facility amounting to CAD 632.3 million. The management believes that its existing cash flows from operations are sufficient to fund its operating obligations, fund capital expenditures and pay its dividend.

Q1FY21 Financial Highlights:

• GEI announces its quarterly result wherein the company posted revenue of CAD 1,609.732 million, higher than CAD 1,458.690 million in the previous corresponding period (pcp). The increase was driven by higher volumes and commodity prices from the Marketing segment.
• Gross profit declined to CAD 72.6 million, as compared to CAD 100.599 million in pcp, due to higher cost of sales (CAD 1,537.132 million v/s CAD 1,358.091 million in pcp).
• Operating income was recorded at CAD 55.849 million, down from CAD 86.652 million in pcp. The group reported higher general and administrative expenses of CAD 19.940 million v/s CAD 18.161 million in Q1FY20.
• Net income stood lower at CAD 32.777 million, as compared to CAD 50.003 million in Q1FY20. The decline was primarily due to the above-mentioned reasons, partially offset by lower net finance costs (CAD 14.988 million v/s CAD 19.332 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in oil & gas prices and change in demand dynamics of these commodities may affect the group’s performance. Moreover, any delay or cancellation in the planned project’s implementation would affect the business prospect.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company charges a stable fee-based component from the Terminals, which depends upon the volumes from the oil sands and have the least volatility with commodity price, which is a key positive, as it would support the performance during lower crude oil prices. Additionally, more than 85% of the company’s operations are under long-term contracts and falls under investment grade counterparties, indicates a balanced risk profile and assures stable cash flows. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Keyera Corp, Inter Pipeline Ltd etc. Hence, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 25.92 on June 16, 2021.

One-Year Technical Price Chart (as on June 16, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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