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:

• Robust Dividend Yield: GEI has a strong history of consistent dividend payment, backed by stable cash flows across economic cycles. In Q1FY21, total distribution stood at CAD 49.494 million, marginally higher than CAD 48.073 million in pcp. Notably, the stock carries a dividend yield of ~5.99%, which looks impressive considering the current interest rate scenario.

Ten-years Dividend History, Source: REFINITIV

• Ample liquidity and prudent capital management: At the end of Q1FY21, the company reported a liquidity level of CAD 800 million in form of revolving credit facility and cash balance. This seems to be sufficient to navigate the current working capital requirements and capital investments. Moreover, the company does not have any maturity date till 2025, which indicates retention of liquidity.

• Leading pipeline connectivity to enhance business prospects: The company has industry leading inbound and outbound pipeline connectivity. The above connectivity has been secured from connection agreements built over decades, which is difficult to replicate by the other industry players and hence, it acts as a moat for the group. Moreover, this also provides cost efficiency to the company and provides production volumes to reach market at a competitive price.

Q1FY21 Financial Highlights:

• GEI declared its second quarter result, wherein the company posted revenue of CAD 1,609.732 million, up from 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 slides to CAD 72.6 million, from 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).
• The group reported its operating income at CAD 55.849 million, down from CAD 86.652 million in pcp. The period was marked by higher general and administrative expenses (CAD 19.940 million v/s CAD 18.161 million in Q1FY20), while net other operating income came lower at CAD 3.189 million v/s CAD 4.214 million in pcp.
• 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: The group’s performance is directly correlated to the international commodity prices, and a volatility in the commodity prices would affect the performance. The company witnessed an increase in the total debt, which remains as a key concern as it would lead to higher finance expense.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

In order to combat the market volatility and ensure higher income stability, the company gradually shifted to Take-or-Pay or Stable Fee-Based revenue, which is a key positive. In FY20, the group’s ~80% of the adjusted EBITDA came from Take-or-Pay or Stable Fee-Based fee structure compared to ~15% in FY14 and 45% in 2017, respectively. We have valued the stock using the Price to CF 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 Pembina Pipeline Corp, Keyera Corp and Inter Pipeline Ltd etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 23.39 on July 14, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary

One-Year Technical Price Chart (as on July 14, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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