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 Updates:

• Opportunity from the Canadian Renewable Diesel Segment: As per the recent plan, Government has proposed Clean Fuel Standard to drive significant demand growth outside of British Columbia region. Notably, British Columbia already has an established market for renewable diesel given its Low Carbon Fuel Standard (LCFS) scheme, and hence, the demand is likely to remain elevated on a long-term basis. The company is highly poised to take advantage of the growing demand coming from the sector.

Source: Company Presentation

• Exponential Surge in Cash Flows: In Q1FY22, the company reported operating cash flows of CAD 305.7 million v/s CAD 43.5 million in pcp. The growth was supported by higher net income coupled with increase in changes in working capital. This is impressive and it would support the company’s overall liquidity. This momentum is likely to continue in the coming days, as the company’s all infrastructure revenue from comes from long-term take-or-pay or fee-for-service contracts, which suggests cash flows stability.

• Impressive Dividend yield: The company reported a higher dividend payment of CAD 51.3 million in Q1FY22 million, as compared to CAD 49.4 million in pcp. This is impressive as most of the companies are lowering their distribution in order to retain liquidity. The stock of GEI carries a dividend yield of 5.38% on an annualized basis, which looks impressive considering the ongoing interest rate scenario. Moreover, the Board of Directors approved a quarterly dividend of CAD 0.37 per common share payable on July 15, 2022.  

Risk associated with the Investment:

The Marketing segment is exposed to commodity price fluctuations arising between the time contracted volumes are purchased and the time they are sold. Hence, this might dampen the company’s realization rate and subsequently the revenue.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• GEI announced its first quarter result, wherein the company posted revenue of CAD 2,668.4 million v/s CAD 1,609.7 million in pcp. The surge was primarily due to higher commodity prices and volumes from the Marketing segment.
• The company reported its gross profit of CAD 95.4 million v/s CAD 72.6 million in pcp, supported by elevated revenue, partially offset by higher cost of sales.
• The quarter was marked by a higher general & administrative expense and reported an increase in other net operating income. The company reported higher operating income of CAD 82.8 million v/s CAD 55.8 million in pcp.
• Net income surged to CAD 51.9 million in Q1FY22, as compared to CAD 32.7 million in pcp, thanks to a higher operating income, partially offset by a higher income tax expense.
  

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group

Stock Recommendation:

The company reported adjusted EBITDA of CAD 20.6 million, which is considerably higher than CAD 3.2 million in pcp. This is impressive as it reflects better cost management and improved operational efficiency. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Pembina Pipeline Corp, Keyera Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of GEI at the last closing price of CAD 27.51 on June 10, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

Disclaimer

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