Description

General:

We wrote up GEI previously and are unfortunately slightly underwater on it, with approximately 10 percent in distributions offsetting most but not all of the 12% stock price decline over the period (SPX +4% over the period).  Hopefully, second time around will be more of a positive result….

Brief Business Summary:

We are providing a short summary of the business here, but for a more detailed, longer-term perspective, please see our prior writeup and the two others on the site.

Gibson is a Canadian midstream energy company.  Prior to the recent acquisition, Gibson’s operations were exclusively in Canada and included 1) a growing (2011-2019) and (more recently; 2020-2023) stable liquids infrastructure business -- primarily two terminals with storage tanks, pipelines, etc. and, 2) a liquids marketing business that is somewhat volatile over the short-run, but which seems to generate about $100m/year in Ebitda on average over a multi-year period.

Below is a snapshot of the Ebitda by segment over the last 12 years.  Note that the company (as of the last 3+ years) is operating in just two segments (the black and grey bars below), as several non-core businesses (light blue) have been divested.

The Gateway acquisition

In June GEI announced the Gateway acquisition: complementary midstream assets in Texas.  We like the acquisition and think there is a good chance we get a re-rating higher of the shares over the next 6-24 months.  If we dont get a re-rating, we still get a 20-25% return over 12-18 months, including the distribution:

1. The first reason we like the PF company with the acquisition is that it inflects the growth profile of the whole company. Note that the underlying (pre-acquisition) infrastructure Ebitda (after a period of growth from 2012-2019) has leveled out at around $430M-$440M for 2021/2022/2023:

Underlying infrastructure EBITDA by FY: 

2021: 434M

2022: 435M

2023E 440M

Gateway is a less mature asset and has a long runway of growth potential ahead of it:

• export capacity only 67% utilized 
• can add additional tanks on adjacent land
• permian production (serviced by Gateway infrastructure) expected to grow 7% per year through 2028; this should translate into higher utilization of existing Gateway infrastructure and lead to additional infrastucture commissioned at the complex.

With Gateway, our PF projections (this also includes 3 additional tanks coming on line in Canada, which have already been announced and adds back in the assumed 100m in marketing Ebitda):

2024: 705M

2025: 740M

2. The second reason we like GEI here is that GEI is already under-distributing, with a 55% payout ratio in the most recent quarter and a 13% free cash flow yield.  The Gateway transaction requires minimal maintenance capex and takes the free cash flow yield to about 16%.  This seems entirely too high for assets with stable and now growing cash flow and with over 85% take or pay contracts.

3. The third reason we like this entry point is the overall valuation:

Gibson is bite-sized, even after the acquisition-- relative to some of the larger midstream players.  It's multiple reflects that, at a full 5 turns or nearly 40 percent lower than its larger peers and where other tarnsactions have taken place.  While likely not imminent, at some point, it seems likely that GEI could easily be acquired at a very attractive price by one these larger players.  This dynamic, in our view, really limits the downside here.

If GEI re-rates to just 10x over the next 9-12 months (still 3+ turns below comps/peers and consistent with its historical trading range in the past of 10-12x), using 2025 EBITDA of $740M, the shares would trade to about $30.  Even if we just straight-line the current multiple of 8.5x, the shares trade up to $23.50. 

4. Lastly, there is a possible additional short-term opportunity: prior to today, there was an arb situation as GEI launched a bought deal for approxiamtely 20M subscription rights, as part of the financing of the transaction.  The rights convert to shares today (8/2) and become freely tradeable today.  It's diffcult to predict the outcome, but there is often significant volatility in these situations, with 20M+ shares available to trade for the first time today on a base of 142.  It's possible this will create an even more attractive short-run opportunity, if in fact some of those who bought in the rights offering have now decided to sell, as they are slightly in the black and also collected a distribution.

Note: all numbers in this report are in Canadian dollars.

Disclaimer:

We make no claims or guarantees about the accuracy, completeness or adequacy of the contents of this report and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document and may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author and is presented herein without warranty of any kind – whether express or implied. Readers should do their own due diligence.

Catalyst

1. Potential near-term arb unwind opportunity related to rights offering.
2. Integration of the Gateway acquisition skews business mix more toward less volatile cash flow streams, creates inflection in ebitda growth.
3. Implied resumption of share repurchase program in early 2024.
4. Closure of gap in multiples with larger, more liquid names.
5. Continued modest dividend growth for foreseeable future.
6. Accelerated debt paydown due to increased free cash flow
7. New tanks coming on-line: one in 4Q of this year and two in 2024.
8. Expansion of customer base/growth at Gateway
9. Possible takeout by larger midstream infrastructure players