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Edited Transcript of GEI.TO earnings conference call or presentation 7-May-19 1:00pm GMT

Q1 2019 Gibson Energy Inc Earnings Call

Calgary May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Gibson Energy Inc earnings conference call or presentation Tuesday, May 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Chyc-Cies

Gibson Energy Inc. - VP of Strategy, Planning & IR

* Sean M. Brown

Gibson Energy Inc. - Senior VP & CFO

* Steven R. Spaulding

Gibson Energy Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew M. Kuske

Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research

* Benjamin Pham

BMO Capital Markets Equity Research - Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Linda Ezergailis

TD Securities Equity Research - Research Analyst

* Patrick Kenny

National Bank Financial, Inc., Research Division - Research Analyst

* Robert Catellier

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Robert Hope

Scotiabank Global Banking and Markets, Research Division - Analyst

* Robert Michael Kwan

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Gibson Energy's 2019 First Quarter Conference Call. Please be advised this call is being recorded. I would now like to turn the meeting over to Mark Chyc-Cies, Vice President Strategy, Planning and Investor Relations. Mr. Chyc-Cies, please go ahead.

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Mark Chyc-Cies, Gibson Energy Inc. - VP of Strategy, Planning & IR [2]

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Thank you, operator. Good morning, and thank you for joining us on this conference call, discussing our first quarter 2019 operational and financial results. On the call this morning from Gibson Energy are Steve Spaulding, President and Chief Executive officer; and Sean Brown, Chief Financial Officer. Listeners are reminded that today's call refers to non-GAAP measures and forward-looking information. Descriptions and qualifications of such measures and information are set out in our continuous disclosure document available on CEDAR.

Now I'd like to turn the call over to Steve.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [3]

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Thanks Mark. Good morning, everyone, and thank you for joining us today. This was another strong consistent quarter for Gibson Energy. The adjusted EBITDA from combined operations of $124 million, adjusted EBITDA from continuing operations $118 million and distributable cash flow from combined operations of $83 million. We've been able to continue to strengthen our already strong balance sheet and fund our dividend and infrastructure projects. Infrastructure had another steady quarter and continues to grow. The increase was driven from placing 1 million barrels of Hardisty tankage and the Viking pipeline into service. Marketing was very strong and in line with the outlook we provided on last quarter's conference call.

We're very happy when there's an opportunity to realize outside earnings from marketing. We use it to pay down debt and fund growth capital. And in terms of growth, we've continued to execute our capital projects. Both the first tanks in the Hardisty Top of the Hill build-out and the Viking pipeline were placed in service ahead of schedule and on budget.

Our customers were able to benefit from the early use, and we started earning early. For tankage we realized the revenue as soon as it's placed in service, as it's mostly from the lease fee. The pipeline, there can be a ramp-up period. Throughput on the Viking pipeline has grown steadily since we placed it in service in December. It is now operating near its current capacity and consistent with our expectations. We have several low cost options to expand the capacity as needed. The expansion of the HURC rail facility also went into service in the first quarter, increasing the capacity from 2 to 3 unit trains a day or about 180,000 barrels per day. This is fully contracted through our partner on a take-or-pay basis. All our capital projects under construction are proceeding very well. They are on budget and most are ahead of schedule. At this rate, we have a new project entering service each quarter across the next 4 quarters. We're currently performing a turnaround at Moose Jaw and hot work connections for the expansion project are being completed during the turnaround, allowing us to place the expansion in service without a shut down. We expect this expansion will enter service at the end of the second quarter.

Late in the third quarter, we'll be ready to start up Pyote East, including the connection into Wink. We've ordered the pipe and plan to start construction by the end of June.

At Hardisty, there's 2.5 million barrels of additional tankage under different phases of construction. We expect to place 4 tanks or 2 million barrels of tankage into service across the fourth quarter of this year and the first quarter of next.

If we have a good summer of construction, we could place the tanks in service a couple months early. It's a bit early to say at this point, as winter continues hanging on here in Alberta. As winter breaks, we will begin construction on the foundation of the storage tank we announced earlier this year. We are targeting fourth quarter 2020 in service days for this tank. Ideally, we will build the foundations for the last 2 tanks at the Top of the Hill this summer. This will reduce costs as we leverage our ongoing work. We're also executing on the commercial side. As discussed, we sanctioned 1 tank so far this year. And as you heard us say at the Investor Day last month, we are very confident we will sanction 1 million to 2 million barrels of tankage per year over the next several years. Our confidence for this year and next is based on current commercial discussions. The U.S. team is currently pursuing several exciting opportunities, both on the gathering front, around our pile gathering platform and on contracting tankage at Wink. We will remain measured in our approach, but are optimistic we will sanction projects through the balance of the year.

As we talked about at Investor Day, a major accomplishment was the completion of our divestitures. We have sold all of our noncore business, leaving us with a very focused infrastructure asset base. And we achieved our target on proceeds and timing. With our existing platform of businesses, Gibson Energy is in great position today. The projects we have under construction will drive 10% plus distributable cash flow per share grow through 2020.

Our balance sheet is very strong with leverage and payout well below our target ranges. And we are very pleased to see the strength recognized by DBRS through our first investment-grade rating.

In summary, the results in the first quarter of 2019 were very strong from both our operational and financial perspectives. We will continue to execute. We are very focused on the delivery of our capital projects, and we expect the commercial teams north and south of the border will keep securing new projects to keep our engineering team busy. Our financial position is very strong. Leverage and payout both remain well below target ranges. We will remain fully funded. The objective for the next couple of quarters is very clear. We need to keep executing on our strategy, keep doing what we said we would do.

I will now pass it over to Sean, who will walk as through our financial results in more detail. Sean?

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [4]

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Thanks, Steve. As Steve mentioned, we had a strong first quarter. Results were very much in line with our internal expectation and our outlook remained consistent with what we outlined at Investor Day at the start of last month.

I will say that we are very glad to have the dispositions completed and we expect to close Canadian Truck Transportation in the next couple of months. It also makes our business much simpler to talk about on our earnings call with only 2 segments, one of which is very consistent quarter-to-quarter.

In terms of the financial results, adjusted EBITDA from combined operations of $124 million in the quarter was a $22 million increase in the first quarter 2018. On a more comparable basis, adjusted EBITDA from continuing operations of $118 million in the quarter was a $32 million increase in the first quarter of 2018. Distributable cash flow increased $26 million over the first quarter of 2018.

Digging into the main drivers of the increases over the first quarter of last year: infrastructure segment profit was up $6 million, with projects coming into service as Steve indicated; and a $34 million increase in contribution from marketing. On an adjusted EBITDA basis this was partly offset by the $7 million in foreign exchange losses and unrealized gains on financial instruments largely attributable to activities within the marketing segment. On a sequential basis, marketing segment profit in the first quarter was a $16 million decrease from the fourth quarter of 2018. Contribution from infrastructure was up $3 million, which was reflective of each of the new projects we placed into service, only providing revenues for part of the quarter, meaning we will see the full increase in the second quarter. We also had a small gain on the sale of the [S Noir] which closed in February. However, most of the variance to the fourth quarter is explained by the $20 million decrease in marketing as differentials peaked in the fourth quarter of last year. And while some may have thought that our market -- that our outlook for marketing on the last call was a bit conservative, the $61 million that marketing earned was fairly close to the outlook. Where the WPF to WTI differential on the fourth quarter was nearly USD 40 per barrel, it decreased to USD 12 in the first quarter with a curtailment. As a result, most of the segment profit from marketing in the quarter was realized in January from positions put in place during the December cycle for 1 month for delivery. And with the differential for the second quarter, looking like what will average about USD 10 as well as the turnaround at Moose Jaw during the quarter, our current outlook is that marketing will be towards the bottom end of the $15 million to $20 million per quarter midcycle run rate we've previously discussed. As a result, the second quarter should be the weakest of 2019 for marketing.

That said, differentials are trading wider for the second half of 2019, likely needing to approach USD 20 in order to support incremental crude by rail and we'll also see the impact of the new Alberta government. To the extent we do see differentials push out towards USD 20 that would be upside, likely pushing marketing above $20 million per quarter.

Working down to distributable cash flow from combined operation, the first quarter results of $83 million was effectively in line with the fourth quarter and as mentioned before, a $26 million increase over the first quarter of 2018.

In terms of notable items. G&A in the first quarter was a bit higher than our 2018 run rate as we incurred severance costs related to the departure of one of our senior executives. Also as part of our 2019 budget, we reviewed the allocation to the businesses. While these costs are flat or lower than 2018 on an absolute basis, the allocation change between corporate expenses and business unit segment profit results in a $1 million to $1.5 million increase in quarterly run rate G&A. With the strong results, distributable cash flow from combined operations for the trailing 12 months increased to $309 million, pushing the payout ratio down to 62% and further below our 70% to 80% target range. Similarly, debt to adjusted EBITDA 2.3x remains well below our 3x to 3.5x target.

If, as we showed in our Investor Day materials, marketing moved to mid-cycle levels for the balance of 2019 and as we continue to fund our capital program, we would expect our leverage and payout to be around the bottom end of our target ranges at the end of the year. To the extent marketing is above our mid-cycle range, we should remain below our target ranges. And as I mentioned in my prepared remarks at Investor Day, through the divestiture of noncore businesses, the continued improvement of our balance sheet and a strong consistent performance of the business all contributed to our first investment-grade credit rating, which we received from DBRS last month. This has already helped decrease costs in our credit facility and could further decrease foreign cost, if we're able to secure a second investment grade credit rating.

In summary, the first quarter was very much in line with our expectations, with both infrastructure and marketing right where we thought they would be. Importantly, we remain fully funded for all the sanctioned capital, our payout and leverage are well below target levels and the strength of the business will continue to build as we place additional infrastructure into service over the coming quarters. We are very pleased with how things are going and we'll look to sustain the momentum during the rest of the year.

At this point, I will turn the call over to the operator to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeremy Tonet with JP Morgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just wanted to kind of touch base on the Permian a bit more and follow up with what you talked about at the Investor Day as far as really getting some gathering systems, getting the work behind that to secure that to backstop the potential for storage at Wink. Just wondering if you could provide a bit more detail there and how you see those conversations progressing with your customers and any change in your thoughts since the Analyst Day? I realize that's just a short while back at this point.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [3]

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I think, I'll just explain we've ordered the pipe, the [right of way] is well along. We expect to place it in service late third quarter. It looks like it's going to come in as expected or really near expected case on volume. Really, what we're chasing out there, Jeremy, would be kind of those bunts and singles. So the type of volumes that we're chasing would come on in 2,000 to 5,000 to 10,000 barrels a day, but not very much more -- not a large amount of incremental capital on top of that. The kind of just bunts and singles with high rates of returns.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Great. And with the bunts and singles, is this kind of referring to potential other gathering systems beyond Pyote, just to be clear, or just kind of extensions of the Pyote.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [5]

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Just extensions out from Pyote, Jeremy.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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That's helpful. And Viking, I think you touched on there's a bit of a ramp there and there was also some kind of noise in the segment with regards to the [EFM] sale as well, just wondering how we should think about run rate for volumes in the pipeline segment given kind of those gives and takes there and where you see that progressing over there.

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [7]

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I think in our prepared remarks -- thanks, Jeremy, it's Sean here. In our prepared remarks we talked about that the Viking pipeline is ramping up as we speak. I think they're around 75% right now. We'd expect that to continue to ramp up as we move through the second quarter. I'd have to get back to you on a specific volume number, but that's sort of the quantum we've been talking about.

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Operator [8]

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Our next question comes from Rob Hope of Scotiabank.

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Robert Hope, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Just want to continue on the Viking pipeline. So if I understand correctly volumes are at 75%, when will you start looking at a kind of adding some additional kind of horsepower there and an expansion of that asset or other gathering lines in the area?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [10]

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I would think it's probably going to be more in the third or fourth quarter, probable we'd do something -- many of those smaller producers that they've reached their limit at that 10,000 barrels a day limit. And so that's kind of slowed down their drilling and then of course, a lot of them got hurt in the first quarter -- the fourth quarter of last year as far as cash flow. But we expect it to ramp back up and be running near capacity in the third or fourth quarter. We can put some deep drag reducing agent in there and then we can put up a small pump station to really come close to adding another additional 50% capacity pretty easy.

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Robert Hope, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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All right. That's helpful. And then just more a bit of a granular question. Just on the Q2 outlook for marketing. If it's at the lower end of the mid-cycle economics yet you have an outage at the Moose Jaws as well as really tight dips, I'm just wondering what would put you below that range in terms of a negative outcome.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [12]

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I mean it's not really a scenario that we expect to see, Rob, to be candid. But I mean for that to occur, we'd have to see differentials well below $10 for the entire third quarter and you'd have to probably be like Q2 where you have you know,0 Moose Jaw out for at least a month of it. I mean as we talked about on the call, even with Moose Jaw out for month and differentials being below what we would think as being the sort of mid-cycle levels, which if you remember is more in that $12-ish range. We still expect to be at that lower end of the 15 to 20. So struggle really to see where we would go materially below that and really any scenario when you take that into context.

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Operator [13]

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Our next question comes from Patrick Kenny with National Bank Financial.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [14]

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Just on the Wink up here and thinking about your discussions that you may be having with some of the larger pipeline operators here to sign agreements to connect the 160 acres into those pipelines. Just wondering if you have an update on timing, when we might hear something on those connections.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [15]

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So we've signed -- I believe we've signed 2 connection agreements. We've got right of way that goes up into Wink and connecting into these facilities. Just like I said, I think we'll place those in service late third quarter. Some of those pipes are going to come in, in the late and third quarter too, so those export pipes. But we're not -- we'll be able to flow even if the export pipes aren't up, because we're connecting to some of the infrastructure there that has capacity.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [16]

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Okay. That's great. Sean, appreciate the near-term outlook here on the marketing with dips where they are, but just back to your comment around the strip pricing showing $20 barrel kind of late 2019 into 2020. Just wondering if you're starting to layer on any hedges to sort of protect the upside -- the high end of your guidance range there of the $60 million to $80 million.

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [17]

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We have layered on some hedging, because the third and fourth quarter and the stronger pricing. But I can't say that we've hedged a tremendous amount, not as much as we hedged last year.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [18]

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Is there a target percentage that you want to be hedged as you enter the second half of the year, if differentials are -- if the strip pricing remains where it is?

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [19]

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We don't have a target right now. We like that $20 and $21. So we would probably, if it got above $21 we'd start to think more serious about hedging a larger volume. I think we placed a lot of our hedges last year around $25 to $26. We lost a lot of money on those hedges. But we benefited on the actual physical [plot].

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [20]

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Yes. I don't -- we don't have a specific target. I think we -- what we're trying to do is remain rather fluid in around what we're seeing in the market and what we expect in the market as we move through the year. So not a specific target, but we'll continue to look for opportunities, if we can, to lock in like Steve said.

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Patrick Kenny, National Bank Financial, Inc., Research Division - Research Analyst [21]

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Okay. Sounds good. And then just lastly, Sean, any update on your discussions with S&P over the timing where you might be under review for an upgrade?

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [22]

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No. No real update from Investor Day. As you might imagine, I am in active dialogue with all of our rating agencies including S&P. They normally do their annual review in August. Of course, we'd like them to take a look at the company sooner than that. Just given the dramatic transformation we're seeing. And but not just in sort of business profile, but really cash flow quality and credit quality quite frankly. So we are in active dialogue. But again, really what they do is out of our control. We can just try and work constructively with them. So I'm still quite hopeful, but no real update from Investor Day at this time.

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Operator [23]

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Our next question comes from Linda Ezergailis with TD Securities.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [24]

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I see in your refined products you've gained some market share. I'm wondering if it's reasonable to assume that continues or potentially trends even higher, can you talk about some of the competitive dynamics in some of your refined products?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [25]

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Gaining market share, I would say in Canada the market has been weaker this year for our drilling fluids, just because of the down cycle in drilling in Canada. And where we've gained market share was probably in the Permian basin, where we've moved a lot of our drilling fluid. Yes. I think there's really not much more to add to that, Linda, unless you had further you wanted us to elaborate on.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [26]

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No. But I guess we can just assume that it's a steady state going forward is reasonable?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [27]

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Well, what happens is that during the first quarter what we do is we build considerable inventory in our refined products such as our roofing flux and our asphalt. We store that and then sell it and then we start to move it out late in the second quarter and into the third, Linda.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [28]

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Okay. And then so none of the working capital build was related to line fill or anything else going out on another part of your business then?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [29]

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Some was, but it was really kind of joint between line fill and really the whole refined products that we had in storage. Really down in the States. We took out storage this year, which is a little bit different than we've done in the past and filled that storage for our roofing flux and our heavy asphalt.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [30]

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Okay. And can you give us, is there any update or change in your cash tax outlook for this year and beyond? We saw a little bit lower than expected, I guess, current income taxes but you had a high actual paid cash tax. I'm just wondering you can kind of walk us through the cadence of how it might unfold for the rest of the year and beyond.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [31]

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Yes, yes, happy to. So maybe I'll touch on the high cash tax paid this quarter. If you recall, just the way installments work for taxes, we actually guided people to using current tax last year, because the way we had budgeted previously didn't have that marketing outperformance, marketing outperform, that's largely taxable. Didn't have to pay taxes last year, actually had about a $14 million refund, but then had a large installment that was due for last year's performance in Q1. So that's the high cash tax payable. But we really tried to get in front of that last year and guide people -- they think [that they still] have to use current tax because of it. We did have some offsets in the first quarter here, where cash taxes were somewhat less than what we would have otherwise guided or our current taxes. As we move forward to the rest of the year, our guidance would remain consistent with what we have previously indicated to people, which is basically assume the U.S. is not taxable, and in Canada assume that our cash taxes or current taxes will be primarily off of our marketing business. So 27% times whatever you are forecast for marketing and that's where guide you from a tax perspective throughout the rest of the year.

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Operator [32]

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Our next question comes from Robert Catellier with CIBC Capital Markets.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [33]

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What are the opportunities or implications for Gibson, if producers take up the rail car commitments that the previous government made but the current provincial government wants to cancel?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [34]

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Robert, I don't see it as any real change. Our agreements with -- our contracts in place would remain in place. And any contract USD might have would remain consistent.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [35]

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So you don't see any disruption where maybe the rail -- the cost of rail plummets a bit and then there's sort of half cycle thinking on rail costs?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [36]

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That wouldn't affect our business, we're not big into railing ourselves, so...

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [37]

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Yes. I was thinking more on the follow through and impact on differentials. So you get cheaper rail and maybe the differential looks different?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [38]

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Yes. Well maybe that pushes you down to the $18 versus the $20 to $21 that...

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [39]

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Right. So it's only a marginal impact, if any?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [40]

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Yes.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [41]

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Okay. Just Steve, now that you have an investment-grade rating does it makes sense to refinance any of the notes that are outstanding early or do you just wait for maturities or for developments at the other rating agencies?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [42]

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Robert, I'm going to let Sean answer that one.

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [43]

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Maybe I'll take that one, Robert. No, no, absolutely I mean if you look at, so really -- we only have one investment-grade rating, so the catalyst for those sort of decisions will be the second investment-grade credit rating, but you hit it dead on the nose. I mean to the extent that we do get that second investment-grade credit rating. As I understand it or I'm being guided to, there's material interests savings for a new term debt issuance somewhere in call it, if you're thinking about our 5.25%, it's probably 175 basis points, or something in that range depending on the term. If you look at the call premiums on our exiting bonds. The math is not hard. Our 5.375%, 2022s are callable, our next call period is in July. That's extremely economic to call, especially in the 3.5%-ish range for a new, 5- to 7-year issuance. The 2024s are less economic to call, so to the extent that we were to get that second investment-grade credit rating, we'd likely look to do something with the 2022s and then probably wait until it's a bit more economic for the 2024s but that's all -- all things we're looking at right now.

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Robert Catellier, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [44]

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Okay. That sounds promising. And then what's the thinking on preferred shares. Under what circumstances would you issue pref. I don't know maybe the market is not perfect right now, but assuming the market opened up, what point does it make sense to include pref in the structure.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [45]

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Right now, if -- again, the catalyst there first would be the second investment grade credit rating. Our rate -- I would think of pref and hybrids as being sort of fungible product, just depending on the after tax pricing of each. We have been fairly clear that we're fully funded and so that's staying within our leverage targets and retaining -- using our retained cash flow. So where I can see is definitely for pref and we absolutely think it's something that makes sense for a company like us, especially deploying capital, primarily in the tankage. But that would be the extent that capital gets to a level that we don't -- we're not fully funded solely off leverage -- in our leverage target range and our retained cash flow. So no necessity for prefs right now, but it is a fantastic tool as we move forward. But it definitely needs the second investment grade credit rating.

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Operator [46]

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And next question comes from Ben Pham with BMO.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [47]

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On your infrastructure results, you mentioned a couple of different moving parts in the quarter and I'm curious, so what do you think your directional run rate would have been, if you think about Viking phase employ projects and then service and perhaps some of the curtailments easing a little bit here?

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [48]

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I'll take that Ben, maybe Steve can add in if he wants. I mean if you think about really what we're referring to is that the mid-quarter sanctioning a number of projects. So that chart, Viking ramping up in the 1.1 million barrel, so from a run rate perspective, it's probably a couple of million dollars above where we are today. The only caution I would give there, as we think about the second quarter, we would have had a partial contribution from some of our parity assets that we sold in the first quarter there. So having sold that February 28, you will see that roll off in the second quarter. And the second one being, if you recall the Moose Jaw facility is basically that the [equity they take] comes down in the second quarter, based on the fact that it's not available for the turnaround. And so from a Q1 perspective, I think a couple of million dollars above where we were there. But again, I caution through the second quarter there are some offsets that we'll see.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [49]

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Okay, okay. That's great. And so when you then think about the full year guidance, you guys have put out there's a $20 million range, it sounds like you're really hitting the midpoint of that, but the -- more to check it, what do you think are the biggest factors to think about when you think about that $20 million range.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [50]

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Again, I mean, our infrastructure is incredibly rateable, that's why we're comfortable giving a range for this year and quite frankly, a range for next year and even a run rate as we exit next year. So there's not a lot of factors. I mean we've already brought these in service early. As you know, we're bringing another million barrels of projects into service in Q4 this year. To the extent that, that came in early that could be some upside for that certainly. Volume doesn't play a tremendous part there, but if you did see some extra volumetric revenue that could drive it. And then also, as we think about bringing on some of the U.S. infrastructure initiatives we have that we expect to bring on sort of at the latter part of the year. That would all be sort of in and around that, but absolutely remain confident within that sort of guidance that we gave for the infrastructure segment at Investor Day.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [51]

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Okay. And there's a question about taxes, is there anything to think about in terms of taxes on your asset sale processes?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [52]

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No, no. We have been very efficient as we structured these asset sales. So we have largely -- there has been very little cash taxes as we've moved through them, and we would expect that to be the same as we move through really what is the last asset sale that needs to close, which is our Canadian trucking business.

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Operator [53]

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Our next question comes from Andrew Kuske with Crédit Suisse.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [54]

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I appreciate the time lines that you've given on the callable debt and your annual review at S&P, so let's just go under the assumption that you get the investment-grade rating from 2 of the raters. How do you think that sets you up for, you're really pursuing some of the activities in the Permian, that's pretty distinct from a U.S. standpoint, and you've got the operational excellence. So does that really change your offering from what you're pursuing in the U.S.?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [55]

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I think that's more of a commercial question. I mean, we think about our business development activities, I mean, to be clear, we are chasing what we view as being the highest-quality projects within being fully funded, but it's not like if we all of a sudden had a bunch of extra funding capacity that it would change what we're doing in the U.S. But I think, if I'm reading your question correctly, Andrew, it's more of a -- does being fully investment-grade make us more attractive as the counterparty, is that it?

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [56]

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That's essentially the essence of it that you're a more attractive counterparty to deal with.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [57]

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Yes. I don't see that as a big driver in our negotiations, north or south of the border. It may help us on it'll reduce some of our LC costs, essentially in our marketing business, but that would be the really the largest impact. Right now I don't -- I have not seen that impact in any new commercial negotiations, Andrew.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [58]

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Okay. That's helpful. And then when you look at some of the transactions that have happened in the market there's been quite a few on the year-to-date in the mid-stream space. When you think about the investment-grade rating that you'll have in all likelihood in the future, how do you think about your just relative valuation versus the transactions that have happened with generally lower quality assets versus your ability to actually underpin longer-term debt at much cheaper than you've got now. How do you think about that dynamic or disconnect?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [59]

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I mean, so there's always going to be a bit of a private, public disconnect or the extent there is. I think all I'd say there is we look at where we trade certainly vis-a-vis some of our peers, and we see our cash flow quality, we see our credit quality and we see -- have our absolute visibility to delivering the growth we've talked about in a very risk-controlled manner and the fact that it is doing exactly what we're doing right now. So we think if you think about us relative to our peers, certainly that we are -- there's still a room for multiple compression, if not even growth beyond that. So I'll probably leave it at that as opposed to commenting specifically on sort of public private multiple differentials.

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Operator [60]

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Our next question comes from Robert Kwan with RBC Capital Markets.

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Robert Michael Kwan, RBC Capital Markets, LLC, Research Division - Analyst [61]

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I'm just kind of digging in around what you're seeing for additional tankage in Western Canada and just the nature of the customer discussions. Just have you seen any changes as you think about a few things around earlier this quarter in the line 3 delay, anything coming out of the Alberta election as well as Keystone XL and TransCanada acknowledging it's missed the summer construction season this year?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [62]

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Robert, we're still -- we said 2 to 4 at the Investor Day, which was several -- a month ago. I would say we're still at 2 to 4. Obviously, if those pipelines move forward that would accelerate additional tankage. But I think currently, we're still at 2 to 4 this year, and feel good about 2 to 4 next year too, Robert. So anywhere from the 1 million to 2 million barrels this year and next year.

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Robert Michael Kwan, RBC Capital Markets, LLC, Research Division - Analyst [63]

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And I guess Steve just by, to clarify, by virtue of you talking about pipelines going ahead, driving more storage, I guess the nature of the discussions really are customers that are looking for the storage for those future expansions rather than storage to stage barrels and the optionality trying to figure out how they can just get any barrel out at this point.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [64]

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It is really both. I mean we're having discussions with, obviously, we're having discussions with the end users, the big U.S. refiners and then we're also having discussions with the oil sands customers. We're having discussions on both sides of the fence. And we think we can continue to grow without those pipelines, again about 2 to 4, but I think the pipelines would accelerate it.

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Robert Michael Kwan, RBC Capital Markets, LLC, Research Division - Analyst [65]

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All right. Got it. And then just to finish. How should we think about the economics to you from the HURC volume expansion, just given the way the agreement works between you and USD, is it really just fee-based volumes through your portion of the assets, is there upside there, how much capital did you put out just to support the expansion?

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [66]

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We haven't really talked about the capital number. But the way to think about the cash flow is that it's similar to the initial contracts. It's really all take-or-pay. And so somebody signed up for space, they don't use it at all, we get paid our take-or-pay amount. They do use it, we get paid the same. Where we are in -- so, if you recall, Robert, your original one is, we actually own the pipe going into the facility. USD owns the facility, the original contract, the take-or-pay revenues were split based on capital contribution not quite 50-50, but for all intents and purposes, it is a relatively even split. The way to think about the expansion is very similar. It actually took a bit less capital for us on the pipeline side to allow for the expansion. So we actually topped up our capital a little bit to maintain our pro rata share, so as you think about the contributions to take-or-pay. And then the other part, which is the same from USD is to the extent that this the additional volumes that are moving through that terminal, which there would be with the third unit train that volume most likely needs tanks, and so that has helped drive additional tankage demand that we've seen.

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Sean M. Brown, Gibson Energy Inc. - Senior VP & CFO [67]

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(inaudible) Bigger. Yes, we did top it up.

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Steven R. Spaulding, Gibson Energy Inc. - President, CEO & Director [68]

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But Robert, the project economics are very, very good here, because this is really just an expansion project. And it's all with 0 terminal value, if you look at the economics.

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Operator [69]

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And I'm not showing any further questions at this time. I'd like to turn the call back over to Mark.

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Mark Chyc-Cies, Gibson Energy Inc. - VP of Strategy, Planning & IR [70]

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Well thank you, everyone, for joining us for our 2019 first quarter conference call. Again, I would like to note that we have made certain supplementary information available on our website at gibsonenergy.com. If you have any further questions, please reach out to us at investor.relations@gibsonenergy.com. Again, thanks for joining us and your continued support of Gibson Energy. Thank you.

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Operator [71]

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Ladies and gentlemen, that does conclude today's presentation. You may now disconnect, and have a wonderful day.