DBRS Assigns Ratings of BBB (low) with Stable Trends to Gibson Energy Inc.

DBRS Limited (DBRS) assigned an Issuer Rating and Senior Unsecured Notes (Senior Notes) rating of BBB (low) to Gibson Energy Inc. (Gibson or the Company). All trends are stable. The ratings are underpinned by high-quality contracted cash flows from the Company’s (1) infrastructure assets, primarily comprising crude oil-storage terminals; (2) strong competitive position; and (3) improved business and financial risk profile following the disposal of its non-contracted assets in 2017–2018. Gibson’s ratings are constrained by variable earnings from its wholesale segment, lack of geographic diversification and a high dividend payout ratio.

The majority of Gibson’s infrastructure segment (approximately 80% of F2019 EBITDA) cash flows are supported by long-term take-or-pay and fee-for-service (FFS) contracts. Approximately 85% of cash flows from the terminals business is derived from investment-grade counterparties with an average remaining contract life of ten years. Gibson’s terminal customers are primarily oil sands producers with stable production and long reserve lives, which reduces volume risk under the FFS contracts and overall re-contracting risk. The Company’s infrastructure and connectivity advantages have allowed it to establish a strong market position in the terminal business, especially in Hardisty, Alberta, and should allow Gibson to capture additional storage demand in western Canada. DBRS believes that the Company’s business risk profile has also improved with its decision to divest non-contracted assets and deploy its medium-term growth capex on the infrastructure segment. The Company placed 1.1 million barrels (bbls) of storage into service in February 2019 and expects to place an additional 2.0 million bbls in service over the next 12 months, all under long-term contracts.

Gibson’s wholesale segment (approximately 20% of F2019 EBITDA) cash flows are subject to volatility depending on the crude oil price differentials, as highlighted by the outperformance in 2018 following cyclical lows in 2016 and 2017. Gibson expects earnings from this segment to trend lower in 2019–2020 to $60 million to $80 million per year compared with $211 million in 2018. The Company has limited geographic diversification with the majority of its cash flows generated from assets in the Western Canadian Sedimentary Basin (WCSB), which exposes Gibson to basin-specific risk. Longer-term demand growth for storage in the WCSB will depend on the development of additional pipeline egress options; however, all major pipeline projects are facing delays. Gibson is currently expanding its gathering pipelines business in the United States, which could provide additional diversification. Furthermore, the Company has a high dividend payout ratio relative to its peers, which could weaken its financial risk profile if performance in the wholesale segment is consistently below expectation.

The Company’s lease-adjusted cash flow-to-debt and EBIT interest coverage ratios improved materially in 2018, resulting from outperformance in the wholesale segment, growth in infrastructure cash flow and the partial use of proceeds from asset sales to reduce debt. Gibson expects lower contribution from the wholesale segment in 2019. Although the growth in infrastructure cash flow is expected to partially mitigate this weakness, DBRS expects credit metrics to weaken but remain supportive of the current rating. DBRS expects the Company to maintain its stated target leverage (net debt-to-EBITDA) range of 3.0 times (x) to 3.50x, compared with 2.30x in 2018, and fund growth capex with a maximum of 60% of debt.

The Company’s liquidity position is considered adequate with a cash balance of $95 million and $410 million available under its unsecured revolving credit facility (RCF) at YE2018. DBRS expects Gibson to fund most of its budgeted capex ($230 million to $285 million) and dividend payments in 2019 with operating cash flow, available cash balances and proceeds from the disposition of the Canadian trucking business expected to close in mid-2019. DBRS notes that, while a rating upgrade is unlikely in the next two years, ratings could come under pressure if the Company’s business risk profile weakens, leverage rises above its target range or DBRS’s lease-adjusted cash flow-to-debt ratio remains consistently below 15%. DBRS notes that, under the terms of the RCF, Gibson is obligated to create security in favour of the RCF lenders if the Company’s credit rating is downgraded to BB (low) or equivalent by one of the credit rating agencies. If the Senior Notes are not secured on an equal and ratable basis with the RCF, the Senior Notes will be subordinated to the RCF and, consequently, the rating of the Senior Notes could be negatively affected.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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