Morningstar DBRS Confirms Gibson Energy Inc. at BBB (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Gibson Energy Inc.'s (Gibson or the Company) Issuer Rating and Senior Unsecured Notes (Unsecured Notes) rating at BBB (low). Morningstar DBRS also confirmed Gibson's Junior Subordinated Debt (Hybrids) rating at BB. All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
At the time of the last credit rating confirmation, Morningstar DBRS had noted that strong competition from other assets could shorten the tenor of contracts at the South Texas Gateway Terminal (Gateway) when they are recontracted and lower asset utilization and service fees. However, Morningstar DBRS notes that the operating performance at Gateway since the acquisition closed in August 2023 has shown positive momentum. Throughput has exceeded the Company's initial expectations because of an increase in the use of very large crude carriers and incremental spot barrels from existing customers. Gibson is also evaluating adding additional pipeline connections and deepening the channel through dredging to improve Gateway's competitive position. The Company is in active negotiations with existing and new customers at Gateway to recontract capacity and expects a favourable outcome. Morningstar DBRS notes that Gibson's business risk profile will improve if the Company is able to recontract capacity that extends the weighted-average life of its contracts without a material decrease in service fees. Effective from January 1, 2024, Gibson took over as operator at Gateway and Morningstar DBRS would like the Company to operate Gateway satisfactorily for at least a year to realize the benefit of the improved business risk profile on its credit ratings.

The operating performance at Gibson's Canadian assets remained stable. Overall, earnings in 2023 and Q1 2024 were higher relative to the previous periods because of the contribution from Gateway and higher earnings in the Marketing segment. Earnings in the Infrastructure segment will continue to grow over the medium term as the Company deploys capital in that segment, however, earnings in the Marketing segment will likely decline because of narrower heavy/light differentials with the commissioning of the Trans Mountain Pipeline Expansion Project. While Gibson's key credit metrics weakened in 2023 because of the debt raised for the acquisition of Gateway, they remain supportive of the rating.

CREDIT RATING DRIVERS
A positive rating action could occur if the Company's business risk profile improved through favourable contract renewals at Gateway while a cash flow-to-debt ratio of 17.5% was maintained. While unlikely, a negative rating action could occur if there were a rise in price and volume risks or if the cash flow-to-debt ratio weakened to below 15%.

EARNINGS OUTLOOK
Morningstar DBRS expects EBITDA in 2024 to be higher relative to 2023 because of the full-year contribution from Gateway. However, the impact is likely to be partially offset by lower earnings from the Marketing segment.

FINANCIAL OUTLOOK
Morningstar DBRS expects Gibson's operating cash flow (OCF) in 2024 to be comparable with 2023. The impact of higher EBITDA on OCF is likely to be offset by higher interest payments. Gibson's financial risk profile is expected to remain supportive of the current rating. Morningstar DBRS expects the Company to stay within its leverage target (net debt-to-adjusted EBITDA of 3.0 times (x) to 3.5x). Morningstar DBRS also expects the Company to maintain its cash flow-to-debt ratio in excess of 15% over the forecast period.

CREDIT RATING RATIONALE
The rating are supported by relatively stable and contracted cash flows from the Company's infrastructure assets, primarily crude oil storage and export terminals, and gathering pipelines. Gibson's ratings are constrained by earnings volatility in its Marketing segment and increased competition at its crude oil export terminal. The Stable trend acknowledges the progress made on integrating Gateway and Morningstar DBRS' expectation that the Company will maintain its financial risk profile over the medium term.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Gibson, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Gibson, the following FRA factors listed in the Pipeline and Midstream Energy Industry are considered more important: cash flow-to-debt and EBIT interest coverage.

(C) Weighting of the BRA and the FRA
In the analysis of Gibson, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (April 15, 2024), https://dbrs.morningstar.com/research/431181

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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