DBRS Limited (DBRS Morningstar) confirmed Gibson Energy Inc.’s (Gibson or the Company) Issuer Rating and Senior Unsecured Notes (Senior Notes) rating at BBB (low). All trends are Stable. The ratings are supported by relatively stable and contracted cash flows from the Company’s infrastructure assets, primarily crude oil storage terminals and gathering pipelines, and a strong competitive position. Gibson’s ratings are constrained by earnings volatility in its Marketing segment, lack of geographic diversification, and a high dividend payout ratio.
DBRS Morningstar expects that the weak oil prices and decreased demand from the ongoing Coronavirus Disease (COVID-19) pandemic will likely result in modestly lower-than-expected earnings and operating cash flow for Gibson in 2020. Demand for oil storage infrastructure remains high, as the market is in contango, and the Company has a dominant market position in oil storage in Hardisty, Alberta, which is a key crude oil hub for Canada's oil sands production. Gibson's Infrastructure and Marketing segments are expected to contribute approximately 75% and 25% to the Company's EBITDA, respectively, on a normalized basis. The Infrastructure segment largely is supported by long-term take-or-pay and fee-for-service contracts with no commodity price risk but with some (approximately 25%) exposure to volumetric risk from the fee-for-service contracts. Gibson's fee-for-service revenues have been historically stable but, as drilling activity declines, the lower production volumes could have a negative impact on the revenues. A majority of Gibson's storage terminal customers are investment-grade counterparties, mostly large oil sands producers and refiners, and provide some cushion from counterparty risk. However, a prolonged weakness in oil prices could lead to multiple-notch downgrades to the credit ratings of the customers and negatively affect the Company's business risk profile. Moreover, Gibson’s Marketing segment is exposed to volatility from oil price differentials, product margins, and demand for refined products.
The Company is advancing a $300 million capital program in 2020 largely for contracted infrastructure assets, which includes primarily a diluent recovery unit at the Hardisty hub and other terminal and pipeline assets. Liquidity risk is considered modest as the Company has adequate room in its revolving credit facility which was expanded to $750 million from $560 million in February 2020 with the maturity date extended to 2025. Gibson has no near-term refinancing risk as its two Senior Notes are due in 2024 and 2029.
Gibson has limited geographic diversification with the majority of its cash flows generated from assets in the Western Canadian Sedimentary Basin (WCSB), which exposes it to basin-specific risk. Longer-term demand growth for storage in the WCSB will depend on the development of additional pipeline egress options. The Company has a high dividend payout ratio relative to its business mix, which could weaken its financial risk profile if performance in the Marketing segment is consistently below expectation.
DBRS Morningstar considers a positive rating action as unlikely in the next two years given the uncertainty with coronavirus. A negative rating action can occur if (1) the Company’s business risk profile weakens because of the factors mentioned above and (2) debt-to-capital exceeds 70% or cash flow-to-debt weakens to below 15% on a sustained basis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, and DBRS Morningstar Criteria: Guarantees and Other Forms of Support, which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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