DBRS Limited (DBRS Morningstar) confirmed Gibson Energy Inc.'s (Gibson or the Company) Issuer Rating and Senior Unsecured Notes (Unsecured Notes) rating at BBB (low). DBRS Morningstar also confirmed Gibson's Junior Subordinated Debt (Hybrids) rating at BB. All trends are Stable. The rating actions factor in the acquisition (the Acquisition) of South Texas Gateway Terminal LLC (STGT) for an upfront cash payment of USD 1.1 billion. Gibson intends to finance the Acquisition through $350 million of subscription receipts (plus a 15% over-allotment option, if exercised) with the balance through a combination of Unsecured Notes and new Hybrids.
STGT is the second-largest U.S. crude export terminal by volume (1 million barrels per day (Mmbbls/d)) and is one of two export facilities in the Texas Gulf Coast with multiple very large crude carriers capable docks. STGT currently has crude oil storage capacity of 8.6 million barrels and has connections to four major pipelines delivering crude oil from the Permian and Eagle Ford basins. STGT operates a fee-based business with approximately 95% revenue generated under contracts with minimum volume commitments of 0.64 Mmbbls/d. Approximately 86% of STGT’s contracts are with investment-grade counterparties with a weighted average remaining contract term of approximately 3.3 years.
DBRS Morningstar expects the Acquisition to modestly improve the Company’s business risk profile. The Acquisition improves the contribution of contracted cash flow as a percentage of overall gross profit from 80% to 85% (including intersegment profit), increases scale, and improves asset diversification. Demand supply considerations for STGT also remain favorable as Ingleside, where STGT is located, has direct connectivity to volumes from the Permian Basin through major pipelines, and its share of U.S. crude exports has grown to 56% in 2022 from 28% in 2018. However, the Acquisition reduces the weighted average tenor of Gibson’s contracts to approximately five years from approximately six years with a possibility that the tenor will reduce further when the contracts at STGT are renegotiated. DBRS Morningstar also notes that the assets acquired as part of the Acquisition face strong competition from other assets, which could have an impact on asset utilization and service fees.
DBRS Morningstar expects the Acquisition to have a negative impact on the Company's financial risk profile because of a material increase in debt. However, Gibson's financial risk profile prior to factoring the Acquisition was strong for the rating with adequate headroom to absorb additional debt. Consequently, despite weakening, Gibson’s financial risk profile is expected to remain supportive of the current rating. DBRS Morningstar notes that it expects the new Hybrids to be issued largely under the same terms as the existing Hybrids and hence qualify for an equity treatment of 50%. DBRS Morningstar expects the Company to stay onside of its leverage target (Net Debt to Adjusted EBITDA of 3.0 times (x) –3.5x) but toward the higher end of the target. The Company's liquidity is adequate, with sufficient room in its $1.0 billion sustainability-linked credit facility.
Operating performance at Gibson’s existing assets remained stable. While earnings from the infrastructure segment were relatively flat in 2022 compared with 2021, overall earnings in 2022 were higher because above-average refine product margins led to higher earnings from the marketing segment, and the trend has continued in Q1 2023. While the Company has experienced inflationary pressure on operating costs, the impact has largely been offset by contractual provisions. DBRS Morningstar expects relatively higher oil prices and increased egress capacity in the Western Canadian Sedimentary Basin to likely support the need for storage terminals as evidenced.
A positive rating action can occur if the Company's business risk profile improves through increased contribution from the infrastructure segment while maintaining its financial risk profile. Ratings could be pressured because of a rise in price and volume risks or if the cash flow-to-debt ratio weakens to below 15%.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022; https://www.dbrsmorningstar.com/research/404917)
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar did have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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