Gibson Energy, Inc. (OTC:GBNXF) Q2 2016 Results Earnings Conference Call August 3, 2016 11:00 AM ET
Tammi Price - Vice President of Investor Relations and Corporate Development
Stewart Hanlon - President and Chief Executive Officer
Sean Brown - Chief Financial Officer
Linda Ezergailis - T.D. Securities
Andrew Kuske - Credit Suisse
Rob Holt - Scotiabank
Robert Catellier - CIBC World Markets
Robert Kwan - RBC Capital Markets
Ashok Dutta - Platts
Steven Paget - First Energy Capital
Patrick Kenny - National Bank Financial
Ben Pham - Bank of Montreal
Good morning, and welcome to the Gibson Energy Second Quarter 2016 Results Conference Call, in which management will review the financial results of the Company for the three months ended June 30th, 2016.
I will now turn the call over to Tammi Price, Vice President of Investor Relations and Corporate Development. Please go ahead.
Thank you, Paul, and thanks everyone for joining us this morning. During today's call forward-looking statements may be made. These statements relate to future events or the Company's future performance, and will use words such as expect, should, estimate, forecast, believe, or similar terms.
Forward-looking statements speak only as of today's date, and undue reliance should not be placed on them, as they are subject to risks and uncertainties which could cause actual results to differ materially from those described in such statements.
The Company assumes no obligation to update any forward-looking statements made in today's call.
Any reference during today's call to non-GAAP financial measures, such as EBITDA, adjusted EBITDA, pro forma adjusted EBITDA, distributable cash flow, or payout ratio, is a reference to a financial measure excluding the effect of certain items that would impact comparability.
For further information on forward-looking statements or non-GAAP financial measures used by Gibsons, please refer to the 2016 second quarter Management's Discussion and Analysis issued yesterday by the Company and in particular, the sections entitled forward-looking statements and non-GAAP financial measures. All financial amounts mentioned in today's call are in Canadian dollars, unless otherwise stated.
Participating on today’s call are Stew Hanlon, President and CEO, and Sean Brown, Chief Financial Officer. The format for the call will be that Stew will provide an overview of our results, and Sean will highlight a few items regarding our financial position and capital spending. This will be followed by a question and answer session.
Cam Deller, our Manager Investor Relations, and I will be available after the call to answer analysts modeling questions.
With that, I'll turn it over to Stew.
Thanks, Tammi. Good morning, everyone. Despite the recovery in crude prices off the first-quarter lows, drilling and completion activity remained at historically low levels throughout the second quarter. Production volumes continued to decline.
Without the benefit of any offsetting contributions from our newly commissioned terminal infrastructure this quarter, we experienced a further year-over-year decline in segment profit. The weak industry conditions, in addition to competitive pricing pressures, continued to depress our results in our more activity sensitive business lines in the second quarter.
This challenging business environment was further exacerbated by seasonal influences, including an extended spring breakup impacting our logistics segment, an unexpected longer than normal annual turnaround at our Moose Jaw facility, impacting both our Infrastructure segment and our Wholesale segment, and warmer than average weather impacting propane and NGL demand within our Industrial Propane and Wholesale segments.
Finally, while the negative consequences of the Fort McMurray forest fires were felt in virtually all of our business segments to differing degrees, the associated oil sands production curtailments were felt most acutely within our Wholesale and Logistics segments.
Although as predicted, the second quarter of 2016 was challenging, even after normalizing for these non-recurring events. I am confident that the additional cost realignment initiatives we instituted in the first quarter and our continued focus on accretive investment and infrastructure will help us successfully navigate today's difficult business environment.
On a positive note, we are pleased to see the recent modest uptick in North American oilfield activity levels. We have seen an increase in the number and potential materiality of inbound customer calls over the past couple of months.
We believe that the combination of improved commodity pricing, as well as industry wide efficiency gains has positioned our industry for increasingly healthier activity levels.
Notwithstanding the broad cost realignment efforts we have undertaken in the past several quarters, we have maintained a high degree of revenue generation capacity in our activity sensitive businesses, which will offer tremendous torque to the upside when conditions do improve. In the interim, we continue to focus investment capital on the highest risk adjusted return projects within our infrastructure segment. Importantly, we remain committed to our strategy of rebalancing our portfolio increasingly towards our integrated midstream infrastructure and platform.
Along these lines, as we announced on July 20th, we have initiated a process to explore the potential sale of our industrial propane business. This initiative is consistent with our long-term strategy, and we look forward to updating you at an appropriate juncture.
I will now discuss the individual business segments in more detail. Segment profit of CAD44 million in our Infrastructure segment was down approximately CAD4 million over the first quarter, owing to the extended turnaround at our Moose Jaw processing facility as a result of unexpected repairs to fix corrosion discovered in the main crude heater unit. This resulted in an extra two weeks of turnaround activity, which is illustrated by a 53% decline in throughput volume over the same period last year.
I am pleased to note that all other assets within this business segment performed as expected, posting steady to modestly higher sequential EBITDA contributions over the first quarter.
Now the key to this stability is the highly contracted fixed fee revenue profile over Edmonton and Hardisty terminals, which posted steady EBITDA contributions, despite experiencing an approximate 20% decline in volume throughput as a result of the production curtailments associated with the Fort McMurray forest fires.
Precisely for this resiliency, we look forward to continued delivery of storage and pipeline connection infrastructure projects that are currently underway at our Hardisty and Edmonton terminals and which are underpinned by long-term fixed-fee contracts with creditworthy counterparties.
The 300,000 barrel storage project for Statoil at Edmonton and 800,000 barrels of new storage capacity at Hardisty are on track for commissioning in the late third quarter. Considering the commissioning schedule of these secured growth projects in 2016, and with good line of sight to midyear commissioning of a further 1.8 million barrels of storage capacity at Hardisty in 2017, we expect to see robust growth within our Infrastructure segment well into the 2018 timeframe. I would also mention that all projects are proceeding extremely well and are currently on time and on budget.
In addition to this, we continue to make good progress with commercial negotiations that we are confident will result in the construction of additional storage in connection to infrastructure and contribute to further cash flow growth to the visibility in 2018 and beyond.
Importantly, we expect the EBITDA contribution from our Infrastructure segment to become an increasingly more significant part of our portfolio and our internal modelings demonstrates that it will cover an increasingly larger component of total company-wide fixed charges, including dividends and debt service costs.
Segment profit in our Logistics segment fell sharply in the second quarter. The slight uptick in oilfield drilling activity, while a welcome and positive indicator, was not impactful on our second-quarter results. To date, the increase in activity levels has been concentrated in select, high-quality basins where competition amongst service providers remains intense.
Further impacting segment profit negatively in the second quarter was a temporary reduction in sulfur hauling revenue as a result of oil sands production curtailments caused by the Fort McMurray forest fires in May. We estimate that the financial impact from this alone was approximately CAD2 million in segment profit.
I am pleased to highlight that both crude oil and water hauling volumes and the related EBITDA contributions stabilized in the second quarter. This supports our long term strategy to focus on production related business lines and reflects the quality of our service officering that has enabled us to increase market share at the expense of industry competition.
Offsetting these contributions from our ancillary wellsite business lines were weak in the second quarter. Despite this, I would note that field level margins remain positive in the second quarter and their visibility for increased customer demand is improving as we progress into the third quarter. While I am disappointed with the sequential business performance declines in this business I am pleased to report gross margins of 25% as a percentage of sales, which continue to reflect the relative resiliency of our business model.
Additionally, while our recent cost realignment initiatives are proving successful, I believe we have struck an appropriate balance between cost reductions and the maintenance of operating capacity that will enable Gibsons to participate in the rebound as activity levels continue to improve. So consistent with the outlook expressed in our first quarter conference call, we expect improving results in our Logistics business lines as we progress through the second half of 2016.
Looking further into 2017, we expect steadily improving industry conditions will offer us the opportunity to deploy the large amount of underutilized capacity within this business segment as we recover it to historical profitability.
Our Wholesale business delivered modestly positive segment profits in the second quarter, with our team being challenged by declining overall crude oil production volumes, warmer than normal weather, and narrow oil price differentials. This difficult business environment was further impacted by forest fire related production curtailments, which reduced margin opportunities within our crude marketing activities. Under these circumstances, the team has been focused on bolstering asset utilization and throughput rates within our other business segments.
Within our NGL marketing activities, warmer than average weather curtailed propane margin opportunities. And again, the Fort McMurray forest fires curtailed both volumes and margin opportunities with other NGLs.
As I noted earlier, the extended turnaround activities at our Moose Jaw facility impacted our ability to satisfy product demand for two additional weeks. And when combined with the already difficult wellsite fluids market, resulted in only modest EBITDA contributions from the sale of refined products. We conservatively estimate that the extended Moose Jaw turnaround, combined with the forest fire-related production curtailments had an approximate CAD4 million impact on Wholesale segment profit performance in the quarter.
Notwithstanding the sequential quarterly decline in segment profit in our Wholesale business in the second quarter, our outlook for this segment remains positive for the second half of 2016, with good visibility to strong road asphalt sales and normalizing fundamentals in the crude oil, refined products, propane, and other NGL markets.
Segment profit of CAD3 million in our Industrial Propane segment was down approximately CAD1 million over the same period last year, owing predominately to lower oilfield demand compounded by an approximate 15% decline in heating degree days in our key operating areas within Western Canada. Additional headwinds included a loss of distributed volumes to customers in the Fort McMurray area due to the forest fires in May.
Despite the volume challenges we experienced in the second quarter, I am pleased with the maintenance of historical profitability levels, as gross margins on a per unit basis remain stable. This is a testament to our business model that employs a rack plus pricing scheme and takes very little risk related to underlying commodities. Similar to our business Logistics segment, our cost realignment initiatives proved successful with an approximate 15% reduction in second-quarter overhead expenses over the same period last year.
Our outlook for this business in the second half of 2016 remains positive, with fundamentals supported by the improving health of our key oil and gas customer base in western Canada and expectation of more normal weather that will return following the negative El Nino influences that we endured last year.
So in summary, the second quarter had some unique, non-recurring challenges which we conservatively estimate negatively impacted segment profit by an approximate CAD10 million. Although we are not satisfied with our second quarter financial performance, even after adjusting for these factors, we are successfully managing through these challenges, and we remain confident that we have the necessary pieces in place to fully participate in the inevitable recovery.
In the interim, we remain focused on the execution of our growth projects currently underway and the successful completion of new, long term take-or-pay contracts that will enable the continued growth of our infrastructure footprint.
I'll pass it over to Sean now, who will discuss out capital expenditures and financial position. Sean?
Thanks, Stew. To start, I'd like to highlight Gibson's capital expenditures in the second quarter of CAD63 million, CAD52 million of which was spent on growth capital and CAD11 million of which was spent on upgrade and replacing capital. Our growth capital expenditures were primarily directed towards advancing the following key initiatives - the Statoil tank and expansion of related infrastructure at Edmonton and the storage tank expansion projects on the east and west sides of the Hardisty Terminal.
As Stew noted earlier, we're making good progress in the key construction projects within our infrastructure segment. Predominantly reflecting projects which are currently underway, we expect 2016 growth capital expenditures to be roughly CAD225 million.
If we progress the additional infrastructure project Stew mentioned earlier, we'd expect these to impact 2017 and 2018 spending levels. Our current outlook for growth capital spending in 2017 remains consistent with previous disclosure, with an estimate of CAD200 million to CAD300 million. Supported by our recent equity and convertible debenture offering, we are confident we have the appropriate leverage and liquidity profile to execute our business plan.
In this regard, at the end of the second quarter of 2016, our debt to debt plus capital ratio is 42%, our leverage ratio, represented by total net debt to trailing 12 month pro forma adjusted EBITDA was 3.3 times, and our interest coverage ratio was 3.6 times.
At the end of the second quarter, we had CAD242 million of cash and full availability of our CAD500 million revolving credit facility. This liquidity buffer provides sufficient flexibility as we manage through what we hope to be the bottom in industry conditions, and offers the ability to capture incremental growth opportunities above and beyond our current expenditure profile.
The Company declared dividends of CAD169 million in the 12 months ended June 30th, 2016, while distributable cash flow for the same period was CAD135 million. Thus, dividends declared represented 125% of distributable cash flow generated. Similar to the first quarter, these payout ratios are above our full-cycle target level.
Notwithstanding this, we remain comfortable in our outlook for improving cash flows as we commission our large; contractually backstop infrastructure projects in late 2016 and into 2017. This secured growth outlook provides us with the comfort to stray temporarily from our long-term targeted payout range, with our financial modeling indicating a more comfortable level being achieved in the latter part of 2017.
That concludes my comments, so now I'll turn it back over to Stew.
Thanks, Sean. The past 24 months represent one of the deepest and most prolonged downturns in our industry in modern history. Clearly, we at Gibsons have not been immune. That being said, I feel we have managed the business appropriately through this cycle. The restructuring and cost realignment initiatives undertaken in the first quarter are just now being demonstrated in our second quarter results, and we expect to see continued benefits in future quarterly results.
The improvement and stability in oil prices has provided our customers greater certainty with respect to future cash flows, resulting in the confidence to continue increasing the development activities, however modestly. Furthermore, the efficiency gains our customers have achieved, particularly in the high-quality, shorter cycle time opportunities, indicate healthier activity levels can return in a lower oil price environment than prior years.
Our North American footprint offers flexibility and numerous opportunities to capture growth opportunities as the development activity expands along the cost supply curve. Prices may fluctuate, but every day that passes, we get closer and closer to a rebalanced oil market. Speaking quite frankly, the oil industry is not going away any time soon, and history has proven that when conditions improve they often do so much faster and harder than anyone expects. We are well positioned to participate in the recovery while continuing to offer our customers integrated solutions along the value chain.
Operator that concludes our prepared comments. At this time, we'd like to open the call up for questions.
Thank you. [Operator Instructions] The first question is Linda Ezergailis from T.D. Securities. Please go ahead, your line is open.
I have a question with respect to your outlook on the dividend payout ratio. You mentioned that you expect it to come down in the second half of 2017. Is that assuming no change in the dividend level, I guess during your scheduled increase, which would next be early next year. Or how might I think of how the Board might be assessing what an appropriate dividend level might be?
Yes, I'd say Linda, that certainly against the backdrop of a challenging 2016 any increase in the dividend being contemplated would be extremely modest, if any. So when we talk about the dividend payout ratio becoming more comfortable or more normalized towards the back half of 2017, we're just really sort of taking the current dividend level and then looking at the growth in the contracted cash flows that we have coming from the Infrastructure segment. Looking at it through that very, very conservative lens certainly allows us to be quite confident in the sustainability of the dividend at its current rate.
Okay. That's helpful. And just as a follow up question in terms of scenario planning. Under what scenarios if any, might Gibson kind of slide off side with its covenants? Right now you're compliant. But I just want to make sure that I'm not missing any potential trends on that front.
Sean can maybe augment my answer to that question. But certainly, we have done extensive modeling and scenario planning. And following the equity raise and the convertible debenture issuance that we did during the quarter, we're extremely comfortable that under almost under any scenario through at least the end of 2017, we're well within our covenant ratios.
Yes. Yes, as Stew said, I mean, we ended the quarter at 3.3 times our covenant. Until the beginning of 2018, sorry it’s still the beginning of 2018 it's 4.85 times. So any financial modeling we have would indicate a sufficient level, more than sufficient level of comfort below that on the back of the financing we did complete this quarter.
Okay. Thank you. And just final question on capital allocation. Your Industrial Propane sale process, can you give us a sense of timing and what the time lag might be to reinvest the proceeds?
It's a little bit early to sort of speculate in terms of the timeline around the sale. We're about the launch the process within the next day or so. And so we're quite comfortable that there will be a lot of interest in that business from potential buyers. But in terms of the timeline around the sale process itself, I would expect that it will take some months.
With respect to reinvestment of the proceeds, we have indicated that our target CapEx on a gross basis for 2016 is CAD225 million. We have come up with confirmation of our guidance for 2017 of CAD200 million to CAD300 million.
And as I mentioned in the call, we are very confident that additional infrastructure opportunities will present themselves, which we'll be able to talk about in the near future, which will allow us to look at maintaining an investment in the Infrastructure segment well into 2018 timeframe. So I would suggest that if you are thinking in terms of the end of this year for completion of a sale process if, in fact, we're successful in that, we would be positively reinvesting in that business through the 2017 timeframe.
Thank you. The next question is from Andrew Kuske from Credit Suisse. Please go ahead.
Thank you. Good morning. I got some questions for Stew or Sean. And it's just, how do you think about capital management. And clearly you're thinking hard about it with the possible sale of Industrial Propane. But do you think about maybe monetizing a portion of the Infrastructure assets, just given the fact that valuations in general for contracted infrastructure are quite high and then maybe redeploying counter cyclically into more activity sensitive businesses which have very cheap valuations at this stage in the cycle and positioned for rebound? Like how do you think about that? And if you monetize maybe only just a small sliver of, say the core Infrastructure assets.
Very interesting question, Andrew. I would say that our current strategy is almost the opposite of what you have outlined as being a potential. And that gets down to the nature of the company that we want to build. We very much have as a stated strategy, the continued expansion and investment in the Infrastructure segment, with a de-emphasis on those more activity-based or cyclical businesses.
So I'm not withstanding the fact that, yes, we could monetize a higher multiple business and take advantage of a very, very, a potentially very lucrative M&A market on the services side, our stated strategy is to do exactly the opposite of that. We'll continue to look for opportunities to build on the Infrastructure segment and to de- emphasize those businesses that typically and traditionally would trade at a lower multiple.
That's helpful. And then maybe just some clarity on the Industrial Propane business, if we could maybe get a bit of granularity or color just around the volumes that come from the customers that you have that you're renting equipment to. What's the proportionality of the total volumes that are really tied to the rental business?
I'd have to get back to you with a specific number on that, Andrew. We -- the Canwest business it's characterized by a large amount of equipment that we do have in the rental space. It's a very sort of equipment heavy and service heavy business for us. That's why we characterize it as being an industrial propane business, not a retail propane business.
And so with the vast majority of the volumes that we do sell, there is a related rental income stream related to that volume, I guess is probably the best way to put it. Specifically, what's the breakdown between volumes and how that relates to specific rentals, like I said, we'd have to get back to you with that.
And I guess maybe the implication is if that percentage is very high, you have a high degree of stickiness with business that may imply a higher multiple that you may receive for the business?
Yes, that's what I tried to say, however [Indiscernible]. The business fleet, like I said is very equipment intensive and service intensive. And so we believe that that provides a reasonably high barrier to entry from a competitive perspective. And it has traditionally made the revenue stream from that business very, very stable and quite sticky.
Okay, great. Thank you.
Thank you. The next question is from Rob Holt of Scotiabank. Please go ahead.
Yes, thank you. Maybe a follow-up on Andrew's initial question. With you looking to de-emphasize some of the service businesses, could you look to potentially divest some of these businesses?
You know, never say never. Obviously, the decision that we made around divestiture or potential divestiture of our Industrial Propane business is indicative of our willingness to look at strategies that are consistent with our overall strategic focus, which is to build the Infrastructure segment.
Currently, the market's not really conducive to a lot of M&A activity, notwithstanding the fact that we did initiate the sale process for Canwest Propane following a fairly significant inbound expression of interest for that business. So I'd say that's definitely within the realm of possibility as we go down the road. But we have no current plans.
Okay. No, that's helpful. And then just moving on to your capital plan for 2016 and 2017, of the CAD200 million to CAD300 million in 2017, can you say how much has been commercially secured so far?
In terms of contracts that we've announced, I'd say we're probably somewhere south of 50%. In terms of our confidence in that CAD200 million to CAD300 million number, I'd say our confidence level is very high.
All right. And then just one follows up on that. Regarding your commentary on new projects being secured in the near term, would these be largely storage and connection. And would they be serving existing volumes or would they require additional oil sands projects to be sanctioned?
With respect to the first part of your question, yes, it'll be consistent with the infrastructure announcements that we've recently made. And so it'll be tanks and connections and that sort of thing. With respect to answering your second question I think we'll be able to talk with more clarity if and when we make those announcements.
All right. That's helpful. Thank you.
Thank you. The next question is from Robert Catellier from CIBC World Markets. Please go ahead, your line is open.
Hey good morning. Thank you. I just wanted to at risk of repeating a question really dive into the use of proceeds if you're successful with the sale of Industrial Propane. I mean, it just seems to me with about CAD240 million on the balance sheet, even with the capital spending plan you have today you [Indiscernible] haven't drawn on a line of credit, it just seems like a sale of the Industrial Propane business will leave you with quite a bit of money to reinvest. So maybe you could just speak to your level of confidence being able to reinvest that money within the year of sale of the Industrial Propane business.
Within the year of sale, I would say we probably wouldn't spend the entire use of proceeds from an organic perspective. But we have talked as well about our opportunities to invest in the Infrastructure segment, both in Canada and the U.S. as we see sort of post meltdown, more appropriate valuations within that sector. And so when we talk about the use of proceeds for Canwest Propane or for the sale of the Industrial Propane division, that certainly is the way we think about it.
We recognize that the sale will leave us with certainly ample liquidity, but we're quite confident that we will be able to find very accretive investment opportunities for those proceeds and they will be related to growing the Infrastructure segment.
Okay. That's helpful. And maybe I'll just follow up with a pointed question then. Would you sell a business without a use of proceeds would you still make that sale and just trust that there's enough opportunity out there for you to redeploy the money?
I guess I'll answer that question this way. We, like I said, initiated the sale process subsequent to sort of a fairly significant inbound expression of interest in the business. We recognize that that business is probably more valuable from a market perspective in somebody else's portfolio than it currently is in ours, and so that's sort of one lens through which we look when we make a decision to sell the business.
The other lens through which we're looking is our confidence in the next little while to be able to continue to grow the Infrastructure segment and to reinvest those proceeds. And so I guess the way I tried to answer that question is certainly from an organic perspective, we won't reinvest the entire proceeds from the sale within 2017, but we have seen opportunities and we continue to see opportunities that we are quite interested in to further grow our Infrastructure segment, perhaps even beyond Western Canada.
Okay. That's helpful. Thanks for letting me beat that horse to death. One other question. Just in the energy services now we've seen the second write off in about six months of the intangibles, which I think now are if I'm not mistaken, written down to zero. But with that, is there any sign of a bottom here in that segment yet? Did that rise in the price of oil to $50 get things going? Are you confident at all that we've seen a bottom here?
Well, calling the bottom is a particular frightful exercise. I would say what we have seen as we go through sort of the April, May, June timeframe is a modest increase in the rig count, both in Western Canada and throughout the U.S. And as I said in my prepared remarks that's really concentrated on some of the higher quality basins. And so activity levels within Canada, the Duvernay, the Montney, the Viking. Within the United States, we're talking about the Permian, the Anadarko, that sort of thing. So more important than oil prices, of course, is just overall activity levels and spending activity with respect to our E&P customers.
So at 50 bucks, I think people are feeling a lot more confident than they are at $39. And so today we're at $39. Three weeks or four weeks ago we're at $50. And so it's really, really difficult to say whether or not this one's going to stick. Having said that, our activity levels in the second quarter are certainly sequentially higher than they were in the first, and we're expecting to see a continuation of that trend line, however modestly into the third and fourth quarters. And so we're modestly optimistic that the tide has turned.
Okay. Thank you. I didn't mean to try to make you call a bottom. I was just trying to see if you saw any green chutes yet. But that's it for me. Thanks.
Yes, there are green chutes. We are starting to see capital budgets being increased and not slashed. And like I said for the most part week over week we are seeing modest increases in rig count, which is, I think a positive sign.
Okay. Great. Thanks.
Thank you. The next question is from Robert Kwan from RBC Capital Markets. Please go ahead, your line is open.
Good morning. Maybe just following on that line of questioning then. You've seen some of the things [ph], Stew; you pointed to on rig count. I'm just wondering, as you look at, say your show line numbers with the fire impact behind you and some of these activities maybe bottoming out if not showing some green chutes, when you look at, say the Logistics segment and the Wholesale segment are kind of two that were quite impacted by the fire and then activity levels breakup, what have you. Have you seen a recovery in the July numbers then, versus what you had coming out of Q2?
Well, without getting into too much specifics, I would say that we're quite confident that the third quarter in both of those areas will be certainly stronger than the second quarter.
Okay. And then you had it in the Industrial Propane release and you touched earlier on the call just mentioning new potential contracts shortly. I'm just kind of wondering, is there any additional definition. Does that mean this quarter? Does this mean this year? Can you give some sense as to what you might be alluding to when you say shortly?
As you can expect I mean, when we announce a new infrastructure project, it's typically following the -- well, I'll say it's always following the signing of a definitive contract for the long term with a significant counterparty. And so to that extent then, the discussions and the timing thereof is not completely within our control, of course.
So like I said, we're quite confident in our capability and our ability to secure additional projects and we hope to be able to announce those in the near term. Whether that near term is in the next weeks or sometime this quarter is, like I said, not entirely within our control.
I understood. I guess maybe to put it differently, you are at a stage where you're trading a lot of paper, discussing maybe finer details versus broader commercial terms in terms of pricing, is that fair?
We're at an advanced stage of discussions, yes.
Okay. Do you think that's an exclusive discussion that you're having right now or do you think it's a bit more of a competitive process?
That's an area of discussion I'd rather not get into.
Okay. Fair. Fair enough. There was some talk here on acquisitions and just generally how you're looking to grow kind of the, “Infrastructure segment”. I think you kind of really pinned down some of this, as you mentioned short term or contracts you might get in the short term, what that might mean. Just as you think about Infrastructure on the acquisition side particularly, as you look into potentially the U.S., can you just talk about what you might be looking for in terms of contracting, volumetric exposure, and whether it would be very similar or maybe deviate then from the storage business in Canada as it relates to tanks/terminals?
Yes, we'd be looking for infrastructure that is fee for service and to the largest extent possible would be supported by contractual obligations. The nature of the business in the U.S. is somewhat different than it is in Canada and particularly different than it is within our infrastructure business in Canada. Most of the long-term infrastructure projects that we have are in support of oil sands projects. And so you're marrying up infrastructure over the next several decades with a production profile that is essentially secured over several decades.
The U.S. situation, impacted as it is by sort of the shorter cycle, higher impact shale formations, is somewhat different. So we'll be looking for probably small to mid-size opportunities to either acquire or develop a Greenfield infrastructure that would be in support of volumes that are coming on stream that would be and the infrastructure would be supported by contracts.
Having said that, the nature and the duration of the contracts is likely going to be somewhat different than it would be in Canada. Having said that, we see opportunities that peak our interest, and so we're going to work really hard to try and bring some of those to fruition.
And I guess just given some of those differences, does that cause you to look at an acquisition under that type of contractual structure with a higher hurdle rate than what you might in Canada for, say a Hardisty tank?
Yes, we would look at all investment opportunities and appropriately risk adjust the expected return that we would require. So I guess the short answer is yes.
Okay. Maybe I just quickly finish, the numbers were coming a little quickly at the front of the call. So the CAD10 million impact, did that break down CAD2 million in Logistics, CAD4 million in Infrastructure, and that was Moose Jaw, and then CAD4 million in Wholesale?
That's correct, yes.
And so just on the CAD4 million Infrastructure on Moose Jaw, if that's an inter corporate transfer, is that correct, so is that CAD4 million in Wholesale effectively CAD8 million?
No. The impact from Moose Jaw in the Infrastructure segment was a split between the revenue that was foregone because of the longer turnaround, as well as the fairly significant additional costs that was required to -- I don’t think I mentioned briefly in my prepared remarks, we discovered fairly extensive corrosion in the crude heater, which was something we hadn't expected to see, and so we had to replace essentially all the piping within the crude heater within that unit, and so that was a fairly substantial additional cost.
Okay. Understood. Thank you very much.
Thank you. The next question is from Ashok Dutta from Platts. Please go ahead your line is open.
Thank you. Hi, good morning, Stew. Just trying to close the loop here, wanted to get an update as to what's going on with the crude by rail loading facility.
The facility remains, certainly remains in service. As you may know, that facility, from our perspective, is supported by long-term take or pay contracts. And so from a revenue and EBITDA generation perspective, it's performing as you would expect because it's contracted.
I can confirm that volumes are certainly below capacity out of that facility, as they would be for any other crude by rail facility, I think literally across North America. Our outlook for that business remains quite positive over the medium term as we continue to see growth coming out of western Canada, particularly from the oil sands and other areas and as we see the continued tightening of pipeline capacity downstream of Hardisty in particular. And so within the medium to long term, we remain quite bullish with respect to crude by rail and the potential we have to continue to grow that business.
But the facility like I said is operating well and from a contractual perspective is performing exactly as we would expect it to.
All right. Thanks.
Thank you. The next question is from Steven Paget from First Energy Capital. Please go ahead.
Thank you. Stew, as you say, pipelines are pretty much full right now. Beyond crude by rail, would you mind commenting on how this affects Gibsons' businesses?
From a perspective of continued tightening of export pipeline capacity, I'd offer sort of a macro and a micro point of view on that, Steven. From a micro point of view, in other words specifically for Gibsons, it does positively impact our point of view with respect to crude by rail and our ability to grow that business. It also, I think increases the value and the necessity for additional tankage upstream of Hardisty, and so certainly that's tankage at both Edmonton and Hardisty.
And so we think that reversely [ph] is a good thing for Gibsons because it does improve the value or increase the value of that tankage. Over the long term and speaking from a more macro perspective, however, as we continue to have difficulty as an industry sanctioning and building new export pipes, that's going to have moving impact in terms of investment within Western Canada. And obviously, that's not good for the industry in Western Canada and that's certainly not good for Canada as a whole.
And so from a macro perspective, I'd say it's a long-term negative. From a micro perspective, in the shorter and medium term, it's probably a positive, a net positive for Gibsons.
Thank you, Stew. You've talked about possible infrastructure acquisitions. What's your strategy for originating potential deals?
We, as we would with almost any accretive business development opportunity, try and use market knowledge as much as possible. Certainly, there are brokered deals that we have a look at and that we do sort of investigate. Typically, we wouldn't buy anything out of a brokered situation. What we try and do is find something that fits with us either because of a good counterparty fit or because of good geographic fit and something that sort of flanges up with our marketing logistics and transportation capabilities.
So we look at things through all of those lenses. We've got very, very capable men and women across North America that are, we think, are very, very knowledgeable in terms of the market in which we operate. And so we're continually sort of looking at opportunities both, like I said, smaller and larger. But it's typically ideas that we try and generate ourself.
Thank you, Stew. Those are my questions.
Thank you. The next question is from Patrick Kenny from National Bank Financial. Please go ahead.
Yes, good morning guys. Just circle back real quick on your cash balance right now. We also saw material increase in payables since last quarter. So just wondering if you can confirm what the jump in payables relates to and that it is just a temporary increase that'll normalize and come out of cash through the balance of the year.
Boy, that's an accounting question. I'm just looking at the balance sheet today. I would say that it's just a normal -- a build that's probably not related to anything in particular except for perhaps timing. We would expect that that situation will normalize. And, certainly, our current ratio, we would expect to remain within the normal range throughout this year.
Okay. Thanks for that, Stew. And then just maybe on the dividend and payout ratio front, 2016, for obviously reasons, will be well above 100%. But absent material recovery in your base business, there's likely an 18 to 24 month gap here between selling the propane business and bringing on new infrastructure cash flow, so just wanted to get a sense as to your comfort level to ride a payout ratio above 100% and for how long before considering right sizing the dividend to the current environment.
Thanks, its Sean here. As Stew said earlier, absent the propane sale, certainly, our modeling would indicate that we get to a more comfortable range at the tail end of 2017. What I'd say is our modeling, even with a sale of the Industrial Propane segment indicates we get to a range that we'd clarify as more comfortable, certainly not as comfortable with that immediate use of proceeds.
But I think our intention is that we will be able to deploy those proceeds throughout 2017. And the infrastructure that will be commissioned throughout the year will bring that payout ratio down, certainly on a trailing basis, but definitely on a prospective basis, if you think of when the commissioning happens as well. So a fair bit of commissioning mid 2017, which will contribute to tail end of 2017 cash flows, but through 2018 cash flows as well.
I guess just to augment those comments, when we look at the dividend and the payout ratio and do our sort of own internal modeling, I think we're being extremely conservative with respect to the prospective recovery of our Logistics and Wholesale segments, absent sort of meaningful contribution from our Industrial Propane division. So right now I'm not concerned at all about needing to right size the dividend.
Okay. Thank you very much, Steve. Thanks, Sean.
[Operator Instructions] The next question is from Ben Pham from Bank of Montreal. Please go ahead.
Okay, Thanks. Wanted to follow up on the last question on the dividend, the payout. A bit of conversation about that this morning. I'm just wondering what the payout policy historically you've had that 50% to 60%. You are going through some pretty structural changes for the positive with Infrastructure. So that number is stale and maybe are you looking at the payout differently as a -- I think there's some commentary about Infrastructure supporting fixed charges. Are you looking at Infrastructure supporting your dividend now in terms of your definition of comfortable?
Yes, I think as Sean mentioned in his remarks, or maybe it was me, I can't recall, as we look at the contracted growth profile within our Infrastructure segment, we become increasingly more confident that it will cover the vast majority of our fixed charges, including the dividend and our interest expense. We haven't today sort of reflected on and aren't prepared to say that previously if we were thinking 50% to 60% payout ratio, then now we're comfortable within a higher range. Obviously, within the 2016, 2017 timeframe, we likely won't get into that 50%, 60% range.
With a higher proportion of contracted cash flows coming from our Infrastructure segment over the medium term would be willing to and to think constructively about maybe a higher range of payout. I think that makes some sense. But like I said, today we haven't made any policy changes and aren't prepared to announce one.
Okay. Thanks for that. And I got to go back and beat the horse on propane, if I may, for that. Just to follow up more, I know that you mentioned sharper focus on the integrated offering that you have. And that's certainly -- to benefit you guys through the up cycle. But just looking at the last quarter there seemed to be a bit of a potential domino effect from having that integrated model.
So I'm just wondering with propane, you got some stable cash flows and maybe some diversifications [Indiscernible]. Is that not enough to perhaps offset the valuation, what you're seeing in propane and maybe capital redeployment?
Great observation and a good question. I'd said in response to an earlier question, the lens that we looked through when we made the decision to potentially divest of the Industrial Propane division was twofold. Number one, we do want to, as a continuation of our long-term strategy, continue to emphasize infrastructure and the contracted in stable cash flow streams, and de-emphasize the more cyclical businesses as well.
We also are quite cognizant that the valuation that we receive from investors and analysts that look at Gibsons as more of a midstream or an infrastructure company is probably diminished with respect to some of our businesses than it would be received if that business was in somebody else's portfolio. And so we believe that it's probably more valuable someplace else than it is within Gibsons.
The decision to sell, like I said, was subsequent to the receipt of fairly significant inbound expressions of interest. And so we have a fairly good sense as to whether or not we're going to be successful at an appropriate valuation for selling that business. But it wasn't an easy decision to make because it is a good business. It is remarkably stable and it has provided us with good opportunities both for growth as well as for accretive cash flow generation over the last 25 years because that's essentially where I started with Gibsons.
And so like I said, it's a great business. But we just looked at it and said, okay it doesn't make as much sense in our portfolio of capabilities as it would potentially make sense in somebody else's.
Okay, thanks for that. I dropped off a little bit there, so sorry I missed some of that. The only last thing I wanted to check with you, Stew, in terms of your prepared remarks on maybe just the green chutes that you highlighted. And are you -- and maybe just correct me if I'm wrong, are you feeling a little bit more positive of the turn than you were in the last quarter where we just came into kind of a six week downturn versus kind of what you're seeing today with activity levels and made it [Indiscernible] to the upside?
Yes. Just 10 seconds, yes. Like I said, however, we are certainly cognizant of the fact that this current down cycle has thrown quite a few curve balls at the industry. And so what we would have thought was perhaps the start of a turn at this point last year with $60 crude oil, certainly turned into a bit of a route since we saw crude pricing fall off to $27, $28 in January. We were 50 bucks three weeks ago, four weeks ago, and people were feeling quite positive. Today we're $39, with really no sort of underlying fundamental differences within the complex.
My prepared remarks I said every day we get closer to oil supply/demand balance, which is true. And I would say that what we're seeing in terms of increases in investment and increases in the rig count, etcetera, however modest, provide us with optimism that perhaps we are starting to trend up and to the right out of what we hope was the bottom.
Okay. That's helpful. Thanks, everybody.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back to Ms. Price.
Thanks again for your interest in Gibsons. As mentioned earlier, Cam and I are available after the call if there are more questions. Have a good day everyone.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
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