President and CEO Marc Dutil of the Canam Group Inc. not only manages the needs of his customers and his enterprise, but also the expectations of shareholders.
Stew Hanlon and the executive team at Gibson Energy Inc. didn’t flinch when the price of crude oil went into a freefall during the second half of 2008.
Hanlon watched, along with the rest of the world, as the West Texas Intermediate benchmark oil price hit a record high of $145 per barrel in July 2008, before bottoming out at $30 per barrel five months later.
Hanlon was Gibson’s Chief Operating Officer at the time. He also watched as the oilfield services company grew its balance sheet during that tumultuous period in the oil and gas industry. “That I think is a mark of how little outright commodity prices effect our business. We make our money when crude oil flows; and we make our money by transporting it and by marketing it – not trading it,” Hanlon says. “It’s not riskless, but I can sleep at night.”
Hanlon took the reins as Gibson’s President and CEO in April 2009. The company’s steady success during the recession, as well as the previous six decades, was parlayed into taking Gibson public. The company issued shares at $16 each and raised $500 million during its initial public offering (IPO) in June 2011.
Accessing the public market has been a catalyst for growth at Gibson. The company used the capital to execute a handful of strategic acquisitions and strengthen its market position in storing, transporting and marketing crude oil, amongst other services. The company’s stock price has risen to $23 and investor confidence in Gibson has grown since the IPO, despite the company serving an industry with massive swings in pricing, supply and processing capacity.
“You have to make sure you keep your eye on 12 months, 24 months and 36 months, post-IPO,” Hanlon says. “If you’re going to the marketplace to convince investors to give you something that’s very precious to them – their investment capital or their equity –they should trust you with that. Their then going to be watchdogs, so to speak, so you have to be in the position to do what you say and be good stewards of that capital.”
Gibson marketed its first crude oil transaction in 1953, selling 365 barrels to the British American Oil Co. on behalf of Anglo American Oils Ltd. The Calgary-based company had revenues of $5 billion during 2011, which was more revenue than any other midstream company headquartered in Canada.
During the 58 years that separate those two milestones, Gibson built a large crude oil transportation and storage network. The company has the capacity to store 4.2 million barrels of oil in Alberta, and has 14 treating and terminal facilities in Canada. Gibson operates 495 kilometres of pipeline in Western Canada and has one of the largest trucking fleets in North America with 1,130 trucks and 2,060 trailers. Another 16,000 barrels of oil per day is processed at a refinery in Moose Jaw, Saskatchewan, to produce asphalt, roofing material and well site fluids. Gibson also operates the second largest propane retail distribution service in Canada, under the Canwest Propane name.
Gibson is deeply entrenched in an industry struggling with unfavourable margins. New technology has unlocked massive oil and natural gas reservoirs across North America. The disconnect between the location of the supply and the location of the market has eroded resource prices for producers, but has created ample opportunity for a midstream company in the crude oil transportation market.
“That’s our calling card,” Hanlon says. “We’re large, we’re independent, we’re at centre ice, we can take your barrels and get them to where they need to go.”
Gibson also has a robust rail fleet with more than 1,000 rail cars. The company recently signed two joint venture agreements to augment its rail capacity. One will provide increased service in Alberta and the other will provide increased service in Texas. “Our view of rail is similar to any investment. We look at it from the view of long-term sustainability,” Hanlon says. “There is always going to be a particular grade of crude that is wanted in a particular market in North America that’s not always going to be served by pipeline. If you have optionality and flexibility, then you can always utilize rail facilities to augment quality management or location arbitrage factors.”
Gibson, however, does expose itself slightly to price volatility through its refinery and marketing business segments. The company buys a couple hundred thousand barrels of oil each day produced at the wellhead and from other market players on stream. But to limit the risk those contracts are bought and sold simultaneously within the same price month to limit exposure to commodity price swings. On the operations side, service contracts are negotiated much longer than the spot trades on the commodities market. “The contracts we take back are very long-term in nature and they’re fixed in terms of the return profile that we need to get in order to market that long-term investment,” Hanlon says. “If you’re going to be in this business for a long time, and we’re in to our sixth decade already, you have to think beyond the current cycle.”
Gibson spent its first 55 years as a company with limited growth capital and had a short leash in terms of spending from its majority owners, which at times included an England-based services company and a New York-based investment firm.
The IPO in 2011 loosened the company’s purse strings. Gibson spent $289 million on acquisitions in 2010 and 2011. The company set aside $142 million for growth capital those same two years and has another $165 million earmarked for growth in 2012. Gibson also completed 19 acquisitions in the 10 years leading up to 2012 and Hanlon says each one fit within strictly defined parameters. Gibson was looking for complimentary services or a new geographic opportunity.
“We always orient ourselves to a production base and midstream services. We don’t want to get too far downstream,” Hanlon says. “We’re not too far into the upstream. We’re in that midstream space, so for a deal to fit it has to fit within those goalposts.”
Although the company now has the finances at its disposal to grow rapidly, Hanlon is careful to not overstretch the company, ensuring Gibson remains sustainable through downturns similar to 2008.
“We had five decades of growing up and acting as a small entrepreneurial midstream company and I think that’s deeply embedded within our DNA here,” Hanlon says. “I think that at the end of the day we still sort of picture ourselves as being a small services company. We have to be a little more innovative and a little bit more service oriented in order to make sure we continue to serve our customers. Hopefully it’s the same 10 years from now, 20 years from now and long after I’m gone.”