Gibson Energy Inc. (TSX:GEI) Has a Steady 7.2% Dividend With a Very Low Risk Business

Gibson Energy Inc. (TSX:GEI) has a newly transformed business model where nearly all of its cash flows are stable, cemented into decade-long contracts. Now is the time to pick up its 7.2% dividend yield.

| More on:
You Should Know This

Image source: Getty Images

It’s been a difficult year investing in energy stocks. Nearly all Canadian producers have seen their shares sink. Some, like Encana Corp, have seen shares fall by more than 50%. But it’s not all bad news.

Over the past year, the stock of Gibson Energy Inc. (TSX:GEI) is up by a few percent. When you add in its 7.2% dividend, investors have experienced double-digit gains in 2018. With oil prices stuck around $50 per barrel, that’s an impressive return.

How has Gibson outperformed nearly every peer this year? It’s simple: they’ve dramatically reduced their exposure to commodity prices, focusing instead on providing critical services like refining, distribution, terminals, and pipelines. Their business model is crucial to the oil and gas industries regardless of what commodity prices do.

Transitioning to a low-risk business model

As a midstream player, Gibson Energy has been in an enviable position. It has a diversified asset base with heavy exposure to both Canadian and U.S. production. So weakness in one region—such as what we saw with oil prices in Alberta this fall—can be offset by more attractive economics elsewhere.

Over the next decade, Gibson anticipates growing cash flows by around 10% per year. While this may not seem like a huge reward for investors, the risk profile of the business appears fairly low, so the tradeoff is more than compensated for.

For example, by the end of 2019, 85% of cash flows will come from its infrastructure businesses. Nearly 90% of those cash flows come from investment-grade companies with decade-long contracts. So unless these customers decide to stop producing oil, Gibson likely has at least 10 years of reliable cash flows ahead of it, more than enough to service its 7.2% dividend.

But the company hasn’t always had this low of a risk profile. In 2014, only 35% of cash flows came from the company’s stable infrastructure segment. As stated earlier, that should rise to 85% of cash flows in 2019. Next year, 100% of all capital spending is dedicated to growing its infrastructure businesses, so stable cash flows should continue to rise.

Now is the time to take advantage

While it may take a few quarters, or even a few years, for the market to catch up to Gibson’s new and improved business model, savvy investors can take advantage today by scooping up shares at a discount. Since November, Gibson stock is down around 15% due to pressures across the rest of the energy sector, even though Gibson’s cash flows will hardly be impacted.

As long as oil companies keep producing oil, Gibson’s assets will remain in demand. In 2019, the company anticipates a payout ratio of around 80%. Long-term, however, the payout ratio is targeted to be between 70% and 80%, suggesting Gibson’s management believes cash flows should grow over time.

While it’s unlikely Gibson energy will double or triple over the next five years, the stock has an extremely favourable risk to reward ratio. With a well-covered 7.2% dividend plus a transformed business model in which nearly all of its cash flows are stable and cemented into decade-long contracts, investors should be able to count on Gibson stock for attractive returns for many years to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »