By Rod Nickel
WINNIPEG, Manitoba (Reuters) – TC Energy’s proposed pipeline split is a bet that the company will be able to supply more Canadian crude to U.S. refiners in the Gulf of Mexico, but the company faces stiff competition and will be heavily in debt when it starts.
The South Bow spinoff, which TC investors will vote on June 4, will help Calgary, Alberta-based TC reduce its high debt load and focus on natural gas transportation.
South Bow’s entry comes as Canada, the world’s fourth-largest oil producer, benefits from expanded options for transporting crude. Rival Trans Mountain opened its expansion last week to move more barrels to the U.S. West Coast and Asia.
South Bow also faces its biggest Canadian rival, Enbridge, which is pursuing its own U.S. strategy in the Gulf and has the largest U.S. oil storage and export terminal in Texas.
Gulf exports, however, are not an attractive option for South Bow, which has access to third-party shipping facilities, said Hillary Stevenson, senior director of energy market intelligence at research organization IIR Energy.
The Keystone Pipeline, South Bow’s flagship asset, ships 622,000 barrels per day (bpd) from Canada to Nebraska, where it branches off to the Midwest and Cushing, Oklahoma. From Cushing, the Marketlink pipeline transports 750,000 b/d of crude to refineries in Texas.
Shippers have reserved 94% of Keystone under a long-term contract, leaving the remaining capacity for the spot market.
South Bow’s capital priorities will be debt repayment, organic growth and shareholder returns, its new president, Bevin Wirzba, said Friday during a quarterly conference call.
Wirzba, who declined an interview request, previously said the Gulf offered “huge opportunities,” citing additional demand last year on Marketlink and possible joint infrastructure projects.
However, U.S. operational refining capacity in the Gulf is expected to see a net decline of 2% by 2025, as the closure of the 263,776 b/d LyondellBasell refinery in Houston next year will eliminate more than production than what incremental expansions of other facilities could add, Stevenson said.
South Bow’s plan to increase its share of refined medium and heavy crude in the Gulf is therefore dependent on replacing other foreign suppliers.
The construction of Mexico’s newest refinery provides such an opportunity when Pemex’s 340,000 b/d Olmeca plant comes online this year, processing more Maya crude in the country rather than on the U.S. Gulf Coast.
“South Bow is positioning itself to supply the missing Maya barrels,” Stevenson said.
HIGH DEBT
South Bow will also be constrained by high debt from the start. The spin-off will issue C$7.9 billion ($5.75 billion) of debt to buy out debt currently held by TC and plans to bring the debt to less than five times its EBITDA at the time of the spin-off.
U.S. midstream competitors typically have debt less than four times EBITDA, said Rob Thummel, senior portfolio manager at Tortoise Capital, which owns TC shares.
“It will be more of a slower growing entity, not necessarily an aggressive acquirer,” he said.
