Varcoe: A ‘new beginning’ for South Bow Corp. as demand for oil — and pipelines — keeps rising

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A new multibillion-dollar pipeline company officially premiered on Tuesday, with South Bow Corp. spinning out of TC Energy Corp. and its shares starting to trade on the Toronto Stock Exchange.

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South Bow CEO Bevin Wirzba says the response to the company’s startup — including its ability to raise $7.9 billion in debt capital this summer — underscores its future and the long-term demand for western Canadian oil.

The new Calgary-based midstream company has 600 employees and key pipelines connecting Alberta’s oilsands to critical U.S. demand markets, including the Gulf Coast and American Midwest.

“Our trading will reflect that we are an independent entity,” Wirzba said in an interview before the company began trading on the country’s main stock exchange.

“It’s now the start of a new beginning for South Bow.”

South Bow owns and operates 4,900 kilometres of liquids pipelines in Canada and the United States, and 7.6 million barrels of tank terminal storage capacity.

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Its assets include the Keystone pipeline, which began operating in 2010 and ships about 20 per cent of western Canadian oil to the U.S.

Just under half of its employees will work at its downtown Calgary head office — South Bow has leased four floors in Manulife Place — and the rest in its Houston office and other field offices.

TC Energy, which has been selling off assets and deleveraging in recent years, announced in July 2023 it would spin out its liquids pipeline operations into a new stand-alone business.

TC leaders have said the move would allow each business to focus on its own strategies. (Shares in South Bow opened at $29.30 on Tuesday and closed at $29.07; they are expected to start trading on the New York Stock Exchange around Oct. 8.)

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“It’s good to see new companies formed in the midstream space that are going to be able to receive the attention that they need. These are key assets,” analyst Nate Heywood of ATB Capital Markets said Tuesday.

“Having the successful spin-out just proves that there’s an appetite for oil and gas infrastructure and an appetite for that type of investment in those assets.”

Last month, South Bow announced it had raised $7.9 billion of debt capital, and its total offering was more than six times oversubscribed, “a key message to show the service that our business provides is critical to North America over the long term, over multi decades,” Wirzba said.

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There’s been a furious debate in recent years over the future demand for oil in an era of decarbonization, ESG and a sharper focus on climate change.

Global demand for oil continues to rise this year, with the world using more than 102 million barrels per day (bpd), although some industry forecasts have consumption peaking this decade.

Last week, Canadian Natural Resources Minister Jonathan Wilkinson said peak oil demand could happen this year, although the latest data from the International Energy Agency show consumption rising this year and in 2025.

Canada has the third-largest proven oil reserves in the world and oilsands production continues to reach record heights.

Major operators are planning to expand output.

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Pipeline capacity in the country has been constrained for much of the past decade, but the startup of the Trans Mountain expansion project this spring offered much-needed relief, while giving producers access to new global export markets.

Oilsands output is expected to continue to ramp up and some experts believe Canadian pipelines could be running full again within a few years, perhaps as early as 2026, said Kevin Birn, Canadian oil markets chief analyst for S&P Global Commodity Insights.

S&P projects Canadian oilsands output will climb by 500,000 barrels per day (bpd) by 2030, and plateau at 3.8 million bpd around 2030.

“There’s a demand market for pipelines that exists, and a demand market for incremental expansion,” he said.

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“If you’re in the business of providing oil transport, you see security of demand, both from the established base but the growth that’s projected as well.”

South Bow has said in addition to paying a base dividend, its capital allocation priorities will be to reduce its debt level, followed by investing in its strategic corridor.

Its new Blackrod connection project will build 25-kilometre oil and gas transportation pipelines to International Petroleum Corp.’s thermal oilsands project, at an estimated capital cost of $250 million.

“We’re evaluating quite a number of other opportunities on the southern end of our system in the Gulf Coast and from Steele City (Neb.) down . . . We’re open for business,” Wirzba said.

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“Our No. 1 priority is, though, to ensure we’re disciplined around our balance sheet and our dividend.”

Laura Lau, chief investment officer with Brompton Group, which owns some shares in TC Energy and South Bow, said the new company could face challenges attracting investor attention due to its size — relative to other larger pipeline firms — but its yield appears attractive at this point.

The fact its debt offerings were oversubscribed also speaks to views about energy demand, she said.

“A number of years ago, sentiment on oil was very negative,” Lau said. “People are realizing it looks like we will need oil longer than expected.”

Wirzba sees growth ahead for domestic oil producers, the need for more egress out of the country and an important role for Canadian energy.

“It wasn’t long ago — thinking about four years ago — when the sentiment around energy security was very different and a bit of a headwind,” he said.

“We truly do have a world-class industry that serves a legitimate role in the global economy and it’s our opportunity as Canadians to choose whether or not we will fill that role.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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