Newly hatched South Bow Corp. SOBO-T -0.78%decrease plans to use takeovers of rival oil pipelines as part of an ambitious plan to more than double the size of the Calgary-based energy infrastructure company.
South Bow, spun out of TC Energy Corp. TRP-T -0.79%decrease 13 months ago, held its first investor day on Nov. 19. And itoutlined plans to profitably build the company from its current $15-billion enterprise value, which includes its equity and debt, to $30-billion-plus over the next five years.
South Bow chief executive Bevin Wirzba said acquisitions are part of the growth strategy and the company is evaluating several potential opportunities. Analysts said South Bow will need to acquire between $3-billion and $8-billion of energy assets to hit its goal.
“We do have faith in the management team to execute, and industry M&A activity levels are high, but this is an ambitious strategy,” analyst Robert Catellier at CIBC Capital Markets said in a report.
South Bow reports $93-million third-quarter profit, up from past year
South Bow owns the Keystone pipeline connecting Alberta oil fields to Texas refineries. The company forecast it will spend roughly $4-billion on organic growth initiatives over the next five years on projects that include expanding its pipeline network in Alberta.
South Bow could acquire Calgary-based Gibson Energy Inc. GEI-T -0.60%decrease, which owns oil terminals in Alberta and Texas and has a $4.2-billion market capitalization. Or it could buy assets from Inter Pipeline Ltd. IPPLF +1.51%increase, which has 3,300 kilometres of pipelines and oil storage operations in the Alberta oil sands, analyst Robert Hope at Scotia Capital Markets said in a report.
South Bow management is also talking to private equity funds that own energy infrastructure and must eventually sell these businesses and pay back their investors, Mr. Hope said. The company will move cautiously, and “potential transactions must align with South Bow’s capital allocation framework, carry a similar risk profile and deliver per-share accretion,”he said.
South Bow’s opportunities to expand come partly from its existing foothold in what Mr. Wirzba calls an “irreplaceable corridor” that connects the strongest supplies of heavy oil in the world – from Alberta’s oil sands to refiners in the U.S.
And he is adamant Western Canadian production is only going to grow, as oil sands and conventional producers boost output, after investing billions of dollars on expanding operations and takeovers of their own.
“We believe that over the next 10 years, we could see again another 1-million barrels [a day] of growth potential out of that basin,” and moving through pipelines to refineries, Mr. Wirzba told the investor conference.
The first half of that expanded production won’t even need much capital to get going, he added; it will come from things like new solvent technology and improved well designs.
That’s great for industry, but producers are going to have to get their commodities to market somehow – and that’s where South Bow sees a shining opportunity, he said.
The company plans to build or acquire feeder pipelines, Mr. Wirzba said.
By creating more revenue streams, South Bow can spread its governance and optimization costs over several assets, “which makes our base business that much more competitive going forward.”
South Bow doesn’t intend to turn down opportunities that make sense,but that doesn’t mean it will start chasing risky deals in order to grow more quickly, he said, adding it will take a “disciplined approach to risk.”
South Bow explores increasing crude exports after Carney raises Keystone XL revival with Trump
Maurice Choy, an RBC Capital Markets analyst, said in a report that companies pursuing an active M&A program often face mixed reactions from the market.“However, management’s presentation at the investor day should offer some reassurance to investors that it will remain disciplined.”
South Bow’s revenues are splitwith roughly 30 per cent in Canada and 70 per cent in the U.S. Despite overtures from other parts of the world, Mr. Wirzba said it intends to remain focused only on those two markets.
“We can just be focused in this corridor, in this kind of industry, and be very successful. So we don’t see any need to deviate from that,” he said.
South Bow sends Canadian heavy oil to U.S. refineries that also import the fossil fuel from Venezuela. The South American country is the fourth-largest U.S. supplier, behind Canada, Mexico and Saudi Arabia, shipping 228,000 barrels a day last year.
Given the political uncertainty in Venezuela, RBC’s Mr. Choy said South Bow has an opportunity to supply far more oil to Texas refineries.
“Roughly 700,000 barrels per day of crude oil imports from other countries in the U.S. Gulf Coast region may be displaced by Canadian products,” Mr. Choy said in a recent report.
In 2024, Canadian energy companies shipped 4.1 million barrels of oil each day to U.S. refiners.