More Growth is in the Pipeline for South Bow Shareholders After Our +31% Return

When our clients first became shareholders of South Bow (SOBO) on September 25, 2024, it wasn’t by choice. The new company was a spinoff from TC Energy. To be frank, we weren’t expecting much. 

Expanding SOBO’s Keystone pipeline had been a political football for years. The Bush administration started the process. When the application was made, the Obama administration rejected it. Donald Trump revived the project during his first term, only for Joe Biden to cancel it again on his first day in office in January 2021. 

When SOBO was spun off, it looked like Justin Trudeau and Kamala Harris would be shaping energy policy together, and the word pipeline had effectively been de-platformed by cancel culture. Who would have thought that 14 months later, Ottawa would be pushing to build a west coast pipeline?

Nevertheless, the 31% total return our clients have received has come as a pleasant surprise.

What makes South Bow’s financial profile a must own for investors is the stable and predictable cash flow that SOBO generates. Approximately 90% of its normalized EBITDA is secured through committed arrangements, which significantly limits exposure to commodity-price and volume volatility. Almost 96% of customers are investment-grade. This predictable cash flow translates into +2-3% normalized EBITDA growth going forward.

While some view it as a “single-asset company” because of Keystone’s overwhelming size and importance, it is an irreplaceable piece of infrastructure. The pipeline provides the most direct path to the U.S. Gulf Coast for Western Canadian crude oil from Alberta to the strongest demand markets in the U.S. Midwest and Gulf Coast.

However, South Bow has an aggressive long-term strategy that combines deleveraging with substantial growth.

The company is aiming to double its enterprise value from $15B to $30B by 2030. Management plans to achieve this through a combination of takeovers and organic expansion, but emphasizes they won’t sacrifice their leverage targets to make an acquisition.

In addition, the company’s first major growth initiative, the Blackrod Project, has achieved mechanical completion a few weeks ago. This project, which connects the International Petroleum Corp.’s Blackrod facility to South Bow’s Grand Rapids Pipeline, is expected to start generating cash flow in 2026.

The primary goal is to lower its net debt-to-normalized EBITDA ratio from a starting point of 4.8x down to 4.0x by the end of 2027. Once that’s complete, expect the dividend (which currently offers investors a 7.3% yield) to increase.

Why buy the stock? President and CEO Bevin Wirzba made the case best at last month’s investor day. With a 7.3% dividend yield, “Do you think we’ll still be around in a decade? Will people renew their contracts? If so, with the dividend yield, you get the company for free at the end.”

-written by Jeff Pollock