By Nia Williams
(Reuters) – Canada’s Trans Mountain oil pipeline will rely heavily on last-minute shippers to make profits, the company’s financial projections show, clouding Ottawa’s efforts to sell the pipeline as C $34.2 billion ($25.04 billion) has been completed after years of delays.
Documents filed by Trans Mountain as part of a regulatory dispute over the tolls show it could take up to eight years to make money unless the pipeline fills thousands of barrels a day of free shipping space.
Trans Mountain said it expects the pipeline to see heavy use as Canadian production grows, but some traders and analysts warn that will be a challenge given higher tolls and logistics constraints at the Port of Vancouver, where the pipeline ends.
The 890,000 barrels per day (bpd) pipeline began operating in May and reserves 20% of the space for uncommitted, or spot, customers, who pay higher tolls than shippers with long-term contracts.
Documents filed with Canadian regulators in April show several use cases for that 178,000 barrels per day of spot capacity.
In a scenario with zero spot shipments, the pipeline would not generate a positive stock return until 2031 (earnings after depreciation, interest and taxes are subtracted). If, as Trans Mountain predicts, the pipeline is 96% full from next year, stock returns will change. positive in 2026.
This month, a Trans Mountain executive told Reuters that a “little bit” of spot capacity is being used. Trans Mountain Chief Financial Officer Mark Maki said spot capacity was important to the company’s overall economics and he expected volumes to increase late in the year.
But demand for spot shipping is difficult to predict because it depends on the fluctuating price of Canadian oil versus other heavy crude in the U.S. and Asian markets, said Morningstar analyst Stephen Ellis.
He described Trans Mountain’s long-term forecast for a 96% occupancy rate as aggressive.
“One of their biggest Achilles heels is their dependence on the local economy,” said Robyn Allan, an independent economist who has studied Trans Mountain’s finances. “Everything is based on a very optimistic set of forecasts for the next twenty years.”
Rival Enbridge (NYSE:) Mainline, which carries crude oil to the U.S. Midwest and Eastern Canada, offers 100% spot capacity, but toll rates are about half that of Trans Mountain. TC Energy’s (NYSE:) Keystone pipeline to the US reserves approximately 10% spot capacity.
A Canadian crude trader said demand for Trans Mountain depends on how full competing pipelines are.
Canada Development Investment Corporation (CDEV), the government-owned company that owns Trans Mountain, noted in May 2023 that higher tolls could deter customers.
“Forecast tolls for pipeline transportation are higher due to the cost escalation (of the expansion) and have reduced competitive advantages,” CDEV said.
Costs rose during construction to nearly five times the 2017 budget and prompted a backlash from dedicated shippers including Suncor Energy (NYSE:) and Canadian Natural (NYSE:) Resources, who are facing higher-than-expected tolls as a result .
One mountainous segment rose from an estimated C$377 million in 2017 to C$4.6 billion in 2023 after technical problems. Other segments traveling through Metro Vancouver increased from C$310 million to C$1.7 billion over the same period.
NO HURRY TO SELL
Prime Minister Justin Trudeau’s government bought Trans Mountain in 2018 to ensure the expansion, which has nearly tripled shipping capacity from Alberta to the Pacific coast, continues.
However, Ottawa never intended to become a long-term owner and Canada’s Treasury Department said it is planning a sale process.
Spokeswoman Katherine Cuplinskas said the expansion was an important economic investment, creating revenue and good-paying jobs.
Maki urged Ottawa not to rush the sale given uncertainties over spot market demand, the toll dispute and Ottawa’s plan to sell a stake to Indigenous communities.
“If you’re trying to sell something and you have uncertainties, it’s going to affect the value someone is going to pay for it,” Maki said.
Trans Mountain has borrowed C$17 billion from the Canadian government and has a C$19 billion syndicated loan facility from commercial banks. Its April financial projections show it could pay more than C$1 billion in interest annually through 2032, although that will depend on interest rates and the company’s future capital structure.
Morningstar’s Ellis said even Trans Mountain’s best-case forecasts show the pipeline will generate only about 8% return on equity in 2034, which he described as the minimum acceptable level for a high-quality Canadian midstream asset.
Trans Mountain’s debt-to-EBITDA ratio, a measure of how well a company can cover its debt, will start at 11.6 in 2025 and remain above the typical level of 3.5 for a midstream company through 2040, he said.
“If this wasn’t a state-owned company, the market would have a very hard time supporting this. Those leverage ratios are like crap,” Ellis said.
Trans Mountain said interest payments are likely to be reduced as the company is recapitalized, and is working with the government to optimize its financing plan.
Many analysts say Ottawa will have to take a cut in its investments to make Trans Mountain attractive.
Pembina Pipeline (NYSE:) Corp, the only publicly traded company to publicly express interest in buying Trans Mountain, recently said there was still too much uncertainty. Indigenous groups are also waiting for more clarity.
“Until the tolls are resolved, it will indeed be challenging to move forward with the sale of the pipeline,” said Stephen Mason, CEO of Project Reconciliation, an Indigenous-led group seeking to bid for a stake in Trans Mountain.
($1 = 1.3702 Canadian dollars)
