Western Canadian Refining Will Falter Under Oversupply And Legacy Risks

Key Takeaways

• Long-term declines in petroleum demand and oversupply in the diesel market threaten Tidewater's margins, refinery utilization, and overall revenue stability.
  
• Heavy regional concentration, high debt levels, and execution risks in new energy projects increase vulnerability to regulatory changes, financial strain, and future earnings pressure.
  
• Policy-driven renewable fuel demand, asset sales, diverse customers, and recent acquisitions are strengthening earnings stability, financial flexibility, and long-term margin growth for the company.

Catalysts

Tidewater Midstream and Infrastructure Ltd.

• The accelerating global transition toward decarbonization and greater electrification is likely to erode long-term demand for traditional petroleum products, leaving Tidewater exposed to declining pipeline throughput and reduced refinery/plant utilization, which would structurally lower both revenue and asset returns over the coming decade.
  
• Persistently high renewable diesel imports have created an oversupplied Western Canadian diesel market, pressuring refined product margins to multi-year lows at Tidewater's Prince George refinery; this dynamic is expected to persist and could even worsen as global renewable supply expands, forcing net margins and EBITDA potential structurally downward.
  
• Legacy asset and revenue concentration in Western Canada exposes Tidewater to heightened risk of regional regulatory shifts and market disruptions, including stricter environmental regulations and unpredictable policy changes, which threaten to depress long-term cash flows and increase the risk of stranded assets.
  
• Elevated leverage continues to constrain Tidewater's flexibility to fund necessary growth and diversification projects, while also exposing it to rising interest expenses and refinancing risks, which threaten to compress net earnings and curtail future capital allocation to higher-return initiatives.
  
• Execution risk in new growth areas such as renewable diesel and sustainable aviation fuel remains high, with the potential for cost overruns, delays, or regulatory hurdles to prevent these initiatives from offsetting declines in the core business, thereby placing future consolidated margins and earnings per share at risk.

Tidewater Midstream and Infrastructure Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tidewater Midstream and Infrastructure compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tidewater Midstream and Infrastructure's revenue will grow by 14.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.2% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach CA$46.1 million (and earnings per share of CA$0.12) by about August 2028, up from CA$-58.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1.1x on those 2028 earnings, up from -1.6x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 12.0x.
• Analysts expect the number of shares outstanding to decline by 5.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.02%, as per the Simply Wall St company report.

Tidewater Midstream and Infrastructure Future Earnings Per Share Growth

Risks

• The strong policy-driven demand for renewable fuels in Canada, with the British Columbia Low Carbon Fuels Act amendments doubling renewable diesel requirements and mandating domestic production, is stimulating robust offtake agreements and higher pricing benchmarks, which may drive revenue growth and margin expansion for Tidewater Renewables in the coming years.
  
• Tidewater has successfully diversified its customer base for refined products following the expiry of the Synovus offtake agreement, expanding sales channels and optimizing logistics, which could increase resilience, support higher average realized prices, and stabilize earnings.
  
• The company's ongoing sale of noncore assets is enhancing liquidity and financial flexibility, which could enable investment in growth projects or reduce debt service costs, ultimately improving net margins and future profitability.
  
• The Prince George Renewable Diesel Complex is ramping toward stable, high utilization following the fire incident, and the company's renewable diesel contracts at US import parity benchmarks position Tidewater to benefit from increasing environmental credit values, supporting EBITDA and net income growth.
  
• The acquisition and integration of Pembina's Western Pipeline segment is projected to yield cost reductions, operational synergies, and optimized feedstock procurement, all of which can create operating leverage and improve consolidated cash flow and margins over the long term.

Valuation

• The assumed bearish price target for Tidewater Midstream and Infrastructure is CA$0.1, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tidewater Midstream and Infrastructure's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$0.5, and the most bearish reporting a price target of just CA$0.1.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$2.1 billion, earnings will come to CA$46.1 million, and it would be trading on a PE ratio of 1.1x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of CA$0.22, the bearish analyst price target of CA$0.1 is 120.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.