Commissioning Progress And Contracted Cash Flows Will Support A Stable Long Term Outlook

Catalysts

About South Bow

South Bow operates energy infrastructure assets focused on contracted pipeline and related midstream services across Canada and the United States.

What are the underlying business or industry changes driving this perspective?

• The Blackrod connection is moving from construction to commissioning, with mechanical completion achieved and cash flows expected to start in early 2026. This supports incremental revenue and contributes to normalized EBITDA in the intra Alberta and other segment in the second half of 2026.
• Highly contracted cash flows and a focus on being the first choice provider for customers along established supply basins and demand centers give South Bow line of sight on normalized EBITDA of about $1.01 billion in 2025 and a forecast of about $1.03 billion in 2026. This underpins earnings stability.
• System wide integrity work, including multiple in line inspections and integrity digs, is aimed at restoring Keystone toward baseline operations. This could improve access to uncommitted volumes over time and influence revenue and normalized EBITDA if market conditions become more supportive.
• Ongoing optimization as South Bow exits transition services and retools internal processes, such as procurement and supply chain, is intended to reduce operating costs. This can support net margins and EBITDA without relying solely on volume growth.
• Tax legislation changes in the U.S. that extend interest deductibility and the acceleration of tax pools are expected to support distributable cash flow of about $700 million in 2025 and about $655 million in 2026. This directly affects cash earnings available after capital spending and dividends.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming South Bow's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 20.5% in 3 years time.
• Analysts expect earnings to reach $426.0 million (and earnings per share of $2.07) by about January 2029, up from $332.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 16.5x on those 2029 earnings, up from 16.4x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 14.7x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Keystone remains under pressure restrictions for longer than anticipated or is only partially restored. This could reduce available uncommitted capacity and limit upside from spot volumes over time, putting a cap on revenue and normalized EBITDA.
• Crude price differentials stay tight or tighten further. This reduces the economic incentive for shippers to use incremental or spot capacity, which would weigh on marketing results and limit any improvement in distributable cash flow and earnings.
• Growth projects, both organic and inorganic, do not advance beyond Blackrod or are sanctioned on less favorable risk and return terms. In this case, South Bow may not add enough new revenue lines to support its targeted EBITDA growth, leaving revenue and earnings more reliant on the existing asset base.
• Tax benefits from U.S. legislation and accelerated tax pools roll off after 2026 without comparable new offsets. This would lift the effective cash tax burden and reduce distributable cash flow and net income, even if normalized EBITDA remains steady.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$38.45 for South Bow based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$45.22, and the most bearish reporting a price target of just CA$23.06.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $2.1 billion, earnings will come to $426.0 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of CA$36.29, the analyst price target of CA$38.45 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.