The Keystone Pipeline suffered a rupture in early April, releasing 3,500 bbl of crude oil in North Dakota. The spill is far from the worst on Keystone but could still prove costly for South Bow (SOBO), which no longer has the financial cushion of TC Energy’s (TRP) natural gas assets to absorb service disruptions.
The oil release occurred on April 8 at Milepost 171 near Fort Ransom, ND. The incident shut down the pipeline for eight days while South Bow made repairs and cleaned up the spill. SOBO said it recovered most of the released oil, but Keystone is now operating at a reduced pressure under an agreement with regulators.
Keystone’s stability has been a primary concern for investors. The pipeline has reported numerous leaks since starting operations in 2010. The most recent spill occurred in December ’22, when 14,000 bbl seeped into land and waterways in Washington County, KS.
The incident proved costly for TRP, the former Keystone owner and operator. TRP saw a $72MM decline in liquids revenue from 3Q22 to 4Q22 and incurred ~$480MM in clean-up costs, according to EDA’s Financial Blueprint Models. The spill idled the line for 21 days, dropping quarterly throughput from ~600 Mb/d to ~524 Mb/d. The impacts also carried over to 1Q23 as reported liquids revenue dropped to $398MM (-$57MM Q-o-Q).
East Daley covered the pricing impact from the last major spill in 2022, and we’re monitoring the Western Canadian Select (WCS) and WTI price spread during the latest event. WCS prices notably weakened during the 8-day outage as oil backed up into Canada, pushing the discount to -$11/bbl (see figure).
SOBO reports earnings on May 15. In the 1Q25 Earnings Preview, East Daley lowered our ’25 EBITDA forecast to account for increased costs and reduced volumes following the April incident.
The spinoff from TRP in 4Q24 saddled SOBO with $5.8B in long-term debt, resulting in a net debt to EBITDA ratio of 4.5x. The company aims to decrease its leverage and increase its dividend over time. However, the recent spill will hinder SOBO’s progress as free cash flow is diverted to additional maintenance and remediation costs. – Gage Dwan and Trever Morley Tickers: SOBO, TRP.
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