Tudor, Pickering, Holt on Tuesday initiated coverage of South Bow (SOBO.TO) with a buy rating and a C$38.00 price target following the spin out of the oil-pipeline operator from TC Energy (TRP.TO).

"We are expanding our midstream coverage by adding TC Energy's Liquids spin-off, South Bow Corporation. With a relatively simple and straightforward asset footprint, SOBO's core business is the Keystone pipeline system, which is a vital piece of WCSB egress infrastructure underpinned by 585mbpd of commitments (94% of capacity) with an average contract life extending into the next decade. Although SOBO will carry a fairly hefty debt load (TPHe YE'24 leverage 5.0x) in its first year operating as a standalone company, we do foresee a path to delevering to 4.5x by YE'26, which is faster than management's comments of "within three years", given during their business update call in September. Volumes on the Keystone pipeline system have performed well through H1'24 at more than 620mbpd. Throughout the remainder of the year, we expect volumes to decline towards contract levels as barrels are displaced off legacy pipelines and allocated to the new Trans Mountain Expansion project. In '25 and '26, continued production growth in the WCSB will back-fill capacity additions from TMX, leading to increased pipeline utilization rates and wider spreads between Canada and the US, all of which will benefit SOBO's earnings," analyst AJ O'Donnell wrote.

(MT Newswires covers equity, commodity and economic research from major banks and research firms in North America, Asia and Europe. Research providers may contact us here: https://www.mtnewswires.com/contact-us)

Price: 34.88, Change: -0.77, Percent Change: -2.16