Executive Summary: Rigs: The total US rig count decreased by 8 for the May 26 week, down to 563 from 571 rigs. Infrastructure: On June 4, TC Energy (TRP) shareholders voted in favor of spinning off the company’s liquids pipelines segment into South Bow Corp. Storage: East Daley expects an increase of 2.24 MMbbl in commercial and Strategic Petroleum Reserve (SPR) inventories for the week ending June 7.
Rigs:
The total US rig count decreased by 8 for the May 26 week, down to 563 from 571 rigs. Liquids-driven basins drove the decline, down 5 rigs W-o-W to a total count of 458 from 463 the previous week. The Permian Basin count saw the largest loss, decreasing by 7 rigs W-o-W. The Bakken saw a loss of 1 rig. The Anadarko Basin increased 2 rigs and the Eagle Ford gained 1 rig.
In the Bakken, operator True Companies dropped 1 rig. In the Permian, Delaware operators Occidental Petroleum, Exxon, Diamondback Energy and Permian Resources each removed 1 rig. Midland operators Diamondback Energy, Chevron Corporation and Triple Crown Resources also dropped 1 rig each. In the Andarko Basin Continental Resources and Blake production added 1 rig each and EOG Resources added 1 rig in the Eagle Ford.
Infrastructure:
On June 4, TC Energy (TRP) shareholders voted in favor of spinning off the company’s liquids pipelines segment into South Bow Corp. South Bow will own the Keystone, Marketlink, White Spruce, and Grand Rapids pipeline systems. The spinoff will be effective between late 3Q24 and early 4Q24.
South Bow will be saddled with C$7.9B in long-term debt (C$1.5B in hybrids and C$6.4B in senior notes) compared to C$3.8B in shareholder equity, bringing total capitalization to C$11.6B. TRP estimates the initial leverage ratio to be 5.0x; management intends to reduce leverage by 0.25-0.50x over the next three years with a long-term target of 4.0x.
In the TRP Financial Blueprint, East Daley Analytics currently forecasts the South Bow assets to make C$1,544MM in 2024 EBITDA. Our estimate would place South Bow’s leverage ratio at 5.1x, slightly higher than management’s expectations.
EDA forecasts South Bow’s earnings will increase at a 4% CAGR from 2024-28. Keystone drives the growth with a 3% CAGR, plus C$42MM in annual EBITDA from the Blackrod project. Blackrod includes a 6-mile crude oil pipeline and 16-mile natural gas lateral, plus associated facilities. The expansion will provide crude oil transportation from International Petroleum’s Blackrod project to Grand Rapids Pipeline.
Keystone generates stable earnings from 8-year contracts for 94% of the pipeline’s ~620 Mb/d of capacity. Despite these contracts, Keystone has had reliability issues in the past, most recently an ~14 Mbbl leak in December 2022. Without the cushion of TRP’s natural gas assets, future operational issues may cause volatility to South Bow earnings.
South Bow’s second-largest asset is the 750 Mb/d Marketlink Pipeline connecting Cushing to Gulf Coast markets. Marketlink has been a drag on earnings, as a narrow spread between WTI and Magellan East Houston (MEH) prices has discouraged nominations. The asset’s long-term performance will be determined by the South Bow marketing team’s ability to fill capacity in competition with Seaway Pipeline.
EDA will release an independent South Bow model once the transaction is finalized. The complete financial outlook for the South Bow assets as well as TRP can be found in East Daley’s Financial Blueprints.
Storage:
East Daley expects an increase of 2.24 MMbbl in commercial and Strategic Petroleum Reserve (SPR) inventories for the week ending June 7. We expect total US stocks, including the SPR, will close at 828 MMbbl.
The US natural gas pipeline sample, a proxy for change in oil production, decreased ~0.29% W-o-W across all liquids-focused basins. Samples decreased 4.74% in the Eagle Ford and 2.4% in the Williston Basin, offset by a 1.49% increase in the Permian and a 1.92% increase in the Gulf of Mexico. The Williston Basin and Gulf of Mexico have a high correlation between gas volumes and crude oil volumes, whereas the Permian and Eagle Ford‘s correlation is less than 45%. We expect US crude production to remain flat at 13.1 MMb/d.
According to US bill of lading data, US crude imports increased by 202 Mb/d W-o-W to 7.26 MMb/d. More than 60% of the supply originated from Canadian pipelines into the US, with the remainder largely coming from ships carrying crude from Mexico, Venezuela and Argentina.
As of May 17, there was ~330 Mb/d of refining capacity offline, including downtime for planned and unplanned maintenance. EDA expects gross crude inputs into refineries to decrease by ~540 Mb/d W-o-W, coming in at 16.6 MMb/d.
Vessel traffic monitored by EDA along the Gulf Coast increased W-o-W. There were 24 vessels loaded for the week ending May 31 vs 19 the prior week. EDA expects US exports to be 4.4 MMb/d.
The SPR awarded contracts for 2.95 MMbbl to be delivered in June 2024. The SPR has 370 MMbbl in storage as of May 31, 2024.
Regulatory and Tariffs:
Presented by ARBO
Almost all pipeline tariff rates will increased by the FERC index amount (1.2647%) effective July 1, 2024.
Tariffs:
Enbridge Pipelines (FSP) L.L.C. Joint rates were increased and a surcharge was implemented to recover the costs imposed by the Minnesota Public Utilities Commission to decommission the Line 3 Replacement Pipeline effective July 1, 2024 FERC No 3.43.0 IS24- 598, filed May 31, 2024)
Express Pipeline LLC New international joint rates were established for the 2024 Open Season pursuant to the TSAs. Existing rates were increased by 3% pursuant to the signed TSAs effective July 1, 2024. 2024 FERC No 167.25.0 IS24- 593, filed May 31, 2024)
The above information is provided by ARBO’s Oil Pipeline Tariff Monitor. For more information on regulatory proceedings or tariff rates, please contact please contact Corey Brill via email at corey@goarbo.com or phone at 202-505-5296. https://www.goarbo.com/
