In October 2024, TC Energy (TSX: TRP) completed the spin-off of its liquids pipelines business, creating South Bow (TSX: SOBO) as an independent, publicly traded entity. South Bow operates approximately 4,900 kilometres of crude oil pipeline infrastructure connecting Alberta supplies to key U.S. refining markets. Post-separation, TC Energy focuses exclusively on natural gas infrastructure, storage, power, and energy solutions.
South Bow’s spin-off from TC Energy creates a compelling investment proposition as a specialized liquids pipeline company operating a vast network of critical crude oil infrastructure, including the Keystone pipeline system. Moreover, South Bow plans to maintain sustainable dividends through stable cash flows while pursuing capital investments in its pipeline corridor to enhance operations and deliver resilient supply to high-demand North American markets.
The separation enables South Bow to pursue a focused strategy without competing for capital allocation with natural gas and power assets. As an independent entity, the company benefits from stable, contracted cash flows and projects steady 2-3% annual EBITDA (earnings before interest, tax, depreciation, and amortization) growth driven by organic expansion and planned corridor investments like the Blackrod Connection Project starting in 2026.
Despite an elevated leverage of 4.8-5.0 times net debt-to-EBITDA from the $7.9 billion debt assumption, South Bow plans systematic deleveraging over three years through disciplined capital allocation and EBITDA growth.
The company’s low-risk profile, underpinned by long-term contracts and essential infrastructure assets, should support its annual dividend of US$2 per share, translating to a forward yield of 8%.
South Bow’s strategic positioning capitalizes on favourable North American crude oil supply-demand fundamentals while offering operational agility and growth flexibility specific to the liquids sector.
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How did South Bow stock perform in 2024?
In 2024, South Bow reported a normalized EBITDA of US$1.09 billion and a distributable cash flow of US$608 million. Given an annual dividend of US$2 per share, South Bow’s annual dividend expense totals roughly US$415 million, indicating a payout ratio of less than 70%.
South Bow stated that its performance was underpinned by highly contracted assets with minimal commodity exposure, providing stable cash flows for investors.
Looking ahead to 2025, South Bow expects normalized EBITDA of US$1.01 billion within a 3% range, supported by 90% contracted revenue arrangements. However, ongoing tariff uncertainty may create headwinds for uncommitted capacity volumes on the Keystone pipeline system, prompting management to reduce risk exposure in the Marketing segment.
CEO Bevin Wirzba emphasized South Bow’s disciplined approach to capital allocation while pursuing growth opportunities within existing corridors. The leverage ratio is expected to reach approximately 4.8 times by year-end as South Bow advances the Blackrod Connection project, with deleveraging beginning in 2026 when the project generates cash flow.
South Bow maintains a quarterly dividend of US$0.50 per share while targeting long-term leverage reduction to four times. Management remains optimistic about Western Canadian oil sands fundamentals despite near-term market volatility from trade policy uncertainty.
Is this TSX dividend stock undervalued?
Analysts tracking the TSX dividend stock expect adjusted earnings to expand from US$1.56 per share in 2025 to US$2.14 per share in 2029. Given consensus price targets, SOBO stock is forecast to gain 6% over the next 12 months. If we adjust for dividends, cumulative returns could be closer to 14%.
