Trans Mountain pipeline justifies federal government support

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Hear me out on this: Prime Minister Justin Trudeau just might end up being 2024′s infrastructure investor of the year.

Remember the Trans Mountain pipeline? The federal government-owned project facing environmentalists’ protests and seemingly endless cost overruns, with a current expansion price of $30.9-billion? Well, if you haven’t heard, there’s a growing lineup of bidders. By early next year, when oil starts flowing, Bay Street predicts a buyer will take a minority stake that values the entire project at roughly $28-billion.

The economy-sapping problem of Canadian oil producers consistently selling crude for less than their U.S. counterparts? Just the prospect of Trans Mountain being completed is already narrowing that gap.

And as an example of reconciliation in action, could the government ask for a better sign that it’s getting stuff done than pointing to at least three Indigenous groups vying for equity stakes in Trans Mountain?

For a project that held the potential to be the whitest of white elephants for the federal government, and a multibillion-dollar sinkhole for taxpayers, Trans Mountain is shaping up as a policy win, and a project that comes close to financial break even.

Back in 2018, the federal government was all but forced to purchase Trans Mountain for $4.5-billion to improve the economics of the oil patch. Taxpayers were the buyers of last resort. Former owner Kinder Morgan Inc. KMI-N was determined to exit, and none of the obvious buyers – Canada’s pipeline operators – wanted the headaches of what was then a projected $7.4-billion expansion.

Steering clear proved a wise decision for rivals, as five years of near-biblical setbacks followed the government’s investments. On the government’s watch, Trans Mountain’s costs mounted because of factors such as the COVID-19 pandemic and floods.

With completion now only months away, the clouds are clearing.

Buying and twinning the Trans Mountain pipeline is already benefiting domestic oil companies. Historically, Canada has produced far more crude than it could export. By expanding the pipeline, and replacing more expensive and dangerous transport by rail, Ottawa wanted to boost exports and narrow the gap between the price paid for Alberta oil and crude produced in the U.S.

Mission accomplished. In a report, analyst Ben Pham at BMO Capital Markets said the current US$13-per-barrel spread between the price paid on oil from Alberta versus Texas will gradually narrow as Trans Mountain gets close to completion.

Last Friday, Trans Mountain told regulators what it plans to charge producers once its pipelines, which already carry approximately 300,000 barrels of oil a day, almost triple their capacity to 890,000 barrels. Armed with this information, analysts calculated the utility’s profits and cash flow are set to soar. In a report, analyst Robert Hope at Bank of Nova Scotia estimated Trans Mountain’s earnings before interest, tax, depreciation and amortization (EBITDA) will jump from $180-million this year to $2.4-billion next year, and $2.6-billion in 2026.

Previously, The Globe and Mail reported a number of groups, including a partnership between Indigenous groups and Pembina Pipeline Corp., are in preliminary talks with the government over investing in Trans Mountain. Mr. Hope said while any potential buyer will wait for clear evidence that the pipeline expansion is complete, “we expect discussions with potential buyers will accelerate in late 2023, with an announcement possible in the first half of 2024.”

“We expect an Indigenous-led group will ultimately purchase Trans Mountain,” Mr. Hope said. “There could be interest from pension funds or infrastructure funds.” Owing to competition and balance sheet concerns, Mr. Hope said Enbridge Inc. and TC Energy Corp. are unlikely to step up.

For Pembina and its partners, buying a stake in Trans Mountain would be transformative and lucrative. Mr. Hope mapped out four different scenarios, with the consortium taking anywhere from a 14-per-cent to 50-per-cent stake. His “Goldilocks” projection is the Calgary-based utility and the Indigenous groups acquiring 25 per cent of the pipeline in a largely debt-financed acquisition. The analyst sees this investment boosting Pembina’s annual cash flow by 7 per cent.

From the government’s point of view, selling a small stake in Trans Mountain in a deal that values the entire company at $26-billion to $29-billion – Mr. Hope’s estimate – would mark a welcome initial exit from an investment that seemed destined for disaster.