The Trans Mountain Pipeline expansion, or TMX, project is now expected to cost $30.9 billion, a more-than 40% increase from its estimate last year of $21.4 billion and almost 3 times its original estimate of $12.6 billion. The cost increases were attributed to inflation and supply chain challenges, floods, terrain issues, and higher water disposal costs, among other items. It is now almost certain that the Canadian government will lose billions of dollars on a sale, as we can’t see a pathway for any sale price to approach this current cost estimate.
There are no fair value estimate or moat implications for our Canadian midstream coverage.
The pipeline is expected to be in service in the first quarter of 2024 and will add 590,000 barrels per day to the existing pipeline, bringing total capacity to 890,000 barrels per day. The pipeline is more than 80% complete, and given the still-substantial work to be completed, we think higher costs are still possible. With 80% of the pipeline already contracted under take-or-pay contracts, the higher costs can only be recovered with higher rates on the uncontracted 20% capacity, where the market largely sets tariffs.
This is Good News for Enbridge
The most positive implications are for Enbridge (ENB): the more delays and higher costs from TMX, the more room Enbridge has to maneuver. Enbridge recently refined its near-term estimate (we interpret this as 2024-25) for TMX losses on its Mainline system to about 5%-6% of Mainline volumes before new production would restore volumes to historical levels, down from an earlier 10% estimate. The lower estimate is mainly because Enbridge sees rail volumes (about 150,000-200,000 barrels per day) moving first on to TMX, before Mainline begins to see an impact.
There are other positives for Enbridge. Enbridge also sees about 1 million barrels per day of competitor contracts expiring over the next few years that it can compete for effectively. It also has 2 million barrels per day of refineries reliant and many sole-sourced to Enbridge’s system, plus another 1 million barrels per day of downstream market access contracts. Enbridge’s system also moves 4 times the volume that Trans Mountain would move on a similar rate base, so its rates are likely to undercut TMX’s on uncontracted capacity. We’ve also noticed that Enbridge is selectively expanding its Gulf Coast oil pipeline capacity, effectively serving as a further incentive for barrels to remain on its system to earn the best prices from export markets.
The implications are a bit more uncertain for Pembina, as we still think a bid from a Pembina-involved consortium is likely. Pembina’s balance sheet is in excellent shape for such a bid, even if we think the likelihood of overpaying is high. The pipeline is not likely to be expandable further, so Pembina would realistically have to value it based on the current contracts and some assumptions around market rates for the uncontracted capacity of 20%. We remain skeptical of any potential value creation, as we don’t think the Canadian government is likely to sell cheaply given the high-profile nature of the project and the likely negative political implications of being perceived as giving away a “bargain” at the taxpayers’ expense
