Buy TC Energy for capital gains and dividends

Oil and gas stock TC Energy is selling 85 per cent of its Northern Courier Pipeline. This and the sale of another asset will raise $1.75 billion.

Calgary-based TC Energy Corp. (TSX—TRP) (formerly TransCanada Corp.) develops and operates pipelines, power generation and energy storage facilities across Canada, the United States and Mexico.

TC Energy

Oil and gas stock TC Energy carries a lot of oil, a lot of cash, and a lot of debt. But it should maintain its credit rating and continue to raise its dividend.

TC Energy continues to strengthen its balance sheet. It has agreed to sell 85 per cent of its Northern Courier Pipeline to pension fund Alberta Investment Management Corp.

TC Energy also expects to pick up cash when Northern Courier Pipeline issues debt. Both transactions will raise TC Energy’s cash by about C$1.15 billion. The company expects the transactions to close in the third quarter (July 1 to September 20) of 2019.

TC Energy will continue to own 15 per cent of the Northern Courier Pipeline. It will also continue to operate this 90 kilometer pipeline, which transports bitumen and diluent between the Fort Hills mine site and Suncor Energy’s terminal north of Fort McMurray, Alberta.

TC Energy is confident in its outlook

TC Energy president and chief executive officer Russ Girling said: “Along with the sale of Coolidge, which recently closed, we now expect to realize approximately $1.75 billion of proceeds from announced portfolio management activities in 2019. When combined with our significant and growing cash flow, access to capital markets and potential additional portfolio management, we believe we are well-positioned to fund our $30 billion secured capital program in a manner consistent with achieving targeted leverage metrics.”

Strengthening the balance sheet should also prevent further downgrades of TC Energy’s credit rating. In April, Moody’s Investors Service downgraded its credit rating. A year ago, Standard & Poor’s downgraded its credit rating. On the positive side, TC Energy’s credit remains of ‘investment grade’ as opposed to non-investment grade ‘junk’ bonds. Even so, TC Energy does carry a lot of debt.

TC Energy carries a lot of debt

TC Energy’s debt comes to more than five times its EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). That is, its debt is at a relatively high ratio to its underlying earnings.

On March 31, TC Energy net debt stood at $50.159 billion. This was 7.3 times its cash flow of $6.845 billion over the latest four quarters. This is well above our standard comfort zone of two times or less.

Just keep three things in mind. First, following the asset sales, TC Energy’s net debt went down to $48.409 billion. That’s less than seven times its cash flow. Second, growing utilities often carry significant net debt until their operations enter service. Third, utilities generate stable and predictable cash flow. This lets them carry more debt than companies with volatile cash flow.

By another measure, TC Energy’s net debt-to-cash-flow ratio is 1.89 to one. That’s like $1.89 of borrowed money for every dollar of shareholders’ equity. That’s high but seems manageable.

TC Energy remains a buy for further long-term share price gains and growing dividends that yield an attractive 4.6 per cent. We expect this ‘dividend aristocrat’ to continue to raise its dividend each year, despite its significant debt.

This is an edited version of an article that was originally published for subscribers in the June 7, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.