TC Energy Corporation

TC Energy Corporation (TSX: TRP), formerly TransCanada Corp, is an energy infrastructure company engaged in the development and operation of North American energy infrastructure, including natural gas and liquids pipelines, power generation and natural gas storage facilities. 

Key Highlights 

• An Income Play:The company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently it declared a quarterly dividend of CAD 0.87 per share for the quarter ending December 31, 2021. The stock offers a healthy dividend yield of 5.81%, which is lucrative considering the current interest rate environment.

Source: Company

• Advancing Secured Capital Program: The company currently has a potential CAD 22 billion secured capital program and other similar high-quality projects in the works. TRP's capital projects are backed by long-term contracts and/or regulated business models, emphasizing the urgent need for this new infrastructure. At the same time, it provides visibility into the company's earnings and cash flow once these projects enter the service stage in the following years.
  

• Robust Margin Matrix:Despite the turmoiled period, TRP maintained its pace and witnessed a spirited performance across its profit margins. The resilient management assisted the company in outperforming the industry margins also, which is notable. The graph below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine Group 

• Healthy Outlook: The company plans to continue its strategy of expanding, extending, and modernizing its existing natural gas pipeline network with the advancement of its Bruce Power life extension program. It also intends to progress work on the use of renewable energy for some of its proprietary energy loads. In the near future, it anticipates its industry-leading portfolio of secured capital projects to grow substantially. In addition, TRP is also working on several additional renewable energy initiatives that will help it improve its cash flow.

Financial Overview of Q3FY21

Source: Company

• In Q3FY21, the company reported a slight increase in revenue to CAD 3,240 million, against CAD 3,195 million in the previous corresponding period. The rise was mainly due to higher performance from the US Natural Gas Pipelines.
• Income before income taxes in the reported period was CAD 953 million, a decline from CAD 1,202 million in pcp, primarily due to higher plant operating costs, which raised consolidated operating expenses.
• TRP posted a net income of CAD 818 million in Q3FY21, against CAD 1,012 million in the previous corresponding period.
  

Risks Associated with Investment

Most of the projects of the company are capital intensive in nature and require extensive funding. Therefore, delays or shortages in capital funding might dampen the overall performance and lower return ratios. In addition, lower demand due to seasonal fluctuations in the short term might also impact the company's performance.

Valuation Methodology (Illustrative): Price to Earnings based valuation

Stock Recommendation

The company's broad portfolio of critical energy infrastructure assets continued to function admirably and reliably during the first nine months of 2021, meeting North America's growing energy demand. Strong demand for its services and a constant focus on operational excellence drove the results. Despite the ongoing consequences of COVID-19 and energy market volatility, flows and utilization levels across many of its systems were greater than the historical averages, which is a key positive. In addition, the firm is advancing on its CAD 22 billion secured capital program supported by long-term contracts plus regulated business models, which offer insight into the firm's potential earnings and cash flow as it enters service in the coming years. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 59.92 as on November 30, 2021. We have considered Enbridge Inc, Kinder Morgan Inc, Williams Companies Inc etc., as the peer group for comparison.

One-Year Technical Price Chart (as on November 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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