TC Energy Corporation (TSX: TRP) is an energy infrastructure company, consisting of pipeline and power generation assets in Canada, the United States, and Mexico. The company’s pipeline network includes more than 92,600 kilometers of natural gas pipeline, along with 4,900 kilometers from the Keystone Pipeline system. 

Key highlights:

• Setting up low-carbon Hydrogen production hub: Recently the group announced its plan with Nikola Corporation (NASDAQ: NKLA), of setting up a hydrogen production hub on 140 acres in Crossfiled, Alberta, where the group operates as a natural gas storage facility. The hub is expected to produce 60 tonnes of hydrogen per day and the capacity can be increased to 150 tonnes per day later on. The production hub will lower the emission generated in the process, to help the company in achieving its clean energy standards.

• Strategic collaboration for developments on renewable natural gas transportation hubs: On April 25, 2022, the group announced a strategic collaboration with GreenGaS, a major player in the renewable natural gas (RNG) market, to develop a network of natural gas transportation hubs including RNG. The developed network will help in reducing greenhouse gas emissions, increasing participation of diverse biogas sources in renewable energy markets, improving economic viability, and increasing carbon-neutral energy opportunities.

• Increase in daily transmission & improved EBITDA from NGTL: During Q1FY22, the Nova Gas Transmission Line (NGTL) experienced the highest average winter demand since 2000 of 14.2 Bcf/d (billion cubic feet per day) and the USA Natural gas pipelines recorded an average flows of 30 Bcf/d, an increase of 5% from Q1FY21. Hence, in Q1 FY22, comparable EBITDA from NGTL rose to CAD 426 million v/s CAD 397 million in Q1 FY21

• Improved liquidity: During Q1FY22 the group witnessed an increase in its cash and cash equivalent to CAD 1,073 million as compared to CAD 673 million in Q4FY20. In addition to this, the cash flows from operating activities increased to CAD 1,707 million for Q1FY22 vs CAD 1,666 million in Q1FY21. The increased cash balance and cash flow from operations depict a positive aspect of the liquidity garnered by the group to meet its operational expenses and expansionary plans.

• Lucrative dividend yield: The company has dividend yield of 5.272% which is quite appreciable, especially amongst the regular income-seeking investors. Also, recently the company announced a dividend of CAD 0.90 per common share for the quarter ending June 30, 2022, payable on 29 July 2022.
  

Risks associated with investment

The group is vulnerable to the slowing demand of energy consumption because of any substantial rise in prices along with the geopolitical tensions escalating further. With this, the other risk threatening the group's financials and operations are but are not limited to, weather change, foreign currency fluctuations, credit risks, changing ESG and regulatory compliances, etc.   

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing

• The company reported an increase in the total revenue to CAD 3,500 million in Q1FY22 as compared to the total revenue of CAD 3,381 million in Q1FY21. The major increase in revenue was from the US Natural gas pipelines segment, which reported revenue of CAD 1,449 million in Q1FY22 against  CAD 1,351 million during Q1FY21.

• The operating and other expenses declined to CAD 2,538 million in Q1FY22 as compared to CAD 4,572 million in Q1FY21. The reduced goodwill and asset impairment charged reduced to CAD 571 million during Q1FY22 vs CAD 2,845 million in Q1FY21, curtailed the overall operating and other expenses on the lower side in Q1FY22.

• The income before taxes turned positive to CAD 723 million in Q1FY22 vs the losses before taxes of CAD 1,390 million in Q1 FY21.

• The company reported a Net income of CAD 400 million in Q1FY22, vs net loss of CAD 950 million in Q1FY21.
  

Valuation Methodology (Illustrative): Price to Earnings based valuation

Source: Refinitiv, Analysis by Kalkine Group 

Stock recommendation 

The company transitioned to a positive net income of CAD 400 million in Q1FY22 as compared to the net losses of CAD 950 million in Q1FY21. The management is optimistic about the FY22 outlook and estimated that comparable EBITDA to be modestly higher than FY21, and the comparable earnings expected to remain same as FY21, despite the  volatility in energy prices and supply chain disruptions. For FY22 the company has budgeted approx CAD 7 billion for capital expenditure plans, which is higher than FY21, to increase the production capacity to meet the rising energy demand. On the valuation front, the stock is measured on the price to earnings valuation multiple and we have considered   Enbridge Inc., Enterprise Products Partners LP., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing market price of CAD 68.28 on May 2, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 2, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

Disclaimer

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