TC Energy Corp

TC Energy Corp (TSX: TRP) operates as an energy infrastructure company, consisting of pipeline and power generation assets in Canada, the United States, and Mexico. Its pipeline network consists of over 92,600 kilometers (57,500 miles) of natural gas pipeline, along with 4,900 kilometers (3,000) miles) from the Keystone Pipeline system. 

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 payable on April 30, 2021, increased by 7%, against CAD 0.81. Moreover, the stock offers a healthy dividend yield of 5.92%, which is lucrative, considering the current interest rate environment.

Source: Company 

• Robust financial matrix:Despite the challenging period in 2020, the Company maintained its pace and witnessed the spirited performance across the net income, comparable EBITDA and funds generated from operations. The Company clocked a CAGR of ~145% in its net income between 2016-2020.

Source: Company 

• Better than industry margin profile:The Company outperformed the industry margin profile, which is a key positive. In FY 2020, the group reported EBITDA margin, operating margin, and a net margin of 63.5%, 44.6% and 37.8%, respectively, which was higher than the industry median of 35.8%, 5.2% and (7.4)%, respectively. 

Financial overview

Source: Company 

• In FY2020, the company reported a slight decline in its revenue at CAD 13 billion, against CAD 13.2 billion in the previous corresponding period. The increase was driven by improved income from Canadian Natural Gas Pipelines, U.S. Natural Gas Pipelines and Mexico Natural Gas Pipelines. At the same time, Liquids Pipelines and Power and Storage segment dragged the performance.
• Operating income stood at CAD 7.2 billion in the reported period, against CAD 7.5 billion, partially offset by higher depreciation.
• Lower interest expense and lower income tax helped the company to post higher net income at CAD 4.9 billion in FY2020, against CAD 4.4 billion in the previous corresponding period. 

Risks associated with investment

Most of the projects of the company are capital intensive in nature and requires extensive funding. Any delays or shortage in capital funding might dampen the overall performance and the return ratios. Lower demand due to seasonal fluctuations in short-term throughput volumes might impact the company’s performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company delivered decent performance through its diversified portfolio of regulated and long-term contracted assets, which generated solid financial results in 2020. The services were deemed essential, given the critical role the group’s infrastructure plays in providing energy to North Americans. Comparable funds generated from operations of CAD 7.4 billion were 4% higher. The increases reflect the strong performance of its legacy assets and contributions from approximately CAD 5.9 billion of growth projects that entered service in 2020.  The Company outperformed the industry margin profile, which is a key positive. On top of this, from the long-term investor’s perspective, the stock is offering a lucrative dividend yield amid a low-interest-rate environment. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 58.72 on March 24, 2021. We have considered Enbridge Inc, Inter Pipeline Ltd, Pembina Pipeline Corp etc., as the peer group for comparison.

1-Year Price Chart (as on March 24, 2021). Source: Refinitiv (Thomson Reuters)

Gibson Energy Inc.

Gibson Energy Inc. (TSX: GEI) is a Canada-based integrated service provider to the oil and gas industry with operations across producing regions throughout North America. The Company is engaged in the movement, storage, blending, processing, marketing and distribution of crude oil, condensate, natural gas liquids (NGLs), water, oilfield waste and refined products.

Key highlights

• An Income Play:The group continued with a track record of dividend distribution and declared an increased quarterly dividend of CAD 0.35 per common share, payable on April 16, 2021. Moreover, the stock offers a healthy dividend yield of ~6.3%, which is lucrative, considering the current interest rate environment.

Source: Refinitiv (Thomson Reuters)

• Substantial cash flows: Despite a challenging 2020, theagile management and operational efficiency of the company helped to garner healthy cash flows of CAD 299 million, against CAD 302 million in the previous corresponding period.

Source: Company 

• Ample liquidity:The company maintained a solid financial position. As of December 31, 2020, the cash balance stood at CAD 53.7 million and had the ability to utilize borrowings under the Revolving Credit Facility of CAD 690.0 million. On February 14, 2020, the Company amended its Revolving Credit Facility to increase the capacity to CAD 750.0 million. Furthermore, it improved the Net Debt to Adjusted EBITDA at 2.8x, below the Company’s 3.0x – 3.5x target range.

Financial overview of FY2020 (Amounts in thousands of Canadian dollars)

Source: Company

• In FY2020, the company reported a decline in revenue to CAD 4.9 billion, compared to CAD 7.3 billion in the previous corresponding period. The decline in revenues was primarily due to lower income from the marketing segment, partially supported by an improved infrastructure revenue.
• The reported period's gross profit stood at CAD 306.1 million, against CAD 333.9 million in pcp.
• On the back of slightly higher G&A expenses, the company posted operating income of CAD 247.0 million, compared to CAD 275.4 million in 2019.
• The company reported a net income of CAD 121.3 million, against CAD 182.9 million in the pcp. A drop in revenue, along with higher operating expenses and finance cost, were the main reasons behind lower net income. 

Risks associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include lower demand for crude oil and natural gas, lower production, prices of these commodities as the low realization prices will dampen their top line, inflation, interest rates etc. 

Valuation Methodology (Illustrative) 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The company maintained resiliency through a challenging year for the oil and gas industry. Despite the challenges of COVID-19, the group continued to grow its Infrastructure cash flows, including placing 1.5 million barrels of tankage at Hardisty Terminal into service near the end of the year and advancing the DRU towards a mid-2021 in-service date. Furthermore, the company is earning health cash flows and maintains ample liquidity. On top of this, from the long-term investor’s perspective, the stock is offering a lucrative dividend yield amid a low-interest-rate environment. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 22.3 on March 24, 2021. We have considered Tidewater Midstream and Infrastructure Ltd, Athabasca Oil Corp, Cenovus Energy Inc etc. as the peer group for comparison.

1-Year Price Chart (as on March 24, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.