TC Energy Corporation

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

Key Updates:

• Acquisition of TC PipeLines, LP: Recently, TRP entered into a merger-agreement, wherein it would acquire all the outstanding common units of TC Pipelines, LP not beneficially owned by TRP. After the agreement, each TC Pipelines, LP common unitholders would receive 0.70 common shares of TRP. The transaction is expected to close by the early Q2FY21, subjected to the approval by the shareholders and customary regulatory bodies. 

• An income Play: Over the years, the group has reported stable dividend payment, backed by stable cash flows. TRP paid a total dividend of CAD 2,226 million for 9MFY20, significantly higher than CAD 1,344 million, a year ago and is a key positive. Moreover, the stock of TRP carries an annualized dividend yield of ~5.3%, which higher than the TSX Composite yield of ~3.32%.

Five Years Dividend History (Source: Refinitiv, Thomson Reuters)

Q3FY20 Financial Highlights:

• TRP declared its quarterly results, wherein the group reported revenue of CAD 3,195 million, slightly higher than CAD 3,133 million in the previous corresponding period (pcp). The increase was driven by improved income from Canadian Natural Gas Pipelines (CAD 1,162 million versus CAD 1,016 million in pcp), while a decrease in income from Liquids Pipelines (CAD 606 million versus CAD 694 million in Q3FY19) remained a drag.
• Operating and Other Expenses stood at CAD 1,823 million, higher than CAD 1,770 million in pcp, due to higher depreciation and amortization (CAD 673 million versus CAD 610 million in Q3FY19).
• The group reported income before income taxes at CAD 1,202 million, higher than CAD 1,113 million in Q3FY19. The improvement was driven by a lower financial charge (CAD 304 million versus CAD 472 million in pcp).
• TRP reported net income of CAD 1,012 million, stood significantly higher than CAD 839 million in Q3FY19.
• Cash and cash equivalent were reported CAD 1,192 million, while total assets were recorded at CAD 101,862 million.       

Q3FY20 Financial Highlights (Source: Company Reports)

Risks: 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 CF-based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group has secured CAD 37 billion capital program and placed over CAD 3 billion of assets into service during 9MFY20. Moreover, all the capital projects are underpinned by long-term contracts which indicates zero impact from the price volatility of international commodities and provides visibility of stable earnings and cash flow for the foreseeable future. Moreover, the acquisition of TC Pipelines would provide access to markets like Western, Midwestern and Northeastern United States, which is a key positive. We have valued the stock using P/CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Enbridge Inc., Kinder Morgan Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 56.57 on January 19, 2021. 

TRP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Vermilion Energy Inc.

Vermilion Energy Inc. (TSX: VET), is a Canada-based international energy company, which focuses on conventional and semi-conventional exploration and development projects. The group is primarily interested in light oil and liquids-rich natural gas.

Key highlights 

• Management's view on 2021 Budget and Production: The management has approved an E&D capital budget of CAD 300 million for 2021, representing a 17% reduction from 2020. The Company's primary focus for 2021 is to preserve liquidity and reduce debt while positioning the Company for long-term sustainability. During the first quarter, the group would invest approximately 31% of the total capital budget. This capex is expected to deliver annual average production of 83,000 to 85,000 boe/d, which would help generate more than CAD200 million of free cash flow.

Source: Company 

• Robust production: The company has a strong history of the robust output, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. Although the company reported average production of 97,656 boe/day for the nine months ended September 30, 2020, reflected a fall by 4% comparing the previous corresponding period due to the turmoiled economic scenario.

Source: Company

• Optimizing operation efficiencies: Over the years, the management has undertaken some prudential steps to minimize the operating costs. This ongoing focus on efficiency has resulted in significant per-unit cost reductions helping the company to achieve healthy margins. 

Source: Company 

Financial overview of Q3 2020 (In thousands of Canadian dollars)

Source: Company 

• In Q3 2020, the company reported consolidated revenues of CAD 274.78 million against CAD 391.89 million in the previous corresponding period. The decline in revenues was primarily due to a reduction in crude oil realized prices.

• The company reported a net loss of CAD 69.9 million in Q3 2020, compared to a net loss of CAD 10.2 million in Q3 2019. The decrease in net earnings was primarily driven by CAD 101.4 million of lower fund flows from operations due to lower realized prices, because of the impact of COVID-19 and the OPEC+ price war, and impairment charges of CAD 35.4 million. 

Risk associated with investments 

As the company is in the exploration business of oil and gas, its revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors that could impact the financial performance are low demand for oil and gas, and financial risk on behalf of their hedged positions. 

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company expects its average production for FY 2021 to be in a range of 83,000 boe/day to 85,000 boe/day, with a primary focus of preserving liquidity and reduce debt. The company mentioned that approximately 31% of the FY 2021 capital budget would be invested during the first quarter, which would help in generating more than CAD200 million of free cash flow. Further, the gradual reopening of the economic and industrial activities, the commodities prices are likely to improve in the foreseeable future, which would improve the group’s performance. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Buy” rating at the closing price of CAD 7.02 on January 19, 2021. For the said purpose, we have considered peers like Enerplus Corp, Baytex Energy Corp, Crescent Point Energy Corp, etc.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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