TC Energy Corporation

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

The Board of Directors declared a quarterly dividend of CAD 0.81 per share, which is payable on June 30, 2020.

Outlook: The Company expects capital expenditures of CAD 10 billion primarily used for the growth projects, maintenance capital expenditures followed by funds for equity investments. The Company expects a possible delay for the capital program due to disruptions related to COVID-19.

Q1FY20 Financial Highlights: TRP declared its quarterly results, wherein the company reported revenue of CAD 3,418 million, declined marginally from CAD 3,487 million in pcp, primarily attributable to a decline in the liquids pipelines and power and storage segments. The quarter was characterized by marginally lower plant operating costs and other costs, a fall in property taxes followed by a surge in the Depreciation and amortization expense. Net Income stood at    CAD 1,285 million, as compared to CAD 1,146 million in the pcp. Cash and cash equivalents stood at CAD 1,890 million and total assets at CAD 107.81 billion as on March 31, 2020.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The recent combination of the COVID-19 pandemic, along with the unparalleled energy demand decline and resulting supply imbalance, has led to significantly depressed commodity prices and restricted capital market access impacting certain of the group’s customers. If the current situation prevailed for a longer time, the group might face a delay in payment from its customers which would hamper the financials.

Valuation Methodology: EV to Sales Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of TRP corrected ~12% so far this year owing to the lower demand for crude oil. The availability of the company’s infrastructure remained largely unimpacted, and utilization levels remained robust, which was in line with historical norms. The group largely insulated from the short-term volatility associated with volume throughput and commodity prices as ~95% the comparable EBITDA is generated from regulated assets and long-term contracts. Further, the company do not see any material impact on its comparable earnings in 2020. To weather the current challenging environment, the company has enhanced its liquidity by CAD 9 billion through unsecured notes, credit facilities etc., which is likely to support the near-term liquidity and working capital requirement of the Business. The group has a solid track record of dividend payment, which is encouraging from income investor’s point of view. At present, the stock is offering a dividend yield of 5.3%, which is lucrative, considering the prevailing low-interest-rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Enbridge Inc (TSX: ENB), Pembina Pipeline Ltd (TSX: PPL), and Inter Pipeline Ltd (TSX: IPL) etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 60.79 on June 16, 2020.

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

Tourmaline Oil Corp.

Tourmaline Oil Corp. (TSX: TOU) is a Canadian energy company engaged exploration, development, and production of natural gas and crude oil in the Western Canada Sedimentary Basin.

Guidance: For the rest of FY20, TOU expects average production within the range of 305,000 boepd, which is likely to generate a cashflow of CAD 1 billion based on strip pricing. The group has reduced its capital expenditure to CAD 800 million, down CAD 125 million from the earlier guidance. The group calculated its estimated net debt to cash flow at 1.8 times based on FY20 forecasted cash flow.

Q1FY20 Financial Highlights: Tourmaline Oil Corp impresses with its top-line performance, while failed to retain the momentum in the bottom-line. Revenue, during the first quarter, stood at CAD 669.64 million, as compared to CAD 579.13 million in pcp, primarily driven by a gain on financial instruments. During the quarter, average production improved to 308,349 boepd against 293,434 boepd in the previous corresponding period. The quarter was marked by a rise in transportation, marketing purchases, general and administration followed by a significant surge in the depletion, depreciation, amortization & impairment expense. The group posted a loss from operations of CAD 40.73 million against a profit of CAD 136.73 million in Q1FY19. Finance expenses stood marginally higher than at CAD 15.92 million against CAD 14.26 million in Q1FY19. Net loss stood at CAD 36.13 million, as compared to a net profit of CAD 87,675 million. The Company exited the quarter with total assets of CAD 11,106.25 million.

Q1FY20 Income Statement Highlights (Source Company Reports)

Risks: The income of the company is directly related to international crude oil prices. Any event, which would affect the crude oil prices adversely is likely to impact the company’s performance negatively.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

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

Stock Recommendation: The Stock of TOU soared 47% in the last three months, due to a price revival in the international crude-oil prices. At the last traded price, the group’s shares were trading above the 75-days and 100-days simple moving average of CAD 11.59 and CAD 11.88, respectively, indicating a bullish- trend. The Company is currently indulged in operating three drilling rigs and strategize to operate with 8 to 10 drilling rigs within the second half of FY20. The group mentioned that it has sufficient liquidity and can manage the FY20 capital budget via internal cash flow generation. Further, the group has CAD 1.3 billion in unutilized borrowing capacity on its credit facilities to support its near-term working capital requirements. The Group operations are impacted by the outbreak of covid-19 pandemic and have been focusing on strengthening its balance sheet and return with capital discipline and reducing its costs to preserve cash. Further, we expect a recovery in oil demand in the coming days as easing lockdown restrictions are likely to result in higher industrial and manufacturing activities. Also, easing in travel restrictions would further provide support to the oil demand. The stock is offering a decent dividend yield of 4%, which is attractive in the current environment. We have valued the stock using EV/Sales based relative valuation method and have arrived at a target upside, offering lower double-digit (in percentage terms). For the said purposes, we have considered ARC Resources Ltd (TSX: ARX), Crescent Point Energy Corp (TSX: CPG) and Parex Resources Inc. (TSX: PXT) etc., as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 12.11 on June 16, 2020.

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

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