TC Energy Corporation

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. The group’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:

• Agreement with NLE: The company collaborated with Natural Law Energy (NLE), wherein the later would make an equity investment of up to CAD 1 billion in the company’s Keystone XL pipeline project. The transaction is expected to close in Q3FY21. The Keystone XL pipeline project plays a central role in promoting North American energy infrastructure and creates a corridor for both Canada and the United States and advances North American energy security.

• An income play: The company has a solid history of dividend payment backed up by stable cash flows and impressive coverage ratios. The company expects that the business would deliver an organic growth of 5% to 7% in the coming years, driven by current project mix and execution of the workflow. From FY15, the company has delivered a dividend CAGR growth of 8% to 10%. At the last traded price, the stock was offering a dividend yield of ~5.592%, which is lucrative considering the current interest rate environment.                   

Dividend History (Source: Company Presentation)

Q3FY20 Financial Highlights:

• TRP announces its quarterly results, wherein the company posted revenue of CAD 3,195 million, as compared to 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), partially offset by a decline in income from Liquids Pipelines (CAD 606 million versus CAD 694 million in Q3FY19).
• Operating and Other Expenses stood at CAD 1,823 million, increased from CAD 1,770 million in pcp, due to an increase in depreciation and amortization (CAD 673 million versus CAD 610 million in Q3FY19).
• Income before Income Taxes stood at CAD 1,202 million, versus CAD 1,113 million in the previous corresponding period, supported by lower financial charges (CAD 304 million versus CAD 472 million in pcp).
• The company posted net income of CAD 1,012 million, stood significantly higher than CAD 839 million in Q3FY19.
• Cash and cash equivalent stood at CAD 1,192 million, while total assets stood at CAD 101,862 million.

Income Statement Snapshot (Source: Company Reports)

Valuation Methodology (Illustrative): Price to CF based

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

Risks: The company’s future projects are capital intensive in nature and requires solid funding. Any delays or shortage in capital funding might dampen the overall performance.

Stock Recommendation:

The company’s business model is resilient in nature and hardly depends upon the commodity prices, which is a key positive. The company expects its FY20 performance would remain consistent with FY19 and expects an increase in capital expenditure due to the Keystone XL pipeline project. However, the majority of the Keystone XL pipeline project is being funded by the Government of Alberta’s, and recent funding from Natural Law Energy seems impressive. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered peers like Enbridge Inc, Enterprise Products Partners LP etc. Considering the above-mentioned facts, current stock price movement, we give a ‘Buy’ rating on the stock at the current closing price of CAD 57.94 on December 11, 2020.

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

Pan American Silver Corp.

Pan American Silver Corp. (TSX: PAAS) is a mining company focused exclusively on the exploration and development of silver mines. Apart from silver, it also sells the byproducts from its silver mining operations, including zinc, lead, copper, and gold.

Key Highlights:

• Impressive Long-term outlook: The company has a diversified asset portfolio with nine operations across Americas with strong reserve of silver (550.2 Moz) and gold (5.2 Moz). Silver has the highest electrical and thermal conductivity of all metals, making it an important metal in the transition to a low carbon economy and ~30% of silver supply is used for electrical applications. As the economies are shifting to low carbon emission, the usage of silver in electrical componentry including electric vehicles are expected to increase in the foreseeable future. Moreover, silver remains as an important component in the buildout of 5G networks, which is expected to be the next major evolution in communication technology.                                               

Source: Company Presentation

• Strong financial position and capital discipline: The company has a healthy balance sheet along with stable cash flow, supported by low-cost production and high-margin product-portfolio. Since 2010, the group generated USD 1.4 billion of free cash flows and has manageable debt component, which is impressive. Net cash generated from operating activities stood at USD 291.744 million in 9MFY20, as compared to USD 152.555 million, a year ago, indicates strong operational performance.

Operating Cash Flow  (Source: Company Reports)

Q3FY20 Financial Highlights:

• PAAS announced its quarterly results, wherein the company posted revenue of USD 414 million, as compared to USD 352.187 million in the previous corresponding period (pcp). The decline was primarily attributable to a lower silver and gold production from Q3FY19. However, a higher average realized price of silver, copper and gold prices supported the top line.

Source: Company Reports

• Mine operating earnings soared to USD 124.561 million, significantly higher than USD 63.850 million in Q3FY19. The increase was driven by a considerable reduction in the cost of sales (USD 175.853 million versus USD 288.337 million in pcp).
• Earnings from operations stood at USD 84.724 million, as compared to USD 38.925 million in pcp.
• Net earnings stood at USD 65.260 million, higher than USD 37.719 million, a year ago.
• At the end of Q3FY20, the group reported a significant reduction in its debt component at USD 95.56 million from USD 275 million in FY19.        

Source: Company Reports

Risks: Any hindrance in the production output due to COVID-19 would affect the performance. Further, volatility in commodity prices would affect the company’s financial metrics.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation: The company focued on prudent capital management and repaid USD 215 million of its credit facility. For FY20, the company expects its capital expenditure in the range of ~USD 195 million to ~USD 201 million and expects its cash costs for silver and gold to remain at USD 6.20 to USD 7.70 per ounce and USD 800 to USD 860 per ounce, respectively. We expect the company’s overall performance would be supported by higher gold and silver prices. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering lower double-digit upside side potential (in % terms). We have considered peers like Fortuna Silver Mines Inc, Silvercorp Metals Inc etc. Considering the above-mentioned facts, current stock price movement, we give a ‘Buy’ rating on the stock at the current closing price of CAD 37.9 on December 11, 2020.

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

Disclaimer

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