Company Reports

TC Energy’s first-quarter results were decent, and we expect to maintain our CAD 63 and USD 47 fair value estimates, as well as our narrow moat rating. While 2024 EBITDA guidance was CAD 11.2 billion to CAD 11.5 billion, we believe that volumes and segment-level earnings still point to upside and our estimate of CAD 11.8 billion. Comparable EBITDA was up 11% year over year to CAD 3.1 billion. Asset sales remain on track to meet the firm’s CAD 3 billion target, with over CAD 1.1 billion in proceeds secured thus far. Management remains confident in achieving its adjusted 4.75 debt/EBITDA target by the end of 2024. Capital spending is also reaffirmed at a midpoint of CAD 8.25 billion, matching our view.

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of Israel’s attack, which also included targets in Syria and Iraq; Iran's subdued response; and the ample warning Israel provided confirm our view that both parties wish to de-escalate tensions. We’d characterize this as a de-escalation attack. This view is in line with broader US and Group of Seven goals.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, the ample warning from Iran ahead of time publicly and privately amid rising geopolitical tensions means the attack was already reflected via a higher geopolitical risk premium in oil prices, in our view. We attribute nearly all of the increase in oil prices to around $91 a barrel from the mid-70s in February to geopolitical concerns versus supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply—if not more—that can be returned to the oil markets if prices were to overheat and spike well above $100 a barrel. We expect there to be more downside risks than upside at the moment to oil prices. In fact, we see higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs. We see this in the rather painful Coastal GasLink project for TC Energy, where capital costs have soared.

OPEC announced that its voluntary cuts due to expire at the end of March have been extended until the end of June. Since oil markets remain weak, we had expected OPEC and its allies to extend the voluntary cuts for another quarter. The 2.2 million barrels per day in voluntary cuts, largely shouldered by Saudi Arabia and to a lesser extent Russia, were originally implemented as a temporary effort last year but have been extended several times as the market has remained oversupplied, in our view.

TC Energy’s sale of the Portland Natural Gas Transmission system for CAD 740 million in net proceeds is great progress toward the company's target of CAD 3 billion in asset sales. Reaching this target will help TC Energy achieve its goal of 4.75 times leverage in 2024. We see the valuation as reasonable for the asset. Given the size, the deal is immaterial to our CAD 63/USD 46 fair value estimate. Our narrow moat rating is also unchanged.

TC Energy’s fourth-quarter and full-year results were a bit better than our expectations, primarily due to a performance-related payment of CAD 200 million for the effective completion of the Coastal GasLink pipeline. The payment boosted 2023 EBITDA to CAD 11 billion, up 11% over 2022 levels, and above our CAD 10.7 billion forecast. 2024 EBITDA is guided toward a midpoint of CAD 11.35 billion, compared with our CAD 11.1 billion forecast, reflecting projects placed in service in 2023 and anticipated new projects in 2024. We expect to maintain our CAD 63 and USD 46 fair value estimates and narrow moat ratings.

Angola announced that it will leave OPEC in what we think is more of a blow to the group’s unity than a material impact on the overall oil markets. The timing is not ideal, as OPEC+ is struggling to defend oil prices. Angola’s recent production level of about 1.2 million barrels per day is only about 2% of the total output of OPEC+. The imminent addition of Brazil (3.8 million bbl/d of oil production), while not subject to a quota, helps offset this loss. We had suggested in our Nov. 30 note that Angola's departure was a possibility, since the country had immediately said it would produce above the 1.11 million bbl/d quota set for it at the last OPEC meeting.

Our key takeaway from the latest OPEC meeting is that the internal member dynamics are highly divisive and chaotic. We don't anticipate this to bode well for the overall oil markets, as investors have less certainty and trust with regard to expected OPEC+ volumes delivered to the market, putting upward pressure on prices. However, even allowing for that uncertainty, we believe the production cuts of 896,000 barrels per day are likely to keep the market in a supply deficit or close to one, keeping prices in what seems to be OPEC+'s preferred band of $80-$100/bbl for the time being. However, we do expect Saudi Arabia will likely need prices to average $100/bbl over the next five years to support its more than $1 trillion investment in Saudi Vision 2030.

TC Energy’s Analyst Day largely reaffirmed our near-term forecasts. Therefore, our fair value estimates of CAD 63 and USD 46 per share and narrow moat rating remain unchanged. The firm reaffirmed EBITDA growth of 7% annually and dividend growth at a midpoint of 4% annually between 2023-26. The dividend will also remain unchanged after the spinoff on a consolidated basis. We're not surprised given its highly secure revenue stream and utility-like profile, with 97% of the business take-or-pay or rate regulated. These key factors primarily support our narrow moat rating. Key growth drivers remain U.S. and Canadian LNG exports, Mexican gas exports, and Bruce Power (nuclear, hydro).

TC Energy’s third-quarter earnings were solid, in our view. After updating our model, our CAD 63 fair value estimate is unchanged, while our U.S. fair value falls $1 to $46 per share due to updated exchange rates. Our narrow moat rating is unchanged. Broadly, we think the firm is making good progress in several areas, including the mechanical completion of Coastal GasLink while maintaining its budget at CAD 14.5 billion, addressing an incremental CAD 3 billion in asset sales, and progressing on the planned 2024 liquids spinoff. Management guided 2023 EBITDA toward the top end of its guided 5%-7% increase over 2022 levels, primarily due to healthy volumes, however, our model had already assumed a strong forecast. We would expect a more fulsome update at its analyst day on Nov. 28, as management deferred more extensive 2024 commentary on the call to its expected detailed presentation.

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs. We see this in the rather painful Coastal GasLink project for TC Energy, where capital costs have soared.

The U.S. Department of Energy, or DOE, recently announced $7 billion in funding for several key hydrogen hubs around the United States. These hubs are designed to help the U.S. administration achieve its goal of 10 million tons per year of hydrogen production by 2030. The effort was extremely competitive as nearly 80 bids were submitted in November 2022, before being whittled down to the seven eventual winners. The $7 billion for funding the hubs will now enter a negotiation stage. Collectively, the hubs are expected to produce about 3 million tons of hydrogen per year and eliminate 25 million tons of carbon dioxide emissions annually. None of our fair value estimates or moat ratings are affected.

The Hamas attack against Israel over the weekend should ultimately not be material for oil markets, in our view. Gaza produces no oil, while Israel produces only a small amount for its own use. However, oil prices were up as much as 5% at one point before retreating, as we think investors are concerned the conflict could destabilize the wider Middle Eastern region, which serves as a transit point for nearly one in every five barrels produced globally.

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs.

Separately from its liquids spinoff announcement (please see our July 27 note for additional details), TC Energy published solid second-quarter results. Overall EBITDA increased about 4% from last year’s results to CAD 2.5 billion, and management reaffirmed its 5%-7% EBITDA growth forecast for 2023 over 2022 levels, despite the pending equity interest sale of Columbia Gas and Columbia Gulf. As this guidance matches our CAD 10.6 billion EBITDA forecast for 2023, we expect to leave our CAD 63 and USD 48 fair value estimates and narrow moat rating unchanged. While TC Energy did not comment specifically on the Canadian wildfires, we note a sequential quarterly decline on NGTL volumes to 13.5 billion cubic feet per day (bcf/d) from 14.5 bcf/d—likely some of that impact is due to production losses by Canadian producers and lower system volumes. The Coastal GasLink project, a source of heartburn for TC Energy with its cost overruns, remains on budget and on track to be in mechanical service by the end of 2023 and is currently 91% complete.

TC Energy has announced it plans to spin off its liquids business (about CAD 1.5 billion in 2022 EBITDA) in a tax-free spinoff likely sometime in 2024. The liquids business is made up of just over 3,000 miles of crude oil pipeline infrastructure transporting Western Canadian Sedimentary Basin crude to U.S. refining markets. At first glance, we don’t expect a material impact to our CAD 63 and USD 48 per share fair value estimates and narrow moat rating.

TC Energy announced it has agreed to sell a 40% interest in its Columbia Gas and Columbia Gulf assets to Global Infrastructure Partners, or GIP, for CAD 5.2 billion. These assets include more than 15,000 miles of gas assets in North America, largely underpinned by regulated rates that handle about 20% of U.S. LNG supply. The valuation at about 10.5 times 2023 EBITDA is very reasonable, as is the expected capital avoidance of $1.3 billion annually (GIP’s share of Columbia’s annual capital spending). As we had expected TC Energy to sell over CAD 5 billion in assets, our Canadian fair value estimate of CAD 63 per share is unchanged, while our USD fair value estimate is updated to $48 per share based on refreshed exchange rates. Our narrow moat rating is unchanged.

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs.

On June 4, OPEC+ announced about 1.4 million barrels per day of production cuts. Saudi Arabia would cut 1 million barrels per day production cut in July 2023 for one month, though it can be extended, which we consider a realistic cut, while the remaining 400,000 net barrels are aligning quotas to actual production levels, and we’d consider paper barrels. The previously announced 1.6 million barrels per day cut (or about 600,000-700,000 barrels per day allowing for quota underproduction) by OPEC cut in April has now been extended through the end of 2024 from through the end of 2023. Our fair value estimates and moat ratings for our U.S. oil and gas coverage are unchanged following the announcement. We’d flag Equitrans and ExxonMobil as undervalued.