Analyst Note| Stephen Ellis |
After updating our model for second-quarter earnings, our CAD 68 fair value estimate for TC Energy remains unchanged, while our U.S. fair value estimates declines slightly to $54 due to exchange-rate changes. TC Energy's second-quarter EBITDA was CAD 2.25 billion compared with CAD 2.2 billion last year, with higher volumes and rates on its natural gas pipelines and greater contributions from Bruce Power offset slightly by reduced volumes on the Keystone system.
The cancelation of Keystone XL has reduced the overall project portfolio to CAD 21 billion, but TC Energy was able to sanction a $700 million effort (the VR Project) to enhance certain U.S. natural gas pipeline assets while reducing its carbon emissions profile. TC Energy also filed a notice of intent to make a NAFTA claim to recover more than $15 billion in damages from the U.S. government due to the Keystone XL cancelation. We expect the odds of TC Energy recovering material damages to be quite small, but it could lead to improvements in the overall regulatory process, reducing the overall uncertainty for any future Canadian-U.S. pipeline proposals.
We think one of the most compelling efforts that TC Energy is pursuing is the joint proposal by TC Energy and Pembina for the Alberta Carbon Grid, serving the oil sands. This transportation and sequestration system could be in service by 2025 and is potentially capable of handling up to 20 million tons of carbon emissions annually. The storage capacity could be 2 billion tons of carbon emissions. If successful, this single project could reduce Canadian oil sands carbon emissions by 30% and overall Canadian oil and gas emissions about 10%. The fees for the system are expected to be materially less than the per ton carbon tax charged by the Canadian government, providing substantial incentives for shippers.