CA - TC Energy Has Substantial Catalysts

2023-05-24 12:11:55 ET

Summary

• TC Energy Corporation has a dividend yield of almost 7% and continued substantial cash flow generation.
• The company has one of the strongest capital programs in the industry, with numerous avenues for growth.
• The company has billions in recent capital spending that hasn't been put into service yet, but is already paid for, which will enable cash flow to grow quicker.

TC Energy Corporation (NYSE: TRP ) is a large energy infrastructure company with a $41 billion market capitalization and a dividend yield of almost 7%. Among the company's projects are its 87% complete $11 billion USD Coastal GasLink project with a multi-decade LNG contract life. That, along with the company's other assets, will be a catalyst for future growth.

TC Energy Corporation 2023 Priorities

TC Energy has continued to work on its 2023 priorities.

The company is putting a massive $4.5 billion USD of projects into service in 2023, while managing costs. The company is simultaneously advancing a $4 billion divestiture program, and it is expecting 6% EBITDA growth YoY, showing its asset strength. We expect that growth to continue as the company puts more projects into service.

As the company continues to place assets into service, we expect earnings to continue growing.

The company managed to put roughly $1 billion in projects into service, including ~$800 million of Canadian natural gas projects. The company is continuing to expand asset connectivity and the company sees multi-decade demand for its impressive integrated assets. The company is becoming a major player in natural gas, which will help future reliability.

TC Energy Major Milestones

TC Energy is continuing to work towards a number of major projects that it has.

The company's massive Coastal GasLink project (($11 billion USD)) is backed by a multi-decade contract and is 87% complete. The company handled the tough winter construction schedule and has completed 85% of all capital crossings. The company is continuing to work towards late-2023 mechanical construction, and we expect a 2024 in-service date.

The company has solved the Milepost 14 spill effectively. For the southeast gateway capital, the company is a massive multi-year project expected to cost $4.5 billion (($3.4 billion USD)). This is another exciting project that will have many years of strong cash flow.

TC Energy Overall Performance

The company's operations have been strong, and it's one of the few companies with strong operations in Canada, the U.S., and Mexico.

The company's Canadian natural gas division is one of its strongest, with net income up 11% YoY. The company has increased volumes substantially to 14.5 Bcf / day and remains a major natural gas mover. Natural gas has much more of a multi-decade runway than oil in our view. In the U.S., comparable EBITDA increased even more by 14% YoY, with throughput at 28.5 Bcf/day.

The company's leading position in pipelines to LNG assets means an incredibly strong multi-decade reserve life. In Mexico, the company's EBITDA increased 16% YoY, with high power sector demand and flows. The company is one of the largest players here. Overall, the company's assets have performed incredibly well.

TC Energy Outlook

The company has an incredibly lofty capital program which should enable future growth

The company's 2023-2026 outlook has a massive $30 billion CAD (($22 billion USD)) in capital expenditures. The company will be issuing roughly $6 billion CAD in additional debt issuances for this growth capital program, with funds generated from operations at just under $6 billion USD (15%) per year. More importantly, a lot of this capital is going to already purchased projects.

The company has limited exposure in Mexico with in-country financing that it's using, and it is planning some additional asset divestitures that could keep net debt growth at 0. The company's capital program doesn't include recent years of capital spending that isn't in service yet, such as the major Coast Gaslink project above.

The company is targeting ~6% in EBITDA growth from its 2022 level of just a hair under $10 billion (($7.4 billion to $7.9 billion USD)). The company's dividend yield is just an air under 7%, and its annualized earnings / share is $3.2 USD versus its $40 / share price. The company is trading at a P/E of ~12.5 which is slightly lofty for the industry.

The company has substantial inflation, interest rates, and foreign exchange risk. However, overall, its earnings are strong and have continued to grow. We expect its capital program will enable even faster growth.

Thesis Risk

The largest risk to our thesis is the massive amount of capital that the company is investing. There's no guarantee that pans out, and Canada is a tough regulatory environment for the company to operate back in. Any failures for the company's massive projects could hurt its ability to drive future returns from its investments.

Conclusion

Relative to its size, TC Energy Corporation has one of the largest capital programs in the industry. The company has spent $10s of billions on projects that haven't been deployed yet that will result in strong earnings growth. We expect the company to continue its investments with its ability to generate double-digit returns on its capital.

TC Energy Corporation has focused on natural gas, which has a strong multi-decade runway for demand. The company's focus on LNG also helps to provide reliable cash flow. The company has an almost 7% dividend yield, which combined with growth, will enable strong overall shareholder returns. Putting this all together, TC Energy Corporation is a valuable long-term investment.

For further details see: