TransCanada: Pipelines and Profits

12/19/2017 5:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

TransCanada Corp. (TRP) offers a unique value proposition for conservative investors in search of a safe yield with substantial upside, notes Roger Conrad, income expert and editor of Conrad's Utility Investor.

The stock yields 4 percent, and the company likely will increase the payout by roughly 10 percent later this winter. TransCanada also has a credible plan to grow its earnings, cash flow and dividend by 8 to 10 percent annually through 2021.

Its plans are fueled by CA$20 billion worth of smaller-scale power and pipeline projects throughout North America. About 95 percent of the company’s projected operating cash flow over this period will come from regulated businesses and assets that operate under long-term contracts.

TransCanada also boasts a strong balance sheet, headlined by CA$1.4 billion in cash on the books, firmly investment-grade credit ratings and its September 2047 bonds yielding just 3.85 percent to maturity.

With TransCanada’s enterprise value (debt plus equity) standing at 16.2 times operating cash flow, the stock trades at a reasonable valuation on a historical basis and relative to its peers. Near-term upside catalysts include a potential final investment decision on the controversial cross-border leg of the Keystone XL pipeline, a high-profile project that would enhance but won’t break the company’s growth story.

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Most investors have focused on Keystone XL to the exclusion of the company’s other opportunities, in part because of the resulting earnings uplift and the potential to improve capacity utilization on the system’s southern leg.

The stock has remained range-bound since mid-2016, suggesting that investors remain skeptical about whether the long-awaited project will move forward, despite the recent regulatory approval in Nebraska. But even without this marquee project, management expects TransCanada’s current project backlog to drive 40 to 60 percent growth in operating cash flow through the end of 2021.

Natural-gas pipelines accounted for 63 percent of the company’s operating cash flow in the third quarter of 2017. This business line includes a number of growth opportunities serving Appalachia’s prolific Marcellus Shale and the promising Montney Shale in Alberta.

TransCanada also has several large-scale initiatives that could move the profit meter significantly if they move forward. Potential opportunities include the CA$5.3 billion repowering of the Bruce nuclear power plant in Ontario and CA$10 billion worth of proposed LNG (liquefied natural gas) infrastructure in British Columbia. Conservative investors can buy TransCanada’s New York-listed shares up to US$50.

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