No Keystone, No Problem

We still see TC Energy as undervalued, although Cenovus’s growth prospects could be hurt

Ruth Saldanha 18 January, 2021 | 10:47AM
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Oil pipeline under construction

On Sunday night, The Canadian Press reported that one of U.S. President-Elect Joe Biden's first actions once he becomes president Wednesday will be to shelve the Keystone XL pipeline expansion, according to transition documents that feature a to-do list for inauguration day. But the pipeline could have been on borrowed time anyway.

In 2015, then-President Barack Obama rejected the pipeline, saying, “if we’re going to prevent large parts of this Earth from becoming not only inhospitable but uninhabitable in our lifetimes, we’re going to have to keep some fossil fuels in the ground rather than burn them.”

Then in 2019, President Donald Trump approved the cross-border project that would transport over 800,000 additional barrels of oil from Alberta’s oilsands to U.S. refineries. 

The Biden campaign said earlier in 2020 that if elected, Biden would cancel the $8 billion pipeline expansion project, owned by Alberta-based TC Energy.

Alberta Premier Jason Kenney said in a statement that cancelling the project would “kill jobs in both countries, weaken cross-border ties and undermine U.S. national security” by making the country more dependent than ever on oil imports from OPEC countries. “Should the incoming U.S. administration abrogate the Keystone XL permit, Alberta will work with TC Energy to use all legal avenues available to protect its interest in the project,” he said.

What does all this mean for Canadian energy players in the space, especially TC Energy?

Put It in Perspective
Morningstar analyst Joe Gemino believes that TC Energy looks undervalued and offers an attractive yield. 

“We are lowering our fair value estimate for narrow-moat TC Energy to $66 from $68. It is unlikely that the pipeline will be built, and we are removing the project from our forecasts. The modest decrease in our fair value was a result of a stronger U. S. dollar versus the Canadian dollar. Despite the lower fair value, we still see almost 25% upside in the 4-star stock. In our view, we think that market is overlooking the incremental cash flow from the company’s growth portfolio, even without the Keystone XL. Additionally, the stock is yielding 6.5% with more than enough coverage from its distributable cash flow,” he explained.

He also added that before the recent downturn in equity markets, TC Energy outperformed the general market and its peers.

“We expect TC Energy to meet its targeted 8%-10% annual dividend growth in 2021 and 5%-7% thereafter, driven by a healthy pipeline of growth opportunities. TC Energy boasts $37 billion in commercially secured capital projects in its growth portfolio. The market doesn't appear to be giving the stock credit for TC's Energy's growth portfolio, which is further highlighted by NGTL expansions,” he said.

But other stocks might suffer.

Earlier in 2020, Gemino slightly lowered his fair value estimate for no-moat Cenovus Energy to account for the risk associated with the Keystone XL pipeline. “We acknowledge that a portion of our fair have estimates and investment theses depend on pipeline expansions. While the Trans Mountain Expansion and Line 3 are progressing and look to be built, the Keystone XL faces more uncertainty. Without the pipeline, we would still expect differentials to stabilize to US$18/bbl by 2022 with Line 3 and TMX providing additional market access. However, as supply ramps up, we would expect the differential to widen to US$20/bbl by the end of the next decade, as the new pipes will be operating at full capacity. Accordingly, we expect lower price realizations for the marginal production that is sold in Alberta,” he said.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Cenovus Energy Inc14.37 CAD0.24
Inter Pipeline Ltd19.96 CAD-0.05Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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