Why is TC Energy Stock So Cheap?

There is a concern over the wildfire impact on natural gas pipeline flows, and worries about cost overruns on the Coastal GasLink.

Ruth Saldanha 24 July, 2023 | 11:18AM
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Interested in more cheap stocks? Check out our recent episode on Barrick Gold stock. 

Key Takeaways on TC Energy Stock

  • Has some of the highest quality assets we cover
  • TC Energy needs to reduce its carbon profile
  • TC Energy stock is trading at a 18% discount

When we discuss pipelines, one of the first things that come to mind is TC Energy (TRP), which owns NGTL and Mainline natural gas pipelines and the Keystone crude pipeline. We consider these some of the highest-quality assets we cover at Morningstar. Plus, the scale of TC Energy’s operations is vast, as it deals with 100,000 landowners, 200 Indigenous communities, 35 U.S. states, seven Canadian provinces, and 12 Mexican states.

Why is TC Energy Stock So Cheap?

Yet, TC Energy’s stock is currently undervalued. According to Morningstar analyst Stephen Ellis, the reason is a combination of concern over the wildfires impact on natural gas pipeline flows and wanting to see the troubled Coastal GasLink in service without further cost overruns.

Ellis says TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge (ENB) but also offers important contrasts, the most critical of which is their approaches to energy transition. Canadian carbon emissions taxes are expected to increase to $170 a ton by 2030 from $40 today, meaning it is critical that TC Energy, with its natural gas exposure, rapidly reduce its carbon emission profile.

Though the overall business earns a Narrow economic moat, Ellis thinks TC Energy’s renewables business lacks an economic moat today, but it is an important area of investment for TC Energy that it needs to pursue, because renewables investments can compete for capital across the rest of the portfolio, generating reasonable returns on capital, allowing the overall enterprise to adapt to the markets as they evolve.

For now, the stock is trading at a 18% discount to Ellis’ $62 fair value estimate.

For Morningstar, I’m Ruth Saldanha

 

bulls TC Energy Stock Bulls Say

  • TC Energy has strong growth opportunities in Mexican natural gas as well as liquefied natural gas.
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas.
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the U.S.

bears TC Energy Stock Bears Say

  • The firm is still expected to rely on capital markets for about 20% of its spending program, while Canadian and U.S. peers are already generating free cash flow after dividends.
  • TC Energy is expected to remain more highly leveraged than most midstream peers over the next few years as it is only targeting long-term leverage levels in the high 4s.
  • Carbon taxes for Canada are expected to be CAD 170 a ton in 2030, putting pressure on the pipeline businesses.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Enbridge Inc49.24 CAD0.88Rating
TC Energy Corp53.17 CAD0.36Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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