TC Energy: Stock of the Week

Will rising carbon costs put an end to 7% dividends?

Andrew Willis 5 February, 2024 | 4:23AM
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Note: The transcript has been edited to clarify that the Alberta Carbon Grid project is a partnership between TC Energy and Pembina.

Key Takeaways for TC Energy Stock:

  • Although Enbridge ENB is more focused on oil and TC Energy TRP is focused on gas, the two companies offer high dividends, similar growth profiles and regulated earnings. They differ significantly on ESG matters, however.
  • TC Energy should mitigate the rising cost of carbon through carbon reduction programs like those Enbridge is undertaking. Rising gas costs could make hydrogen more attractive as an alternative fuel, which would threaten TC Energy’s business.
  • New pipeline permits are difficult to get, but with the end of the Keystone XL, TC Energy’s remaining portfolio of projects is more low-risk and low-profile in terms of potential pushback from regulatory, legal, and community stakeholders.

Andrew Willis: TC Energy stock makes for an interesting comparison with Enbridge. The two companies have sweet dividends, similar growth profiles, regulated earnings and several years of project backlogs.

But if one of these two companies doesn’t continue particularly important projects in the carbon space, it may become harder to argue for more pipeline permits.

Sector strategist Stephen Ellis anticipates that any new major pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs. To help mitigate this, Enbridge has sought to rapidly reduce its carbon emission profile with its own carbon capture projects similar to TC Energy and Pembina's Alberta Carbon Grid, in addition to investing in renewables. We do note, however, that TC Energy recently introduced targets to reduce its Scope 1 and 2 intensity by 30% by 2030 and reach net zero by 2050, which is a start.

Can TC Energy Afford Rising Carbon Costs?

Another reason to invest in carbon reduction is the direct costs ahead for the energy sector. By 2030, Canadian carbon emissions taxes are expected to increase from 40 dollars to 170 bucks a ton. This would not only raise costs but would make hydrogen look like more of a viable alternative to natural gas – which is a threat to TC energy. When compared to Enbridge stock and its diverse energy business, which includes hydrogen, TC Energy seems rather reliant on gas pipelines.

TC Energy investors must then contend the fact that new pipelines are only approved when there is an economic need. At the same time, with the quality of the company’s existing assets near growing regions – pipeline expansions aren’t out of the question.

For Morningstar, I’m Andrew Willis.


bulls TC Energy 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 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.


The author or authors do not own shares in any securities mentioned in this article. 

Image credits: Associated Press


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Enbridge Inc47.57 CAD-0.38Rating
TC Energy Corp52.29 CAD-0.02Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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