Summary
- TC Energy Corporation had a great 2019, culminated by a boxing day sale of Coastal Gaslink assets.
- The recent Middle East conflict is supporting energy prices, along with OPEC led cuts - this should help their bottom line.
- From a technical perspective, the stock is set up to go higher.
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The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn't changed. - Peter Lynch
TC Energy Corporation (TRP) gave investors cheer this holiday season, as it sold off a 65% stake in Coastal Gaslink. The company formerly known as TransCanada announced the partial sale to KKR and the Alberta Investment Management Corporation on Boxing Day last year. TRP will sell a 65% interest in Coastal, slightly less than the 75% expected by many in the market. British Columbia's First Nations do have an option to buy up to a 10% interest, though, so it may end up at that level. TC Energy announced that they expect an after-tax gain of about C$600 million upon closing the sale, which was above expectations of about C$300-500 million on the more significant disposition percentage. This sent the stock higher on the day and highlighted a reliable management team that has been executing for a very long time.
Given the dividend yield of over 4.3%, a strong balance sheet, and a reasonable valuation of around 16x earnings, there is room to the upside on this stock after the recent pullback from the highs. When you consider that interest rates aren't moving higher anytime soon, especially in Canada with its high debt-to-income ratios, as I noted in the Lead-Lag Report back last week, this is a favorable company to be investing in. Collect the dividend with relative safety, and hopefully, get some price appreciation in 2020 as well. If the company can strengthen synergies from new projects, particularly in the U.S. gas pipeline business, that they have built/are building, look for the stock to go higher.
With the top Iranian general killed by the U.S. last week, oil prices were sent firmly higher. The price of Brent crude jumped by more than 3% at one point and hit $69.50 a barrel, the highest since September of 2019. TC Energy, being an energy infrastructure company, will welcome higher oil prices as it should lead to more profitability for the company going forward. Given the years of underperformance in the oil and gas sector, could 2020 be the resurgence year? I certainly think so.
TRP is well diversified across the industry, and higher energy commodity prices would increase the demand for new infrastructure. Their current portfolio includes more than 92,500 kilometers (~57,540 miles) of natural gas pipelines, 4,900 kilometers (~3,045 miles) of oil pipelines, 653 Bcf of gas storage, and about 6,000 MW of power generation (source). With that possibility, and a lower risk-free rate than historically, just another reason to be in the company. That's not to say this investment is without risks, of course. There is the possibility that higher commodity prices are not realized. A reduction in gas flows would also hurt the bottom-line. Not to mention, they have several small- and mid-sized projects in construction right now. If those projects fail to gain the support and confidence and shareholders, it could spell trouble.
The fundamentals appear to be strong here, and the technical set up is also looking positive. The 50 dma is above the 200 dma, both of which are upward sloping. Despite the recent pullback, the stock price remains above those and looks ripe for a rebound. In the last year, there has been a series of higher highs and higher lows. While there is some short-term risk if the stock cannot hold these levels, there is plenty of support levels on the way down that should keep downside risk to a minimum. I think there is an excellent opportunity here to get into a well-run company, which is executing above expectations. Next earnings release is expected on February 14, and if the earnings go as well as the recent asset sale, expect some record highs for the company.
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This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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