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This 5%-Yielding Pipeline Stock Is Largely Immune to the Oil Market Downturn

By Matthew DiLallo - May 3, 2020 at 10:43AM

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TC Energy's business mix and contract structure insulate it from lower volumes and commodity prices.

TC Energy (TRP 0.91%) is one of the few companies in the energy sector that's not feeling the pain of the current market downturn. It's immunity to the impacts of these challenging times were on full display during the first quarter. Those results, as well as the company's outlook, cement the view that its 5%-yielding dividend is on one of the best foundations in the pipeline sector.

A look at TC Energy's first-quarter results

Metric

Q1 2020

Q4 2019

Year-Over-Year Change

Comparable earnings before interest, taxes, depreciation, and amortization (EBITDA)

$2.54 billion

$2.38 billion

6.4%

Comparable funds generated from operations

$2.09 billion

$1.79 billion

16.9%

Cash flow per share

$2.23

$1.94

14.9%

Data source: TC Energy. NOTE: All figures in Canadian dollars. Current exchange rate: 1 CAD=$0.71. 

TC Energy generated excellent first-quarter results as earnings rose more than 6% while cash flow soared 15%. Fueling that growth was the strength of the company's natural gas pipeline businesses and its power and storage segment:

TC Energy's earnings in the first quarter of 2020 and 2019.

Data source: TC Energy. Chart by the author.

Earnings from gas pipelines in Canada rose more than 7% because of a combination of higher rates and expansion projects placed into service. U.S. gas pipelines, meanwhile, grew profits by about 6% as expansion projects at Columbia Gas and Columbia Gulf offset the sale of some of Columbia's midstream assets last August. Finally, earnings from Mexican gas pipelines zoomed 84% because of the completion of the Sur de Texas pipeline.

The power and storage segment grew its profitability by more than 28% during the quarter. Powering that growth was higher power prices and generation volumes, which more than offset an outage at Mackay River and the sale of Coolidge.

The lone weak spot was the company's liquids pipelines, where earnings declined by 21%. Weighing on the segment was lower volumes on the Keystone Pipeline System, reduced contributions from liquids marketing activities, and the sale of an 85% interest in the Northern Courier pipeline last July.

A twist of pipelines with a bright sun shining through.

Image source: Getty Images.

A glimpse of what's ahead at TC Energy

TC Energy CEO Russ Girling commented in the earnings press release on the impact of the downturn on its business and outlook:

The availability of our infrastructure has remained largely unimpacted by recent events with utilization levels robust and in line with historical norms. With approximately 95% of our comparable EBITDA generated from regulated assets and/or long-term contracts, we are largely insulated from short-term volatility associated with volume throughput and commodity prices. ... During the first quarter of 2020, our diversified portfolio continued to perform very well ... comparable funds generated from operations of $2.1 billion were 17% higher. The increases reflect the robust performance of our legacy assets and contributions from the approximately $1.6 billion of capacity projects that have entered service to date in 2020.

The only issue the company has experienced is some slowdown in construction activities as a result of the COVID-19 outbreak. Meanwhile, the company remains optimistic about the long term. Girling stated that "despite near-term market uncertainty, we continue to believe that access to abundant, responsibly produced energy from one of the world's largest reserves and a country with top ESG performance will be crucial to North America's economy, energy security, and standard of living over the longer term." Accordingly, tthe company finally approved the construction of the long-delayed Keystone XL pipeline in March.

With that project, TC Energy now has $43 billion of expansion projects under way, which should come online through 2023. It has secured funding for several of these projects -- including an equity commitment and credit funding backstop by the Government of Alberta for Keystone XL -- thanks to the strength of its balance sheet. With its leverage well within its target range, TC Energy believes these expansion projects will provide it with the fuel to grow its 5%-yielding dividend by 8% to 10% in 2021 and at a 5% to 7% annual rate after that.  

A dividend built to endure

As TC Energy's first-quarter results show, it has one of the more durable businesses in the energy sector. The company was easily able to shake off the oil market downturn that has plagued so many of its peers because of the security of its contract and rate structure. Because of that, and its strong balance sheet, it can continue investing in expanding its portfolio and capturing the growth it still sees ahead for the energy sector. That leads it to believe it can continue increasing its already sizable dividend.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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TC Energy Corporation Stock Quote
TC Energy Corporation
TRP
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