Can you explain what is going on with TC Energy Corp. (TRP)? The shares have fallen about 20 per cent in the past year, and the yield is now about 6.6 per cent, which makes me nervous. Should I be worried about a dividend cut?
Everyone is feeling the pinch of inflation at the grocery store and the gas pump. But for TC Energy TRP-T, inflation has created a multibillion-dollar headache with far-reaching implications for its business and stock price.
The market’s main preoccupation is that costs are soaring at TC Energy’s Coastal GasLink project, a 670-kilometre pipeline that will deliver natural gas from northeastern B.C. to a liquefied natural gas export terminal in Kitimat. In its most recent cost update, TC Energy estimated that Coastal GasLink’s price tag has jumped to $14.5-billion – more than double the initial budget of $6.6-billion – with a further increase of $1.2-billion possible if construction extends well into 2024.
Rising labour costs, skilled worker shortages, construction delays and disputes with contractors have all contributed to the project’s ballooning budget. The runaway costs are forcing TC Energy to explore ways to raise cash to strengthen its balance sheet, preserve its credit ratings and fund other projects in its $34-billion secured capital spending program.
Selling assets is at the top of the list of options. TC Energy has said it is aiming to divest at least $5-billion of assets in 2023 to help with its deleveraging and capital spending plans. But some analysts have been urging the company to be even more aggressive to alleviate investors’ concerns.
“We believe an asset monetization program in the $10-billion to $15-billion range could provide numerous benefits to the company,” said Robert Kwan, an analyst with RBC Dominion Securities, in a recent note to clients. Specifically, it would address concerns about funding TC Energy’s capital plans, substantially improve the company’s debt ratios and alleviate worries about its credit ratings, he said.
TC Energy’s debt is rated investment grade, but rating agencies changed their outlooks to “negative” from “stable” in light of the cost increases at Coastal GasLink.
TC Energy reports fourth-quarter loss due to rising costs of Coastal GasLink
“The negative outlook indicates the uncertainty regarding the timing and amount of the anticipated asset sales necessary to ensure the company can achieve a debt-to-EBITDA [earnings before interest, taxes, depreciation and amortization] ratio of less than 5.0x, consistent with the rating,” Standard & Poor’s said in a Feb. 1 news release. S & P rates TC Energy at BBB+, which is three notches above speculative grade.
Adding to TC Energy’s woes, the company recorded a $650-million “environmental remediation liability” in the fourth quarter after a major spill on a section of its Keystone pipeline in Kansas. S & P said it expects the cost of the December leak “will largely be reimbursed through insurance. However, TC will need to fund the cleanup until such recoveries are received, which will further strain the company’s financial metrics.”
Now, about that 6.6-per-cent dividend yield. Yes, it’s well above TC Energy’s five-year average of about 4.9 per cent, but it’s not so egregiously high that it’s signalling a dividend cut. Indeed, TC Energy raised its dividend by 3.3 per cent in February – the 23rd consecutive annual increase – which is not what one would have expected if the dividend were in any danger.
It’s also worth noting that, on the fourth-quarter earnings call in February, TC Energy’s chief executive officer, François Poirier, reiterated that the company expects to continue to grow its dividend at an annual rate of 3 per cent to 5 per cent.
“I’ll remind everyone … that [declaring dividends] is a board decision. But in terms of what management would be recommending, we don’t foresee any need to make any changes to our long-term dividend growth range,” Mr. Poirier said.
Even with TC Energy’s current challenges, some analysts see the stock’s weakness as an attractive entry point for long-term investors. Matthew Weekes, an analyst with iA Capital Markets, recently upgraded his rating on the shares to “buy” from “hold” with a price target of $62. The shares closed Friday at $56.18.
Although Mr. Weekes remains cautious about “execution risk” when it comes to Coastal GasLink and potential asset sales, he believes the company “will be able to manage through these headwinds over the next couple of years.” He cited the company’s extensive natural gas pipeline footprint in North America, its stable, fee-based and contracted cash flows and TC Energy’s projected earnings growth over the next several years, driven by low-risk projects.
In light of the many uncertainties facing the company, TC Energy’s share price could remain under pressure for a while. But I’m confident that the company will eventually bounce back from this episode. In the meantime, I’ll continue to collect my dividends and look forward to the next increase roughly a year from now.
Disclosure: The author owns shares of TC Energy personally and in his model Yield Hog Dividend Growth Portfolio. View it online at tgam.ca/dividendportfolio
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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John Heinzl