Category: Financial Markets

with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs.

The most critical differences between Enbridge and TC Energy arise from their approaches toward energy transition. Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030 from CAD 40 today, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide.

In addition, Enbridge’s backlog is more diversified across its businesses already, and it already has a more material Renewables business, including hydrogen, renewable natural gas, and wind efforts. This shift is especially the case as a CAD 170 per ton carbon tax in Canada opens the door for potentially sizable investments to reduce carbon emissions.

Financial Strength

TC Energy carries significantly higher leverage than the typical U.S. midstream firm, with current debt/EBITDA well over 5 times. Its long-term target is in the high 4s, again materially higher than peers which are generally targeting leverage of 3 to 4 times. Lower capital spending would move this date forward materially. Midstream peers are largely transitioning to generating free cash flow after distributions or dividends, and in some cases, we consider the shift to be permanent.TC Energy has outlined plans to spend about CAD 5 billion annually on a sustainable basis. About CAD 1.5 billion to CAD 2 billion in maintenance spending on its pipelines and 85% of this is recoverable due to being invested in the rate base. Then, Bruce Power, the U.S. natural gas, and the Canadian natural gas pipelines will consume about CAD 1 billion each annually. TC’s dividend growth remains prized by its investors, and 5%-7% growth going forward is easily supportable under the firm’s 60/40 framework.

Bull Says

• TC Energy has strong growth opportunities in Mexican natural gas, as well as LNG.

• 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 United States.

Company Profile

TC Energy operates natural gas, oil, and power generation assets in Canada and the United States. The firm operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

The downward trajectory of natural gas prices in the last few years has forced Range to focus on cost-cutting. It has been fairly successful at reducing costs over the last few years, and the firm also boasts best-in-class drilling and completion costs. It has not historically been able to generate free cash flow, but this should change in 2021 with higher oil and gas prices and Range shifting its stance to operating in maintenance mode. It has not been as explicit as peers with regards to capital allocation and production targets such as only spending 75% of operating cash flow in any given year.

Financial Strength

Range’s balance sheet is a cause for concern. At the end of the last reporting period the firm had just over $3 billion in long-term debt, resulting in lofty leverage ratios. Debt/capital was 67%. We expect leverage to decline in 2021 with free cash flow generation, but Range needs to do more (asset sales, partnerships) to ensure its balance sheet remains in a prudent position on a more sustainable basis. We expect leverage to fall to below 1.5 times in late 2022 given expected free cash flows. We expect Range to generate free cash flow in 2021 with the recent increase in oil and gas prices. This should allow it to make progress on debt reduction. The firm also has about $1.9 billion available on its revolving credit facility for additional flexibility, so there is a reasonable liquidity buffer. But it would be unwise to heavily utilize this revolver, as it would leave the firm with nothing in reserve. Besides, the capacity of this revolver is subject to periodic redetermination and could come down if lenders get worried about the firm’s ability to service its obligations

Bull Says

• As an early entrant into the Marcellus, Range has a big, blocky acreage position that allows for longer lateral drilling, decreasing capital costs per unit of production.

• Range’s capacity on the Mariner East 2 pipeline gives it access to international NGL markets, supporting realized prices.

• The firm enjoys peer-leading drilling and completion costs per thousand lateral feet.

Company Profile

Fort Worth-based Range Resources is an independent exploration and Production Company with that focuses entirely on its operations in the Marcellus Shale in Pennsylvania. At year-end 2020, Range’s proved reserves totaled 17.2 trillion cubic feet equivalent, with net production of 2.2 billion cubic feet equivalent per day. Natural gas accounted for 70% of production.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Despite considerably higher power forward prices, operating earnings (EBITDA) are expected to drop -36-56 percent in FY22, according to the projection.

Credit Suisse believes the energy market downgrade cycle will be complete if consensus converges on the company’s FY23 guidance range, albeit it retains its lower-end predictions.

For the first time, guidance for FY22 and FY23 energy markets was issued alongside the June quarter report. FY22 EBITDA is expected to be $450-600 million, while FY23 is expected to be $600-850 million.

According to Goldman Sachs, FY22 was always going to be a low point for energy markets, but the outlook was worse than projected. While margins may be constrained in FY22, they should rebound in the following years.

The APLNG joint venture, which continues to succeed, was the only bright spot in the update for brokers. APLNG production in the June quarter was 173 PJ, bringing the year total to 701 PJ. The payout to Origin Energy for FY21 is $709 million, which is broadly in line with forecasts, but, as Macquarie points out, this is where the announcement’s good elements end.

Morgan feels that the downgrade to energy markets is more than offset by the higher projected prices obtained by APLNG in the short term, and so raises its oil price assumptions, resulting in an upgrade to integrated gas profits forecasts.

Retail prices and wholesale purchase costs have largely been determined, according to the broker, thus there is limited possibility for energy market earnings to rise in FY22. Higher market prices and volatility are expected to pass through to higher consumer pricing in FY23. Overall, Morgan feels the market undervalues the combination of electricity and LNG risk.

(Source: Fact Set)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.