(Idea) TC Energy - Q4 Results Confirm That Our Investment Thesis Is Playing Out
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By: Jon Costello
Note: Dollar values in this article refer to Canadian dollars.
From a purely short-term perspective, TC Energy’s (TRP:CA) fourth-quarter earnings slightly beat consensus expectations, and its Adjusted EBITDA was in line. Management’s reiteration of its EBITDA guidance range was among the positives. However, the guidance implied slightly lower earnings over the coming quarters than analyst expectations, which is likely behind the stock’s 2.9% selloff today after its report.
As subscribers know, we don’t base our investment theses on an isolated quarter’s results. From our perspective, the call was very positive. TRP’s financial results and management’s commentary on the company’s quarterly conference call this morning confirmed that our investment thesis is playing out as expected. We believe today’s selloff presents an attractive opportunity to nibble on the shares. Investors can increase their purchases if the shares fall into the low $40s.
Putting the Bears’ Concerns to Rest
I stated my TRP investment thesis in an article, “TC Energy Shares Have Fallen Too Far,” published on July 26, 2023. I said:
Note: Performance since we recommended TRP.
Today [i.e., July 2023], with the investment community fixated on TC Energy’s current problems, its stock is discounting a lackluster future. In fact, its stock fails to price in any significant free cash flow and EBITDA growth that is likely to occur over at least the next five years.
Moreover, while we view the company’s operational and financial issues as significant, we believe they are temporary…Once TC Energy gets past its ongoing series of setbacks, the irreplaceable role it occupies in North America’s energy infrastructure, the attractive return on capital generated by its asset base, and the company’s significant growth prospects will once again be reflected in a higher stock price.
The problems I was referring to at the time of purchase included TRP’s operating snafus in its disastrous Coastal GasLink pipeline project, which was completed far behind schedule and above budget. It also included TRP’s high leverage captured in its excessive 5.2-times leverage ratio at the time.
Since our purchase, the company has made strides in improving its operating performance and reducing leverage, as demonstrated in its fourth-quarter results.
TRP demonstrated its operational improvement when management announced that the company’s $4 billion Southeast Gateway Pipeline project had achieved mechanical completion ahead of schedule. The project is currently tracking 13% below cost and is expected to be placed into service earlier than expected on May 1, 2025.
As for leverage, during the time of our initial purchase, management was guiding to a leverage ratio of 4.75-times in 2024—an objective the market considered unrealistic at the time.
After asset sales that included some crown jewels, such as the sale of a 40% equity stake in its Columbia Gas pipeline system in 2023 and the spinoff of its liquids assets as South Bow (SOBO) in 2024, TRP successfully brought leverage down to its initial 2024 target.
Importantly, leverage is set to stay low. I expect the company to keep its leverage ratio in the mid-4-times range, which will be supportive of its shares as it executes growth projects that increase Adjusted EBITDA. Management reaffirmed its commitment to maintaining its $6-to-$7 billion annual capex spending range, as shown in the graphic below. The capex range was put in place in 2023 in response to investor concerns about leverage.
Source: TC Energy Q4 2024 Earnings Conference Call Slide Presentation, Feb. 14, 2025.
Flat capex over the coming years, coupled with Adjusted EBITDA growth over the same timeframe, will further reduce TRP’s leverage ratio.
Source: TC Energy Q4 2024 Earnings Conference Call Slide Presentation, Feb. 14, 2025.