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TC Energy could shrug off loss of Keystone XL pipeline project

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Essential Energy Insights - January 2021


TC Energy could shrug off loss of Keystone XL pipeline project

The potential cancellation of the Keystone XL oil pipeline project after U.S. President Joe Biden rescinded a key permit would not necessarily dampen TC Energy Corp.'s appeal to investors, midstream industry experts said.

The Canadian pipeline giant has only suspended the 830,000-barrel-per-day, 1,200-mile pipeline project for now. But TC Energy is not expected to reapply for any permits — including a U.S. presidential permit for crossing the international border between the United States and Canada — following Biden's Jan. 20 executive order, which followed through on a campaign promise.

Even though Veritas Investment's Darryl McCoubrey estimated TC Energy will record an impairment charge of at least C$1.00 per share, he noted that the company's natural gas and nuclear segments, which account for approximately 90% of its portfolio, stand to benefit enormously.

"A loss in its oil business indirectly enhances opportunity in its other, much more important operations," he said in an interview. "I don't get why it's all doom and gloom. I get that the Keystone XL windfall would have been huge — my estimate is you could've added C$10 per share maybe had it gone forward ... but that decision in itself doesn't ruin TC Energy's appeal."

Estimates in media reports have put the cost of the Keystone XL project at roughly $8 billion, a figure that could swell with delays and cost overruns. Alberta, which helped cover development costs and which could face financial exposure of more than C$1 billion, might seek damages from the U.S. because of the permit decision, according to Reuters.

According to analysts at RBC Capital Markets, a decision to ditch Keystone XL would best serve TC Energy's equity value. "We believe the market will view TC Energy walking away from KXL as the best outcome for the stock, particularly as we think the stock currently reflects little, if any, value for KXL and investors can now focus on the 'utility-like' story," the analysts told clients Jan. 17.

On Jan. 20, TC Energy units dipped less than 1% to settle at $44.25. As of midday on Jan. 21, those shares were trading over $45.

TC Energy could have a longer horizon for positive free cash flow after dividends, which analysts at energy investment bank Tudor Pickering Holt & Co. said would be pushed to 2024 or later without the pipeline. Midstream management teams have been under pressure from investors to improve that metric and demonstrate a pivot toward new financial reporting practices.

Tudor Pickering Holt also noted that, while it expects TC Energy to appeal the decision and look to recover more than $17 billion, the company can potentially use M&A to "help backfill lost KXL contributions."

Still, there are consequences as TC Energy stops construction on the Canadian part of the pipeline project and at pump sites in the U.S. Reuters reported Jan. 21 that the company is slashing 1,000 construction jobs in the following weeks.