TransCanada Considers More Issuance After China Deal

TransCanada Corp., which announced a C$3 billion ($3 billion) oil-sands pipeline with a Chinese partner this week, said it may issue fresh debt to finance future projects and tap low-interest rates.

The Calgary-based company behind the planned Keystone XL pipeline, has added $7 billion of projects this year, Chief Financial Officer Don Marchand told analysts on a conference call yesterday.

“We will be opportunistic in sourcing required capital given the compelling low-interest-rate environment,” Marchand said, adding that the new Alberta pipeline project with a unit of PetroChina Co. Ltd. will probably be funded with cash.

TransCanada and such rivals as Enbridge Inc. and AltaGas Ltd. will sell debt as production accelerates in Alberta’s oil sands, said Brian Miron, who helps manage C$16 billion in Canadian fixed-income assets across several funds at Fidelity Management and Research in Merrimack, New Hampshire.

These companies “have incredible growth opportunities, and they’re funded mostly with debt, which means these issuers will be continuing and we expect more supply to come into the marketplace,” Miron said in a phone interview. His funds own Enbridge, AltaGas and TransCanada bonds.

TransCanada is among the biggest issuers of non-bank corporate debt in Canada, with almost C$19 billion in bonds outstanding, according to data compiled by Bloomberg. Enbridge, a Calgary-based pipeline competitor, has about C$10 billion.

TransCanada on Oct. 29 said it’s teaming with Phoenix Energy Holdings Ltd., a unit of PetroChina, to develop a pipeline project to ship oil from Northern Alberta’s oil sands to Edmonton. The company last tapped the bond market in August, when it cut its commercial paper holdings and issued $1 billion of 10-year 2.5 percent senior notes.

Commercial Paper

With about $1.5 billion still held in commercial paper at the end of the last quarter, TransCanada has room to replace that with medium-term debt at attractive rates to fuel its expansion, said Matt Kolodzie, a credit analyst at RBC Capital Markets in Toronto.

“There’s certainly room to reduce that further and free up some liquidity to fund capital-spending next year; free up some room for the projects they have,” he said in a phone interview.

Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade corporations rather than that of the federal government held steady as of Oct. 29 at 141 basis points, according to Bank of America Merrill Lynch index data. Yields were 2.98 percent.

In the provincial bond market, the spread over federal debt was unchanged as of Oct. 29 at 75 basis points, according to another Bank of America Merrill Lynch index. Yields were 2.52 percent.

Corporate Returns

Canadian corporate bonds have returned 5.6 percent this year, compared with gains of 2 percent by the nation’s government bonds and 2.6 percent by provincials, according to Bank of America Merrill Lynch data.

Government bonds were little changed, with the yield on the 10-year benchmark note at 1.81 percent as of 8:27 a.m. in Toronto. The price of the 2.75 percent notes maturing in June 2022 was C$108.24.

Bank of Canada Governor Mark Carney, testifying to the House of Commons Finance Committee in Ottawa yesterday, said the country’s labor market still has slack and there are mixed signals in housing. He reiterated that the greatest threats to the national economy are external.

The central bank last week whipped markets between positive and negative growth sentiment as Carney said the need for higher interest rates has become “less imminent” a day after strengthening the case for tightening monetary policy.

Crude Expansion

Even as natural gas prices remain near historic lows and weigh on TransCanada profits, its expansion into crude shipments is being welcomed by bond investors. The spread, or premium investors demand over benchmark government bonds, on TransCanada debt has narrowed an average seven basis points this month to 121 basis points, according to a Bank of America Merrill Lynch index of Canadian corporate five to 10-year debt. The comparable index narrowed an average of four basis points.

The Phoenix deal is “a credit positive as it further diversifies the company,” said Kolodzie.

TransCanada bonds returned 3.2 percent in October, placing it in the top 11 percent of a Bank of America index of more than 1,000 global energy bonds.

Energy producers are grappling with a gas glut in North America that sent prices to a 10-year low in April, from which it’s slowly begun to recover. TransCanada yesterday said third-quarter profit fell 4.4 percent and missed analysts’ estimates as it shipped less natural gas. Of the nine Canadian oil and gas producers that have reported quarterly earnings to date, a third have reported profit that missed analysts’ estimates, the worst of any sector after financial services, according to Bloomberg data.

Regulatory Hurdles

Oil and gas projects involving Canadian companies have hit regulatory roadblocks. Progress Energy Resources Corp. fell 15 percent last week after the Canadian government blocked its C$5.2 billion takeover by Malaysia’s Petroliam Nasional Bhd. Petronas, as the company is known, has since extended the offer as it continues discussions with the Canadian government to adjust terms of the deal.

TransCanada last month submitted a revised proposal for its Keystone XL pipeline, after President Barack Obama rejected the proposal in January. The original plan called for a 1,661 mile (2,673-kilometer) pipeline that would carry 830,000 barrels of Alberta crude to refineries along the Gulf of Mexico.

Increasingly, Americans “see the job benefits, they see the economic benefits and I think more than anything they see the energy-security benefits,” he said.

RBC Capital Markets’ Kolodzie said he thinks the pipeline will be approved and its passage will get easier after the U.S. presidential election next week.

“It’s a very compelling story for Americans,” he said. “And a very strategic asset for Americans to back.”

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