TransCanada Unshackled by Keystone Weight Makes Stock Comeback

  • Investors welcome reduced megaproject risk with Columbia buy
  • TransCanada shares reverse lag behind rival Enbridge

So much for all the hand-wringing over the fate of TransCanada Corp.’s megaprojects. Investors are looking beyond Keystone XL and Energy East.

The company’s stock has been rallying since it announced the $10.2 billion acquisition of Columbia Pipeline Group Inc. in March, breaking out above rival Enbridge Inc. and beating an index of Canadian energy peers. The deal is letting investors shake off President Barack Obama’s rejection of Keystone XL, TransCanada’s most well-known project, as well as all the hurdles facing the even bigger C$15.7 billion ($12 billion) line that would link the oil sands to Canada’s Atlantic Coast.

TransCanada is now seen as less dependent on winning approval for those huge endeavors, according to Steve Belisle, a fund manager at Manulife Asset Management in Montreal who helps oversee C$3 billion. Belisle was among investors who met with the company’s Chief Executive Officer Russ Girling in Montreal on Tuesday and noticed less emphasis on big pipelines.

“The market understands the new strategy and where the company is going,” Belisle said. He has a more positive outlook for TransCanada, though hasn’t purchased shares as he awaits more clarity on business prospects beyond 2018, he said. “They’ve refocused away from those big, politically sensitive projects more toward their footprint in the U.S., where it’s easier to grow and build.”

TransCanada has risen 21 percent this year, compared with a 14 percent gain for Enbridge. The company has also caught up to Enbridge on valuation metrics tied to its earnings and cash flow, according to data compiled by Bloomberg. The S&P/TSX Energy Index is up 15 percent this year in Toronto, with oil hovering near $50 a barrel in New York after surging more than 85 percent from a 12-year low in February on signs the global surplus is easing.

Small to medium-sized projects form the basis of TransCanada’s plan to increase its dividend payments 8 to 10 percent a year through 2020 as larger developments are delayed, and the company has said the takeover of gas-focused Columbia may add to that growth. TransCanada is still pursuing Keystone XL, including with a U.S. court challenge and North American Free Trade Agreement appeal, and has stayed committed to Energy East.

Growth Plans

The shift in perception by investors is noticeable, though lower-profile projects have always been important for the company, Mark Cooper, a TransCanada spokesman, said in an e-mail. The company is focused on the same priorities put in place in 2000, including maximizing the value of its asset base, ensuring facilities that operate safely and executing near-term growth plans, Cooper said.

Graham White, a spokesman for Enbridge, declined in an e-mail to comment on what he called short-term stock movements.

TransCanada rose 0.8 percent to C$54.78 at 12:24 p.m. in Toronto on Wednesday, while Enbridge was little changed at C$52.24.

At Tuesday’s investor meeting, Girling acknowledged it will be challenging to win approval to build Energy East, Belisle said. The project has faced resistance from local communities and political leaders in Quebec, one of six provinces it would cross. While the decision is ultimately up to Prime Minister Justin Trudeau, his Liberal Party is under pressure in Quebec to reject the line, Belisle said.

Marcellus Shale

The market has embraced TransCanada’s acquisition of Columbia because it gives the company a foothold in the large Marcellus shale gas region of the U.S., complimenting its existing gas system, said Michael Kay, an analyst at Bloomberg Intelligence in New York. The deal, due to close by July 1, has helped to effectively eliminate TransCanada’s valuation discount relative to Enbridge based on earnings and cash flow, Kay said.

TransCanada’s enterprise value of 15.2 times its trailing adjusted earnings before interest, taxes, depreciation and amortization has risen from 13 at the end of last year, and compares with 14.6 for Enbridge, according to data compiled by Bloomberg.

“Keystone XL has really hung over TransCanada for so long,” Kay said. “The Columbia deal adds low-risk, near-term growth, versus what they had.”

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