Investors Remain Bearish on TC Energy Deal to Sell Pipeline Interests

Since July, TC Energy’s stock has dropped as investors have seemingly recoiled following the Canadian company’s announced sale of a stake in a crucial gas pipeline in the eastern U.S.

TC Energy stock dropped the day the sale was announced and is still down 7.5% after the company announced on July 24 that it would sell 40% of its equity in the Columbia Gas and Columbia Gulf Pipelines to Global Infrastructure Partners for $5.2 billion.

Investors believe it should have sold for more, said Rob Wilson, vice president of analytics at East Daley Analytics, a Colorado-based analytics company focused on midstream.

“It should trade at a premium, and ideally they wouldn’t have even sold any interest at all because it’s in the Northeast. It’s extremely hard to build a pipeline there, as we've seen from the slow progress of the Mountain Valley Pipeline. … They’re able to access Marcellus gas relatively cheaply. So, I think the reason the investor community frowned on the transaction is it’s one of their best assets,” Wilson told Hart Energy.

The pipelines span more than 15,000 miles, crossing the Marcellus Shale, the largest U.S. gas producing basin, and links supply to the populous northeast. Regulations and the risk of capital inflows make it prohibitive for other competitors. Both pipes are supported by long-term contracts with low-risk shippers including local distributions and producers.

Responding to a request for comment, TC Energy said in an email that “the partnership with Global Infrastructure Partners is a sizeable transaction, demonstrating our commitment to advance our deleveraging goals in a single deal—delivering $5+ billion in asset divestitures before year-end. The transaction was based on many key considerations.”

Those considerations, the company said, include:

• The scope of the transaction, which is limited to the Columbia Gas and Columbia Gas systems;
•  Maintaining operating and strategic control of the systems; and
• A transaction multiple reflective of the current interest rate environment.

TC Energy was seen as a motivated seller because it has $60 billion in debt.

On the same day the deal was announced, Moody’s downgraded TC Energy affiliate TransCanada Pipelines Ltd.’s credit from Baa1 to Baa2. Moody’s ruling action addressed the sale directly stating, “Although this is a credit positive transaction because it will reduce TransCanada’s leverage and reduce the company’s share of capital expenditures on these assets going forward, it will not in itself be sufficient to offset pressure on the balance sheet.”

Wilson said this shows how overleveraged the company is after having lost billions on the Keystone XL pipeline that never came to fruition and the Coastal GasLink Pipeline that went $6.1 billion over budget.

“I think they were forced into a corner,” he said. “Their leverage is so high, they couldn’t really choose the market that they sold assets into.”

TC Energy pays nearly $3 billion in interest on its debt every year. After also paying dividends, the company’s free cash flow drops from $7.7 billion to $1.3 billion, according to Wilson.