Our two pipeline giants are going through a bit of a rough patch.
Both Enbridge Inc. (ENB-T) and TC Energy Corp. (TRP-T) reported fourth-quarter losses of more than $1-billion each. Both also are coping with some major problems.
Enbridge continues to engage in a running legal battle with Michigan over the state’s attempt to close down Line 5, which delivers oil and gas from Western Canada to Ontario and Michigan. The pipeline runs beneath the Straits of Mackinac and is seen by environmentalists as a potential catastrophe if it should rupture. They call it a “ticking time bomb.”
Enbridge is also having problems negotiating with shippers over the cost of using its Mainline pipeline, which is the largest single carrier of Western oil to Eastern Canada. The company has been engaged in pricing talks with oil producers for over a year, with no agreement to date. New Enbridge CEO Greg Ebel refuses to put a deadline on the talks, saying it wouldn’t be useful and that progress is being made.
Over at TC Energy, they’re coping with another huge cost escalation for construction of the Coastal GasLink pipeline in British Columbia. The latest estimate is $14.5-billion, up from the previous forecast of $11.2-billion. And if the project isn’t done by the end of this year, add on another billion or more. The project contributed directly to a loss of $1.4-billion in the company’s fourth quarter. Somebody, somewhere, must be wondering if it’s all worth it.
Meantime, the company is estimating it will cost US$480-million (less any insurance recovery) to clean up the mess from the recent spill of the U.S. Keystone pipeline in Kansas. It still has 800 workers on site.
Despite all this, both companies are raising their dividends this year. Shares in both are down from this time last year but that has as much to do with rising interest rates as it does with the problems I’ve mentioned. Here’s a closer look at both stocks.
Background: Enbridge Inc. is one of the largest energy infrastructure companies in North America. It operates an extensive network of crude oil, liquids, and natural gas pipelines and is also involved in regulated natural gas distribution utilities and renewable power generation.
Performance: Since falling to below $50 in mid-October, the stock has been trading in a narrow range between $52-$56.
Recent developments: Enbridge released fourth quarter and year-end results. Fourth-quarter loss, reported on a GAAP basis, was almost $1.1-billion (a loss of 53 cents per share) compared to a profit of $1.8-billion (91 cents a share) in the same quarter of 2021. For the full year, Enbridge posted a profit of $2.6-billion ($1.28 per share), down from $5.8-billion ($2.87 per share) the year before. The company said the large fourth quarter loss was largely explained by a non-cash goodwill impairment of $2.5-billion relating to the Gas Transmission reporting unit.
Adjusted earnings, which strip out this cost and other one-time events, looked much better. Fourth quarter adjusted earnings were $1.3-billion (63 cents a share), down only slightly from the year before. For the full year, adjusted profit was slightly ahead of 2021.
Distributable cash flow (DCF), a non-GAAP measure, was just short of $11-billion for the full year, compared to about $10-billion in 2021. The increase was mainly due to the strong operating performance from joint venture investments, including Alliance Pipeline, as well as increased economic interest in the Gray Oak and Cactus II pipelines.
The company reaffirmed its 2023 financial guidance, which includes adjusted EBITDA of $15.9-$16.5-billion and DCF per share between $5.25 to $5.65.
Dividend and buybacks: The new quarterly dividend is 88.75 cents ($3.55 a year), to yield 6.8 per cent. It’s the 28th consecutive year the company has increased its payout.
On Jan. 4, the TSX approved Enbridge’s normal course issuer bid (NCIB) to purchase, for cancellation, up to 27,938,163 of its outstanding common shares for an aggregate amount of up to $1.5 billion. The NCIB commenced on Jan. 6 and expires on the earlier date of Jan. 5, 2024, or when the company reaches its share repurchase limit.
Outlook: More of the same, unless Michigan wins its battle to shut down Line 5. That would be a serious blow for the company and would leave Ontario scrambling for alternative fuel supplies.
My advice: Hold. This stock is strictly a yield play at this stage, and a good yield it is.
TC Energy Inc.
Background: TC Energy is one of North America’s major pipeline companies, with 92,600 km of natural gas pipelines and 4,900 km of oil pipelines. It also owns or has interests in 10 power generation facilities with combined capacity of approximately 6,000 megawatts.
Performance: The stock hit a 52-week low of $52.12 in late December but has recovered some ground since.
Recent developments: As with Enbridge the bottom line in the fourth quarter was awash with red ink. The company announced a net loss attributable to common shares of $1.4-billion (a loss of $1.42 per share), compared to net income of $1.1-billion ($1.14 per share) in 2021. This was mainly due to the rising cost of the Coastal GasLink pipeline.
For the full year, net income attributable to common shares was $600-million (64 cents per share), compared to $1.8-billion ($1.87 per share) in 2021.
CEO François Poirier said 2023 will present macroeconomic challenges for the company but he expects comparable EBITDA to be 5-7 per cent higher than last year.
“We continue to expand, extend, and modernize our diversified energy portfolio,” he said. “In 2022, we sanctioned $8.8-billion of projects that are consistent with our risk preferences and expected to deliver a combined return that is above our targeted range of 7-9 per cent. We placed $5.8-billion of projects in service during 2022, with an additional $6-billion expected in 2023.”
As for Coastal GasLink, the company said it is dealing with such difficult conditions as shortages of skilled labour, impacts of contractor underperformance and disputes, as well as weather-related challenges.
Dividend: The board of directors raised the dividend to 93 cents per share for the quarter ending March 31. That’s equivalent to $3.72 per share on an annualized basis, an increase of 3.3 per cent. It’s the twenty-third consecutive year the company has raised the dividend. The stock yields 6.5 per cent at the current price.
Outlook: Coastal GasLink is draining the company’s resources at this time and it’s more than a year away from going into service. The other new projects coming on stream will help, but I don’t see a lot of upside in the stock at this time.
My advice: Hold for yield.
The bottom line is that both these pipeline giants are looking at only modest growth this year. Investors seeking strong and dependable cash flow should buy the dips, but don’t expect much in the way of price appreciation unless the interest rate scenario should suddenly turn around. That’s unlikely but not impossible if a strong recession hits.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe