President Trump, who approved Keystone shortly after taking office, reacted
angrily, calling the decision “a disgrace.” Officials of TransCanada Inc.
were probably seething, but public comment was limited to an assurance the
project would eventually go ahead. Meantime, the company’s share price fell
1.7% on the news.
On the surface, it seems no one likes pipelines any more. Environmentalists
hate them and are determined to block the construction of any new ones.
Their end game, of course, is the strangulation of the entire Canadian
fossil fuels sector. Such a result would have minimal impact on the global
fight against climate change but a major impact on our economy.
Investors have soured on pipelines in part because of the controversies
they generate but also because they are notoriously interest sensitive. As
a result, their share prices have been sinking as rates move higher at an
TransCanada Corp. (TSX: TRP)
has seen its price drop from $65.18 last November to $52.56 recently – a
loss of 19%.
Enbridge Inc. (TSX: ENB)
has fallen to $42.68 recently from $51.04 in January – down more than 16%.
No investor wants to see those kinds of numbers.
But I believe there is still life in this sector, for several reasons.
Pipeline companies continue to produce good earnings and rising revenues.
On Nov. 1, TransCanada reported record third-quarter results. Net income
attributable to common shares was $928 million ($1.02 per share) compared
with $612 million ($0.70 per share) for the same period in 2017. Comparable
earnings were $902 million ($1 per share) compared with $614 million ($0.70
per share) last year. For the first nine months of the fiscal year,
comparable earnings were $2.82 per share, an increase of 24% from 2017.
Enbridge reported adjusted third-quarter earnings (which stripped out
unusual and one-time items) of $933 million ($0.55 per share). That
compared with $632 million ($0.39 per share) a year ago. For the first nine
months, adjusted earnings were $3.4 billion ($2.01 per share) compared with
just under $2 billion ($1.33 per share) last year.
Those numbers speak for themselves. Pipeline companies are doing very well
financially, despite all the flack they’re getting.
We’re all aware of the problems with the Trans Mountain pipeline, and
TransCanada’s Keystone XL continues to be stalled by various legal
challenges. But new pipelines are still being built and more are on the
Enbridge brought $7 billion of new projects into service in 2018. They
included the US$1.3 billion Nexus and US$200 million Teal gas pipeline
projects that began service in October and the US$1.6 billion Valley
Crossing gas pipeline project that will become operational this month.
Enbridge’s biggest current project, the $9 billion Line 3 Replacement
Project, has now cleared all legal hurdles, and the company expects it to
come into service in the second half of 2019. It will provide more
desperately needed export capacity to Western Canadian producers, although
not to tidewater.
TransCanada announced that it will proceed with construction of the $6.2
billion Coastal GasLink pipeline project, which will link the huge gas
fields of North-eastern B.C. to the planned new LNG Canada export terminal
in Kitimat. All 20 First Nations involved have approved to the project.
The sinking market-price of pipeline stocks has boosted yields to even more
attractive levels, and both Enbridge and TransCanada are expected to
increase their dividends next year.
Enbridge is currently paying $0.671 per quarter ($2.684 annually) to yield
6.3% at the recent price. The next increase is expected in February and it
will likely be in the 10% range.
TransCanada pays $0.69 per share ($2.76 per year) to yield 5.3%. Watch for
the next increase in March. CEO Russ Girling has reaffirmed that the
company expects to increase its dividend by 8%-10% annually through 2021.
Most Canadians now realize that pipelines are critical to a strong and
growing national economy and want to see them built. An Ipsos-Reid poll
published earlier this year found 56% wanted to see Trans Mountain
completed, with 24% against and the rest unsure. Even more surprising, the
same poll found that 55% of British Columbians were in favour of the line
with 37% against. That statistic suggests the B.C. government’s strong
opposition to Trans Mountain does not reflect the view of the majority of
Trans Mountain will probably get built eventually, now that the federal
government owns it. The Trudeau Liberals have, somewhat grudgingly, agreed
that the line is essential to Alberta’s economy and have committed to
overcoming the legal challenges to see the project through. Even if they
are defeated in next year’s election, the opposition Conservatives have
pledging their support, so one way or another, it will happen – in time.
We’ve also seen revived talk of the Energy East Pipeline, which was killed
by TransCanada in the face of strong opposition, mainly from Quebec. But
the new premier, Francois Legault, has been somewhat ambiguous about his
view of the plan, stating at one point that he would block any development
in the St. Lawrence Valley but suggesting in another interview he might
look at the plan if Quebec received sufficient royalties from it.
Energy East is probably dead – once Keystone XL and Trans Mountain get
built there may not be enough demand for it. But it would have made good
sense – replacing imported oil from Saudi Arabia with crude from Alberta
and opening another conduit to tidewater (the line would have terminated in
St. John, New Brunswick).
Whatever happens, we can be sure of one thing: Pipelines are not dead, and
more of them are going to be built, thereby enhancing the profitability of
Enbridge, TransCanada, and the other, smaller companies.
In the short run, we may see more weakness in the share price. But these
are sound companies that offer long-term growth potential and attractive,
increasing cash flow. Buy them while they’re cheap. Ask your financial
is one of Canada’s best-known personal finance commentators and
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Notes and Disclaimer
© 2018 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
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own financial advisor before making investment decisions.
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