3 Reasons to Buy TransCanada Corporation

The lower oil price will not impact TransCanada’s (TSX:TRP)(NYSE:TRP) profitability but the lower share price offers an attractive opportunity.

| More on:
The Motley Fool

The price of oil has declined sharply over the past few weeks – depending on the specific contract, declines of 15-22% from the recent peaks have been registered. The impact on oil exploration and production firms has been significant with even the best integrated Canadian operations such as Suncor Energy Inc (TSX:SU)(NYSE:SU) and Imperial Oil Limited (TSX:IMO)(NYSE:IMO) falling substantially.

The share prices of oil and gas pipeline companies, which for the most part have limited direct exposure to the oil price, have fallen in sympathy. The share price of TransCanada Corporation (TSX: TRP)(NYSE: TRP), for example, has now declined by 13% from the recent peak. For reasons explained below, this may have created a good opportunity to acquire shares in the company.

1. TransCanada owns an extremely valuable asset base

TransCanada owns critical energy infrastructure assets in Canada, the U.S., and Mexico. This includes one of the largest natural gas transmission networks in North America measuring 68,500 km, which transports around 20% of North America’s daily natural gas requirements. The company also owns 3,500 km of liquid pipelines that transport almost 25% of Canada’s crude oil exports to the U.S. as well as 19 power plants with 10,800 MW of power generating capacity.

TransCanada also plans to expand the pipeline capacity over the next few years through a $38 billion capital expenditure program. The program will be focussed on the expansion of the oil/liquids pipeline business with capacity expansion mostly backed by long-term contracts or regulated cost-of-service business models. The company expects to almost double EBITDA by 2020 from the 2013 level of $4.9 billion.

The business operations of TransCanada, which are mostly subject to regulatory overview, and certainly subject to intense scrutiny from environmentalists, have strong barriers to entry to possible competitors.

2. The company profitability is not directly affected by a lower oil price

The main income generator for TransCanada is the pipeline business that represents about 70% of its 2013 EBITDA. This is expected to grow to about 80% by 2018 as the new capacity additions come on stream over the next few years. The company does not extract or own the gas or oil transported through its pipelines and accordingly does not have any oil or gas price exposure in this part of the business. Obviously, an extended period of low oil and gas prices may impact the customer base utilising the pipeline facilities but this is not foreseen in the short to medium term.

The considerably smaller energy business through the power generation facilities in the Western Power operations in Alberta and the U.S. Power operations in New England and New York, are exposed to commodity price volatility. Earnings from these businesses are generally correlated to the prevailing power supply and demand conditions and the price of natural gas. Extended periods of low gas prices will exert downward pressure on power prices and therefore profits from these facilities.

3. The dividend is secure and should increase over time

Despite the $38 billion capital expenditure program planned over the next few years, the dividend should be secure and is expected to grow by 5% per year over the next few years (compared to 7% per year since 2000). The capital expenditure program is expected to be financed from operating cash flows, credit facilities, sales of assets to the U.S master limited partnership and preferred shares.

The free cash flow generated by the company (operating cash flow minus maintenance capital expenditures) adequately covers the dividend payments and is expected to do so for the foreseeable future.

Long-term investors should be well rewarded

The TransCanada share price spiked a few weeks ago on rumours that activist shareholders have bought shares in the company but the declining oil price and the general decline in the overall market, have brought the TransCanada share price back to more attractive levels.

With a dividend yield on the current price of 3.7% plus growth of around 5% per year over the next few years, high single-digit returns should be achievable.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Deon Vernooy, CFA has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »