Let’s take a look at the current situation for the power producer to see if it deserves to be on your buy list right now.
Long-term holders of TransAlta are finally getting a bit of good news after the company went through a multi-year slump amid a wave of negative shocks. Difficult times in the Alberta oil patch and an aversion to coal-fired power production resulted in an uncertain future for TransAlta. Add in a balance sheet that was heavy with debt, and it wasn’t long before things started to get ugly.
TransAlta was forced to slash its dividend a couple of times to protect cash flow, which caused yield-seekers to abandon the historically-reliable utility. When all the dust settled, the stock dropped from a 2008 high of $37 per share to around $4 in early 2016.
Management has worked hard to right the ship and clarity on the relationship with Alberta has paved the way for the recent uptick in the stock price. A late 2016 agreement between the province and TransAlta included transition payments of about $37 million per year through 2030 to help the company switch its facilities from using coal as a fuel source to natural gas. As part of the arrangement, TransAlta agreed to remain a key player in the long-term development of a green-energy industry in Alberta.
In addition, Alberta put a plan in place to change the way it pays power producers. Companies will receive payments for power generation capacity, as well as the energy produced, as an incentive to attract new investment in renewable energy projects.
Debt has come down along the way and the market is finally realizing the TransAlta has turned the corner.
At the time of writing, TransAlta trades for $9.70 per share, compared to $5.60 at the end of last year. That’s a gain of better than 70% and the momentum appears to be picking up steam.
Brookfield Renewable Partners (TSX:BEP.UN)(NYSE:BEP) just announced a strategic investment of $750 million in TransAlta and plans to boost its stake in the company to 9%. TransAlta says the investment will enable the company to hit its goal of transitioning to 100% clean energy by 2025. Two Brookfield nominees will be added to TransAlta’s slate of directors put forward for election to the company’s board.
An activist investor, Mangrove Partners, believes a better deal can be found and intends to nominate five candidates of its own for election to the board at the company’s upcoming annual meeting in an effort to derail the Brookfield Renewable investment.
Could the stock double?
Pundits have often said there is significant value to unlock in TransAlta and the management team finally appears to be heading in that direction. With the company getting so much attention, it wouldn’t be a surprise to see the stock continue to trend higher and eventually top the $11.20 mark, which would be a double off the 2018 closing price.
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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 Andrew Walker owns shares of TransAlta.