TC Energy (TSX:TRP) is going through some tough times and making big changes to ensure the business continues to grow. Investors who missed the bounce off the 2020 crash are wondering if the latest pullback in the share price is overdone and if TRP stock is now good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Energy sector outlook
TC Energy is primarily a natural gas transmission business with more than 90,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage in Canada, the United States, and Mexico.
Demand for natural gas is expected to be robust in the coming years. Utilities are switching from coal and oil to natural gas to produce power. Natural gas emits much less carbon dioxide when burned than the other fuels. Renewable energy will continue to expand, but fuel-fired power generation is still needed to ensure power grids can accommodate surges in demand or provide power when solar, wind, and hydroelectric sources are down due to a lack of sunlight, reduced wind, and drought conditions in rivers.
International buyers are seeking reliable supplies of liquified natural gas (LNG) after Europe’s problems with Russian supplies in the past couple of years. Canada and the United States have abundant natural gas reserves that are easy to tap. TC Energy’s existing infrastructure and pipelines under construction put it in a good place to benefit from the anticipated surge in natural gas exports.
TC Energy also has oil pipelines and power-generation facilities that round out the asset portfolio.
TC Energy stock
TC Energy trades near $49.50 at the time of writing compared to above $70 at the high point last year. The drop is largely due to rising interest rates, although soaring costs on the CoastalGas Link pipeline development haven’t helped.
Higher borrowing costs reduce profits and put a dent in cash flow. TC Energy has a $34 billion capital program and uses debt as part of the funding strategy. The steep increase in interest rates is likely behind TC Energy’s recent moves to monetize existing assets. Management already sold a stake in some American assets for $5.2 billion. The company is planning to spin off the oil pipelines business and is evaluating the possible sale of an interest in some assets in Canada.
The Coastal GasLink pipeline project is now more than 90% complete, but the total tab is now expected to be at least $14.5 billion, which is more than double the initial budget.
The moves to shore up the balance sheet should ease investor concerns. At the same time, management is still providing guidance for 3-5% annual dividend growth over the next few years. The board has increased the payout annually for more than two decades.
Rate hikes are likely near their peak. As soon as the central banks indicate they are willing to start lowering rates again, the share prices of energy infrastructure stocks could move meaningfully higher.
Time to buy TRP stock?
Investors with a contrarian style might consider adding TC Energy to their portfolios while the stock is out of favour. At the current price, TRP stock offers a 7.5% dividend yield, so you get paid well to ride out additional turbulence.