TC Energy Corp.’s move to spin off its crude oil business and separate into two companies has various benefits, according to one strategist, including helping the company achieve its debt goals.
On Thursday, the Calgary-based energy company announced a plan to split into two publicly traded entities. TC Energy said in a release that following the transaction, it will focus on natural gas infrastructure, while the new liquids pipeline company will focus on creating value from its asset base.
Stephen Ellis, an equity strategist at Morningstar Research Services, said in an interview with BNN Bloomberg that the move bring several benefits for the company that include lowering leverage as well as highlighting the value of its existing gas and power assets.
“I think it helps TC Energy achieve its debt-related goals,” Ellis said. “The oil spin-off is supposed to be capitalized at five times debt to EBITA and TC Energy has a goal of reaching 4.7 times by 2024. So there’s potential for this to help lower the leverage of TC energy and help it achieve its goal there.”
Spinning off the crude oil business also makes sense from an ESG perspective, according to Ellis.
“It also cleanly separates … the oil assets which have more challenges from an ESG perspective from the more attractive gas and power assets, which have opportunities with carbon capture and hydrogen,” he said.
Following the announcement, Ellis said the LNG side of the businesses is the “big growth driver.”
“Canada I think after many years and many struggles actually has some very viable growth LNG projects coming online,” he said.