Post by
incomedreamer11 on Jul 28, 2023 11:02am
CIBC comments
Our Conclusion The planned tax-free spinoff of the Liquids Pipelines business and Q2/23 results are neutral to our outlook. Benefits of the spinoff may include a potentially higher multiple for the remaining TC Energy business focused on natural gas and low-emissions power. Risks include the ultimate value of the Liquids business in light of its smaller size, lower growth, and currency risk.
We maintain our Neutral rating and our $60 DCF-based price target.
Key Points Spinning Off The Liquids Business: The company announced the intention to spinoff the Liquids Pipelines business into a separate company. The decision is a result of a two-year strategic review and is expected to be completed on a tax-free basis in H2/24. We are neutral to this development as we see some short-term risk to the Liquids Pipeline Company, but see some long-term potential value creation if the multiple on the remaining business expands due to its slightly higher growth rate and focus on natural gas infrastructure, and low-carbon power and energy solutions.
Q2 Results Mostly In Line: Comparable EBITDA at $2.474B was a slight beat to our estimate of $2.382B (+3.9%) and was in line with consensus of $2.478B. Comparable EPS of $0.96 were also a bit lower than our estimate of $0.98 and consensus of $0.95. Comparable Funds From Operations were within 1.3% of our estimate. Mexico Gas Pipelines and the Liquids Pipelines businesses were big outperformers, while Power and Storage and U.S. Gas Pipeline missed slightly. Utilization and availability remain strong in all business units.
Outlook Tweaked: The 2023 EBITDA guidance was maintained at 5%-7% growth vs. 2022, while the comparable EPS expectation changed from modestly higher to consistent with 2022 due to higher non-controlling interests. Total capital expenditures for 2023 are still expected to be $11.5B- $12B. The DRIP was discontinued as expected.
Other Updates: The CGL project is approximately 91% complete with no changes to the $14.5B total project cost. On Keystone, the company revised the environmental remediation cost estimate from $650MM to $794MM to meet the required restoration endpoints. The majority of the estimated costs will be eligible for insurance recovery.
A Further $3B Of Asset Sales Expected: In line with our estimates, the company expects to complete another $3B of asset sales through a number of transactions, albeit with a timeline extending through 2024 compared to our 2023 estimate.
Price Target (Base Case): C$60.00 DCF model with a WACC of 6.81% and a terminal multiple of 10.4x EBITDA
Upside Scenario: C$70.00 Assumes a 17x P/E multiple on 2024 EPS
Downside Scenario: C$42.00 Assumes a 10.0x 2024 EV / EBITDA multiple driven by negative market sentiment towards energy.