TC Energy Stock: Poised to Rise Further

While energy stocks are up nearly 25% this year, shares of TC Energy Corporation (TRP) have posted much smaller gains of about 14%. However, the 14-day relative strength index of 33 suggests that TC Energy still has a lot of room for further growth.

It also looks like the positive momentum for TC Energy Corporation and other energy stocks won’t fade, so I’m bullish on the stock.

My sentiment is based on the current global macroeconomic conditions and the geopolitical situation being impacted by the war in Ukraine, leading analysts to forecast increased demand for natural gas flowing through the pipelines of midstream operators, including flows from TC Energy.

For beginners: the RSI is a technical analysis tool used to assess whether the price of a stock or other asset is either overbought or oversold. When the RSI is above 70, the stock is generally considered overbought, while below 30 is considered oversold.

TC Energy Corporation

TC Energy Corporation is an energy infrastructure company that operates a network of more than 93,000 km of natural gas pipelines that transport natural gas from supply ponds in Canada to refining markets located in the U.S.

The company also owns (regulated) natural gas storage facilities with a total capacity of 535 billion cubic feet (Bcf), and (unregulated) natural gas storage facilities with a total capacity of 118 billion cubic feet located in Alberta. It operates 5,000 km of pipelines to transport crude oil from the Alberta Basin to refineries in Illinois, Oklahoma, Texas and the U.S. Gulf Coast.

In addition, the company either owns or has an interest in seven power generation assets in the Canadian provinces of Alberta, Ontario, Quebec, and New Brunswick, with a total capacity of approximately 4,300 megawatts.

The company is headquartered in Calgary, Canada.

Q1 2022 Results

Due to higher natural gas flows through TC Energy’s natural gas transmission system, and the U.S. natural gas pipelines, the midstream operator delivered a positive turnaround in net income attributable to common shareholders, and consistent operating cash flow with last year’s results.

For the first quarter of 2022, TC Energy posted a net income of C$400 million or C$0.36 per common share, versus a net loss of C$1.1 billion or C$1.11 per common share in the prior-year quarter.

Pro forma earnings were $1.12 per common share, compared to the median analyst estimate of $1.11.

Operations generated cash flows totaling $1.7 billion during the quarter.

Financial Condition and the Dividend

The company’s balance sheet could be a lot stronger.

The Altman Z-Score of 0.83 indicates that there is currently a possibility that the company could even face bankruptcy in the next few years. This is most likely because the company relies heavily on outside capital.

In fact, as of March 31, 2022, cash on hand was just $1.1 billion, versus a monstrous $38.3 billion in total exposure to banks and bondholders.

An interest coverage ratio of 3.04 indicates that TC Energy can easily carry the weight of this financial burden, as interest payments on all debt are made by the company to its lenders on a timely basis.

The ratio, which should ideally equal at least 1.5, is calculated here as EBIT of $1.762 billion divided by interest expenses of $580 million. EBIT is calculated as comparable EBITDA of $2.388 billion, less depreciation and amortization of $626 million.

It’s worth noting that the company continues to grow its dividend, and in just 12 months, its quarterly payout rose 11.11% to C$0.90, paid on April 29.

Profitability

The company’s net income margin (TTM) is 24.9%, versus the industry median of 6.87%.

EBITDA margin (TTM) is 64.68%, against the industry median of 24.09%.

Past performance is no guarantee of successful future results, but based on the outlook below, it is reasonable to expect a continued improvement in the company’s profitability.

That could provide a solid foundation for a higher share price, as it would allay concerns about the sustainability of the high debt burden, while ensuring the dividend payout.

Outlook

The U.S. has a problem with its energy stocks.

Despite supply-side efforts, the U.S. is now struggling to close the gap between current inventories and historical levels, raising major concerns about its program’s ability to meet domestic energy needs.

TC Energy Corporation and other operators are part of the strategy to solve the energy problem. Now more than ever, these companies are receiving special attention from the government.

The company will continue to focus on upgrading critical infrastructure at its existing location, including the expansion of certain facilities along the Southeast Mainline.

As a result of these development activities, the operation is expected to meet increased demand for natural gas from the U.S. Gulf Coast and other refining markets, including Arizona, California, and Mexico.

TC Energy is involved in several clean energy projects in Canada that aim to drastically reduce emissions of CO2, and other greenhouse gases into the atmosphere. In collaboration with other companies, these projects are underway in Ontario and Alberta, mainly consisting of the operation of a CO2 transport and capture system, and the realization of a hydrogen production center.

In the near term, TC Energy Corporation will benefit from an expected nearly 23% increase in monthly demand for natural gas, driven by higher cooling needs and more robust overseas demand.

The final factor comes from the Russian government’s decision to cut natural gas supplies to Poland and Bulgaria, coupled with fears that supply disruptions will affect more countries in Europe.

TC Energy Corporation is very well positioned, with about 25% of U.S. LNG flowing through the company’s pipelines before reaching overseas.

Wall Street’s Take

Over the past three months, 16 Wall Street analysts have issued a 12-month price target for TRP. The company has a Hold consensus rating based on six Buys, eight Holds, and two Sell ratings.

The average TC Energy Corporation price target is $58.02, implying 7% upside potential.

Conclusion

TC Energy Corporation has performed well this year, following a strong growth in the energy sector.

It seems this positive momentum is far from over, and further gains in the stock price are likely.

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