TC Energy shares drop 5% on oil pipelines business spin-off plan.

TC Energy shares drop 5% on oil pipelines business spin-off plan.

TC Energy Plans to Spin Off Liquids Business, Shares Decline

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TC Energy, the operator of the Keystone pipeline, announced plans to spin off its liquids business, causing its shares to fall more than 5% on Friday. The move is aimed at allowing the company to focus on transporting natural gas. The decision to spin off the liquids business comes just days after TC announced it would sell a 40% stake in its Columbia Gas Transmission and Columbia Gulf Transmission pipelines, in an effort to reduce its high debt levels.

Despite the strategic moves, TD Securities downgraded TC to a “hold” rating from a “buy” rating, expressing skepticism about the potential value creation resulting from the spinoff. In a note, TD analyst Linda Ezergailis voiced concerns about execution risk and potential distractions from TC’s existing strategic priorities. As a result of the news, TC’s stock price plunged 5.3% to C$44.81, reaching a seven-year low.

The spinoff of the liquids business is expected to be completed by late 2024, pending a shareholder vote. This move will enable TC to raise C$8 billion in debt, which will be used to repay the company’s outstanding debt. According to TC CEO Francois Poirier, the company needs to sell an additional C$3 billion in assets over the next 18 months to achieve its target debt-to-EBITDA ratio of 4.75 times. TC currently has a debt-to-EBITDA ratio of 5.4 times and aims to reduce it to 5 times by the end of this year.

Poirier emphasized that the separation into two listed companies will provide opportunities for greater growth that surpasses what a single company can achieve. He described the week as both busy and transformative for TC.

Following the announcement, the National Bank of Canada upgraded TC’s rating to “outperform” from “sector perform.” The spinoff will separate TC’s high-growth gas and power assets, which are expected to grow at a compound annual rate of 7% through 2026, from the liquids assets, which are projected to grow at a slower rate of 2-3% over the same period, according to a note from Morningstar.

The liquids business currently operates over 3,000 miles of infrastructure, transporting Canadian crude to U.S. refineries. The decision to spin off this portion of the company’s operations may have been influenced by the cancellation of TC’s proposed Keystone expansion in 2021. U.S. President Joe Biden’s revocation of a key permit was the main factor behind this cancellation, as highlighted by Morningstar analyst Stephen Ellis.

Despite the mixed reactions from analysts, TC Energy remains optimistic about the future. The company believes that focusing on natural gas transportation will provide them with more opportunities for growth as they navigate the energy transition. TC Energy’s transformation journey continues as it adapts to the changing landscape of the industry.

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