By Rod Nickel
WINNIPEG, Manitoba (Reuters) - TC Energy's surprise plan last week to split the company accelerated a stock selloff, but shareholders bet the North American pipeline operator will finish the year on a higher note by completing the troubled Coastal GasLink project.
Shares of Calgary, Alberta-based TC, which has a market value of C$48.4 billion ($37 billion), plunged 13% to a seven-year low last week. Investors registered disappointment after TC said on July 24 it would sell a stake in two U.S. natural gas pipelines for less than some expected, then announced on Thursday plans to spin off its liquids business, including the Keystone oil pipeline.
TC's return to focus on its natural gas pipeline roots, along with its power business and energy transition projects, should pay off in the long run, shareholders and analysts say. Natural gas demand is expected to remain strong longer than demand for higher-emitting oil as countries decrease the use of fossil fuel.
But in the short term, investors are pinning their hopes on the timely completion of Coastal GasLink.
The 670-km (416-mile) pipeline, co-owned with private equity firm KKR and Alberta Investment Management Corp, will transport natural gas to British Columbia's Pacific Coast for export. It has been dogged by delays and rising costs.
"The biggest thing they need to do: the pipeline needs to be concluded," said Darren Sissons, a partner at Campbell Lee & Ross, which owns TC shares. "Get it done, stop wasting time. If you have to add a little bit of money, just get it done."
The project, which TC began planning in 2012, is now 91% complete and on schedule for mechanical completion late this year at a cost of C$14.5 billion, TC said last week, more than double the initial estimate.
TC shares edged higher on Tuesday after rising 4.4% on Monday. They are down 12.2% this year, while rival Enbridge is down 8.7% this year.
'LOW-HANGING FRUIT'
Coastal GasLink's earlier delays and cost increases have frustrated investors, with construction crews confronted by protests and challenging mountainous terrain.
Now the project is nearly done.
"It's low-hanging fruit for (TC)," said Martin Cobb, senior vice president at TC shareholder Lorne Steinberg Wealth Management. "Getting this (done) would tick the box that they can actually execute."
Once Coastal opens, TC needs to execute the asset sales and repay debt, then carry out its spinoff to rebuild credibility, said Rob Thummel, senior portfolio manager at Tortoise Capital, which owns TC shares.
TC's net debt to EBITDA is higher than that of Enbridge and its U.S. peers, according to Refinitiv, and TC is aiming to reduce that to 5 times this year from 5.4 last year.
Scotiabank analyst Robert Hope said investors should "buy the dip", calling the sell-off an overreaching. He noted that the broader market has missed the fact that Coastal' s risks have diminished given summer construction progress.
TC now offers a dividend yield of 8%, the highest among major North American pipeline operators, according to Refinitiv.
In a statement to Reuters, TC said its priorities are to execute its major projects, including Coastal, improve its balance sheet and improve the operation of its assets.
But some see more risk ahead.
"The perceived value of TC's assets has changed materially over the past few days," said Odium Brown analyst Cory O'Krainetz. "We share investors' disappointment and regret holding the stock through this turbulent time."
About 8% of TC's shares listed in Canada and the United States are shorted, compared with 5% for rival Enbridge, according to S3. Short sales are bets that a stock will decline.
($1 = 1.3191 Canadian dollars)