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Over the past 5 years, shale oil and gas production from the Bakken formation has increased significantly. As this is the case, Canadian oil and gas have been competing with the significant increase in Bakken oil and gas for pipeline space. Because of this competition for pipeline space, there is a need for increased infrastructure projects to help supply crude to the refineries in the U.S. and to the coasts for shipping overseas.

As there is not enough infrastructure to move all the nat gas and crude to the refineries and to ports for shipping, a backlog of oil and gas has built up. This backlog of oil has generated a painfully steep discount compared to U.S and global light crude benchmarks. Because the Canadian companies are having to sell their crude at a discount, this has brought the price of many Canadian oil and gas companies down. Some of the companies that have been negatively impacted by the lack of infrastructure are Suncor Energy Inc. (SU), Canadian Natural Resources Ltd. (CNQ) and Imperial Oil Ltd. (IMO). An increase in infrastructure to move the oil and gas to refineries and to the coast for shipping overseas will help create stimulus for all companies affected by the backlog of oil, and in turn, the Canadian and American economies. TransCanada Corporation (TRP) is positioned well to capitalize on the needs for increased energy transportation.

In the section below, I will analyze the three year performance of TransCanada Corp. I will look at the company's past profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

All numbers sourced from Company Webpage and Morningstar

Profitability

Profitability is a class of financial metrics used to assess a business' ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2010 = $1.272 billion.
  • Net income 2011 = $1.582 billion.
  • Net income 2012 = $1.354 billion.

Over the past three years TransCanada's net profits have increased from $1.272 billion in 2010 to $1.354 billion in 2012. This signifies an increase of 6.45% in earnings over the past 3 years.

  • Operating income 2010 = $2.433 billion.
  • Operating income 2011 = $3.221 billion.
  • Operating income 2012 = $2.829 billion.

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, the company's operating income has increased. Transcanada's operating income has increased by 16.28%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2010 = $1.272 billion.
    • Net income 2011 = $1.582 billion.
    • Net income 2012 = $1.354 billion.
  • Total asset growth

    • Total assets 2010 = $46.589 billion.
    • Total assets 2011 = $48.995 billion.
    • Total assets 2012 = $48.333 billion.
  • ROA - Return on assets

    • Return on assets 2010 = 2.73%.
    • Return on assets 2011 = 3.23%.
    • Return on assets 2012 = 2.80%.

Over the past three years, TransCanada's ROA has increased from 2.73% in 2010 to 2.80% in 2012. This indicates that the company is making more money on its assets than it did in 2010.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2010

  • Operating income 2010 = $2.433 billion.
  • Net income 2010 = $1.272 billion.

2011

  • Operating income 2011 = $3.221 billion.
  • Net income 2011 = $1.582 billion.

2012

  • Operating income 2012 = $2.829 billion.
  • Net income 2012 = $1.354 billion.

Over the past three years, the operating income has been higher than the net income. This indicates that the company is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2010 = $46.589 billion.
    • Total assets 2011 = $48.995 billion.
    • Total assets 2012 = $48.333 billion.
    • Equals and increase of $1.744 billion
  • Total liabilities

    • Total liabilities 2010 = $29.862 billion.
    • Total liabilities 2011 = $31.671 billion.
    • Total liabilities 2012 = $31.422 billion.
    • Equals and increase of $1.560 billion

Over the past three years, TransCanada has acquired more total assets than total liabilities. This indicates that the company has not been financing its assets through debt. Over the past three years, the company's total assets increased by $1.744 billion, while the total liabilities increased by $1.560 billion.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2010 = $3.237 billion.
    • Current assets 2011 = $3.640 billion.
    • Current assets 2012 = $2.824 billion.
  • Current liabilities

    • Current liabilities 2010 = $5.661 billion.
    • Current liabilities 2011 = $5.880 billion.
    • Current liabilities 2012 = $5.881 billion.
  • Current ratio 2010 = 0.57.
  • Current ratio 2011 = 0.62.
  • Current ratio 2012 = 0.48.

Over the past three years, TransCanada's current ratio has decreased from 0.57 in 2010 to 0.48 in 2012. As the number has declined over the past three years and is below 1, this indicates that the company would not be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 shares outstanding = 692 million.
  • 2011 shares outstanding = 703 million.
  • 2013 Current shares outstanding = 706 million.

Over the past three years, the number of company shares have increased. The amount of common shares have increased from 692 million in 2010 to 706 million in 2013. This signifies a 2.02% increase over the past 3 years.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2010 = $4.950 billion / $8.064 billion = 61.38%.
  • Gross margin 2011 = $5.690 billion / $9.139 billion = 62.26%.
  • Gross margin 2012 = $5.687 billion / $8.264 billion = 68.82%.

Over the past three years, TransCanada's gross margin has increased. The ratio has increased from 61.38% in 2010 to 68.82% in 2012. As the margin has increased, this indicates that TransCanada has been more efficient.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $8.064 billion.
    • Revenue 2011 = $9.139 billion.
    • Revenue 2012 = $8.264 billion.
    • Equals an increase of 2.48%.
  • Total Asset growth

    • Total assets 2010 = $46.589 billion.
    • Total assets 2011 = $48.995 billion.
    • Total assets 2012 = $48.333 billion.
    • Equals an increase of 3.74%.

As the revenue growth has increased less than the assets on a percentage basis, this indicates that the company is making less money on its assets than it did three years ago.

Based on the fundamentals above, TransCanada is showing very good results. Over the past three years, the company is showing strength in all areas except for the asset turnover and the working capital. Both ratios are showing a decline but they are showing very slight declines. The rest of the fundamentals indicate strength for the company. Based on the above criteria, TransCanada is showing that it is a strong company that has been capitalizing on a need for increased oil an gas infrastructure.

Looking forward:

Transcanada Corp. currently has over $48 billion of assets and according to the company webpage "has a superior growth portfolio that will see the company invest approximately $22 billion in a number of energy infrastructure projects throughout North America. The majority of these projects are under construction and are expected to be completed over the next three years." Three of the major projects that the company is working on are the Coastal Gaslink Pipeline which is located in British Columbia, Canada, the Alaska Pipeline and the conversational Keystone XL Pipeline which would hook up the Alberta Tar sands to refineries on the Gulf Coast.

Coastal GasLink Pipeline Project: Shell Canada Limited (RDS.A) (RDS.B) and its joint venture partners in the LNG Canada project, are looking to develop a pipeline approximately 700-kilometers long. This line will be designed to safely deliver natural gas from the Montney gas-producing region, near Dawson Creek, B.C., to LNG Canada's proposed liquefied natural gas facility near Kitimat, B.C.

(click to enlarge)

Chart sourced by (nwcoastenergynews.com)

Another project that TransCanada and Exxon Mobil (XOM) have been working on is the Alaska Pipeline Project. The two companies began working together in 2009 to develop this Project. "This project is designed to connect Alaska's vast North Slope natural gas resources to new markets and deliver a reliable and secure source of clean burning energy for decades to come."

(click to enlarge)

Map sourced from (wikipedia)

The Keystone XL Pipeline is a very controversial pipeline that has been in the news over the past few years. The Keystone XL Pipeline is a proposed 1,179-mile (1,897 km), 36-inch-diameter crude oil pipeline beginning in Hardisty, Alta., and extending south to Steele City, Neb.

Along with transporting crude oil from the tar sands in Canada, the Keystone XL Pipeline will also support the significant growth of crude oil production in the United States by allowing American oil producers more access to the large refining markets found in the American Midwest and along the U.S. Gulf Coast.

(click to enlarge)

Map sourced from (acfnchallenge.wordpress.com)

These three significant projects put forth by TransCanada will increase the flow of energy across North America. The pipelines will create flow from Alaska to the Gulf Coast of Mexico. This increase in energy transportation will create stimulus for all companies affected by the backlog of oil, and in turn, the North American economy.

Analysts' Estimates

Analysts at MSN Money are estimating a strong year for 2013 and the growth to continue in 2014. EPS estimates for FY 2013 are $2.21 while growth is expected to continue into 2014 as EPS estimates increase to $2.50. Bloomberg Businessweek supports this idea as they expect the company's revenues to be around $9.3 billion for FY 2013 and increase to $10.0 billion for FY 2014.

Price Targets

  • Finviz has a price target for TransCanada Corporation at $51.10
  • Recently, Deutsche Bank gave the company a "hold" rating but increased its target to $52.00.

Since 2009, the average P/E ratio for Enbridge has been 18.80. As the company has averaged a P/E of 18.80 and is expected to have an EPS in 2014 of approximately $2.50, this would give the stock a price target of around $47.00. As indicated in the Huffington Post Article: Keystone XL Pipeline Approval Could Impact Investors Portfolios." A denial of Keystone XL could shave several dollars off of TransCanada's stock price, whereas an approval would lead to a modest pop."

As the need for oil and gas transportation grows TransCanada is positioned to capitalize on this need. Currently, TransCanada has many projects on the go. Even though these projects are loaded with environmental and political debates, the potential for the lines to go through is there. If TransCanada can get these lines up and running, this would prove to be very profitable for the company, for the investors and the North American economy.

Source: TransCanada: Pipelines To Grow The Economy