TC PipeLines - Midstream Company With Strong Growth Prospects

| About: TC PipeLines, (TCP)

Summary

TC PipeLines present stock price is less than 75% of the company's 2015 highs. Despite these difficulties, the company continues to offer a respectable dividend of 6.75%.

TC PipeLines has managed to grow its dividend for 17 consecutive years. At the same time, the company has significant growth prospects from TransCanada's capital spending program.

TC PipeLines strong present dividend along with the company's strong growth prospects make the company a solid investment at the present time.

TC PipeLines (NYSE: TCP) is a publicly traded MLP that works in the midstream sector of the oil market. At the same time, TC PipeLines offers investors an annual dividend of $3.76 that comes out to a 6.74% annual yield. On top of this annual yield, TC PipeLines sponsor, TransCanada, is a rapidly growing oil company with a market cap of almost $40 billion and significant growth potential. Combining TC PipeLines' growth potential with the company's present strong dividend, and as we will see, TC PipeLines is a strong investment at the present time.

Introduction

TC PipeLines is a publicly traded MLP with TransCanada Corporation owning 27.1% of TC PipeLines outstanding units. TC PipeLines is based on Calgary, Alberta but owns pipelines primarily in the United States. Despite the company's already significant pipeline ownership, TC PipeLines has significant room for expansion throughout North America as the oil industry grows. This growing oil industry, of which TransCanada is a big part, will bring TC PipeLines significant future midstream assets.

TC PipeLines' stock price peaked in mid-2014 at just over $50 per share. From that point, in the face of a crashing oil environment, TC PipeLines' stock price increased until a late-2014 stock price peak of more than $75 per share. However, from that point, TC PipeLines' stock price began to fall to a February 2016 of less than $40 per share. Since then, TC PipeLines' stock price has recovered to present prices of more than $55 per share.

However, even with this recent recovery, TC PipeLines' stock price is still just over 70% of the company's 2015 highs. As we will see, TC PipeLines has significant room for its stock price to grow.

TC PipeLines Overview

Now that we have an introduction to TC PipeLines along with the company's recent stock price performance, it is now time to look at TC PipeLines overall.

TC PipeLines Investment Proposition - TC PipeLines Investor Presentation

TC PipeLines, as a midstream company, has a very strong track record of consistent distributions. The company has managed to increase its dividend annually for 17 years in a low, and the company's annual distribution of almost 7% is very impressive for the offshore drilling industry. At the same time, the company has continued to offer this opportunity from a solid financial position with low-risk long-term assets.

The company's impressive growth history along with its growth opportunity helps to highlight the opportunity that TC PipeLines is.

TC PipeLines Asset Map - TC PipeLines Investor Presentation

Currently TC PipeLines entire portfolio consists of 7 natural gas industry. Compared to other fuel sources like coal, natural gas is a growing industry and a clean fuel source. As the MLP of TransCanada Corporation, TC PipeLines is the MLP for a very large company with a large future capital program. As part of this capital program, TransCanada will likely have additional assets it drops down to TC PipeLines. The dropdown of these assets will significantly help TC PipeLines future earnings and dividend potential.

At the same time, it is important to keep an eye on the quality of these assets. These assets often last many decades and come with long-term ship-or-pay contracts. As a result, these contracts have very little exposure to commodity prices. On top of this, the only reason that these companies don't pay TC PipeLines is if they go bankrupt. Given the spread of TC PipeLines customers, it is unlikely that this happens.

TC PipeLines Strategy

Now that we have a detailed overview of TC PipeLines, it is now time to discuss TC PipeLines strategy.

TC PipeLines Distributable Cash Flow - TC PipeLines Investor Presentation

This image provides the sources of TC PipeLines 2016 Distributable Cash Flow for the 9 months ending September 30. 92% of the company is under long-term contracts, and out of this, the majority of the earnings come from the company's GTN and Bison pipelines. On top of this, TC PipeLines PNGTS (Portland Natural Gas Transmission System) pipeline helped to further diversify the company's cash flow in 2016. This diversification will continue to increase the strength of TC PipeLines income stream.

TC PipeLines Asset Base Cash Flow - TC PipeLines Investor Presentation

Now that we have an overview of TC PipeLines cash flow for the past 9 months, it is now time to continue discus TC PipeLines' strategy in additional detail. TC PipeLines has stable cash flow from its asset base of reliable and resilient infrastructure. The company has a disciplined investment approach with a focus on long-life infrastructure. This long-term infrastructure focus means that TC PipeLines will continue to have long-term impressive cash flow.

At the same time, TC PipeLines has impressive growth opportunities.

Not only does the company have significant future dropdowns from TransCanada, the company also has the opportunity for future third party acquisitions. These acquisitions can increase TC PipeLines future cash flow. On top of this, out of TC PipeLines 7 present pipelines, 3 of them are only approximately halfway owned by TC PipeLines. This means that TC PipeLines can purchase a larger portion of these pipelines and easily increase future cash flow.

TC PipeLines TransCanada Growth

Now that we have a detailed overview of TC PipeLines including the company's overall growth strategy, it is now time to continue by discussing TC PipeLines specific opportunities from TransCanada.

TC PipeLines TransCanada Capital Program - TC PipeLines Investor Presentation

TC PipeLines, with a market cap of $50 billion, has a $25 billion near-term capital program. This capital program involves a number of projects, most significantly the NGTL System with an estimated capital cost of $5.4 billion and the Columbia pipeline with an estimated capital cost of $7.7 billion. Both of these pipelines are anticipated to be in-service from 2016-2020.

Any part of these pipelines going to TC PipeLines will bring the company significant future income.

TC PipeLines Structure - TC PipeLines Investor Presentation

This shows an overview of TC PipeLines attachment to TransCanada Corporation. TransCanada corporation recently acquired Columbia Pipeline Partners for a total of $13 billion. At the same time, TransCanada Corporation has a 27.1% indirect ownership in TC PipeLines. This ownership stake is worth approximately $1 billion while 72.9% of TCP is publicly owned.

TC PipeLines Financials

Now that we have discussed TC PipeLines strategy and the company's growth opportunity from TransCanada, which owns 27.1% of the company, let's finish up by discussing TC PipeLines Financials.

TC PipeLines Financial Picture - TC PipeLines Investor Presentation

TC PipeLines earned a total of $58 million in the three-months ended on September 30 in 2016. This net income for the quarter has increased from $49 million from the 3 months ending in September 30 2015. This resulted in a net income per common unit of $0.65 for the quarter. This is below TC PipeLines quarterly income. However, the company's distributable cash flow from its EBITDA is more than the company's total cash distributions.

As we can see, over the past year, and especially for the year, TC PipeLines has managed to increase its distributable cash flow. The company increased its distributable cash flow by almost 15% from the first 9 months of 2015 to the first 9 months of 2016. This shows a significant increase in TC PipeLines distributable cash flow that has allowed the company to increase its dividends even in the face of a slight increase in outstanding units.

TC PipeLines Financial Position - TC PipeLines Investor Presentation

As a result of TC PipeLines strong income and strong growth potential, TC PipeLines has an incredible financial position. The company has managed to hold an investment grade credit rating with a solid capital structure and quality assets. The company has a credit facility of $0.5 billion with $0.3 billion available at the end of 3Q 2016. The company has the opportunity to request a $0.5 billion increase in its credit facility.

This shows how TC PipeLines has the ability to pay out its distribution at the present time on top of having the capital ability to acquire more assets increasing its future cash flow.

Conclusion

TC PipeLines, even with its recent stock price recovery, is still less than 75% of the company's 2015 highs. Despite these difficulties, TC PipeLines continues to offer investors a very respectable dividend of approximately 6.75%. On top of these impressive dividends, TC PipeLines has significant growth prospects.

TC PipeLines is a subsidiary of TransCanada, a company with a $50 billion market cap that has recently undertaken a significant acquisition of more than $10 billion. On top of this, TransCanada is undertaking a significant $25 billion capital expansion program. This program will result in the dropdown of additional future assets to TC PipeLines.

This should result in future income for TC PipeLines helping the company to continue growing its distribution. As we can see, TC PipeLines has both a respectable current dividend and strong growth prospects that make it a strong investment at the present time.

Disclosure: I am/we are long TCP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , , , Oil & Gas Pipelines, Alternative Investing
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