HomeMost PopularThe Gambler's Lament: TC Energy Facing Value Trap

The Gambler’s Lament: TC Energy Facing Value Trap

Actionable Trade Ideas

always free

Bull trap. Trading, investing nvesting and financial market concept.

The Company’s Risky Temptation

I can’t help but think that TC Energy (NYSE:TRP) (TSX:TRP:CA) may be a value trap, all things considered:

  1. Valuations are near their 10-yr troughs
  2. TC Energy’s negative FCF generation record is expected to continue
  3. TC Energy’s debt portfolio does not directly benefit from rate cuts
  4. Unclear reasons for the spinoff of the liquids business
  5. Asset sales can lead to deleveraging but value destruction risks are there

TC Energy’s Financial Challenges and Decisions

TC Energy – A Turbulent Pipeline of Financial Decisions

TC Energy has seen its net interest expense rise rapidly, eating away at its earnings before interest and taxes (EBIT). This has left many investors concerned about the company’s financial position. Even in prior years, debt costs have taken a significant portion of the company’s EBIT.

TC Energy’s Liquids Pipelines business, which involves the transport of Canadian crude oil from Alberta to US refining and export markets, has been struggling. Over the past three years, its earnings before interest, taxes, depreciation, and amortization (EBITDA) have experienced negative growth. Despite this, the company has decided to spin off this business into a separate entity. This decision has not been met without skepticism, as the rationale behind it remains ambiguous. The lack of clarity is raising doubts about the company’s strategic direction, leading many to question whether fixing their FCF and debt profile should be the priority.

To tackle its debt burden, TC Energy has already divested CAD 5.3 billion of assets and plans to sell a further CAD 3 billion. Management is aggressively striving to achieve their deleveraging goal; however, their tone suggests a sense of urgency that has not gone unnoticed. The risk of value destruction in these asset sales is looming large, particularly as recent sales may have occurred at lower prices than expected. This has raised concerns about the possible adverse effects of the company’s financial decisions.

While TC Energy may appear attractive with its high dividend yield and relatively cheaper valuations, the underlying challenges cannot be overlooked. The company’s persistent negative FCF profile, weak returns on capital, and rush to sell assets have cast a shadow over its prospects. Given these circumstances, TC Energy receives a “Neutral/Hold” rating, despite its low 10-year valuation.

Swing Trading Ideas and Market Commentary

Need some new swing ideas? Get free weekly swing ideas and market commentary from Jonathan Bernstein here: Swing Trading.

Explore More

Weekly In-Depth Market Analysis and Actionable Trade Ideas

Get institutional-level analysis and trade ideas to take your trading to the next level, sign up for free and become apart of the community.