What Could Drive TC PipeLines’ Stock in 2016?
Your Insider's Guide to TC PipeLines in 2016
Correlation with commodity prices
The correlation between TC PipeLines’ (TCP) stock price and the near-month WTI (West Texas Intermediate) crude oil futures price over the past 12 months (as of April 11, 2016) was 0.47. This indicates a medium positive correlation between the two. On the other hand, the correlation between TC PipeLines’ stock and natural gas over the same period was 0.05.
This means that TC PipeLines, which is primarily in regulated natural gas transmission, had a much higher correlation with crude oil prices than with natural gas. This was the same case with other midstream companies that are primarily in the gas business. The midstream sector, as a whole, has moved with crude oil prices since mid-2014, even when prices fell steeply.
A recovery in oil prices could mean a higher stock price for TC PipeLines. But TC PipeLines’ shares could also remain under pressure as long as crude oil prices remain weak.
Peers
Enbridge Energy Partners (EEP), Western Gas Partners (WES), and Tallgrass Energy Partners (TEP) had correlations of 0.54, 0.54, and 0.48, respectively, with crude oil prices over the past one-year period. The above graph shows the movements in WTI, natural gas, and TC PipeLines’ stock prices over the past fifteen years.
Notably, TCP forms 1.5% of the First Trust North American Energy Infrastructure Fund (EMLP).
Outlook for TCP
TC PipeLines has relatively stable cash flows “underpinned by FERC (Federal Energy Regulatory Commission) regulated pipelines with long-term ship-or-pay contracts,” according to its management. The MLP’s growth is expected to be supported by dropdowns from parent TransCanada (TRP). On January 1, 2016, TCP acquired a 49.9% interest in PNGTS (Portland Natural Gas Transmission System) from TransCanada for $226 million. This should contribute to TCP’s earnings in 2016.
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