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TC Pipelines Hits 52-Week High: Does the Rally Have Legs?

Zacks Equity Research
ONE Gas (OGS) reports strong Q1 results, courtesy of new rates, colder-than-normal weather and customer growth.

Shares of TC Pipelines, LP TCP hit a 52-week high of $37.56 during the trading session on Mar 27, before retracting a bit to close at $37.28. The stock has moved up around 16% on a year-to-date basis. As it is, infrastructural bottlenecks in North America have boosted the demand for pipeline operators in the region, thereby enabling the partnership to book substantial profits.

Let’s delve deeper to find out the factors responsible for the stock’s upsurge.

Catalysts Behind the Uptrend

The partnership’s impressive regionally-diverse portfolio of midstream assets including Northern Border, Great Lakes and PNGTS pipelines, among others, are driving the growth of the firm. TC Pipelines benefits from strong demand for Northern Border Pipeline, which is the primary transporter of gas from the low-cost Western Canada Sedimentary Basin (WCSB) to the U.S. Midwest. The pipeline, which is operating at high levels of throughput, is booked through the end of the decade.

The company has been progressing well on its Portland XPress project, with Phase 1 placed into service late last year, and Phase 2 and 3 likely to come online by next year. With the rising demand for service in New England, the company is marching forward with the Westbrook XPress project, which is the second PNGTS expansion project.

Considering the partnership’s long-term pipeline contracts, strong market position, and continued demand in WCSB and Bakken, TC Pipelines is likely to maintain its growth momentum in the quarters ahead. Pipeline pinch throughout North America creates exciting opportunities for pipeline firms like TC PipeLines that are poised to capture the economic benefit of this trend.

TC Pipelines’ history of generating strong distributable cash flow (DCF) bodes well. The partnership’s 7% yielding payout, which is higher than the industry, boosts investors’ confidence. Notably, DCF in 2018 totaled $391 million, higher than $310 million a year ago. 

Is Further Upside Left?

While natural gas transportation assets of TC PipeLines generate stable, recurring and low-risk earnings and cash flows, there are certain headwinds to watch out for.

As we know, the FERC regulatory changes will significantly impact TC Pipelines. With the partnership no longer having the advantage to add income tax allowance to its cost-of-service fees, the tariff rates will fall for certain pipelines. In fact, it expects a material decrease of around $30 million annually, starting this year.The change in income tax policies will result in rate reduction and in turn impact cash flow. Under the revised FERC ruling, the dropdown of assets by its parent company TransCanada Corporation TRP no longer remains a viable funding lever for the Canadian energy infrastructure giant.

As such, TC Pipelines has to rely on the organic expansion on its existing systems like Portland Xpress and Westbrook Xpress, and on other potential growth opportunities. In regard to the unfavorable FERC ruling, TC Pipelines slashed its payout last year in a bid to bolster its financial profile, which is highly leveraged, with around 70% debt.

Considering all the factors, is TC Pipelines likely to maintain its share price momentum?

Well, although the distribution cut and uncertain dropdown prospects may spell trouble in the short term, we believe that the company will be able to tide over the challenges. Hence, it is better to retain this midstream MLP in your portfolio, which currently carries a Growth Score of A and a Zacks Rank #3 (Hold). Indeed, the FERC ruling has altered the business dynamics of the partnership to a certain extent but TC Pipelines is anticipated to reap benefits from its impressive portfolio and brownfield expansions.

Meanwhile, investors interested in the same industry can opt for Delek Logistics Partners, L.P. DKL and Summit Midstream Partners, LP SMLP, each carrying a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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