Morningstar | Another Strong Quarter for TransCanada, but Stock Still Remains Highly Undervalued
During the quarter, narrow-moat TransCanada generated comparable earnings of CAD 946 million, or CAD 1.03 per share, compared with CAD 719 million, CAD 0.82 per share, in the year-ago period. Comparable earnings surprised to the upside compared with our expectations, driven by better than-expected performance in the U.S. natural gas pipelines business, increased volumes on the Keystone Pipeline driven by excess Canadian crude supply, and lower U.S. income tax rates. The company also reported distributable cash flow of CAD 1.7 billion, also above our expectations. Higher distributable cash flow is attributed to the improvement in comparable earnings.The Keystone XL (KXL) remains in the legal system’s hands. The South Dakota Supreme court dismissed an appeal against the pipeline, but outstanding challenges remain in Nebraska and Montana. TransCanada continues to work with the U.S. Department of Justice to defend the legal challenges against the presidential permit and the environmental assessments. We think there is still time for the project to begin construction during the first half of 2019, and we still expect the KXL to be placed into service by the end of 2021.
We plan to incorporate the financial results into our model shortly, but for now, we don’t expect a material change to our $54 (CAD 72) fair value estimate.
For a detailed look into Canadian crude market and pipeline trends, please refer to our January Energy Observer, "Pipelines Are Canada’s Lifelines."
For a deeper dive into TransCanada and what the market is missing about the stock, see our April Select report, "What the Market Is Missing on Keystone's Impact on TransCanada."
TransCanada is an energy company. Co. operates three business segments: natural gas pipeline, which transports natural gas across Canada, the U.S. and Mexico, and has regulated natural gas storage facilities in Michigan with a total capacity of 250 billion cubic ft.; liquids pipelines, which consists of wholly-owned and operated crude oil pipeline systems that connects Alberta and U.S. crude oil supplies to U.S. refining markets, as well as connecting U.S. crude oil supplies from the Cushing, OK hub to refining markets in the U.S Gulf Coast; and energy, which includes a portfolio of power generation assets in Canada and the U.S., and unregulated natural gas storage assets in Alberta.
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