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Morningstar | TransCanada: Still Waiting on the Keystone XL

TransCanada’s stock hasn’t fared well over the past year, underperforming its peers and the broader market. A perfect storm of outside factors--rising interest rates, uncertainty over the status of Keystone utilization, and the Federal Energy Regulatory Commission's proposed tax disallowance, coupled with increasing leverage associated with the current investment cycle--has driven the stock lower.We think the market is placing too much emphasis on these largely transitory factors and overlooking TransCanada’s big picture. We expect TransCanada to meet its targeted 8%-10% annual dividend growth over the next two years, driven by a healthy pipeline of growth opportunities. TransCanada boasts CAD 38 billion in commercially secured capital projects in its growth portfolio, highlighted by the Keystone XL. We are optimistic about pipeline expansion. The widening of the heavy oil discount has given some investors pause as the higher differential hurts realized prices for exploration and production companies that are meant to expand production and fill the proposed pipelines. But the widening heavy oil discount only shows that new pipelines are needed now more than ever. With TransCanada's plan for the Keystone XL to solely serve the U.S. Gulf Coast, the project has contracts for 93% of its targeted capacity. The legacy Keystone pipeline will serve the U.S. Midwest, providing a more attractive market with higher netbacks for producers' spot production. We expect the project to be operational in the second half of 2021. Further, the FERC proposal will have minimal impact on TransCanada, affecting only 13% of EBITDA and an even smaller portion of its growth projects. Finally, a return to a more normalized dividend yield would mean a higher price for TransCanada's shares in the face of rising interest rates. While the market places too much emphasis on less important outside factors and overlooks the positive impact that the growth portfolio will have on future cash flows and the balance sheet, the time is right for long-term investors to capitalize on the stock's upside while collecting a steady stream of growing income.