Nov 21, 2017
Three things TransCanada must do to keep growing its dividend
With or without Keystone XL, TransCanada is promising to keep boosting payouts to shareholders.
In its response to Nebraska’s decision to approve an alternative route for the oil sands export pipeline on Monday, the Calgary-based company reminded investors that it does not need Keystone XL in order to keep growing its dividend every year “at the upper end” of an eight to 10 per cent range through 2020.
Below, BNN breaks down what must be done in order for TransCanada to meet that goal and the challenge facing those dividend growth plans once this decade ends.
GET BACK TO ITS ROOTS
For decades, TransCanada (TRP.TO) was almost exclusively focused on shipping natural gas. Crude oil pipelines are, for them, a relatively new business and is not where TransCanada is focusing the vast majority of its $24-billion short-term capital spending plan. Fourteen of the 18 projects included in that plan — accounting for more than $20 billion—– are either expansions of or additions to the company’s existing network of natural gas pipelines. Only two crude oil pipeline projects — accounting for just $1.2 billion — are included in the near-term plan.
KEEP MEXICO HAPPY
Three of the natural gas pipelines included in the near-term plan are in Mexico. And with an estimated combined cost of more than US$2.5 billion, they make up a substantial portion of the company’s short-term spending plans.
TransCanada believes the company has been “embraced” by Mexico. In a July 2016 blog post, the company even repurposed a quote from an article originally from Seeking Alpha claiming Mexico “will likely remain a key source of growth for TransCanada for the foreseeable future.”
Former TransCanada CEO Hal Kvisle told BNN on Tuesday the company’s Mexican business is self-contained enough to withstand any risks posed by the potential dismantling of the North American Free Trade Agreement. Andrés Manuel López Obrador – currently the frontrunner ahead of next year’s Mexican presidential election – could pose a threat to the Canadian company’s business there as he has vowed to crack down on the country’s energy sector.
CLARIFY POST-2020 PLANS
The company’s $24-billion capital spending plan will run dry around 2020, but TransCanada claims to have an equal amount worth of longer-term projects capable of keeping the dividend climbing.
While the company acknowledged in its latest earnings release those future plans “have greater uncertainty,” that could be an understatement.
Keystone XL accounts for nearly half of that total, with the estimated project cost being roughly $10.2 billion; even though analysts such as RBC’s Robert Kwan say the project is still too risky to be included in valuation models.
Another $6.7 billion, or 28 per cent of the long-term capital plan, is related to building pipelines specifically intended to supply liquefied natural gas (LNG) export projects on Canada’s west coast. The company recently said it expects Canadian LNG exports to begin in roughly a decade, yet none of the major LNG export projects proposed to date have committed to construction. Analysts have grown increasingly pessimistic in recent years on the sector’s prospects.
