Yahoo Finance TC Energy stock downgraded over 'disappointing' $5.2B deal value
Several analysts expect additional asset sales in the coming months
TC Energy (TRP.TO)(TRP) shares were downgraded by CIBC Capital Markets after the first deal in the company's plan to shed assets came with a smaller-than-expected price tag.
The Calgary-based energy infrastructure firm announced a $5.2 billion deal on Monday to sell a 40 per cent stake in two massive U.S. gas transmission systems to New York City-based Global Infrastructure Partners (GIP). The move is the first in TC's $5-billion-plus divestiture program announced last fall aimed at shoring up the company's balance sheet by the end of 2023 through the sale of non-core assets.
The Columbia Gas and Columbia Gulf pipelines span more than 24,000 kilometres across North America, delivering a substantial portion of daily U.S. natural gas demand. TC says it will continue to operate the line. The company expects GIP's share of capital expenditures to average more than $1.3 billion annually over the next three years. The deal is expected to close in the fourth quarter of 2023.
CIBC Capital Markets analyst Robert Catellier called the $5.2 billion valuation "lower than expected" and "a bit disappointing" in a note to clients on Monday. He downgraded Toronto-listed TC shares to "neutral" from "outperformer," while lowering his price target to $60 per share from $62.
"The valuation is a bit disappointing relative to our expectations," he wrote. "We believe the sale was in the context of the market and reflective of recently higher interest rates."
TC says the 40 per cent equity stake implies an enterprise multiple of 10.5 times.
"We had assumed an average multiple of 11.0x for asset sales in our valuation. Clearly, the market has changed," Catellier wrote.
Raymond James analyst Justin Jenkins echoes this, calling the valuation "decent" although "lighter than expected" in a note to clients on Monday.
"Although this is a solid double-digit multiple across the midstream space, we would have expected a bit higher valuation for long-haul, regulated natural gas assets with a diverse supply-push and demand-pull profile, and a visible growth/capex runway," he wrote.
While the deal, if closed, ticks off TC's $5 billion divestiture target for 2023, several analysts expect additional asset sales in the coming months. The company continues to grapple with the rising cost of the Coastal GasLink pipeline in British Columbia, which has climbed about 130 per cent above the original 2018 estimate.
TC Energy is slated to report its second-quarter financial results on Friday.
Toronto-listed shares dipped 2.8 per cent to $49.47 as at 12:05 a.m. ET on Tuesday.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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