A remediation company deploys a boom on the surface of an oil spill after the Keystone pipeline ruptured and leaked an estimated 14,000 barrels of crude oil in Kansas.Kyle Bauer/The Associated Press
Canadian pipeline operators are struggling to expand their networks amid environmental concerns over fossil fuels, making this month’s rupture of TC Energy Corp.’s TRP-T Keystone conduit in Kansas look like a setback for the company.
Why have investors tuned it out?
TC Energy announced that it had shut down the Keystone pipeline on the evening of Dec. 7, after detecting a rupture that had leaked an estimated 14,000 barrels of crude oil destined for Cushing, Okla., where oil is refined and stored. Only part of the line resumed operations this week.
It was one of the largest oil spills in the United States in more than a decade. But the impact on TC Energy’s share price has been muted, to say the least.
After markets opened on Dec. 8, the day after the rupture was announced, the shares fell just 6 cents, to $57.99. The next day, the shares fell another 25 cents, but still a decline of less than half a percentage point.
One big reason for this collective shrug from the market: The recent history of pipeline ruptures has had negligible financial impact on the pipeline operator.
TC Energy reported a 6,600-barrel leak on the Keystone in North Dakota in November, 2017. Despite a two-week shutdown, the company said that there was no significant impact on its 2017 earnings.
Indeed, it swung to a fourth-quarter profit of $861-million, up from a loss in the fourth quarter of 2016. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by $13-million, year-over-year. And the company raised its dividend by more than 10 per cent.
“Past spills have not been material financially,” Robert Kwan, an analyst at RBC Dominion Securities, said in a note released after this month’s shutdown was announced.
TC Energy did not respond to a request for comment on Friday.
There may be other reasons why the market has ignored the rupture.
For one, investors appear to be far more concerned about the rising costs for the ongoing construction of TC Energy’s Coastal Gaslink pipeline, which weighed on the stock price last month.
When the company announced near the end of November that the project has experienced “significant cost pressures” related to labour costs, contractor underperformance and disputes, the share price sank 4.1 per cent on the day of the bad news. It fell another 1.6 per cent the next day.
No dollar amount was given to the cost overruns on the project, which will deliver natural gas from northern British Columbia to an export terminal in Kitimat when it is completed (it’s about 80 per cent done now).
But the warning arrived just four months after TC Energy said that the expected cost of the Coastal Gaslink pipeline had risen to $11.2-billion, up 70 per cent from an earlier estimate.
Analysts believe the latest cost estimate could add another $2-billion to the price tag. The initial share price decline, which wiped out more than $5-billion from TC Energy’s market capitalization – or the value of its outstanding shares – suggests investors are worried about the final cost.
At the very least, the stock appears to be reflecting the growing financial uncertainty surrounding the project. And this uncertainty comes at a time when the broader stock market is turning its attention to the prospects of a recession next year, walloping major indexes and sending the economically sensitive S&P/TSX Energy sector to a 10-week low on Friday.
Where does TC Energy go from here?
The Keystone downtime may not have a significant financial impact on the company in the current quarter. But it could weigh on valuations as TC Energy prepares to sell as much as $5-billion worth of assets – perhaps including a portion of the Keystone pipeline – over the next year to fund its growth plans.
“We wonder if the spill will have implications for a sale in 2023,” Mr. Kwan said in his note, adding that a regulatory review of the spill could stall a transaction.
However, at least investors can look to the dividend during this period of uncertainty. The current yield of 6.4 per cent is not only attractive but may be providing a buffer to further volatility, since the yield grows more attractive as the share price declines.
As well, analysts expect that the company’s plan to raise its distribution by 3 to 5 per cent a year remains on solid ground, given the low payout ratio.
Make no mistake: Pipeline ruptures are bad news, especially for the environment. But next to other challenges facing TC Energy – and the glow of that dividend for shareholders – this month’s Keystone downtime may be little more than a distraction.
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