This week delivered the TC Energy spin-off. The popular Canadian pipeline and energy company split into two parts – natural gas and energy production and the smaller oil pipeline segment. Investors received 0.2 shares for every TC Energy share that they held. What to do with the TC Energy holdings? I’d suggest that if you already held TC Energy, you’ll probaly like the new cleaned up version. You might take a look at the South Bow spin-off. I took a second look, and on second thought I will sell South Bow and move the proceeds to may favourite oil and gas producer.
The markets generally approved of the spin-off arrangement.
We saw the TRP price fall by about 8% on the day of the spin-off, but then saw some recovery. The market was liking the newer cleaner up TC Energy.
TC Energy becomes a natural gas pipeline, storage and energy producer pure play. The move also shifts significant debt from TC Energy to South Bow. Take it, it’s yours I say.
The stock has been a sub sector leader from September 1st, but Keyera leads the way …
South Bow swamped in debt
South Bow is debt laden and the dividend is not likely to see an increase for about 4 years. They need to work off that excessive debt. That’s a sign that the dividend is not covered, or is at least an excessive strain on the balance sheet.
Here’s the South Bow investor page. In essence a pure oil transportation play …
South Bow will build upon its already established business and solid foundation to unlock the full potential of its competitive corridor, connecting critical western Canadian crude oil supply to key refining and demand markets in the U.S. Midwest and Gulf Coast.
Canada has the third-largest proven oil reserves in the world and oilsands production continues to reach record heights. There is a PDF presentation that you can download, on that page.
From the Calgary Herald …
Oilsands output is expected to continue to ramp up and some experts believe Canadian pipelines could be running full again within a few years, perhaps as early as 2026, said Kevin Birn, Canadian oil markets chief analyst for S&P Global Commodity Insights.
S&P projects Canadian oilsands output will climb by 500,000 barrels per day (bpd) by 2030, and plateau at 3.8 million bpd around 2030. Of course projections for peak oil demand are as wide and varied as Canada. My ‘common sense’ take is that reaching peak oil in the next decade is highly unlikely. And as a guess, the peak date is well beyond several years due to global economic growth in developing nations and very muted demand for eletric vehicles (outside of China) that are slated to help reduce demand for oil.
The oil hedge
That said, the projections for natural gas use are much more ‘favourable’. An investor who holds TC Energy will likely profit from that increased demand over the next decade or two. Natural gas is some form of oil risk hedge. The gradual adoption of EVs will increase energy demand and hence natural gas demand.
Value removal, just a like a dividend
And while it was a good week to reflect the markets general approval of the spin-off, the market certainly did account for the removal of value from the TC Energy mothership.
It’s the same event when we receive a dividend, it is a removal of value from the company. The share price falls by an equal amount of the dividend on ex dividend day. The stock continues to be priced by the market makers.
A dividend is a removal of value, not a creation of value. But the dividends certainly send signals, I call them a divining rod. And yes, they certainly make investors feel good. The dividend can be a sign of the value that’s ready and available to be harvested. But keep in mind that there is no difference between a share sale and a dividend except for tax treatment. Share sales usually become superior due to the control and flexibility that they allow.
If you continue to hold both, your dividends received will remain the same due to payments from both companies.
Of course you don’t have to worry about any of the above if you build your own ETF portfolio, or hold one of the wonderful asset allocation ETFs in Canada. The ETF providers will have received the South Bow shares, but South Bow is unlikely to be added to the TSX Composite (XIC.TO) or TSX 60 (XIU.TO) and other market index ETFs. The ETF providers be forced to sell the holding.
Selling South Bow for Canadian Natural Resources
I will stick in the land of oily stocks with the South Bow proceeds, and will move the funds to my favourite oil and gas producer – CNQ. CNQ is highly weighted to oil. As readers know I put Canadian oil and gas stocks on the table in late 2020. We have been greatly rewarded as that is about ‘500% ago’. I continue to chip away in certain accounts with the Big 4 being the main focus – CNQ, SU, IMO and Tourmaline (natural gas producer).
Suncor on the move
But one of my favourite energy ‘analysts’ suggests that the Suncor outperformance will continue …
I’d be more than happy to see that. If SU can perform like CNQ, that’s a bonus and then some.
More utilities and more defense
Readers will know that I’m a big fan of defensive equities for retirement. Pipelines and utilities make the list, pipelines being ‘utility like’.
In May we looked at why pipelines and utilities stocks were on the move. The tailwinds were and are obvious, and meaningful. Utilities and pipelines are crushing the market in 2024, and from the time of that post.
I like this share from Scott Barlow that offered RBC’s take on Canadian utilities and mid stream offerings.
It would take little effort and a small number of stocks to greatly reinforce the portfolio defensive line. You can then look to iShares XST.TO and/or BMO’s STPL.TO to add the very useful consumer staples sector. U.S. and European healthcare stocks would fill another hole on the defensive line.
Last week we were greatly boosting our spend rate in retirement with utilities in the mix. That’s a must read for retirees and near retirees.
More on the mortgage reset ‘tsunami’
Here’s an interesting 2-post thread on what might happen to mortgage payment resets for those who hold fixed terms and variable rate mortgages. Rate cuts might more than soften the blow.
More Sunday Reads
We’ll set our sights on Dividend Hawk to kick things off. For Hawk’s portfolio you’ll find the dividends received and stock stories of the week. Hawk is certainly sitting on Canadian pipelines as well.
And in a busy week for stocks, you’re likely interested in what Dan at Stocktrades has to say. Here’s Stocktrades favourite Canadian stocks for 2024.
Check out Canada’s top Robo Advisor
There were 4 new posts this week at Findependence Hub. Topics range from health and the cost of eldercare to lessons learned in retirement.
I have updated the GICs rates again in the EQ Bank post. More GIC declines of course.
Make your cash work harder at EQ Bank.
That said, rates are still above inflation, protecting your spending power.
And Kyle is making sense of the markets at MoneySense.
Thanks for reading and sharing these posts.
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