Is an Activist in TC Energy’s Future Pipeline?

Any board of directors will fear a letter from an activist shareholder. They’re loud, disruptive, and usually seek short term solutions. Often, several managers at the top lose their jobs.

Data from Insightia shows that in recent years, both sides of the border have seen an acceleration in activist campaigns. Last year, there were 53 in total domestically, up 18% from 2021. The U.S. saw 511 campaigns, up 11% from the year before. These are just the ones we know about. According to Kingsdale Advisors, two-thirds of activist battles take place behind the scenes. It’s only when the Board gives an activist shareholder the cold shoulder that the campaign turns public.

Should TC Energy be next to face the music?

Well, in 2014, Transcanada Pipelines (as it was known then) had one on their doorstep. A small New York hedge fund bought shares and had two demands. First, it wanted the company to “drop down” its U.S. assets to its master limited partnership for tax optimization. Second, it sought to spin off the Power and Energy segment from the rest of the company.

Transcanada responded to the analysis, calling it flawed. In this case, the activist walked away a few months later. But not every company is so lucky. Almost a decade ago, hedge fund investor Bill Ackman set his sights on shaking up CP Rail. Its stock had lagged its rail peer, CN Rail, for years. Ackman got his wish and installed new management. Last year, Suncor became the target of Elliott Investment Management. Suncor destroyed a lot of shareholder value following its Petro-Canada acquisition in 2009. Elliot has won several board seats and time will tell if they become more disruptive in the future.

After Transcanada’s 2014 experience, analysts continued to ponder if it remained a sitting duck for future activism. In 2015, several reports discussed the subject. One analyst mused that there were three options that Transcanada could pursue to increase shareholder value.

1. Break up the company.
2. Increase the dividend.
3. 3.Drop down assets to its master limited partnership to tax optimization.

While the company has been spared from a disruptive activist since 2014, we’ve nevertheless seen several of these changes take place. Yet the stock has not reacted.

1. Last month, TC Energy (it changed its name in 2019) announced it was spinning off a segment, the kind of thing you would expect an activist to advocate. It wasn’t the Power and Energy segment suggested in 2014. Instead, it was their oil pipelines business, the segment with the on-again, off-again, on-again, off-again Keystone Pipeline that was the subject of much controversy over the last decade… not to mention oil spills that create quite the distraction when they occur.
   
   The market didn’t like it, probably because it came out of left field, but also because there was too much disruption in so short a period. The company announced the week before that it was selling 40% of its stake in the Columbia Gas Transmission and Columbia Gulf Transmission pipelines for C$5.2 billion. They made the sale to pay down debt. While this was a minority stake, which should (and did) command a lower valuation, the market wanted to see the company sell its stake for a higher price.
   
   
2. The annual dividend was $1.84 per share at the beginning of 2014, implying a yield of about 3.8% at the time. Today, that same dividend is $3.72, accompanying a yield of 7.9%. There’s no chance of a dividend cut because management just affirmed their plans to grow it by 3-5% each year a few weeks ago. The company has consistently raised this dividend each year since 2000 (including the pandemic).
   
   
3. The master limited partnership was acquired by the corporation, which simplified its corporate governance, so nothing to say about this one.
   

We like the planned spin off and think sellers of TRP at the end of July made the wrong decision when the announcement was made.

The oil pipeline, which has been subject to much controversy over the last decade due to the political hot potato called Keystone, coupled with oil spills that have accompanied very unpleasant headlines, is a distraction. This segment is responsible for the stubbornness in the stock price.

We plan to hold the other segments, which make up 85% of the company’s cash flow. That includes the natural gas pipelines in Canada, the U.S., and Mexico; nuclear energy facilities (remember they own half of Bruce Power, which supplies Ontarians with about 30% of their electricity needs), and hydro. We’re most excited about the Coastal GasLink, which is now 91% complete. It’s being constructed in British Columbia and once finished, liquified natural gas (LNG) can finally flow to markets abroad.