On Jun 24, 2013, we upgraded natural gas transporter
TC PipeLines L.P.
) to Neutral from Underperform. Our new investment thesis is
supported by a Zacks Rank #3 (Hold).
Why the Upgrade?
We expect TC PipeLines' proposed purchase of additional stakes in
two major U.S. gas systems from parent
) to be immediately accretive to earnings and distributable cash.
We also like TC PipeLines' steady cash-flow generating pipeline
assets, which provide stability and financial capacity to deliver
cash distributions in a disciplined manner.
With its investments in low-risk energy infrastructure assets, TC
PipeLines has been able to provide stable cash distributions.
Over the last few years, the partnership has consolidated its
business through a combination of organic efforts and accretive
TC PipeLines' impending deal to increase its stake in two
important U.S. gas pipelines - Gas Transmission Northwest LLC and
Bison Pipeline LLC - to 70% from the pre-existing 25% is expected
to improve the partnership's distributable cash flow immediately.
The transaction will also lower its relative exposure to the
Great Lakes, which is presently experiencing earnings and cash
Finally, TC PipeLines has established a track record of providing
stable and growing cash distribution to unitholders. The
partnership has a proven history of distribution growth with 13
hikes in as many years.
But at the same time, TC PipeLines is poised to suffer from lower
transportation rates on Northern Border and substantial
uncontracted capacity at Great Lakes. Moreover, with natural gas
fundamentals remaining volatile, we do not see any major price
upside for TC PipeLines stock during the next few quarters.
Stocks That Warrant a Look
While we expect TC PipeLines to perform in line with its peers
and industry levels in the coming months and advice investors to
wait for a better entry point before accumulating units, one can
Delek Logistics Partners L.P.
Summit Midstream Partners L.P.
) as good buying opportunities. These energy pipeline
partnerships - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from
DELEK LOGISTICS (DKL): Free Stock Analysis
SUMMIT MIDSTRM (SMLP): Free Stock Analysis
TC PIPELINES (TCP): Free Stock Analysis
TRANSCDA CORP (TRP): Free Stock Analysis
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