Pipes intended for construction of the Keystone XL pipeline are shown in Gascoyne, N.D. on Wednesday April 22, 2015. THE CANADIAN PRESS/Alex PanettaAlex Panetta/The Canadian Press
Rashid Husain Syed is a Toronto-based journalist, consultant and energy analyst who lived in Saudi Arabia for a quarter of a century.
The writing is on the wall. The fossil-fuel industry is under increasing pressure. Its future is uncertain, and the industry knows it – well. It is now beginning to play things safe.
The announcement by TC Energy Corp. TRP-T last Thursday that it will split into two separate companies, and spin off its crude oil pipelines business, needs to be seen from this perspective of the changing industry environment.
The movement to focus on environmental, social and governance factors has been gaining traction with investors, and net-zero regulations worldwide have cast a pall on the future of emissions-heavy industries.
It’s only a matter of time before traditional fossil-fuel companies shift their business models accordingly. This applies even more so to TC.
Despite boasting a large, approximately 4,900-kilometre-long oil and liquids pipeline infrastructure and moving roughly 20 per cent of Western Canadian crude oil exports to key refining markets, that part of the business has long been troublesome for the company.
Even before the industry’s current pressures, oil was a political lightning rod for TC. That portion now comprises just 12 per cent of the company’s earnings, as it strains under a heavy debt load.
Analysts may question the separation, but it’s not hard to see how the cerebral gears have been turning within the TC brain trust: It may be the least bad move out of a rotten hand.
Make no mistake, this is no equal separation. With TC’s decision to retain the name of the company only for its non-pipeline operations, TC is clearly trying to distance itself from its traditional core business of transporting hydrocarbon liquids along pipelines.
The decision follows a similar one by miner Teck Resources Ltd. TECK-B-T, which has embarked on an ESG-focused split between its metals and coal units.
The lack of interest by investors in ESG-unfriendly sectors seems to have pushed TC toward its split. Although chief executive officer François Poirier insists investors are not shying away from the pipeline industry, he conceded, “It’s just that there’s been so much growth on the gas and low-carbon side of the business.”
Moving to cleaner energy is now a target. Analysts largely concur, even if some of them question how such a strategy is appropriate for TC’s specific situation.
The company has been under scrutiny by analysts and credit-rating services for its significant debt load and cost overruns on the Coastal GasLink project in British Columbia. In a bid to reduce the debt load, on July 24, the company announced plans to sell off a 40-per-cent stake in its Columbia Gas Transmission and Columbia Gulf Transmission systems in the United States for $5.2-billion, a relatively low valuation that screams desperation.
Announcing the split into two companies, Mr. Poirier said he also hopes to make an additional $3-billion in divestitures between now and the end of 2024. He said the funds will be used to pay down debt and clear the way for the growth of the two newly separated companies.
But a portion of TC’s long-term debt is also to be transferred to the newly formed liquids pipelines company on a cost-effective basis. Analysts have questioned how exactly this helps with the debt situation.
Even so, the split may well be the wisest choice – or at least not the worst one. Oil is not some crown jewel for TC.
The company’s oil business is marked by a bitter, decades-long and high-profile saga that spanned two prime ministers and three U.S. presidents. The ultimate cancellation of the 1,900-km-long Keystone XL pipeline project – which was set to carry 830,000 barrels of oil sands crude a day from Alberta to Nebraska – turned out to be a major setback for TC’s future ambitions.
The end of the project came amid another cancellation that was also politically fraught and expensive: that of TC’s proposed Energy East pipeline, which was to carry Alberta crude to Canada’s East Coast.
In announcing the split of the company last Thursday, Mr. Poirier said the decision was the result of a two-year strategic review. The debt load on TC and the pipeline debacles must have weighed heavily on the outcome of the review process.
Meanwhile, the energy world has moved a long distance since the Keystone XL pipeline was proposed in 2008. The movement toward cleaner energy is slowly but surely gaining traction. Who can fault TC for trying to tap some of that potential?