As part of its growth strategy for 2023, Calgary, Alberta-based TC Energy (CA:TRP, US:TRP) announced last November that it would divest more than $5 billion in assets to help pay for its $34 billion in secured capital projects expected over the next five years.

“TC Energy’s secured capital program is expected to be primarily funded through a combination of increasing cash flows, incremental long-term debt and hybrid capacity, and other sources of capital,” stated the company’s Nov. 29, 2022, press release.

“We expect that any funding requirements exceeding our targeted annual capital expenditure range of $5 to $7 billion will be funded through our flexible $5+ billion divestiture program that is expected to be executed during 2023.” (See company-provided chart below)

On July 24, the company took a big step toward its 2023 divestiture by announcing that it would sell 40% of Columbia Gas Transmission LLC (Columbia Gas) and 40% of Columbia Gulf Transmission LLC (Columbia Gulf) for $5.2 billion.

The buyer? Global Infrastructure Partners (GIP) is a New York-based infrastructure asset manager with more than $100 billion in assets under management. Those assets generate more than US$80 billion annually.

The announcement is good news for TC Energy shareholders as it provides the midstream operator with greater financial flexibility in the years ahead as it works through its backlog of capital projects.

TRP stock down almost 7% since the November strategy reveal. The Global X MLP & Energy Infrastructure ETF (US:MLPX) is up 4.9% in the same time. That exchange-traded fund has an almost 8% portfolio allocation of TC Energy shares.

Considering that discount, does the news make the shares a buy?

Strengthens Balance Sheet

Although TC Energy set its ambitious divestiture target for 2023 as a way to provide it with the financial flexibility it needs to carry out its $34 billion in capital projects by 2026 without leveraging its balance sheet. There is no question the short-term effect is to strengthen its balance sheet, while maintaining control of Columbia Gas and Columbia Gulf.

So, from this perspective, it’s a win/win solution.

In addition, as part of the sale agreement to GIP, the two companies will share in future costs for annual maintenance, modernization, and expansion of the two systems. With a deep-pocketed partner like GIP, TC Energy wouldn’t have to reduce or eliminate capital projects on the drawing board.

At the end of Q1 of 2023 (March), the company had net debt of $59.3 billion. The 40% divestiture cuts net debt to approximately $54.0 billion, or 104% of its current market cap.

For consumer discretionary investors, that’s still very high. However, for midstream operators with large capital projects on tap, it’s a reasonable amount. Any reduction in leverage without losing control of significant assets such as the gas pipelines ought to be considered a win.

“While the headline valuation is likely underwhelming, the deal shores up the balance sheet,” The Globe and Mail reported BMO Capital Markets analyst Ben Pham’s comments.

How’s TC Energy Made Out With Columbia Investment?

The company acquired Columbia Pipeline Group in March 2016 for US$13.0 billion, which included the assumption of US$2.8 billion in debt.

“[Columbia’s] attractive and inimitable portfolio of FERC [Federal Energy Regulatory Commission]-regulated natural gas transmission assets, catering to one of North America’s most prolific supply basins, rendered it a natural acquisition target for any entity seeking entry into or scale within this market,” Hart Energy reported Jeffries equity analyst Christopher Sighinolfi’s comments at the time.

At the time of the deal’s announcement, the price paid by TC Energy in Canadian dollars was $16.9 billion. The sale of the 40% values the assets at $13 billion (1 USD = 1.3172 CAD), or $4 billion less than what it paid.

Of course, it has generated income for the past seven years. In Q1 2023, the Columbia Gas and Columbia Gulf pipelines generated US$395 million and US$59 million in earnings before interest, taxes, depreciation and amortization (EBITDA).

On an annualized basis, that is $2.4 billion, or an annual return on invested capital (ROIC) of 14.2%. For long-lived assets like these, that’s a reasonably healthy ROIC.

Of course, now that it’s sold 40% of these assets, it loses almost $1 billion in annual EBITDA from its income statement.

Is TRP a Buy?

Of the 20 analysts covering TRP stock, just seven rate it ‘overweight’ or an outright ’buy’, with 10 on the fence with a ‘hold’ and three an outright ‘sell’. However, the median target price of US$45.05 suggests there is still upside expected from its shares over the next 12 months.

Investors will learn more about the ramifications of the transaction when TC Energy reports its Q2 2023 results on July 28 before the markets open.

Down nearly 10% over the past month, there remains skepticism from analysts that its growth plans are on the right track. It makes sense for investors to wait until after it reports earnings to buy TRP stock when more divestiture information is available.

This article originally appeared on Fintel

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