In the Canadian energy infrastructure space, TC Energy (TSX:TRP) continues to experience share price declines. Investors are continuing to discount future cash flows amid worries primarily around counterparty risk in the energy sector, particularly oil and gas producers.
The degree to which the correct amount of counterparty risk is being priced into TC Energy’s stock is the key question I have. It appears the market is preparing for some sort of Armageddon in the entire Canadian energy industry. This scenario may or may not play out. The number of defaults and/or contract modifications with energy transportation companies remains unknown.
Oil producers who will ultimately default are also incentivized to pay their pipeline companies as long as possible.
The energy production business involves both the extraction of oil, gas or other products, as well as the eventual shipping of said energy to refiners and other companies further down the supply chain.
In order for an oil and gas company to receive payment for their products, this product must be transported. This makes pipelines the first expense paid by most producers, as keeping energy flowing and out of internal storage is key to at least bring in some revenue to cover variable costs.
For investors in companies like TC Energy, I want to point out that things likely have to get a lot worse before we worry about counterparty risk on a mass scale. I would recommend that investors consider the value proposition a stock like this provides.
Invest wisely, my friends.
