Overvaluations Will Crumble As North American Gas Faces Decarbonization

Key Takeaways

• Investor optimism may be misplaced due to underestimated risks from energy transition trends, stricter climate policies, and declining long-term demand for fossil fuels.
  
• Ongoing capital needs, regulatory challenges, and potential contract instability could threaten project economics, asset utilization, and overall financial stability.
  
• Strong asset base, stable earnings, disciplined growth, and ESG initiatives position TC Energy for resilient performance and expanding opportunities in a changing energy landscape.

Catalysts

Operates as an energy infrastructure company in North America.

• Investors may be overestimating TC Energy's long-term revenue and EBITDA growth by assuming that the current surge in North American natural gas demand-driven by LNG export growth, coal-to-gas conversions, data center buildouts, and electrification-will persist at elevated rates, despite mounting global pressures for renewables and potential demand destruction for fossil fuels over the long run.
  
• Market optimism around new project announcements and sanctioned capacity additions may be ignoring structural risks from stricter climate policies and possible future carbon pricing, which could increase regulatory costs and compress net margins for pipeline operators like TC Energy.
  
• There is excessive confidence in the long-term stability of rate-regulated or take-or-pay contracts; however, longer-term secular shifts toward decarbonization and capital flight from fossil fuel infrastructure could result in lower asset utilization and impair TC Energy's ability to renew or replace contracts at current terms, impacting revenues and earnings stability.
  
• The expected cadence of brownfield expansions and the associated capital-efficient returns may prove unsustainable if advancements in alternative energy storage, electrification, or declines in North American gas production reduce system throughput, challenging future revenue growth and project economics.
  
• Investors may be underappreciating the long-term impact of elevated leverage and ongoing capital expenditure needs, especially if future project execution is delayed or faces cost overruns due to regulatory, legal, or stakeholder challenges; this increases the risk profile and could drive higher interest costs, weaker net margins, and potential credit rating pressure.

TC Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TC Energy's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.7% today to 23.4% in 3 years time.
• Analysts expect earnings to reach CA$4.0 billion (and earnings per share of CA$4.01) by about August 2028, down from CA$4.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, up from 16.8x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 12.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

TC Energy Future Earnings Per Share Growth

Risks

• Structural long-term growth in North American natural gas demand, driven by increased LNG exports, electrification, coal-to-gas conversions, and rapidly expanding data center and industrial loads, positions TC Energy to benefit from greater asset utilization and expanded project opportunities-supporting top-line revenue growth.
  
• Robust backlog of brownfield, capital-efficient projects with higher average unlevered after-tax IRRs (up to 12%), take-or-pay contracts, and sanctioned returns underpins predictability in future earnings and supports net margin stability.
  
• Long-lived, regulated pipeline assets and high barriers to entry (including incumbent market positions and customer relationships) enable TC Energy to secure long-term contract renewals, shielding revenues and earnings from competitive and regulatory shocks.
  
• Active balance sheet optimization, marked by successful project execution, deleveraging targets (aiming for 4.75x by 2026), and disciplined capital allocation, improves financial resilience and could support sustained or growing dividends-positively impacting earnings and shareholder value.
  
• Strategic investments in emissions reduction, renewable natural gas, nuclear (e.g., Bruce Power), and ongoing partnerships position the company to access ESG-focused capital, maintain its social license, and diversify revenue streams-potentially leading to steady or increasing net margins over the long term.

Valuation

• The analysts have a consensus price target of CA$73.762 for TC Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$80.0, and the most bearish reporting a price target of just CA$59.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$17.2 billion, earnings will come to CA$4.0 billion, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of CA$68.42, the analyst price target of CA$73.76 is 7.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.