(Reuters) Shares of TC Energy fell nearly 5% after the Keystone pipeline operator said it would spin off its liquids business to focus on transporting natural gas.
The spinoff, combined with TC's announcement that it will sell a 40% stake in its Columbia Gas Transmission and Columbia Gulf Transmission pipelines, will help TC reduce its high debt levels.
But TD Securities downgraded TC to "hold" from "buy", saying it was skeptical the spinoff would create value.
"We see execution risk introducing uncertainty and potentially distracting (TC) from its existing strategic priorities," TD analyst Linda Ezergailis said in a note.
Shares in Toronto plunged 4.4% to C$45.21, touching a seven-year low.
"There's blood in the water, the stock has already been going down on the back of the Columbia transaction, so I think there's some (selling) piling on," said Ryan Bushell, president of Newhaven Asset Management, a TC shareholder.
Bushell said TC's new focus after the spinoff on natural gas and power is attractive to him, however, given the expansion of liquefied natural gas export capacity in the United States and increasing electrification.
TC Energy shares sink on plans to spin off oil pipeline business
Once the liquids business has spun off by late 2024, subject to a shareholder vote, it will raise C$8 billion in debt to repay debt at TC.
TC CEO Francois Poirier said TC needed to sell another C$3 billion in assets during the next 18 months to reach its 4.75 times debt to EBITDA target. TC had 5.4 times debt to EBITDA last year and is aiming to reduce that to 5 times this year.
The TC share sell-off reflects a re-rating after the company made the Columbia deal at a lower price than some expected, and now plans a spinoff carrying more debt compared to EBITDA than some U.S. peers, said Brandon Thimer, equity analyst at First Avenue Investment Counsel, a TC shareholder.
Poirier said the breakup into two listed companies allows them to pursue more opportunities for growth that exceed the ability of one company to do.
"It's been a busy week but an extremely transformative one,” Poirier said.
National Bank of Canada upgraded its rating of TC to "outperform" from "sector perform".
TC's Keystone pipeline in December spilled more than 14,000 barrels of oil in Kansas. The liquids business spans over 3,000 miles of infrastructure, which transports Canadian crude to U.S. refineries.
Morningstar analyst Stephen Ellis said that the 2021 cancellation of TC's proposed Keystone expansion, following U.S. President Joe Biden revoking a key permit, may have played a role in the company deciding to spin off its oil business.
