TransCanada Corp.: A low-profile, natural gas play

Posted May 11th 2009 2:30PM by Joseph Lazzaro
Filed under: Stocks to Buy

TransCanada Corp. (NYSE: TRP) is a natural gas play with promise, but macroeconomic hurdles and a highly leverage balanced sheet make it suitable for high-risk investors only.

TransCanada is a natural gas transmission and storage company that also owns oil assets and electric power generation assets (including 19 wholly owned power plants), among other operations.

Further, despite relatively low natural gas prices, two recent positives drive the Buy rating: 1) TRP bought the proposed 289-mile Bison Pipeline, which runs from Wyoming's Powder River Basin to North Dakota, and will interconnect two TRP pipeline systems, creating a larger system; and 2) the company bought the Ravenswood Generating Facility for $2.8 billion, giving it exposure to New York's lucrative power market.

The First Call F2009/F2010 EPS estimates for TRP are $1.93 / $2.21.

The risks? Obviously, a failure by the U.S. economy to start to recover by Q3 would weigh on F2009 results, given the correlation between U.S. GDP growth and natural gas prices. Hence, a tight stop has been set.

Stock Analysis: TransCanada Corp is a high-risk stock. Consider buying a 25% position in TRP now; then buy another 25% in three months, if U.S. and Canadian economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your TRP position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $18.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.