Ruth Saldanha: Hello, and welcome to our limited time series "The Morningstar Canada Stocks Outlook for 2023," where we will speak with Morningstar equity analysts to find out what they expect in the new year. Today, Stephen Ellis of Morningstar Research Services is here to discuss Canadian energy, a mainstay of the Canadian economy.
Stephen, thank you so much for being here today.
Stephen Ellis: Thank you so much for having me.
Canadian Energy Stocks Had Healthy Results in 2022
Saldanha: How has Canadian energy performed in 2022? Was it in line with your expectations?
Ellis: Yeah. I mean, we think that Canadian energy results were very healthy in 2022 and that reflects the addition of new projects, the highly contracted and regulated nature of the business and they also were able to capture really wide marketing spreads for hydrocarbon for most of the year. Aside from financial results, we also were really positive on the fact that there were a number of agreements which didn't (indiscernible) relating to several shared equity ownership and projects, which we think really reduced investor uncertainty.
LNG is a Key Area to Watch for Canadian Energy Stocks in 2023
Saldanha: Going ahead for 2023, what should investors expect?
Ellis: So, looking ahead for 2023, we think a key area is going to be LNG both in the U.S. and in Canada. The U.S. has been sanctioning a number of new LNG efforts recently, and we've also seen progress in Canada with LNG Canada and most recently, Woodfibre. The other items we'd really like to see more focus on would be the expansion of the renewable portfolios – wind, solar and other credentials, so they can also include stronger ESG related targets as well.
Saldanha: And what are some of the key risks on which investors should keep an eye in 2023?
Inflation and Energy Prices are a Risk for Canadian Energy Stocks in 2023
Ellis: So, I think there are several major areas to watch. The first with high inflation expectations, we want to be sure that projects stay within their budgeted cost. Otherwise, investor returns are going to be extended over a longer timeframe. Unfortunately, with TC Energy's (TRP) Coastal GasLink project, we do expect a material increase to that budget in 2023. So, that would be an area definitely worth watching. Other area is energy prices and spreads have definitely weakened in the last couple of months. So, that is going to curtail those marketing spreads which were a definite tailwind this year.
Two Canadian Energy Stocks Could Raise Dividends in 2023
Saldanha: And what is the dividend outlook for Canadian energy next year?
Ellis: So, despite all the volatility, I think, in the space during a very volatile 2022, we think that dividends remain very strong and very stable. For Enbridge (ENB) and TC Energy (TRP), which are the bellwethers of the space, we expect about 3% to 4% growth in dividends next year. This is definitely lower than it had been in the past. However, the (firm to counterbalance) they have a very robust project slate of projects, so there is required capital investment, and they're trying to ensure that their dividend increases are more sustainable.
Top Canadian Energy Stock Pick
Saldanha: Finally, what's your top Canadian energy pick for 2023 and why?
Ellis: So, we don't think there are too many bargains in this space, unfortunately, at the moment, as the major midstream names we cover – Pembina Pipeline (PPL), TC Energy, Enbridge and Keyera (KEY), all trade around our fair value estimates or slightly above our fair value estimates. So, we'll wait I think for a more broader pullback before making new investments. That said, if we were to pick a favorite, we do like TC Energy primarily because it has a really great LNG position. And so, that is really one of the best growth areas in midstream, we think, over the next couple of years. So, that is a very good project for them. The thing that is really positive about TC Energy is its Mexican gas position. It recently concluded an agreement with the Mexican state regulators and the state-owned entities. So, Mexican earnings are actually expected to more than double over the next couple of years, which for midstream, I mean, that's a really strong result. So, we think TC Energy is definitely one worth keep an eye on for a pullback.
Saldanha: Great. Thank you so much for joining us today, Stephen.
Ellis: Thank you for having me.
Saldanha: More analysts covering Canadian stocks will be joining me to chat about their expectations for 2023. So, stay tuned. For Morningstar, I'm Ruth Saldanha.
