Canada’s Clash of Pipeline Titans

by Aaron Levitt | April 10, 2012 11:24 am

With roughly 95,000 miles worth of crude oil pipelines and additional 328,000 miles of natural gas lines lacing the U.S. countryside, plenty of companies own and operate the pipes. However, two firms continue to make the majority of the headlines: Canada’s leading pipeline duo of Enbridge (NYSE:ENB[1]) and TransCanada (NYSE:TRP[2]) have spent much time in the news lately as both have unveiled ambitious plans for expansion.

TransCanada is probably most known for its reviled Keystone XL pipeline[3] and the political battle that it sparked. Ultimately, the Obama Administration shut that project down, and TransCanada is now in the process of resubmitting it in three parts. Enbridge, along with partner Enterprise Products Partners (NYSE:EPD[4]), created a stir with the announcement it would reverse the flow of the critical Seaway pipeline[5] and send oil toward refiners in the Gulf of Mexico. Since then, Enbridge has been eating TransCanada’s lunch as it continues to launch new pipeline plans aimed directly its rival.

For investors in energy infrastructure companies, this is a battle of titans — and the outcome could have major portfolio implications.

An Energy Backbone Showdown

Enbridge currently owns and operates more than 24,600 kilometers (about 15,300 miles) of pipelines and ships more than 2.2 million barrels of crude oil and various liquids a day. Likewise, TransCanada features a network of more than 57,000 km (35,400 miles) of natural gas infrastructure that taps into virtually all major gas supply basins across North America. The pair forms a huge portion of North America’s energy logistics backbone. So when two major players in a vital industry begin going at each other’s throats, it certainly has portfolio implications.

While the two firms have hardly been friendly throughout their operating histories, the real rivalry began last year with TransCanada’s ill-fated Keystone XL pipeline extension. That massive project was designed to move syncrude from the oil sands of Alberta to U.S. refineries in the Gulf of Mexico. Since the pipeline crossed the U.S.-Canadian border, it needed federal government approval.

However, as pressure from environmental groups mounted, President Obama put his approval on hold. Republicans attempted to force Obama’s hand by including a decision deadline in a critical piece of legislation. Ultimately, the president was reluctant to approve the pipeline without proper studies on the environmental impact, and the project was killed.

TransCanada has since divided the pipeline into three parts[6], two of which won’t require major government support.

At the same time, Enbridge launched its first salvo into the pipeline fight. Just before last Thanksgiving, it purchased the critical Seaway pipeline from ConocoPhillips (NYSE:COP[7]). The pipeline was originally designed to move imported oil from tankers in the Gulf of Mexico northward to Cushing, Okla., the primary U.S. storage depot.

However, after buying Seaway, Enbridge agreed to reverse its flow, enabling it move the glut of shale oil from the storage depot down to the refiners in the Gulf. The company started draining the pipeline in February in order to begin the reversal and is scheduled to provide around 150,000 barrels per day of capacity beginning June 1. That will rise to more than 400,000 bpd after pump additions and upgrades are completed by 2013.

The firm also is planning on adding[8] a second 512-mile Seaway parallel line to increase expansion even more. Essentially, Enbridge’s move undercuts TransCanada’s proposals. Enbridge has already received purchase agreements and usage pledges ranging from five to 20 years from wide range of customers.

But Enbridge didn’t stop there. Almost like a bully kicking sand in TransCanada’s face, Enbridge announced ambitious plan to send Alberta’s syncrude south. It plans to spend $2.8 billion to build another pipeline[9] that will link Flanagan, Ill., to the Cushing hub. That line will connect to an existing route in Canada. The kicker: Since the Flanagan South line won’t cross national borders, it won’t require the same federal approval as Keystone XL.

TransCanada isn’t sitting still, however. The firm recently announced a key natural gas pipeline project in Alaska[10]. That line would eventually meet up with a liquefied natural gas (LNG) export facility on Alaska’s coast. After a deal with the Alaskan government, firms like Exxon (NYSE:XOM[11]) are now looking to monetize their huge natural gas deposits in the region. TransCanada’s pipeline could be huge win for the beleaguered infrastructure firm.

Who Will Prevail?

For investors, this energy infrastructure showdown can have wide-reaching portfolio implications. While it’s really too early to tell who’ll ultimately come out on top, Enbridge seems like it has the upper hand now. The lack of regulatory approval requirements is a huge edge and will enable it gain vital first-mover status.

Investors tend to agree because at around $38.90 now, Enbridge shares are just below their 52-week closing high of $39.52. And these two projects should help continue the firm’s growth trajectory. That’s because pipeline firms are toll collectors, charging customers based on volumes moved. With a potential 585,000 bpd flowing through the Flanagan South pipe and with the twinned Seaway pipeline system moving around 850,000 bpd, the profit potential for Enbridge is monstrous.

The projects will pay for themselves quite quickly and become major earnings contributors in future. Analysts at CIBC World Markets[12] estimate that the two pipelines will increase annual earnings per share by 20 cents by the time they’re fully in service.

While Enbridge shares aren’t as cheap now as its rival — TransCanada can be had for forward price-earnings ratio of 17 — paying 21 times future projected earnings certainly doesn’t make Enbridge expensive by any means. Add this to Enbridge’s market-beating 3% dividend yield, and you have a recipe for success.

For investors, the current choice is clear. Enbridge continues to prove why it’s one of North America’s leading pipeline firms.

As of  this writing Aaron Levitt doesn’t own any of the securities mentioned here.

Endnotes:
  1. ENB: http://studio-5.financialcontent.com/investplace/quote?Symbol=ENB
  2. TRP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRP
  3. Keystone XL pipeline: http://investorplace.com/2012/01/ways-to-benefit-from-scrubbed-keystone-xl-pipeline-eeq-brk-b-cni-unp-trp-gs/
  4. EPD: http://studio-5.financialcontent.com/investplace/quote?Symbol=EPD
  5. reverse the flow of the critical Seaway pipeline: http://investorplace.com/2012/03/keystone-xl-crude-oil-transcontinental-pipeline/
  6. divided the pipeline into three parts: http://www.reuters.com/article/2012/02/27/us-keystone-idUSTRE81Q1II20120227
  7. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  8. planning on adding: http://www.bloomberg.com/news/2012-03-27/enbridge-venture-plans-oil-pipes-to-gulf-as-keystone-blocked-1-.html
  9. to build another pipeline: http://fuelfix.com/blog/2012/03/27/new-pipeline-plan-to-rival-keystone-xl/
  10. natural gas pipeline project in Alaska: http://www.reuters.com/article/2012/03/30/us-idUSBRE82T1BL20120330
  11. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  12. CIBC World Markets: http://www.theglobeandmail.com/globe-investor/enbridge-rally-not-yet-out-of-fuel-cibc/article2384352/

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