by Aaron Levitt | April 3, 2013 12:24 pm
Things aren’t getting any easier for TransCanada (NYSE:TRP) in its quest to gain approval for its massive Keystone XL pipeline expansion.
The project — which was designed to funnel Canadian oil sands crude downward toward refiners on the Gulf Coast — has been fraught with lawsuits, protests and full-on rejections from the Obama administration. Since then, the construction of the pipeline has been split into pieces, and phase 4 — the part crossing the border from Canada — still remains in review.
That review is getting a bit more complicated after recent events. A recent “major” pipeline rupture is throwing a wrench in TransCanada’s spokes and could once again put the project in jeopardy. For investors, it’s the fall of 2011 all over again … and that could lead to opportunities in TRP.
The latest issues with the Keystone project actually has nothing to do with TransCanada, but major integrated oil and gas producer Exxon Mobil (NYSE:XOM).
Over Easter weekend, the company’s Pegasus pipeline ruptured underground in a subdivision near the town of Mayflower, Ark. The leak forced the evacuation of 22 homes and fouled parts of town. Exxon had no specific estimate of how much crude oil had spilled, but the company said 12,000 barrels of oil and water had been recovered, though it didn’t break out how much was oil and how much was water.
The pipeline carries roughly 95,000 barrels per day of crude oil from Patoka, Ill., to Nederland, Texas. Aside from the potential environmental damage, the issue is that the crude oil carried by Pegasus is very similar to the kind that the Keystone XL will transport. The question is whether this type of fuel is more corrosive and difficult to clean up than conventional crude.
Environmentalists cited the incident as one more reason why Obama should reject TransCanada’s permit.
The episode in Arkansas came just days after a Canadian Pacific (NYSE:CP) train carrying bitumen-based oil derailed in western Minnesota, spilling an estimated 30,000 gallons of crude. This follows the EPA ordering Enbridge (NYSE:ENB) to perform additional dredging and cleanup in Michigan’s Kalamazoo River, stemming from a July 2010 rupture of a pipeline that also carried heavy crude. More than 843,000 gallons spilled during the leak.
According to the Pipeline & Hazardous Materials Safety Administration, the U.S. saw 364 spills from pipelines last year that released about 54,000 barrels of oil and refined products. A “spill” is defined as any incident in which more than five gallons of fuel are leaked.
All in all, these incidents have put the spotlight right on the Keystone and its approval. Already, environmental groups such as the Sierra Club have put the pressure back on the Obama administration to deny the permit.
Rep. Ed Markey of Massachusetts summed up the position in a statement that read, “Whether it’s the proposed Keystone XL pipeline, or … (the) mess in Arkansas, Americans are realizing that transporting large amounts of this corrosive and polluting fuel is a bad deal for American taxpayers and for our environment.”
While staunch environmentalists have used the recent Pegasus “disaster” as a rallying cry against the Keystone, the truth is the two pipelines are completely different.
First, the idea that bitumen-based oil is more dangerous to ship via pipeline is simply not true. Already, there are plenty of pipelines that carry heavier or sour crude oils across our nation. That type of crude oil is almost identical to oil sands-produced crude.
Secondly, there is a huge difference between the style and ages of the two pipelines. The Keystone is poised to be the most technologically advanced pipeline in U.S. history and will be outfitted with state-of-the-art safety features. Already, TransCanada has agreed to 57 new safety procedures including burying the pipeline deeper, installing more shut-off valves and increasing the frequency of pipeline inspections. The Keystone XL also will use technology that instantly recognizes leaks and immediately shuts down oil flow.
Exxon’s pipeline was built in 1940s, under a different set of federal standards and regulations. In fact, about half of America’s 2.3 million miles of pipeline were built more than 40 years ago. Perhaps the best way to minimize leaks is to replace this old and decaying network with modern pipelines — such as the Keystone.
Overall, the spill can be seen as a wake-up call for the need to improve and repair our aging infrastructure.
But for investors, any weakness in TransCanada’s shares as a result of this recent issue (or in general) should be seen as a buying opportunity to add one of the nation’s largest pipeline operators.
The Keystone’s eventual approval would just be icing on the cake.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2013/04/watch-for-an-exxon-discount-on-transcanada/
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