by Aaron Levitt | January 16, 2014 10:33 am
The massive TransCanada (TRP) Keystone XL pipeline extension, long in limbo over environmental concerns, might finally get a nod, and soon.
Environmental activists and pundits have pressed President Barack Obama’s hand over the 1,179-mile pipeline that will cross the border from Canada into North Dakota. This border crossing has been the main bone of contention in the entire 2,151-mile Keystone system that will ultimately carry oil all the way down from Canada’s oil sands and into the Gulf Coast, and has caused the project to wallow sans approval for roughly five years.
However, Canada has given the U.S. an elbow today, with Canadian Foreign Minister John Baird, telling the U.S. Chamber of Commerce that “the time for a decision on Keystone is now.”
The prospects for approval are more promising than not. An early March 2013 draft of the final environmental impact study by the State Department showed that the pipeline didn’t have much influence of climate change or the environment. This was one of the major sticking points in the approval process, and TransCanada estimates that the final draft of the paper will support a similar conclusion.
Once that study is released, the project’s 90-day national interest determination clock begins ticking, and the Obama administration will have to come to a conclusion. That should happen by the beginning of the second quarter.
At the same time, TransCanada isn’t waiting around for the outright OK. The firm has already begun construction on the various southern legs of the Keystone that don’t require presidential approval; those will begin transporting crude oil by 2015 (though that timeline could be pushed back further). As for crossing the U.S.-Canadian border, TRP has begun exploring using a combination of rail and pipeline. Railways don’t require presidential approval and ironically would actually emit more emissions that the originally pipeline plans.
Either way, the Keystone XL — in some form or another — is coming to prairie near you. And that could mean some big things for several stocks. Here are some of the biggest winners.
The obvious play is all of this mess is TRP stock. The firm has sunk billions into developing the project, and an approval would send shares flying. More importantly, the Keystone’s steady flow of crude oil are just the kind of assets that pipeline owners love — i.e., they generate huge cash flows.
Cash flows from the completed Keystone XL will be almost immediately accretive to TRP shares because the dragged-out approval process has allowed TransCanada to essentially save up enough cash to fund/build the project outright. Plus, TRP doesn’t plan on issuing too much debt to make it happen.
Aside from the potential capital appreciation in TRP stock, investors could be treated to some hefty dividend increases from the pipeline firm. Already, TransCanada yields a very healthy 3.9%.
Canadian heavy oil and tar sands producers have seen their profits diminish as the lack of sufficient infrastructure has curtailed demand for Western Canadian Select (WCS) crude. The fracking boom creating oodles of lighter, easier-to-refine WTI crude oil isn’t helping either.
The Keystone XL will eliminate many logistics issues, and producers in the oil sands should immediately see a bump in price for their production when it starts flowing.
The biggest winner could be Suncor Energy (SU). The company first pioneered drilling in the oil sands back in the 1960s and has continued to amass a large acreage position in Alberta. Hindering that position has been the huge disconnect between WCS and WTI crude oil, and profits at SU continue to be muted. However, if the Keystone is approved, Suncor should be able to boost profits and see its shares improve.
Integrated giant Exxon Mobil (XOM) actually has a lot to gain by having the Keystone XL approved.
First, XOM’s refineries in the Gulf are equipped to handle the heavy, sour crude that will be pumped downwards from Alberta. And even if the spread between WSC and WTI returns to a more historical range, XOM should still capture plenty of refining margin.
The other ace up Exxon’s sleeve is that it owns the bulk of Canadian oil sands producer Imperial Oil (IMO) — currently 70% of the shares outstanding. Imperial’s Kearl project in Alberta promises to be a monster and is already pumping out about 110,000 barrels per day from the oil sands. However, Exxon and Imperial estimate that they should be able to produce roughly 345,000 barrels per day by 2020. That could mean some hefty profits at XOM as it produces then refines all of that WCS crude oil.
Already winning big on the margin front, the nation’s largest independent refiner Valero (VLO) could be a big beneficiary of the Keystone XL’s approval.
Like Exxon, Valero’s refiners in the Gulf are some of the best equipped to handle the Canadian crude as they have been typically been fed by imports from Mexico and Venezuela. Valero has already committed to taking at least 100,000 barrels a day — roughly 20% of initial capacity — from Keystone XL until 2030 and has begun expanding the hydrocracking capacity at these refineries.
Aside from the profit margin potential, Valero has another reason to win from the Keystone — its option to purchase a chunk of it. VLO has the right to buy up to 15% of the pipeline. With its recent pipeline master limited partnership spinoff, Valero Energy Partners LP (VLP), VLO could be setting itself up for a nice tax-advantaged drop-down if the project is ultimately approved. That could result in higher dividends for shareholders down the road.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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