Time To Buy Enbridge and Sell TransCanada

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For Canadian midstream firm TransCanada (TRP), its Keystone XL pipeline has been relatively a total disaster. The massive project — which is designed to ship Canadian oil sands crude southward — continues to be put on hold. Various lawsuits, Presidential committees and bureaucratic red-tape have taken hold, preventing TransCanada from finishing the piece of energy logistics infrastructure. For longer suffering TRP stock investors, Keystone XL doesn’t look like it will ever fully get up and running.

Meanwhile, cross-town rival Enbridge (ENB) continues to laugh all the way to the bank — even when it comes to shipping oil sands crude southwards.

ENB and its master limited partnership subsidiary Enbridge Energy Partners (EEP) have been making all the right moves in the midstream space. ENB and EEP have even managed to get government backing on several key future pipelines designed to move oil sands crude.

For investors, the choice is clear: When making a bet on Canada’s midstream players, ENB is the winner.

ENB Wins Again

While TRP has been struggling to gain approval for the cross-border section of the Keystone XL, ENB has quietly figured out a solution that will allow them to ship oil sands crude down towards the refineries in the Gulf. No Presidential approval necessary.

For ENB, the key was that it has two pipelines in place that are roughly adjacent to each other.

Enbridge’s Alberta Clipper pipeline was designed to be a Keystone XL rival — shipping oil sands crude from Alberta over the 49th parallel and into the Gulf. Like the Keystone, the Clipper pipeline is awaiting government approval to cross the border.

Here’s where it gets interesting for ENB and problematic for TransCanada.

Enbridge’s currently operational Line 3 pipeline already crosses the border and has all the necessary clearances to ship crude back and forth between Canada and the U.S. So, Enbridge is planning on building several interconnections on either side of the border. These interconnections will allow ENB to transfer the oil sands crude from its Alberta Clipper to Line 3 in order to cross the border. Then the interconnections will move the bitumen back to the Clipper on the other side.

The beauty for ENB is that adding these interconnections will require little to no additional capital expenditure and zero additional permits from the U.S. State Department. Even with that in mind, internal memos show that the plan has the State Department’s blessing. The end result is that the Alberta Clipper will be able to increase its flow by around 120,000 barrels per day.

ENB Has Won Before

However, this isn’t the first time that ENB has beaten TRP to the punch.

When the Keystone XL first began to flounder, ENB proposed the Northern Gateway pipeline that would ship oil sands crude westward to British Columbia. From here that bitumen would be shipped to emerging Asia for processing. The Canadian Government Northern loved the Northern Gateway pipeline project and fast-tracked it through the approval process.

At the same time, while TransCanada has struggled in the Bakken and North Dakota, Enbridge has recently won approvals for new crude-by-rail terminals to tie into its existing pipeline network, which is actually larger than TRP’s in the first place.

Sell TRP, Buy ENB

With Enbridge basically beating TransCanada on every front, the clear winner in the battle of Canadian midstream players is ENB stock.

The recent plan to begin shipping bitumen over an already existing pipeline will only have oil sands producers choosing ENB over its rival for their energy logistics needs. No need to wait until TRP comes up with a solution or gains approval for the Keystone XL pipeline, which will still mean more business and earnings at Enbridge.

As for that Enbridge earnings growth, investors are paying the same for both EB and TRP stock. Both stocks trade at a forward price-to-earnings ratio of around 22. While TRP does offer a higher dividend, Enbridge has been the winner on the dividend growth front. The midstream firm has managed to increase its dividend by about 13.9% over the last five years. At the same time, Enbridge has been using its MLP more effectively, in terms of drop-downs, than TRP has TC PipeLines (TCP). So, Enbridge has tax-advantaged distributions.

All in all, investors looking for more growth from their midstream investments may want to consider swapping out of TRP and into ENB stock. In the long run, ENB should translate to bigger gains.

Disclosure: None

Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/enbridge-enb-eep-trp-tcp-keystone-xl/.

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