TransCanada and the Keystone XL: Too Little, Too Late?

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The last six years have been a quite a mess for midstream firm TransCanada (TRP) and its much-maligned Keystone XL pipeline.

The massive infrastructure project, which was originally designed to move crude oil from Canada’s vast oil sands downward toward refineries in the Gulf, has been stuck in a quagmire of bureaucratic red tape. Various protests, regulatory commissions, lawsuits and other issues have caused the project to be stalled for what seems like an eternity.

transcanada-trp-stockAnd while it looked like the project would forever be “kicked down the road,” Congress is taking action. The Republican-controlled House approved a bill on Friday to complete the fourth phase of the pipeline, and the Democrat-controlled Senate, after long delays, is expected to vote this week.

Things are looking like they are heading in the right direction for the massive Keystone XL infrastructure project and potentially TRP stock.

But don’t get your hopes up just yet.

There are still plenty roadblocks awaiting the Keystone XL, no matter what happens in Congress. Buying TRP stock and banking on the oil sands project based on the news could be a tad shortsighted.

Six Years of Keystone XL Delays

Since 2008, the main issue for TransCanada’s Keystone XL project has been the border crossing from Canada into the U.S. by way of Nebraska. This piece of the project requires a State Department review and presidential approval and so far that yea or nay hasn’t come — despite years of waiting in limbo. The issue has been the subject of various environmental groups’ ire as well as various legal and government inquisitions.

On Friday, the U.S. House of Representatives voted 252-161 to authorize the building of the Keystone XL pipeline. The bill basically would override the president’s indecision and get the ball rolling on the border crossing. Both the southern and northern legs of the pipeline are already functioning and in some instances transporting crude.

TRP shares were up about 1% in after-hours trading on the news — which really isn’t that much considering this is one of TransCanada’s biggest projects. Well, there is always a catch.

In this case there are several catches.

There are plenty of political hurdles for the Keystone XL to overcome, the biggest of which is getting through the Senate. Legislators there will begin debating the House’s bill on Tuesday. Unfortunately for Republicans, the Democrats control the Senate until January. Analysts predict that the 100-member Senate is still one vote shy of the 60 needed for passing the Keystone XL.

Even if it does pass the Senate and arrives on President Obama’s desk, it doesn’t mean that it will get signed into law. In fact, Obama has pretty much said he’ll veto it and will only OK the project after the completion of a long-delayed State Department review.

As if the federal government’s fighting wasn’t enough, several states have a say in the Keystone XL and Nebraska is the biggest of them all. A court decision there effectively overturned legislation that allowed the Keystone XL’s pipeline route to be approved by the governor rather than state’s Public Service Commission.

The state Supreme Court will rule within weeks on whether the Nebraska Public Service Commission — which also regulates things like telephone poles, taxi cabs and grain bins — will need to review the pipeline before it can cross the state. Essentially, all this congressional infighting could all be for not, if Nebraska says, “No, thank you.”

As if that wasn’t enough, the energy sector may not need the Keystone XL anyway. As the project has been delayed by six years, energy producers have found other ways to ship crude oil.

Other repurposed pipelines and crude-by-rail operations, which don’t require presidential border approvals, have already begun shipping plenty of Canadian crude southwards toward the Gulf. According to ARC Financial, the amount of Canadian crude processed at Gulf Coast refineries will nearly double to 400,000 barrels a day in 2015 due to these measures.

Energy producers simply don’t need to book capacity space on the Keystone XL pipeline. Even original backers of the project, such as Continental Resources (CLR), have voiced opinions over the years that the mega pipeline is no longer needed at all.

No Real News for the Keystone XL

At first blush, the House approving the Keystone XL to be built is great news for the massive infrastructure project. Unfortunately, the news just brushes the surface. There are still too many balls up in the air to actually be convinced that TransCanada will have a fully operational oil sands pipeline here in the future.

Odds are it won’t.

And investors shouldn’t play those odds. Rushing out to buy TransCanada stock based on Congress’s actions may not be the best decision an investor can make. Even more so, when you consider that costs for the project due to delays has doubled to a whopping $8 billion. That’s becoming some serious coin for a project that was originally going to be funded from cash flows and cash on hand.

While TransCanada continues to plod along with the Keystone XL, rivals like Enbridge (ENB) continue to find workaround to the rules and move more oil sands crude southward. Ultimately, ENB may be a better buy than TRP — especially if the Keystone finally gets denied or kicked down the road even farther.

Bottom Line

Despite the action, the Keystone XL most likely won’t be built — at least not while Obama is president. Investors shouldn’t bank on getting any sort of bump in TRP stock because of it.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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/2014/11/keystone-xl-trp-transcanada/.

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