The saga surrounding TransCanada’s (TRP) Keystone XL pipeline system is getting a bit ridiculous. After years of delays, setbacks, protests and other headaches, things looked like they were heading in the right direction for the massive infrastructure project and potentially TRP stock.
At the end of January, the Keystone XL pipeline expansion received a positive environmental study review from the State Department. That environmental review was seen as a critical step in the approval process to finally getting the pipeline built and running. That appeared to open the door for TransCanada to begin constructing the pipeline, and approval from the Obama administration was expected to come in just a few short months.
A new court ruling could add nearly a year back onto the approval process, and for investors, it might be time to bid farewell to TRP stock and the much maligned Keystone XL.
Another Hiccup in Nebraska
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 presidential approval and so far that yea or nay hasn’t come … despite years of waiting in limbo.
And limbo just got a little longer.
A court decision in Nebraska has effectively overturned legislation that allowed the Keystone XL’s pipeline route to be approved by the governor rather than state’s Public Service Commission. Republican Gov. Dave Heineman had been an ardent supporter of TransCanada’s pipeline and quickly approved the route in 2013 after legislation was enacted giving him the power to do so. Unfortunately, that approval was deemed “unconstitutional and void,” as depriving the PSC — which also regulates grain warehouses and recreational vehicles — of that power violates the Nebraska constitution.
In short: Judge Stephanie Stacy basically ruled that the approval for the Keystone XL didn’t happen because it wasn’t allowed to happen in the first place.
Analysts estimate that the PSC might decide on another route for the Keystone XL rather than what Heineman initially green-lighted. For TransCanada, that means it could take up to another year before the Keystone XL is finally approved in Nebraska before it reaches Obama’s desk for presidential approval. And none of that even guarantees it will be approved.
Essentially, the Nebraska court decision allows Obama the ability to continue kicking the can down the road and perhaps gives an out to disapprove of the Keystone XL all together. By putting off the final decision, Obama can avoid angering voters in major energy-producing states — just in time for the midterm or even the 2016 presidential elections.
Meanwhile, the court ruling gives him a perfect way to support environmentalists and reject the pipeline project. (“I was going to approve it, but now that it technically didn’t happen in the first place, I have to say no.”)
None of this is good for TRP stock or the Keystone XL extension. Which is why it might be time to say goodbye to TransCanada and its shares.
A Better Bet
The Keystone XL is seen a huge growth engine for the midstream firm. The potential long-term accreditive cash flows were set to be huge as the pipeline began to funnel oil sands crude oil from Alberta down to the Gulf Coast.
However, with the project still being tossed around, that growth potential isn’t going to happen anytime soon. That’s not to say that TransCanada’s other assets aren’t worthy of ownership. TransCanada is one of the largest pipeline operators in North America. But the expected Keystone XL approval has been the main driver of TRP stock for the past few years.
Thus, investors looking for Canadian pipeline growth might want to turn their attention away from TRP stock … and toward rival Enbridge (ENB).
Enbridge features a larger network of pipelines than TransCanada and is also targeting rising oil sands for its future gains. Unlike TRP, Enbridge’s proposed Northern Gateway project won’t flow south, but across Canada into the British Columbia coast for export. The project has already been given approval by the National Energy Board, and despite opposition has a much better chance of getting approved. That fact has many oil sands producers already booking capacity on the Northern Gateway instead of Keystone XL.
And considering that both TRP and ENB stock trade at roughly the same forward valuations (~18 P/E), ENB investors might be getting the better long-term deal as their oil sands pipeline is more likely to be built.
Ultimately, the Keystone XL debacle continues to turn into more of circus each day. For investors, it’s time to pass on TRP stock and move into ENB.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.