by Aaron Levitt | February 5, 2014 6:15 am
Investors in TransCanada (TRP) stock got some much welcome news over the weekend. The much-maligned Keystone XL pipeline expansion received a positive environmental study review from the State Department.
That environmental review is seen as a critical step in the approval process to finally getting the pipeline built and running.
The Keystone XL pipeline will ultimately link Canada’s vast tar sands in Alberta with refineries along the coast of Texas and Louisiana. Unfortunately, the border-crossing piece has proved problematic for TRP stock as it requires Presidential approval — and the President has refused to grant a permit if the project has a negative effect on the environment.
So you’d think the State Department’s positive review would be the greenlight for the Keystone XL and TRP stock? Well … it’s not so simple. There are some pretty good indications that the project may get canceled after all, putting TRP shares’ recent rise at risk. Yet, if things go according to plan, TransCanada shares could surge on the news.
Let’s take a look at some of the pros and cons for TRP stock and the Keystone XL.
A safer way to ship oil sands crude: The main environmental argument against TRP’s Keystone XL is that the pipeline would spur rising oil sands production. But the State Department’s findings showed that higher production from the region is coming — whether or not the Keystone XL is built. Ultimately, that crude oil would be delivered via railway if the TRP’s pipeline isn’t built. With some high profile crude-by-rail accidents occurring lately, the Keystone XL might actually be the safer alternative for the oil sands. That puts TRP stock in a prime driving seat to be the premier logistics play on Canada’s vast oil sands reserves.
Immediately accreditive cash flows: Pipelines are great for one thing — steady and stable cash flows. After all, it’s the volume of oil, not the price that matters to the pipeline owner. The approval of the Keystone XL would be great for TRP stock cash flows and its dividend — especially considering the long, drawn-out approval process has actually been a big “win” for TransCanada shares. As Obama has placed the approval for the pipeline on the back burner, TransCanada has basically been able to save up enough cash to fund and build the Keystone outright. That means, any cash flows from the Keystone XL will be immediately accreditive to the bottom line of TRP stock and master limited partnership (MLP) subsidiary TC PipeLines (TCP).
The approval is just a superficial gesture: While the State Department’s positive environmental review is nice a gesture for TRP stock, TransCanada has already begun construction on the various southern legs of the project that don’t require presidential approval. These pieces of the pipeline expansion are set to begin transporting oil in 2015. As for the critical border crossing, TRP stock has that set in motion as well. TransCanada recently announced that it has made plans to use a combination of rail and pipeline. Border-crossing rail lines don’t require presidential approval and can be built rather quickly. Either way, TRP stock is set to profit from the Keystone XL.
But on the flip side…
We simply don’t need the oil: The world was much different back in 2008, when the Keystone XL was first proposed. Back then, building the massive pipeline seemed like a no-brainer as oil prices were touching $150 per barrel and we were importing a record amount of energy. Fast forward to a world where formations like the Eagle Ford and Bakken are pumping out hundreds of thousands of barrels worth of crude oil daily and the pipeline doesn’t really make much sense. Even original backers of the project — like Continental Resources (CLR) — have voiced opinions that the mega pipeline is no longer needed at all.
Many Americans still don’t want it: Despite being a potential win for the overall economics, a lot of Americans simply don’t want the Keystone XL in their backyards. Currently, only 56% of Americans actually approve of the pipeline. That slight majority does not make the approval decisions any easier. And with mid-term elections around the corner, the pressure could be on for lawmakers to appease voters who oppose the project.
The economic benefits may not live up to the hype: Pick-and-shovel infrastructure projects generally are great boosts to a sagging economy. And the hope is that the Keystone XL will produce a plethora of benefits for the U.S. Unfortunately, some of that boost may not live up to the hype. TransCanada originally said that it will use between 3,500 to 4,200 construction workers to build the Keystone XL. However, opponents to TRP’s plans say that the pipeline will not actually create any real long-term employment gains. Additionally, the many Americans in the middle of the country could be faced with higher oil and gasoline prices as “trapped” WTI crude can be moved more freely. Rising fuel costs is one way to zap an economy real quick.
For TRP stock, the cons against the Keystone XL are very real issues that President Obama will have to weigh when he makes his final decision. Ultimately, a verdict of “no” would send shares downwards.
However, the long-term picture for the project and TRP stock may actually be pretty rosy. The fact that TransCanada has considered the crude-by-rail option and already has portions of the pipeline in construction/completed basically means it’s coming regardless of the president’s actions.
So, should you buy TransCanada stock? Yes, TRP stock and its 4% yield are big buys.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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