Oil and Gas
TransCanada Clears Legal Hurdle for Keystone XL Pipeline
About a decade ago, TransCanada Corporation (NYSE: TRP) announced a new pipeline project called the Keystone XL.
This $8 billion 1,184-mile-long project has been tied up in legal battles ever since.
Many of the landowners in the pipeline’s path hate it. It arguably has more opponents than any other pipeline project.
But now the Keystone XL is finally moving forward.
TransCanada just announced that the U.S. State Department completed its environmental review of an alternative route through Nebraska. It concluded that major environmental damage would be unlikely in the event of a leak.
The State Department also noted that TransCanada has fewer spills than the industry average.
Connecting Canadian Crude
The purpose of the 830,000-barrel-per-day pipeline is to connect the tar sands oil fields in Alberta with the existing Keystone pipeline in Nebraska. This will give Alberta’s crude producers a better price for their oil.
Currently, Western Canadian Select crude trades at a discount of $27 per barrel to West Texas Intermediate. That’s the widest discount since December 2013.
The reason? Existing pipelines are full.
Producers without pipeline capacity use railways to ship crude to U.S. refineries, which is more expensive than using pipelines.
On top of that, crude production at Suncor Energy’s (NYSE: SU) Fort Hills oil sands unit is surging. It’s expected to hit 90% of its 194,000-barrel-per-day capacity by year-end.
Opponents of the Keystone XL point to a lack of customers for the pipeline. A few years ago, that argument might have held water.
But not today. Oil sands producers say their No. 1 issue is lack of pipeline takeaway capacity.
Today, Canada’s crude exports by pipeline amounts to nearly 4 million barrels per day.
But three new cross-border pipelines are soon to be under construction. Besides the Keystone XL, an extension of the Trans Mountain pipeline will soon start construction.
And Enbridge’s (NYSE: ENB) Line 3 Replacement Program will nearly double the operating capacity of the existing line to 760,000 barrels per day.
If all three of these pipelines are completed, Canada’s crude export capacity will balloon to 5.5 million barrels per day.
Where to Invest?
Investors can play the Keystone XL in two ways. From an investment standpoint, I like both TransCanada and Suncor but for different reasons.
TransCanada is finally going to complete the Keystone XL. That will provide an immediate bump to both revenues and earnings.
And TransCanada has a great dividend yield of 5.35%. I expect we’ll see continued increases there as revenues ramp up.
Suncor is probably the best pure play on the Canadian oil sands. Now it can operate its Fort Hills plant at full capacity.
That means higher revenues and greater margins. While not on par with TransCanada, Suncor does have a dividend yield of 3.06%.
I view both companies as oil sector growth and income plays.