TransCanada: What’s Next After The Looming Presidential Veto Of Keystone XL Pipeline?
Summary TransCanada’s Keystone XL has received a majority “yes” vote from Senate, but it will likely get vetoed by President Obama. There are several things the company can do, including asking for remedies under the North American Free Trade Agreement. Further delays, however, will not jeopardize TransCanada’s future as the company has bigger and better projects in its capital program. Last week, the Democrats blocked the passage of TransCanada’s (NYSE: TRP ) Keystone XL pipeline bill in the U.S. Senate, lingering on the house’s discussion over the construction of the project. On Thursday, however, the Republicans — who have favored the pipeline — successfully passed a slightly amended version of the bill with 62 “yes” votes, thanks to the support from nine Democrats. But the bill is still five votes short of 67 required to bypass a presidential veto. The White House has already said that the President is going to use his authority to stop the bill from becoming a law on the pretext of the completion of the ongoing U.S. government review. The proposed 1,179-mile pipeline will carry 830,000 barrels of heavy oil a day from Canada’s tar sands to Nebraska’s Steele City, where it would connect with existing pipelines headed for refineries at the U.S. Gulf Coast. The pipeline will be built with a price tag of C$8 billion and could lift TransCanada’s annual EBITDA by US$1 billion when fully operational. The bill will likely get vetoed by President Obama, but that won’t be the end of Keystone XL. The fact that the project got the green light from the U.S. Senate for the first time since it was proposed in 2008, and a favorable ruling from Nebraska’s Supreme Court earlier this year, could be a harbinger of more positive things to come. It also helps that Keystone XL supporting Republicans now control both houses of Congress. Following the veto, the Republicans can modify the bill and resubmit for another round of debate. The legislative act with two-thirds majority will override the need for a presidential permit. Additionally, TransCanada could opt to seek remedies under the North American Free Trade Agreement (NAFTA), arguing that the rejection of the project is in violation of this historic agreement. The energy chapter of the free-trade agreement stipulates uninterrupted flow of oil, except under exceptional circumstances. Although it is debatable whether such an action would be a desirable for TransCanada, I believe it could certainly have an impact on the senators’ and President Obama’s decision. Alternatively, to avoid all the controversy surrounding the construction of a border-crossing pipeline and eliminate the requirement of a presidential permit — while also giving Canadian oil producers access to the U.S. Gulf Coast — TransCanada could construct a rail loop that would link up U.S. and Canadian crude pipelines. The company has already said that it is mulling the establishment of a rail terminal in Hardisty, Alberta — where the Keystone XL pipelines would have begun — and an import terminal in Cushing, Okla., which is the heart of the U.S. oil storage capacity with access to all the major markets. That said, TransCanada’s future prospects aren’t wrecked by the political wrangling over Keystone. That’s because over the years, Keystone has become less relevant to the company. In fact, Keystone XL is neither the largest nor the most profitable project in TransCanada’s C$46 billion backlog of capital programs. The C$12 billion Energy East pipeline is currently the biggest project in the company’s backlog. The Energy East pipeline would carry as much as 1.1 million barrels of crude oil a day from Alberta to shipping terminals located in eastern Canada, while lifting the company’s annual EBITDA by C$1.7 billion. Analysts believe Energy East could offer better margins than Keystone XL. (click to enlarge) Energy East Pipeline Map, Project Website . Besides the major pipelines, TransCanada also has C$13.2 billion of small- to medium-scale projects, which will gradually come online over the next three years. These projects, the company’s CEO Russ Girling said during the third-quarter conference call, will “provide visible benefits” to the company’s shareholders and will increase EBITDA. Furthermore, TransCanada has also diversified into power generation and gets around one-fifth of its earnings from this business. The company owns around 11,800MW of power generation capacity, serving customers in Alberta, Ontario, Quebec, and the northeastern United States. TransCanada’s 2,480MW Ravenswood Generating Station in Queens, N.Y., is its biggest plant and can handle around 21% of N.Y. City’s peak load. Meanwhile, due to the delays, the Canadian oil sands producers that would have been the biggest beneficiaries of the Keystone XL pipeline — such as Canadian Natural Resources (NYSE: CNQ ) , Suncor Energy (NYSE: SU ) and Cenovus Energy (NYSE: CVE ) — have been using other sources to ship their crude. Consequently, according to latest data from the National Energy Board of Canada, crude oil exports via rail have climbed 11.6% sequentially and 47.1% year over year to 182,059 barrels a day in the third quarter of 2014. Bottom Line The Nebraska Supreme Court ruling on Keystone XL removed a key hurdle in the construction of the project and the recent Senate approval is another step in the right direction. The bill will likely get vetoed by President Obama, but TransCanada will still have several options on the table. Ultimately, despite delays, I believe the pipeline will be built. That said, TransCanada has several other projects in its pipeline that are bigger, better, and less controversial than Keystone XL. TransCanada’s shares have fallen by 10% over the last six months, settling at $44.48 when the markets closed on Friday. The company’s shares are reasonably priced at 23.5 times its trailing 12 months earnings. The shares have been largely priced between 21 and 26 times over the last three years. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) Business relationship disclosure: This article was written by Sarfaraz A. Khan, with valuable contributions from Adnan Mushtaq, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan nor Adnan Mushtaq have any positions in the stock(s) mentioned in this article. The article expresses the author’s own opinions and does not constitute investment advice. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.