Congressional Republicans paved the way for anti-oil factions to claim a short-term victory and provided them oodles of fuel for their fundraising engines by attaching a rider to last fall’s payroll tax bill that would expedite a decision on TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone Gulf Coast Expansion Project, or “Keystone XL.” President Obama sealed the deal this week by rejecting–“without prejudice,” in the very frank words of the Canadian prime minister’s press office–the 1,600-mile extension to TransCanada’s Keystone Pipeline System.
This, a whole lotta headlines and a little more momentum for TransCanada’s stock’s post-five-year-high slide are the sum total of this latest expression of Americanized kabuki. The overwhelming likelihood is that the USD7 billion Keystone XL will get built along the new path agreed by the company and the state of Nebraska. As of this writing none of the shippers committed to using the 830,000 barrels per day capacity on XL have abandoned pipeline.
That will ultimately determine whether it gets built, whether demand still exists. Enbridge Inc (TSX: ENB, NYSE: ENB) and its partner Enterprise Products Partners LP (NYSE: EPD) plan to reverse the Seaway Pipeline, which brings oil from the Gulf Coast to a storage hub at Cushing, Oklahoma. But this project is unlikely to steal customers, at least not yet. Enbridge itself doesn’t view its project as a direct competitor with Keystone XL.
The stock has eased back in 2012 after closing 2011 at a five-year high on the Toronto Stock Exchange (TSX). The stock is down more than 6 percent this year to a Thursday close of CAD41.70. Management is likely to continue its pattern of raising the quarterly dividend by CAD0.02 per share, which it’s done every year since 2007, to bring the 2012 payout to CAD0.44 per share per quarter. At that rate the stock currently yields 4 percent.
Five Bay Street analysts have maintained their outlooks for TransCanada in the aftermath of President Obama’s temporary rejection, among them an “outperform,” a “buy,” a “sector outperform,” another “buy” and a “hold.” One house, FirstEnergy Capital, downgraded the stock to “underperform.” The current buy-hold-sell line is nine-five-two. Standard & Poor’s rates the company A- with a “stable” outlook, while Moody’s rates it Baa1 with a “stable” outlook as well.
TransCanada carries a significant debt load, but not out of line with its peers. Its 45.79 percent debt-to-assets ratio compares favorably to Enbridge’s 48.17 percent. Enbridge, currently yielding 3.1 percent, is trading at a 3.72-to-1 price-to-book ratio, while TransCanada is relatively cheap at 1.82-to-1. If Keystone XL doesn’t happen–which at this point remains an unlikely worst-case scenario–TransCanada will be worse off for the sunk costs, about CAD1.9 billion, and the absence of new revenue come from the effort come 2014.
Management, however, continues to add projects apart from XL, though it is the biggest infrastructure project on the North American docket at the moment. TransCanada continues to diversify its overall asset base, adding or making progress on significant power generation assets during the third quarter of 2011, including 590 megawatts of wind power in Quebec.
Comparable earnings for the three months ended Sept. 30, 2011, were CAD417 million, or CAD0.59 per share, up from CAD374 million, or CAD0.54 per share, in the same period in 2010, on new pipeline and power generation assets as well as higher realized power prices in Alberta. Higher interest expense and lower contributions from its US Power and Alberta Gas Storage units dragged on results. Along with a likely 4.7 percent dividend increase management will report fourth-quarter and full-year 2011 results on or about Feb. 15, 2012.
TransCanada is soldiering on, as management announced yesterday that it will re-apply for a Presidential Permit. In a press release CEO Russ Girling said, “This outcome is one of the scenarios we anticipated. While we are disappointed, TransCanada remains fully committed to the construction of Keystone XL.” Mr. Girling also noted that work is “underway on a number of fronts to largely maintain the construction schedule of the project.” The company “expects” a new application will be evaluated in time for Keystone XL to come online in late 2014.
Management has avoided making any explicit commentary on the process south of the border, though it’s experience on the ground in Nebraska, where it was able to find a solution that satisfied stakeholders across the political spectrum, certainly must compare extremely favorably to stepping into the Washington, DC, swamp. About as controversial as TransCanada’s language has gotten is to label output from the Middle East, et al, “conflict oil,” a turn of phrase perhaps calculated to touch/antagonize social justice buttons among the greens.
Keystone XL won’t solve the North American energy security dilemma. It will not relieve the world of geopolitical stress. It will not bring the per barrel price of oil below USD100 on its own. It will not make you taller, thinner, or wittier, nor will it create all the economic benefits its proponents push. It’s another vital piece in a currently lacking infrastructure puzzle. No one project–fossil fuel, geothermal, tidal, run-of-water, biofuel, wind, solar, nuclear–will solve our energy needs.
At the same time, Keystone XL won’t kill the environment. A fact clearly lost on Darryl Hannah and her compatriots, whose express enemy in their fight is the oil sands, is that the vast majority of carbon emission occurs during the burning phase and not the extraction or production of crude oil. Meanwhile, additional emissions resulting from increased oils sands imports would amount to much less that 1 percent of overall US greenhouse gas emissions. Nor, as has been posited, will oil sands output flowing through XL present a greater environmental danger because of its chemical composition. The type of crude that’ll move through it is already moving all over North America.
The clearest summation of the state of things we’ve come across is the one that came from the office of Canadian Prime Minister Harper, in what’s called among head-of-state press corps “the readout,” this one describing the phone call President Barack Obama made to his counterpart revealing his decision. The prime minister, who last May led his Conservative Party to election wins sufficient to guarantee him his long-coveted parliamentary majority, got his version out first and managed to undermine whatever favor the Obama administration may have tried to curry with greens by pointing out that the decision “was not a decision on the merits of the project” and highlighting an implicit invitation to TransCanada to apply based on the new route.
Mr. Harper’s summary concluded with a diplomatic brush-back pitch: “The prime minister reiterated to the president that Canada will continue to work to diversify its energy exports.”
Had the Keystone XL plan that reached the US State Dept included the route the company has worked out with the state of Nebraska we wouldn’t be discussing this issue today. Construction would be well underway, and the Obama re-elect people would be including it among their pro-jobs/pro-energy/pro-security talking points.
The president, recent economic data lending a beneficial hand to his still-suspect chances for four more years, can afford to come down with environmentalists and against labor on this issue. Had the new claims for unemployment insurance number revealed today been a continuation of an upward as opposed to a downward trend announcing approval of a jobs-creating pipeline project would have worked in his favor.
The conflict between idealism and Realpolitik began playing on these shores long before Nixon and Kissinger went to China. Thomas Jefferson wanted to believe in French popular and intellectual support for the American Revolution. Alexander Hamilton, General Washington’s French interpreter and a key figure in securing the economic and military support of a major European power, also understood that the illiberal despot Louis XVI simply wished to hurt his main enemy, the British Empire and George III.
So President Obama will try to have his cake and eat it, too. If current trends in unemployment insurance claims and hiring persist he’s likely to make out in the bargain.
The really good news is this political stuff may have opened up an opportunity to pick up TransCanada shares–and a reliably growing dividend–on the cheap.
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