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Playing The Keystone XL Approval

By Robert Rapier on March 28, 2017

President Trump is having a more difficult time than some imagined in reforming the nation’s healthcare system. But I was so confident that he would be able to make progress in another area that I made it the basis for my top prediction of 2017. My prediction stated that President Trump’s “immediate impact will be in the support at the highest levels of government for oil and gas pipelines.”

Two weeks later – during his first week in office – President Trump issued a Presidential Memorandum designed to advance the stalled Dakota Access Pipeline (DAPL). The memorandum also invited TransCanada (NYSE: TRP) to resubmit its application for the Keystone XL Pipeline project. But these two projects have different implications for investors. More on that below.

DAPL Near Operational 

My January prediction was that the stalled DAPL would be completed and that oil would flow through the line this year. According to news reports, despite ongoing vandalism to the pipeline, that oil flow is imminent.

Further, I noted that approval for this project would be a catalyst for the parent company of the DAPL, Energy Transfer Partners (NYSE: ETP). Indeed, within two weeks of President Trump’s executive action to advance the DAPL, ETP had risen by 11%. (Note that units have pulled back during March, which once again presents a buying opportunity for a great company).

Keystone Pipeline Primer

Regarding the Keystone XL Pipeline, the memorandum stated that “The Secretary of State shall reach a final permitting determination, including a final decision as to any conditions on issuance of the permit that are necessary or appropriate to serve the national interest, within 60 days of TransCanada’s submission of the permit application.”

When pipelines cross international borders with the U.S., the State Department is required to determine that the project was in the national interest to grant a permit.

The Keystone Pipeline has been built in several phases. Phase 1 of the pipeline had the capacity to move 590,000 barrels per day (BPD) of crude oil from the Athabasca oil sands in Alberta to hubs and refineries in the US. Phase 1 was granted a permit by the State Department in 2008 and began operating in 2010.  

In 2011, Phase 2 of Keystone connected Steele City, Nebraska to the major oil hub in Cushing, Oklahoma. Phase 3 connected the Cushing hub to Gulf Coast refineries with a capacity of 700,000 BPD and began operating in January 2014. Phase 3 was the project that President Obama famously endorsed from the campaign trail in 2012, promising to “cut through the red tape” and to expedite the project. Neither Phase 2 or Phase 3 required a permit from the State Department. 

The Phase 4 expansion of the Keystone Pipeline is the one the world came to know as the Keystone XL (“XL” stands for export limited.) Like Phase 1, this expansion would add pipeline from Alberta and cross the US-Canadian border. Thus, the State Department was required to issue a permit. The pipeline would have a capacity of up to 830,000 BPD and terminate in Steele City, Nebraska. 

KXL Approved – Now What?

The Keystone XL had been rejected in 2015 (after years of foot-dragging) by President Obama. Following President Trump’s invitation to TransCanada, it resubmitted the Keystone XL permit application on January 26th. Last Friday President Trump – accompanied by TransCanada’s president – announced that the State Department had approved the permit. 

However, investors should play this differently than the DAPL announcement. The difference here is that DAPL was already near completion, and finishing it would provide cash flow this year to Energy Transfer Partners. The Keystone XL Pipeline might not even be built because during the years of delays the economics of building the pipeline have changed.

First, oil prices have plummeted, making it much less attractive to produce Canada’s oil sands. That potentially negatively impacts volumes on the Keystone XL. Further, the Keystone XL was also going to take volumes of oil from the Bakken region, but competing pipelines – like the DAPL – have diminished that need as well.

Thus even if it is built, it isn’t clear that it will provide significant cash flow to TransCanada as long as oil prices remain depressed. By denying the permit, President Obama may have unwittingly saved TransCanada a lot of money on a project premised on high oil prices and insufficient takeaway capacity.

Conclusions

So investors should take no action on TransCanada as a result of this decision. TransCanada is still a great company, and may very well belong in your portfolio. Just don’t buy it because of the Keystone XL decision. 

However, there are plenty of attractive infrastructure plays that will benefit from the pro-pipeline environment of the Trump Administration. Consider a risk-free trial of The Energy Strategist to learn which ones may be right for your portfolio.

Follow Robert Rapier on Twitter, LinkedIn, or Facebook.


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