Bloomberg News

TransCanada May Be ‘Dead Money’ After U.S. Spurns Keystone XL

January 25, 2012

Jan. 19 (Bloomberg) -- TransCanada Corp. may lag other energy-infrastructure companies as it seeks new growth prospects following President Barack Obama’s rejection of its Keystone XL oil-sands crude pipeline.

The $7 billion project had the potential to add $10 a share to TransCanada’s stock price in 2012 and continue the transformation of the Calgary-based company from a gas and nuclear utility to an oil-pipeline powerhouse, Carl Kirst, an analyst with BMO Capital Markets in Houston, said in a telephone interview.

“If the rejection is permanent, the stock becomes dead money for a time and the company may have to reposition for investors,” he said. “The question would be, ‘When does TransCanada come forward with enough projects to convince people that yes, indeed, there is growth on the horizon?’”

TransCanada will reapply for a U.S. permit to build the 1,661-mile (2,673-kilometer) pipeline after adjusting the route to avoid environmentally sensitive regions in Nebraska, Chief Executive Officer Russ Girling said in a statement yesterday. The company said the pipeline might still be ready to open in 2014 if the U.S. expedites review of its new application.

“While we are disappointed, TransCanada remains fully committed to the construction of Keystone XL,” Girling said. “Plans are already underway on a number of fronts to largely maintain the construction schedule of the project.”

Patience Stretched

More delays may lead producers and refiners to abandon the Keystone XL for competing projects, a development that might force TransCanada to scuttle the project, Kirst said. Many investors expect the U.S. to approve the pipeline before that can happen.

TransCanada fell 1.1 percent to close at $41.89 in Toronto. The shares earlier fell as much as 4.8 percent, the most since May 2010.

Since 2006, TransCanada has poured many of its resources into the Keystone project because potential profits from oil pipelines far outstrip those in its natural-gas and power- transmission businesses, said John Stephenson, who helps manage $2.7 billion for First Asset Investment Management Inc. in Toronto.

“The most compelling story in the value chain is in oil transportation, not natural gas,” said Stephenson, whose funds own more than 1.5 million TransCanada shares. “Unfortunately for TransCanada, this was going to be their big push.”

New Projects

New gas pipelines in Mexico and the Midwest helped TransCanada boost operating income 18 percent in the third quarter, but none of those opportunities compare to the profits that would flow from the Keystone expansion, Stephenson said.

Keystone XL is the second leg of a $12.5 billion pipeline project planned to move crude from Alberta’s oil sands to U.S. refineries near Chicago and on the Texas Gulf Coast. TransCanada began operating the first leg of the pipeline, which brings oil from Canada to Illinois plants, in early 2011.

Revenue from oil pipelines made up less than 10 percent of TransCanada’s revenue in the third quarter, according to data compiled by Bloomberg. The rest came from the company’s gas pipelines and electricity businesses.

The price of gas has dropped 44 percent in the past 12 months as producers used hydraulic fracturing and horizontal drilling to tap oil and gas locked in shale rock formations across the country. Interest meanwhile has waned in expansions of nuclear power plants, in which TransCanada has invested, after reactors in Fukushima melted down after a March 2011 earthquake and tsunami in Japan.

Limited Growth

As a new application awaits approval, TransCanada will face limited growth prospects from the few projects it has pursued alongside the Keystone XL in nuclear power and renewable energy, said BMO’s Kirst.

TransCanada announced Dec. 20 that it would buy nine solar power plants in Ontario for C$470 million ($464.7 million) and continues to develop Cartier Wind, Canada’s largest wind project. Bruce Power LP, a closely held nuclear plant which TransCanada co-owns, is expected to bring two 750-megawatt units back into service this year after a five-year renovation project.

Since the Obama administration announced Nov. 10 it would delay a decision on granting a permit to the Keystone XL project, TransCanada has lagged peers in the so-called midstream business of transporting oil and gas in pipelines, according to data compiled by Bloomberg.

TransCanada Lagging

Rival Enbridge Inc., which is building a pipeline that would compete with the XL, as well as another to ship Canadian crude to the country’s West Coast for export, has risen 4.3 percent since Nov. 9. TransCanada has risen 3.2 percent.

Producers continued to signal that they support the Keystone project after Obama’s rejection, including Jim Mulva, CEO of ConocoPhillips, which holds 30 billion barrels of crude resources in Canada’s oil sands.

“It’s just natural for the oil-sands production to come to the lower 48 states,” he said in comments at a Houston energy conference yesterday, citing refineries that need the oil and the potential jobs the project will bring.

Kerri-Ann Jones, a State Department official who helped review the pipeline project, declined to estimate how long the approval process would take on a new application.

“We are hopeful that this project will be approved in the future based on its merits,” Canada’s Natural Resource Minister Joe Oliver said yesterday.

Canada Seeks Alternatives

Canada, the largest exporter of crude to the U.S., is looking for more markets for its oil to help reduce the discount the nation’s producers receive by shipping 99 percent of the fossil fuel to the U.S., the world’s largest consumer and Canada’s biggest trading partner.

Enbridge’s proposed Northern Gateway oil pipeline would run through British Columbia to the Pacific Ocean, where tankers would carry supplies to China and elsewhere in Asia. The Northern Gateway plan is being investigated at hearings in the western-most province, scheduled to continue into next year, before federal regulators make a decision on whether to approve the proposal.

Northern Gateway faces opposition from environmental and aboriginal groups concerned about damage from a potential spill in rivers that are spawning grounds for salmon. Enbridge says the pipeline will contribute billions of dollars to the Canadian economy.

Prime Minister Stephen Harper “expressed his profound disappointment” to Obama in a telephone call yesterday, according to details of the call provided by Harper’s office.

“Canada will continue to work to diversify its energy exports,” he told the U.S. president.

--With assistance from Jeremy van Loon in Calgary, Jim Polson in New York, Edward Klump in Houston and Theophilos Argitis in Ottawa . Editors: Susan Warren, Theo Mullen

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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