TransCanada May Be ‘Dead Money’ After U.S. Spurns Keystone XL
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 yesterday 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?’”
Chief Executive Officer Russ Girling sought to reassure investors in a presentation today, saying TransCanada is evaluating about C$50 billion ($49.4 billion) in potential projects in its main business areas: oil pipelines, gas pipelines, power and renewable energy.
“Keystone is an important part of our business, but we’re a large business,” he said at a conference in Whistler, British Columbia. “We’ve got a lot of things going on right now. Thankfully, all of those other projects are not attracting the same level of attention as Keystone is right now. We’d never get anything done if that were the case.”
The company’s new projects, which include the largest wind farm in Canada and a long-delayed upgrade at a nuclear plant in Ontario, are expected to boost TransCanada’s operating income by C$2.5 billion by 2015, Girling said. About 26 percent of that growth would come from Keystone XL if the company can win approval and complete the pipeline, 28 percent in power and renewable energy and 44 percent from gas pipelines in Canada and the United States, he said.
Girling said 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. The company said the pipeline might still be ready in 2014 if the U.S. expedites review of its new application.
TransCanada may shorten Keystone XL’s initial path, bringing oil from Montana’s Bakken Shale to refiners in the Gulf of Mexico and removing the need for federal approval, Alex Pourbaix, president of the company’s energy and oil pipelines division, said in a telephone interview today.
‘Not Just Keystone’
“This company is not just Keystone XL, we are a $60 billion company,” he said. “Keystone was such a significant capital project that the delay actually gives us an opportunity to advance a number of other projects.”
More delays may lead producers and refiners to abandon the Keystone XL for competing projects, a development that might force TransCanada to scuttle the proposal, Kirst said. Many investors expect the U.S. to approve the pipeline before that can happen.
TransCanada fell less than 1 percent to close at C$41.70 in Toronto. The shares yesterday 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 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 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.
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 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.
Girling said the company may be able to do more than it originally anticipated due to the Keystone delay.
“Up until this time, we didn’t have capacity for any 2012, 2013 projects,” he said. “As we look at our financial capacity now, we perhaps have more capacity for 2012 and 2013 and beyond.”
Opportunities in gas pipeline transmission will grow as companies begin to phase out coal-fired power plants in favor of natural gas, increasing demand for the commodity as well as prices, he said.
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.
Rival Enbridge Inc. (ENB), 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 and refiners, or so-called shippers, continued to signal that they support the Keystone project after Obama’s rejection, Pourbaix said.
“We have heard from all of our shippers,” he said. “None of them were particularly surprised by the statements from the State Department yesterday. At the same time, they’ve indicated they continue to be strongly behind our efforts to permit our entire project.”
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