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Despite Keystone controversy, analysts give TransCanada a thumbs-up Add to ...

The Dalai Lama is no fan of TransCanada Corp. But many Bay Street pipeline analysts are.

The Calgary-based pipeline and power company’s huge Keystone XL oil pipeline project, which would build a 2,700-kilometre link between the Alberta oil sands and the refining hub of Port Arthur, Tex., has been the focus of celebrity-spangled protests that have escalated since the U.S. State Department released a positive final environmental assessment of the U.S. portion of the project last month.

With the project now in a 90-day review period before the Barack Obama administration decides whether to give a final go-ahead for the controversial project, a growing list of famous names has joined environmentalists in trying to convince the U.S. president that a pipeline linked to the environmentally questionable Canadian oil sands should be rejected.

A couple of noteworthy Canadians – author Naomi Klein and actor Margot Kidder – were among those arrested in protests outside the White House, and the Dalai Lama entered the fray last week. Tibet’s spiritual leader joined eight other Nobel Peace Prize laureates, including South African Archbishop Desmond Tutu, in calling on Mr. Obama to reject the pipeline proposal.

But despite the growing political firestorm surrounding the $7-billion project, analysts still like TransCanada’s stock. Nine of the 14 analysts tracked by Bloomberg have a “buy” recommendation on the stock, versus four “holds” and one “sell.”

The key for many analysts is the valuation of the shares, which is being held back by the risk that Keystone will fall victim to political pressures and be delayed or rejected. TransCanada’s price-to-earnings multiple of 17.1 – based on analysts’ consensus earnings forecast for 2012 – is a far cry from the 20.6 multiple of the company’s main Canadian competitor, Enbridge Inc.

If Keystone gets approved by the end of the year, as the analysts generally expect, TransCanada’s stock may offer more upside than other stocks in the pipelines segment.

“We believe getting approval for Keystone XL represents the biggest hurdle for the company, and TransCanada’s valuation gap will narrow over the long term,” said analyst Cory O’Krainetz of Odlum Brown Ltd. in Vancouver.

Analysts project that the pipeline will generate $500-million to $700-million of additional earnings before interest, taxes, depreciation and amortization (EBITDA) annually once it comes on line in 2013 – a significant pop for a company that had EBITDA of $3.9-billion last year.

“Keystone is very meaningful to TransCanada’s overall financial health,” said Andrew Kuske, analyst at Credit Suisse, in a research note.

Steven Paget, analyst at FirstEnergy Capital, said TransCanada’s stock may rally on “short-term relief” if and when Keystone XL gets final approval, which could provide a near-term opportunity for investors. However, he predicted, the “euphoria” would likely be short-lived.

“Pretty soon, people will go back to looking at the long-term fundamentals,” he said.

Fortunately, analysts generally like the long-term view, too.

“Over time, we continue to believe the market will increasingly focus on [TransCanada’s] rather impressive opportunity set that may drive cash flow and earnings growth in the coming years,” Mr. Kuske said.

TransCanada’s dividends also look to be a strong draw going forward. The company’s dividend yield of 3.9 per cent is already toward the top end of its North American pipelines peer group, and it has raised its payouts by 8 cents a share annually in each of the past five years.

“We assume it will keep up with that (8-cent annual increase) pace next year, and maybe increase it even more in 2013,” Mr. Paget said.

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