Once upon a time pipeline companies were viewed as rather boring investments.
That’s not the case any more. The fate of the contentious Keystone XL pipeline could have an impact on investors’ portfolios in more ways than one.
But John Stephenson, portfolio manager at First Asset Investment Management, says pipelines are still a better way to play the energy industry than investing in producers that are more exposed to commodity price swings.
“It’s still a good bet,” he said. “Is it as good a bet as it was before? No, because you do have some event risk and there are political issues for sure.”
In recent years, pipelines have become the targets of those determined to stop exploitation of Alberta’s oilsands, viewed in some quarters as the dirtiest type of crude there is.
By pinching off the means to ship growing oilsands crude to the lucrative U.S. Gulf Coast market, opponents believe they can slow down development of that resource.
That opposition, and subsequent political wrangling in Washington, has caused repeated delays and setbacks for the Keystone XL pipeline.
U.S. President Barack Obama’s long-awaited decision on the project is expected to come toward the middle of this year, though some believe it could take longer, pushing back the late-2014, early-2015 start-up target.
TransCanada Corp., the Calgary-based company looking to build pipeline, is a blue-chip stock that’s widely held.
A denial of Keystone XL could shave several dollars off of TransCanada’s stock price, whereas an approval would lead to a modest pop, Stephenson said.
“It’s a big deal if you’re an investor in the shares of TransCanada,” he said.
But Lanny Pendill, an analyst at Edward Jones, says TransCanada has several billion in other new projects on the go in addition to Keystone XL.
“To the extent that it doesn’t get approved, I would imagine that we would see some type of short-term, knee-jerk reaction in the stock, just because it would be a disappointment,” he said.
To investors, Pendill says: “don’t panic.”
“Continue to collect that good dividend, stay focused on the longer term,” he said.
“It’s still a utility. It’s still a pipeline company and those earnings are pretty defensive in nature relative to other industries.”
The Keystone XL outcome will also have an impact on the heavy oil companies looking to sell their crude for a higher price, and the Gulf Coast refiners looking to process it.
Canadian heavy oil producers have seen their profits eroded by the price gap between their product and the lighter, easier-to-refine U.S. benchmark, West Texas Intermediate.
A heavy crude discount is not unusual, given its lower quality and distance to market, but the differential widened to a painful $40 per barrel late last year before returning to more normal levels.
Stephenson says the biggest winners if it goes ahead, besides TransCanada, would be Canadian heavy oil companies such as Suncor Energy Inc., Canadian Natural Resources Ltd. and Imperial Oil Ltd. Conversely, they would also lose out most in the event of a rejection.
There are some companies that may see a bump in business if Keystone XL is nixed, Stephenson said.
More and more crude is moving to market by rail in the absence of adequate pipeline capacity, so Canadian Pacific Railway and Canadian National could benefit. As well, TransCanada rival Enbridge Inc. has its own projects to the Gulf Coast that are not as politically contentious.
While Pendill says Keystone XL is an important project that ought to go ahead, he notes there are several other proposals to the south, east and west that could help Canadian producers get their product to market.
Though projects such as Enbridge’s Northern Gateway, and TransCanada’s eastern pipeline proposal face risks of their own, Canadian oil producers should be in good shape if at least some of those pipeline projects go ahead.
“I don’t think it’s going to completely halt production in the oilsands and really penalize the oil producers there, simply because of these other project initiatives that are pretty likely.”