For all the attention given to the approval of TransCanada Corp.'s proposed Keystone XL pipeline through Nebraska this week, TransCanada's share price hasn't done much: It's up about 1 per cent over the past three days.
Investors are seemingly oblivious to what appears to be good news for the stock, but this cautious response looks like an opportunity for anyone willing to make a long-term bet.
On Monday, the Nebraska Public Service Commission voted in favour of an alternative route for the proposed pipeline through the state, seemingly propelling the $8-billion (U.S.) project toward a start date after years of plans and protests.
Canada's oil industry cheered the decision, as did the governments in Edmonton and Ottawa.
These players can see the economic benefits of delivering as much as 830,000 barrels a day of Alberta crude oil to Nebraska, at which point the new pipeline would connect to an existing network that will deliver Canadian oil to refineries on the Gulf Coast. This would mark a significant increase in Canada's export capacity.
But TransCanada's stock is essentially responding to the hoopla with a big shrug, and there are essentially three reasons for the muted response.
First, the Keystone XL pipeline is still not a done deal. TransCanada is now studying the alternative route and will have to secure new easements from landowners; the U.S. State Department still needs to sign off on the new route; and expect appeals and protests from groups that oppose any version of Keystone XL.
An oil spill in South Dakota last week, which shut down parts of the original Keystone pipeline, only adds to the anxiety.
Second, TransCanada shares have been doing well for the past year with the recovery in the price of crude oil, which suggests that the upbeat decision from Nebraska doesn't mark a dramatic turning point for the stock.
TransCanada shares fell about 30 per cent between 2014-16, following the collapse in the price of oil. But they have since risen about 50 per cent as the price of oil rebounded above $50 a barrel. The shares touched a record high in July.
And third, Keystone has never been the one-and-only reason to invest in TransCanada.
That's because the company has done just fine without it. TransCanada is diversified with infrastructure assets of $86-billion (Canadian), spread across natural gas pipelines, oil pipelines and electricity generation.
Earlier this month, it reported a third-quarter profit of $612-million, or 70 cents a share, beating analysts' estimates. That puts it on track for a 2017 profit of $3.01 a share, according to CIBC World Markets.
Meanwhile, income-loving investors have appreciated the steady dividend hikes, which the company expects will continue at a pace of 8 per cent to 10 per cent through 2020.
Which brings us to Keystone XL: Should investors care about it?
If the approvals keep coming – and with state, provincial, White House and Ottawa support, this looks a safe bet – the new pipeline will at the very least assure investors that TransCanada has lucrative expansion opportunities ahead. The clear visibility to growth should attract investors to the stock.
Beyond this boost to sentiment, Keystone XL should also boost TransCanada's profit.
In previous presentations, the company's management has estimated the new pipeline will cost $8-billion (U.S.) to build and will generate $1-billion a year in profit (before interest, taxes, depreciation and amortization).
These estimates are a bit stale now, especially with Nebraska proposing an alternative route. Nonetheless, Robert Kwan, an analyst at RBC Dominion Securities, calculated that Keystone XL has a present value of $4 (Canadian) a share.
Given that TransCanada shares closed on Wednesday at $62.99, the successful completion of Keystone XL implies a gain of about 6 per cent to TransCanada's share price.
That's okay. But clearly the new pipeline is not the sole reason to invest in TransCanada: Come for the infrastructure, stay for the dividend and look at new pipeline approvals as a nice little sideshow.
David Berman