The Keystone XL Pipeline Has A Good Chance Of Eventually Being Approved, Here's Why

Includes: CNQ, SU, TRP
by: Seraphim Blentzas

Very rarely do I side with Newt Gingrich, however in the case of TransCanada Corp. (NYSE:TRP) and its pipeline proposal I'm inclined to agree with him.

The project would provide an immediate infusion of jobs that can't be taken for granted given that 1 in 5 men are unemployed, up from 7% in 1970. The project would create 20,000 American jobs specifically catering to those in the construction industry. As of December 2011, the construction unemployment rate remained unchanged despite an overall decline of 0.6% since August. What makes the rejection highly questionable is that the project is in the national interest of the country meaning that President Obama might not even have the authority to block it.

The pipeline would reinforce Houston's position as the largest refinery complex in the world by boosting throughput at a time when oil rigs in the Gulf of Mexico are leaving for Brazil. Without the pipeline, Texas refineries are losing 700,000 barrels of oil per day. The decision also tarnishes Obama's track record because he has pledged to "work with the oil and gas industry to increase America's energy security," and promised to reduce America's dependence on middle east oil by 75% by 2020. If Obama is really committed to working with the oil and gas industry then he's going to have to include Alberta in the fold, considering the Canadian province is home to more than 2,412 oil and gas companies. The combination of house leader Boehner's strong support for the project and President Obama's insistence that the rushed deadline didn't give it a fair chance of passing, gives it a future.

So why do I think the U.S. Administration will eventually give Keystone the green light ? Well for starters, the Alberta Clipper Pipeline which pipes crude to Wisconsin is receiving very little opposition. In fact President Obama said he would not oppose the 400,000 bpd Seaway Pipeline Project. House Speaker John Boehner calls the pipeline good for the U.S. economy and a major job creator while the President's own Job Council called the project good for economic growth and energy security in its 2011 year-end report. What's clear is that with or without American support, Alberta will continue exploring and producing from the Athabasca oil sands of Alberta. Output from the oil sands is forecast to triple to 5.1 million barrels a day by 2035.

Canadian Natural Resources Ltd (NYSE:CNQ) President Steve Laut said last November "It's pretty clear if Keystone doesn't go ahead, that U.S. markets are not in favour of having Canadian oil," but U.S. imports of Canadian oil are still going up. Between May and October 2011 the U.S. imported 8.5% more oil from Canada while at the same time imports from OPEC and Brazil fell by 7.1% and 33.5%, respectively. In fact oil imports from all countries combined declined by 6.1% or 20,927 barrels a day. Canadian Natural Resources is one company that may appear to have more at stake than it actually does. Although it already uses TransCanada Corp's pipelines, over 80% of the oil it produces is conventional crude not the tar sands type that has environmentalists concerned. In 2011 Canadian Natural Resources won approval from the Alberta government to build the first new refinery in Canada in 35 years. The $15 billion refinery, in which CNRL will have a 50% interest will also be capable of capturing carbon dioxide emissions. The new refinery will have a capacity of over 50,000 barrels per day which means it will be able to handle most of the company's heaviest oil coming from the Horizon oil field.

Regardless of the outcome, Canadian Natural Resources has to be considered a strong buy. Since April 25, 2011 the stock is down 8.4% despite a third quarter recovery in Horizon, the oil field at the core of its future operations in the oil sands and a net earnings resurgence of 41.5% to $1.765 billion in the six months ended September. That gives it a third quarter EPS 16 times higher than it was in the first. Also up at CNRL is the quarterly dividend which has been nine cents for three straight quarters compared to just seven cents in the previous two. If you're concerned about risk, don't be. The Horizon fire that trimmed off 90,000 barrels per day of production in the first half of 2011 was an unusual occurrence.

What is routinely ignored is that TransCanada does have other options. It can make the pipeline an all U.S. route which would circumvent the need for state department approval. The rejection of Keystone has put negative pressure on TransCanada's price possibly creating a buy opportunity for investors pending development of the project, at any capacity. Many of the large players in Canada's oil and gas industry continue to rely on TransCanada's infrastructure and that gives the company some stability. However before jumping in, keep in mind that producers are reporting significant declines in natural gas production and that's affecting throughput and profit at TransCanada.

Opponents bring up the tailings ponds but I don't see that as being a major issue. Canada's second biggest oil company, Canadian Natural Resources Ltd, is one of a number of oil sands producers addressing the issue head on. To separate water from solids more quickly and efficiently, Canadian Natural Resources Ltd is planning to inject captured carbon dioxide from its hydrogen plant into tailings lakes. Positive effects of that are two fold: carbon dioxide gets sequestered and more water gets recycled into the plant thereby reducing the need to use water from the Athabasca River. Suncor (NYSE:SU), Canada's largest by market capitalization is in the process of reclaiming seven of eight tailings ponds.

Suncor has a lot going for it and against it at the moment. In just the last six months the company was hit with a $514 write-down to the value of its Libyan assets. Later, in January it was forced to abandon a lucrative $1.2 billion gas project in Syria. These uncontrollable circumstances combined with a drop in the price of oil, pushed the stock price all the way down to $23.97 which is a level not seen since 2009. With the price of oil back to $100 and output at Suncor's oil sands operations up to 345,000 barrels per day from 162,000 in May, there's no reason to think the stock can't fully recover the losses it sustained between November 2010 and March 2011. That makes Suncor a strong buy just as Barclays suggests.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.