Market News

 December 12, 2013
Keystone pipeline bigger for producers than TransCanada

 U.S. President Barack Obama's ruling on Keystone XL is becoming more critical for oil-sands producers such as Canadian Natural Resources Ltd. than pipeline builder TransCanada Corp.

Calgary-based TransCanada has about C$33 billion ($31 billion) of projects on its books, even without the $5.4 billion pipeline the company had targeted for completion in 2012. For producers, Keystone is the earliest export line scheduled to ease bottlenecks which have helped push Canadian heavy crude $27 a barrel below the U.S. benchmark and are costing the industry about C$18 billion a year, according to Chevron Corp.

Canadian oil-sands output is set to more than double to 4.5 million barrels a day by 2025 from last year and producers are forecast by RBC Capital Markets to spend as much as C$30 billion annually through 2018 to develop the world's third-largest crude reserves. Canadian Natural, which has 120,000 barrels a day booked on Keystone XL, plans to increase oil-sands output by about 14 percent in 2014 from this year.

For large shippers like Canadian Natural or Suncor Energy Inc., Keystone XL "is far more important" than for TransCanada, John Stephenson, who helps oversee C$2.7 billion at First Asset Investment Management Inc., including stakes in TransCanada, Canadian Natural and Suncor, said by e-mail Dec. 4.

Climate Change

TransCanada expects the results of the U.S. State Department's environmental review of Keystone XL by the end of the year, Chief Executive Officer Russ Girling said Nov. 19 in an interview. The report on the pipeline, which would link the oil sands to the world's largest refining center on the Gulf Coast, will help Obama decide whether the conduit would contribute significantly to climate change, the test he set in a June speech for the project's approval.

The assessment is the last analysis before a 90-day period during which the department reviews whether Keystone XL is in the U.S. interest. John Podesta, a Democratic veteran and opponent of the pipeline, will join the White House as an adviser with a focus on energy and climate change just as the administration weighs the project, the White House said yesterday.

Podesta will recuse himself from working on Keystone given that the U.S. review of the project is far along and that his views on it are well known, according to a White House aide who asked not to be identified discussing personnel matters.

Booked Capacity

Canadian Natural has 120,000 barrels a day of capacity booked on Keystone XL, Steve Laut, president of the company, said on a May conference call. The company confirmed the capacity in an e-mail today. Suncor, which expects to boost its production of crude by 10 percent in 2014 from this year, and Cenovus Energy Inc. also are among companies that committed to use the line.

Canadian Natural may gain about 5 percent while other producers such as Cenovus, Suncor, Husky Energy Inc. and Imperial Oil Ltd. may rise if the State Department's review is positive, Todd Kepler, an analyst at Cormark in Calgary, said in a Dec. 6 phone interview. A negative report could spur a 3 percent drop for Canadian Natural, he said.

Imperial Oil committed to take capacity on Keystone XL because the line is "vital" to development of the continent's energy market, Pius Rolheiser, a company spokesman, said in an e-mail. Cenovus is supportive of Keystone XL, among projects that will open access to new markets, Brett Harris, a spokesman, said in an e-mail. Husky doesn't depend on a single pipeline, Kim Guttormson, a spokeswoman, said in an e-mail. She declined to say whether Husky has booked space on Keystone.

Committed Volumes

Suncor has committed volumes on Keystone XL as part of its support of a number of ways to get to market, Sneh Seetal, a spokeswoman, said yesterday in a phone interview.

"Keystone XL remains an important project for TransCanada and for our customers," Shawn Howard, a company spokesman, said in an e-mail.

Canadian Natural rose 22 percent this year through yesterday, Imperial Oil gained 8.8 percent, Suncor increased 10 percent, Cenovus fell 6.1 percent and Husky rose 6.7 percent.

Canadian energy stocks are trailing U.S. peers by 10 percentage points this year, according to Standard & Poor's indexes, as producers struggle to ship oil to the continent's coasts where they can fetch higher prices. The gap between Canadian heavy crude and West Texas Intermediate, the benchmark U.S. grade, has widened to $27 a barrel from $19 on Sept. 19, 2008, when TransCanada first applied to build Keystone XL.

Least Volatile

The lower crude prices due to pipeline bottlenecks are responsible for C$50 million a day in lost profits to the Canadian energy industry, or C$18 billion a year, Jeff Lehrmann, president of Chevron Corp.'s Canadian division, said at a conference in Calgary in October.

TransCanada fell 0.9 percent to C$46.49 at the close today in Toronto, bringing its decline this year to 1.1 percent. It has the lowest volatility among pipeline peers and global energy producers over the last five years, according to data compiled by Bloomberg.

"I don't think it's a show-stopper for the stock if the project does not go forward," Lanny Pendill, an analyst at Edward Jones & Co in St. Louis, said in a Dec. 4 phone interview. Still, TransCanada would probably face a writedown on its investment to date if Keystone is rejected, he said.

Keystone XL is only worth C$1.50 to shares of TransCanada either way as the company has invested in other projects, according to First Asset's Stephenson.

Other Pipes

TransCanada had spent $2 billion on the project by the end of the third quarter, according to Howard, the company spokesman, who declined to specify how much of that could be recovered in the event it's turned down. The company now says the earliest it will be built is 2016.

As TransCanada pursued other projects and split Keystone XL in two by building the southern leg that doesn't require a presidential permit first, the pipeline's contribution to the company's growth diminished. The line now represents 14 percent of TransCanada's roughly C$38 billion in projects backed by contracts, compared with 32 percent four years ago, according to figures compiled from company presentations. The projects include solar power and other oil and gas pipelines.

The northern portion will contribute C$850 million a year in earnings before interest, taxes, depreciation and amortization, compared with C$1.7 billion for the Energy East pipeline TransCanada is proposing from Alberta to the Atlantic Coast, according to Steven Paget, an analyst at FirstEnergy Capital Corp.

'Very Important'

The southern leg of Keystone XL, from Cushing, Oklahoma, to the Gulf Coast, is forecast by Calgary-based FirstEnergy to contribute C$250 million a year. Oil began flowing through the pipe last week and it's scheduled to start delivering crude in mid-to-late January, according to TransCanada.

Even as TransCanada plans to build other oil pipeline capacity, Keystone XL remains "very important" for the company, Girling told reporters last month. "It's still a very important project for the industry."

The pipeline's delay is one reason why Cenovus is making commitments to other projects,Brian Ferguson, Cenovus' CEO, said at an investor conference in September, pointing to rail and barge shipments that have allowed producers to "work around bottlenecks."

For producers boosting North American oil output, "the pipeline is a lot more meaningful" than for TransCanada as multiple new crude conduits are needed to shrink discounts of grades on the continent to global benchmarks, said Pendill of Edward Jones.

"The only way we're going to do that is to provide a greater outlet coming out of the supply centers, that being the Bakken and the oil sands and getting that to the shore lines," he said. "XL could certainly help get that done."