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Yes, TransCanada Can Survive Without Keystone XL

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TransCanada (NYSE: TRP  ) is fighting tooth and nail to get its big Keystone XL pipeline built, but it still has not received presidential approval. The situation has worsened to the point where the pipeline may stay in bureaucratic gridlock indefinitely. The thought of cancelling the pipeline hurts TransCanada, but it will remain a billion dollar energy corporation with profitable pipelines either way. 

Bringing growth projects back down to earth
In 2020 TransCanada hopes to have an asset base of $80 billion CAD and an EBITDA of $9.5 billion CAD, a 48% and 94% respective increase over 2013 levels. Now if we take out the $5.4 billion USD Keystone XL from the asset base and use 2013's EBITDA to asset base ratio, TransCanada's resulting 2020 EBITDA is around $6.7 billion CAD, a 37% increase over 2013 levels.

Boosting EBITDA by 37% is still substantial growth. If TransCanada grows its dividend at the same pace as EBITDA, then in 2020 you can expect a nominal yield around 5.3% on shares you purchase today. 

Even in the worst case scenario it is unlikely that Keystone XL would be written off completely. TransCanada's CEO has already stated that the company is considering the possibility of building rail terminals while awaiting approval of the pipeline. . 

Other pipelines are being built
Enbridge (NYSE: ENB  ) and its MLP Enbridge Energy Partners (NYSE: EEP  ) are spending $7 billion to upgrade its existing Line 3 from 390 thousand barrels per day (mbpd) to 760 mbpd. This boost makes the pipeline's capacity almost equal to Keystone XL's capacity of 830 mbpd, while avoiding the need of a presidential permit. Thanks to Enbridge's regulatory advantage it is quietly stealing Keystone XL's thunder.

This big growth project will help Enbridge reach its goal of growing its EPS from now until 2018. It already expects to post a 10% to 12% EPS compound annual growth rate (CAGR) between now and 2017, and Line 3's upgrade will help once it comes online in 2017. Thanks to Line 3 and other projects Enbridge has $36 billion in enterprisewide commercially secured growth capital for the 2013 to 2017 period, solidifying its position as a solid growth stock.

The big macro issue
It is no secret that the biggest growth in liquid fuels demand will come from developing nations. BP estimates that U.S. liquids demand will actually decrease between 2013 and 2035. This means TransCanada may be better off developing projects that head west, not south.

The refiner Tesoro (NYSE: TSO  ) is already pursing this path with a $110 million 380 mbpd rail offloading facility in Vancouver, Washington. The refiner is trying to replace a large portion of its expensive foreign crude with cheaper North American crude. It costs Tesoro just $5.5 per barrel to $6.5 per barrel to ship oil by rail from the Bakken to tankers on the West Coast, making it an economical way to access landlocked crudes. 

TransCanada can support Tesoro's vision by building short pipelines out of Alberta that feed into rail networks heading to the West Coast. By putting rail offload facilities at the end of its stalled pipelines TransCanada can get its oil to market, help West Coast refiners like Tesoro, and pave the way for more crude exports to Asia. 

Looking ahead
The political controversy surrounding Keystone XL never dies down. It is a serious possibility that the pipeline will not be built. Even without Keystone XL, TransCanada and its competitor Enbridge will continue growing through other liquids and non-liquids growth projects. Accepting rail as a partner and not an adversary will be a big culture change, but by following in the footsteps of refiners like Tesoro, TransCanada and its investors can grow in the face of political gridlock.

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Joshua Bondy

Joshua Bondy works in the energy and materials sector. He works hard to bring to light the underlying forces that drive prices and move the market.

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