Over 90% of Canada's oil goes south to the United States. Generally speaking, U.S. refiners make gasoline and other products out of Canada's oil and sell it domestically and abroad. Canada, however, is having second thoughts about this arrangement, and it could mean big growth for Canadian energy companies.
Captive no more?
Captive markets are a desirable thing in business, but in the case of Canada and energy the country is pretty much a captive supplier. That's worked out well for a long time, but the constant delays in the approval of TransCanada's (NYSE:TRP) Keystone XL pipeline have rekindled a desire among some Canadians to be bigger players on the global stage. It has the oil and natural gas, and there's global demand, so... why is it all still going south?
That's why TransCanada's Energy East Pipeline has the support of key Canadian politicians. Interestingly, those same politicians are opposing Keystone and other projects. Why? Because they move oil for export in its raw form. For example, New Democrats leader Thomas Mulcair believes, "Keystone XL represents the export of 40,000 Canadian jobs."
TransCanada's Energy East Pipeline, on the other hand, will deliver "1.1-million barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada." That keeps jobs in Canada and lets Canada export products from higher up in the food chain. This $12 billion project would be a feather in TransCanada's cap and would help keep the company's top and bottom lines moving higher.
It would also keep this dividend payer's streak of annual increases going. TransCanada's dividend has been upped every year since the turn of the century, taking it from $0.80 a share annually to $1.84 in 2013. The shares yield around 3.9% today. For conservative investors, TransCanada is a good way to get involved in Canada's emergence on the energy world stage.
Direct to the oil
However, if owning a toll-taking middleman like TransCanada isn't your speed, then consider Vermilion Energy (NYSE:VET). This globally diversified energy company has its largest reserve base (about 45%) in Canada. However, its global exposure means it's already playing on a world stage. Its other large operations include France, Netherlands, Ireland, and Australia. Note that Australia puts the company in close proximity to Asian demand, which would likely be a key market for Canadian exports.
What's more exciting about Vermilion, however, is that management is projecting a significant ramp up in production over the next few years. Over the last decade, production has increased at about 6% a year. However, over the next three years Vermilion is calling for production to nearly triple to 16% annually.
And after long periods of mostly stable dividends, the company has increased it in 2013 and has already hiked it for 2014. The yield is currently around 2.3%, about in line with the yield of other large international drillers. What looks like a new dividend policy, coupled with robust production growth, should be particularly interesting to income investors focusing on dividend growth.
Adding to the company's appeal is the fact that Vermilion's operations are located in politically stable regions. As Russia's recent annexation of Crimea has made abundantly clear, where you get oil and natural gas from is increasingly important. That's particularly true for Europe, a key operating region for Vermilion.
A changing landscape
As the United States becomes increasingly self sufficient on the energy front, Canada's natural resources could find less demand from the country's largest, and virtually only, customer. Add to that a desire to step up the value chain by processing more of its own oil and TransCanada's Keystone XL pipeline looks less and less relevant.
No wonder TransCanada is also working on the Energy East project, among others. And, in the end, this Canadian midstream giant wins so long as one of these projects gets approved. With regard to drillers, Vermilion has an interesting global footprint of politically safe oil and big growth plans. With the vast majority of its oil located in Canada it's a good play on that country's efforts to export its energy riches as well as a good play on global demand in general.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Vermilion Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.