Encouraging News for TransCanada Corporation's Competitors

Keystone XL has been mired in politics, and things don't seem to be improving. The U.S. senate has been unable to move forward with an important energy bill that would have let the upper chamber vote on starting construction this year. Now it looks like Keystone XL is back in the same quagmire where it started. This news is not encouraging for TransCanada (NYSE: TRP  ) , but its midstream competitor Kinder Morgan Energy Partners (NYSE: KMP  ) and railways like Canadian Railway (NYSE: CNI  ) can rejoice.

The fundamentals are pushing America away from Keystone XL 
The reality is that America is producing more of its own oil, and domestic oil demand is not growing as it once was. Thanks to improvements in energy efficiencies and other factors the EIA expects that U.S. gasoline demand will actually fall 1.2% annually from 2012 to 2040. Coupled with the rise of the Bakken and Eagle Ford there is simply less demand for Canadian oil. 

The most logical export market for Canadian oil is Asia. BP expects that China alone will increase its liquids demand and completely replace falling OECD demand over the next couple decades. The market has changed and U.S. political opposition to Keystone XL is only part of the problem.

North America's oil economy is developing in new ways
Kinder Morgan's Trans Mountain pipeline already transports 300 thousand barrels per day (mbpd) to the Pacific West Coast. The proposal to expand its capacity to 890 mbpd should have an easier time dealing with political opposition as it is an expansion instead of a completely new pipeline. Given Kinder Morgan's access to the Pacific, China, and better political positioning, Trans Mountain is a quite attractive development.

The rise of tight oil plays is having a big impact on the midstream industry. Since the industry is still unsure as to just how long formations like the Bakken will produce substantial amounts of oil, using rail cars instead of pipelines makes sense. In the event that a tight oil formation produces the bulk of its supply in a five-year period, rail networks can easily be repurposed to transport other goods. The Canadian oil sands do have a more traditional production profile, but regardless the North American energy industry is adjusting the world of tight oil. 

Don't ignore the railways
The rise of the railways is not a short term blip. Everyone from producers to refiners is buying or leasing their own crude oil cars.

The continued blockage of Keystone XL will help support Canada's two big railways, CN Rail, and Canadian Pacific Railway (NYSE: CP  ) . Crude oil has already become an important part of both companies. In the first quarter petroleum and chemicals was CN Rail's fasting expanding segment, growing at 16% year over year absent currency fluctuations. In absolute terms it was also CN Rails' largest segment, comprising 21.1% of Q1 2014 sales. 

CP Rail tells a similar story. Its industrial and consumer products' revenue grew 11% year over year in the first quarter. Assuming that crude is around its 2013 average of 24% of industrial products' revenue, crude contributed 6.7% of CP Rail's Q1 2014 total freight revenue. Crude is not the majority of CP's revenue by any means, but it is a growing and important part of its bottom line that helps to compensate for volatility in other segments.

Kinder Morgan is well-positioned
Kinder Morgan's Trans Mountain expansion is a great project that can connect Alberta to the Pacific Coast and the Asian export markets. TransCanada is also planning for a new world without Keystone XL, but its Energy East proposal is not as attractive. TransCanada is proposing a huge pipeline that goes eastward from Alberta to the Atlantic. Energy East will help replace imported crudes on North America's Atlantic coast, but it doesn't open up key Asian markets like Trans Mountain.

As it stands right now Kinder Morgan Energy Partners' 2014 expected earnings before depletion, depreciation, and amortization are quite diversified, comprised of 43% natural gas pipelines, 24% CO2 related operations, 15% terminals, 15% product pipelines, and 3% Canadian operations. TransCanada on the other hand may have to wait until 2020 before natural gas falls to a similar portion of its EBITDA.

Stick with the trend
While TransCanada continues to fight for Keystone XL, Kinder Morgan is plowing ahead with its Trans Mountain expansion. Even Canada's big railways CN Rail and CP Rail are growing. Given the rise of shorter tight oil developments and depressed oil demand in North America, pipelines that feed Asian export markets and flexible rail networks are attractive investment trends.

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