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Keystone XL's Latest Delay Is Great News for This Company

Reuben Brewer
April 24, 2014

The U.S. State Department is once again extending the approval process for TransCanada's (NYSE: TRP) Keystone XL pipeline. That's bad news for the pipeline company, but good news for Canadian National Railway (NYSE: CNI), which is shipping Canadian crude by rail all the way down to the U.S. Gulf Coast—exactly the path TransCanada's Keystone is supposed to traverse.

When in doubt, punt
TransCanada's Keystone pipeline has been contentious from day one. If the pipeline were in the United States or Canada the approval process would have been relatively swift. The problem is that Keystone will pass over the U.S./Canadian boarder. That shifts the approval right up to the U.S. State Department.

And that's exactly where it's been bogged down in red tape for what seems like, well, forever. At least it must feel that way to TransCanada. In fact, in late January, the company started shipping oil on the southern portion of the pipeline, connecting Cushing, Oklahoma and the Gulf Coast. If the upper portion of the XL pipeline ever gets approved, TransCanada will provide safe and reliable access to the Gulf region for output from key U.S. and Canadian oil regions—specifically the Canadian oil sands.

(Source: Josh Lopez, via Wikimedia Commons)

That said, while the delay is a negative, TransCanada's long-term appeal doesn't rest solely on this one project. In fact, even with the XL delays, TransCanada managed to increase earnings by over 30% last year. And it increased its dividend for the 14th consecutive year, too. The future is just as bright.

For example, in the company's fourth quarter earnings release, TransCanada CEO Russ Girling noted that, "We now have a $38 billion portfolio of commercially secured projects backed by long-term contracts." And that these projects are expected to "generate significant growth in earnings and cash flow as they are placed into service over the remainder of the decade."

This year will see the benefit from the lower portion of the contentious XL pipeline, but there's clearly more to come, including linking "growing crude oil production in Western Canada to refineries and export terminals in Eastern Canada." That's a statement in and of itself; If the United States doesn't want Canada's oil, there are plenty of customers around the world who do. And our northern neighbor isn't going to wait around for us to stop bickering over TransCanada's Keystone pipeline.

It's moving south anyway
That said, there's still oil moving across the Canadian border. It's just traversing a slightly different path—over the railways of Canadian National. In fact, a map of Canadian National's rail line is eerily similar to the proposed route of TransCanada's Keystone project. And there's no doubt that demand exists.