TransCanada's (TRP 0.71%) Keystone pipeline has been making headlines for a decade now. This week, the XL pipeline gained a 3-2 approval to run through Nebraska.

In this week's episode of Industry Focus: Energy and Industrials, analysts Sarah Priestley and Taylor Muckerman talk about what this approval could mean for TransCanada, and what big issues the company still has to face before the pipeline gets flowing. Also, the two talk about OPEC's upcoming meeting in Vienna -- what it could mean for the worldwide price of oil, what news to watch out for, if and when we might see a supply demand balance, and more.

A full transcript follows the video.

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This video was recorded on Nov. 30, 2017.

Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking energy and industrials. It's Thursday, the 30th of November, and we're going to be discussing a couple of recent news items. Joining me in the studio is Motley Fool Canada premium analyst Taylor Muckerman. Taylor, thank you for joining me! How was your Thanksgiving?

Taylor Muckerman: It was great! I stayed local, so I just had to eat and drink.

Priestley: You didn't have to travel too much?

Muckerman: No.

Priestley: I did a lot of traveling. [laughs] Probably about 12 hours cumulative traveling.

Muckerman: Too much traveling.

Priestley: The caveat is, my mother-in-law is an amazing cook, so there was a week of good food and now I'm paying for it.

Muckerman: And the smell of leftovers to keep you on the road.

Priestley: Yes, absolutely. In the news recently, for a couple of reasons, has been the Keystone Pipeline. The pipeline leaked as estimated 5,000 barrels of oil in South Dakota, forcing TransCanada, who owns the pipeline, to shut it down. The other reason Keystone has been in the news is because Nebraska voted to approve the Keystone XL going through the state, albeit with a different route. The XL pipeline, when finished, is estimated to be almost 1,200 miles, running from Alberta, Canada, to Steele, Neb., where it will join an existing pipe. The finished article could carry about 830,000 barrels of oil each day.

Keystone has been a regular feature in the media for a number of years, for a few reasons. President Obama refused to permit the operation. His belief was that it wouldn't lower fuel costs; it wouldn't be additive. It's also been continually challenged by environmental activists campaigning against the development of the oil sands, and also the potential environmental impact of spills along the pipeline's route. It's also been a point of contention, obviously, for many of the landowners which the pipeline would cross through. One of the first things President Trump did when he got into office was grant permits for the project, with the promise of jobs and contracts for steelmakers.

So it's really grown into this big political symbol. It's kind of an indicator of where the U.S. sees its energy future. But XL is one part of a network of pipelines called the Keystone Pipeline System, which is owned and operated by TransCanada. The XL Pipeline mirrors an existing pipeline but is intended to take a more direct route.

Muckerman: It was, but this redirection is sending it back toward the old pipeline so that they can more closely monitor both of them if they move forward with the XL.

Priestley: I see. This all started back in 2008.

Muckerman: Yeah, going on a decade.

Priestley: Is this Nebraska move a watershed moment for TransCanada? Or is it something that's just par for the course?

Muckerman: Like you just said, 2008, this has been going on. President Obama canceled it in November 2015, so two years ago this month. Then it was a big talking point for President Trump during his election, and immediately on becoming president, he said, "Let's go full bore; it's going to be the greatest technology any man or woman has ever seen." So we've seen TransCanada push a little bit further and harder, because they canceled their plans for an Energy East Pipeline in Canada, which was supposed to be almost double the price or the cost of the Keystone XL leg that they're working on now at about $16 billion. This one, estimated at about $8 [billion]-$10 billion after this newly announced redirection.

So, because they abandoned the Energy East, I do think they will probably still pursue this Keystone XL pipeline, now that there's not as much competition to remove oil from the oil sands in Alberta. But it's a setback. They have a few more days left in their ability to question the Nebraska ruling and hope for a reruling on that, but it seems like Nebraska is going to stick to its guns.

But interviews from people on the ground in Nebraska, it seems like the folks there are generally OK with it, but they're going to have to negotiate with folks they haven't talked to yet for this new land. It's going to extend their original pipeline plans by about five miles, but it's going to be a 63-mile redirection, so they're going to have to talk to a lot of people, and that could take the longest. Rather than just making the decision to move forward or not, they're going to have to have new contracts with Nebraskans to send this pipeline over their land, because while it is going to more closely mirror the existing pipelines, some of these contracts with those folks they've already signed have said, "We're only going to allow one pipeline on our land," and they already have that one pipeline, so they're going to have to tear that contract up and renegotiate everything. And because TransCanada had seen all this push back from the government, they might be a little bit in a stronger bargaining power position, and maybe charge a little bit higher rate than they would have if TransCanada wasn't down to their final option for a major pipeline. They have a bunch of small and medium-term projects in construction and finishing up right now, but this is certainly the largest one that they're working on.

Priestley: I think I've already spent about $3 billion. Obviously, a lot of that is on actual pipe.

Muckerman: Yeah, they've already started preparation, for sure.

Priestley: Yeah. But some of that $3 billion is actually on lobbying and compensation, land compensation. So, as you said, it could be quite impactful, and they haven't committed to the project. Although, as you suggested, I'm sure they might.

What I should have offered is exactly what TransCanada is, for those of you listening who aren't 100% sure. Its ticker is TRP. It's an energy infrastructure company, which is essentially a midstream company if you're looking at the oil supply chain. They operate over 40,000 miles of natural gas pipeline as well as the Keystone Pipeline system. It also owns or has interest in 20 power generation facilities. Are they all in Canada, Taylor?

Muckerman: I don't believe so. No, there's a couple in the United States. For the most part, you're looking at over 15 of them in Canada.

Priestley: OK. So, pretty highly concentrated in Canada, although a lot of their other operation is spread throughout the U.S. and Mexico.

Muckerman: Yes, pipelines for sure, spread through the U.S. and Canada, but power generation is dominantly up north.

Priestley: It's obviously not easy to build a pipeline, as we're seeing with this project. But the good thing is, once the pipeline is complete, they tend to enjoy solid returns. Question persists on this -- you think that TransCanada will probably push forward nonetheless, but what do you think the implication would be for them if they didn't do that?

Muckerman: The implication would be, they have a lot more cash on hand that they weren't planning on spending, either cash on hand or debt that they wouldn't have necessarily taken on. They do have very good coverage ratios for their dividend, so maybe they could boost the dividend if they didn't move forward with this. Or they could accelerate the construction of some other projects. Like I mentioned, they have $20 [billion]-$30 billion in small to medium-sized projects that are either already approved and under construction or are in the approval process.

So there's a lot going on with this company. It looks like about $24 billion, they say, in commercial secured growth projects. And those are in Canada and the United States. And one of the bigger ones is their Columbia expansion, which was a recent acquisition, that they're going to be building that portfolio out. And that's basically a natural gas and natural gas liquids system, taking gas from the Appalachian regions, so Marcellus and Utica Shale, down to the Gulf for refining and exportation.

Priestley: If anybody is interested in that topic, we just did a show on it a couple of weeks ago.

Muckerman: Yes, we did. That's a big deal, I think, natural gas in the United States, for the long term.

Priestley: The good thing about some of these projects is they operate on quite long leases. Is that correct?

Muckerman: Yeah, you're looking at a decade or 20 years, potentially, or even longer. Generally, in that 10- to 20-year range. And a lot of them are pay for play. So even if these companies that are their customers don't fulfill the maximum capacity on the contract, they still owe that money. Certainly, if the company goes bankrupt, there are some loopholes that they could weasel their way out of that. But in most cases, this is very secure, long-term forecastable cash flow.

Priestley: And it's also not, although it is, obviously, tangentially, it's not directly related to the commodity cost, either. There may be some deceleration, but --

Muckerman: Yeah, they can renegotiate some things, but they're still not going to get out of the contract completely. So while they do have some commodity exposure, it's far and away less than the actual producers of these commodities are exposed to.

Priestley: The stock is up a little on the Keystone XL news. I think it was 2% when it was first announced. The stock is up 10% year to date. What do you make of the investment?

Muckerman: I think, if you're looking at a pretty well-diversified North American midstream company, it's certainly worth a look. As I mentioned, great dividend coverage compared to some of its peers. It's very large and a good mix of natural gas and oil exposure, along with some natural gas liquids. I think Enbridge is the biggest one in the business, Kinder Morgan not a close second but close enough to be in that tier with Enbridge. And then you have TransCanada. I think it's certainly one to look at if you want that stability of a midstream company and some good forecasting out to 2020, 2021 in terms of top line growth and EBITDA growth.

And like I said, the dividend has some room to run, especially if they don't move forward with Keystone XL. That's $8 [billion]-$10 billion of money that they might have spent on that pipeline that they can either solidify things better or hand out to shareholders.

Priestley: I will say, if anybody is going to google this stock, you may come across a lot of bearish sentiment from its last quarterly earnings. Obviously, here, we don't focus on a quarterly to-quarterly basis, but last quarter was particularly rough for them. However, that was mostly because they were getting rid of a lot of assets in order to pay down some of debt on some of their projects.

Muckerman: Yeah. Like I mentioned, the big acquisition they just made on the natural gas side, that was one of the reasons why they do need to pay down some of that debt.

Priestley: One thing I wanted to get your perspective on, Taylor. I know you're very bullish on renewables, but they recently announced a deal to sell their Ontario solar portfolio, and they've also cut a number of renewable projects. What do you make of this?

Muckerman: It's interesting. There's been a few energy companies, oil and gas companies, that have made this move, but you've seen a few creep back into the renewables space, like BP several years ago. In the wake of the Gulf of Mexico disaster, they sold off pretty much all of their renewable assets right after they decided to coin the term "Beyond Petroleum" for BP. But they've been working their way back into the renewable portfolio. So it just depends what kind of investor you are, and if you want your company to be laser-focused on one area of the energy sector, or if you want a more diversified portfolio.

For TransCanada, it wasn't having a huge impact. And if you're looking toward the future, like we talked about on our last episode together, natural gas is going to be a part of that in terms of power generation and also on the petrochemical side. So, certainly good long-term exposure there with natural gas, and I think that's why they made that Columbia acquisition.

Priestley: So it probably has a lot more to do with being financially rigorous than it does with their actual direction.

Muckerman: Yeah, and just more focused on a certain aspect of the business, which I think, a company this size, you can probably get lost a little bit. Maybe that renewable portfolio wasn't getting the attention it deserved, so they sold it. I haven't looked into that deal intensely, but maybe they sold it at a good price and were fine with that, because that was a better rate of return than they were getting themselves because that wasn't their area of expertise.

Priestley: Absolutely. One thing you touched on earlier that income investors particularly might be interested in, they currently have a 3.7% dividend yield, which is very good, and they've also promised 10% increases over the next few years.

Muckerman: Yeah. Not quite as high as Enbridge has promised, but Enbridge is a bigger company with that Spectra Energy acquisition. I bring up Enbridge A, because it's bigger, and B, because it's a Canadian competitor to TransCanada. But, certainly, 8%-10% dividend growth each year is impressive.

Priestley: It's pretty good. As I said, we're going to be talking a little bit about OPEC. OPEC plus other oil producing nations, chiefly Russia, will meet in Vienna on Nov. 30 to discuss extending the deal that has cut production by 1.8 million barrels per day beyond the current scheduled expiry date in March. I should caveat all of our comments here by saying that unfortunately, we had to pre-record this episode a day early, so with us it's the 29th. There's obviously a chance that there will be new news from OPEC by the time the show airs, but we're just talking generally about possible outcomes and what it might mean for investors, so it should still be useful.

Taylor, a ton of factors at play. Oil has reached a two-year high but seems to be getting spooked a little in anticipation of the OPEC meeting. What do you make of all of these rumors and conjecture?

Muckerman: Basically debating whether or not they want to extend the cuts that they've had in place. It seems like the majority of OPEC members are in favor of extending the production cuts through 2018. We'll find out after the meeting. I think it starts at 6 a.m. Eastern time on Thursday, so we'll find out in mid-afternoon what they decide. But they have invited a host of other countries to the meeting as well to participate in the later-day discussions, Russia being one of them and probably the most important.

We've seen some waffling from Russia, though, so without their buy-in to the extensions of the cuts, it might lose some of the clout that it would normally have, which it has had recently because Russia did take part in the cuts, or at least agreed to them in the last round of meetings.

It's interesting. They thought they could control U.S. production by lowering prices originally by flooding the market. That didn't work, so then they had to cut production, because their national economies are so reliant on oil. And wouldn't you know it, the United States is about to become a net exporter of oil and oil products such as gasoline and diesel and natural gas liquids, things like that. So, didn't really work out as well as they had planned, and it continues to degrade their economies and the ability to fund their budgets. All these countries are reaching deep into the coffers, because a lot of the things they offer to their citizens are very subsidized based on the price of oil and natural gas.

Priestley: Yeah, absolutely. Russia is really the wild card, as you said. I think their economy minister has come out and said that Russia's economy has been hurt by the cuts, which is exactly what you just said. They almost hinted at delaying the decision, which I think would, as they say it back home, set the cat among the pigeons a little bit. Saudi Arabia is always seen as the head honcho; it's very likely that they will advocate to extend the contract. They have a lot of political upheaval at home.

But the bottom line is, an export revenue slump is the last thing they need. Uncertainty is the last thing they need. And with the impending IPO for Saudi Aramco, I think they'll be looking to get the highest price possible. And that's what this agreement has achieved. It has pushed prices up to the highest level for the last two years.

Muckerman: Absolutely. You talked about the Saudi Aramco IPO, they were talking about that sometime next year. And certainly, if it does go public, it's going to be much more in the public eye, not only in terms of its supposed control of global oil production but its actual control of global oil production, because no one is going to invest in it without auditors going in there and examining the actual financials and books and reserve estimates. And those reserve estimates are based on the price of oil and the estimated price of oil. So, where it's at now, the company certainly won't be worth as much as it was two or three years ago, three years ago, when oil was above $100 per barrel in November 2014. So it's in their best interest, because they're hoping for this company to be worth over $1 trillion.

Priestley: That would be the largest IPO ever, wouldn't it?

Muckerman: Yes, it would. They're not going to IPO the entire company. It will be a small slice of it. But that small slice is still going to be a massive, massive offering simply because, if it's worth over $1 trillion, even 5%-10% is one of the biggest companies on the market. So yeah, it's a big deal for them, and as OPEC controls about 40% of oil production around the world, they're hoping they can regain the control of the markets that they used to have. But record production here in the United States right now at prices of $60 a barrel. That's certainly not what they were expecting, and the rig count continues to click up for horizontal and unconventional drilling. We're showing continued cost improvements both onshore and offshore. Technology is certainly keeping their ideas at bay.

Priestley: U.S. production reached a record weekly high last week at 9.65 million barrels per day. And as you said, more and more coming online. Crude inventories fell by 1.9 million barrels the week just before Thanksgiving. So inventories are falling, and that should also help. I've seen a lot of speculation that if OPEC does extend the reduction in output, it could overstimulate the market and push prices higher. How likely do you think that actually is?

Muckerman: It's tough to say. If it does push prices higher, that's going to encourage other countries to drill more, so that could put a cap on the supply demand-balance and drive supply much higher. It's certainly what U.S. producers are most likely to do if prices continue to creep up, because this has forced them to become more efficient, and they're producing out of profit right now. So if it climbs higher, all these wells that they have drilled but haven't fracked yet are ripe for the picking.

Priestley: Yeah, absolutely. I think it's definitely on the discipline of the individual enterprises, too. Although the status quo would probably be preferable to most traders at the moment, I would imagine.

Muckerman: Yep.

Priestley: And one thing that they're really being pushed to come up with is some kind of exit strategy to easily transition out of this when we reach a point of equilibrium. As you said, it's just ridiculously difficult to predict. [laughs] 

Muckerman: Yeah, who knows if we'll ever find a point of equilibrium, because at the point where we might think that we have, five to 10 years from now, we could have majority electric vehicles on the road in some highly consumable countries for oil and gasoline. So, time will tell, but I'm skeptical of ever finding a balance for longer than a month or so.

Priestley: Yeah, absolutely, especially because, you have Ecuador coming out and basically saying they won't comply. Libya and Nigeria, who were exempt from the previous arrangement because of civil strife, they're also coming back online and have no intention, I believe, of sticking to it. So even though they're small contributors, you have so many of these disparate people and organizations to control. I agree with you, it must be like trying to herd the cats.

Muckerman: And it's a political weapon as much as it ever has been.

Priestley: Yes, absolutely. Thank you so much! As always, you're ridiculously knowledgeable and insightful, so thank you.

Muckerman: You just picked a Canadian company, so it was right in my wheelhouse. I appreciate that.

Priestley: [laughs] Well, that's it from us today. If you would like to get in touch, feel free to email us at [email protected], or tweet us on Twitter at MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Next week, join us on Thursday for a look at UPS and FedEx during the holiday season. For Taylor, I'm Sarah Priestley. Thanks for listening, and Fool on!