Enbridge's (ENB 0.74%) Northern Gateway pipeline just received approval from a Canadian federal environmental and energy regulators' panel. Now the federal government has 180 days to review the $6.5 billion pipeline, placing the big decision in June 2014. Canada needs to get more oil out of its interior, and new pipelines could open up the precious Asian markets. While the deal is not done yet, 2014 will be a big year for Enbridge and its shareholders.
Northern Gateway 101
This pipeline will move 525,000 barrels of oil per day from Alberta to tankers in Kitimat in British Columbia. It will also carry 193 mbpd of heavy oil thinning condensate from B.C. to Alberta. The panel did not give Enbridge a free ride, however. The company must put up $950 million in liability coverage and comply with 208 other conditions.
While it is impossible to predict the future, there is a good chance the pipeline will be approved. Canada's reliance on U.S. refiners makes Canadian energy producers sell their products at a discount, reducing federal and provincial tax income. Also, transporting oil through mountain passes in rail cars is not too attractive after runaway crude cars in Lac-Megantic, Quebec killed 47 people.
Investing in Enbridge
Enbridge is the overarching business in all Enbridge-related companies. It is expecting to put up 50% of the cost of Northern Gateway. The project is financed with 30% equity and a target 12% base return on equity. Enbridge is a stable company with interests in midstream operations throughout North America. Growth projects like Northern Gateway will help maintain the average dividend-per- share compound annual growth rate of 13% it has posted from 2004 to the end of 2013.
You can also invest in the Enbridge Energy Partners (EEP +0.00%) MLP. While this MLP is based on Enbridge's U.S. assets, it is also looking forward to big new pipelines. The $2.6 billion Sandpiper will move 375 mbpd of crude toward Superior, Wisconsin. with an in-service date of 2016. This MLP is trying to hit a distribution compound annual growth rate of between 2% and 5% between now and 2016, and Sandpiper is an important part of the equation.
The competition
Northern Gateway is not the only crude pipeline hoping to export more Canadian oil westward. Kinder Morgan (KMI 0.35%) already runs the Trans Mountain pipeline from Edmonton, Alberta down to Vancouver, and it would like to expand its capacity from 300 mbpd to 890 mbpd. Kinder Morgan has an advantage with Trans Mountain as the pipeline is already operational; it only needs to be expanded. The $5.4 billion expansion project just filled an extensive application with the National Energy Board. It does not expect to start construction until 2015 at the earliest.
If you want to hedge your bets and put your money into Trans Mountain and Northern Gateway, Kinder Morgan offers more than one way to invest in Trans Mountain. Kinder Morgan is the general partner of its MLP, Kinder Morgan Energy Partners (NYSE: KMP). Kinder Morgan is a traditional corporation with a 4.6% yield. Kinder Morgan Energy Partners trades with a historical distribution yield of 6.6%. Canada is currently a small portion of both companies' revenue, making up 3% of 2013 expected cash flow.
If you are looking for high growth, Kinder Morgan is the better option. It is expected to see long-term growth rates of around 9% to 10%, while Kinder Morgan Energy Partners expects to see 5% to 6%. The downside is that profits made by Kinder Morgan are taxed twice, once on the corporate level and then again on the investor level.
Final thoughts
Canada needs to get more of its oil to market. Shipping oil directly from Alberta to tankers on the West Coast makes the most sense as Asia is the world's growing energy consumer.
The Canadian government will give a more definitive answer about the future of Northern Gateway in the middle of 2014, and now is the time to start looking at investing in Enbridge. At the same time, Kinder Morgan just filed a big application for its Trans Mountain expansion. Between Northern Gateway and Trans Mountain, you have many ways to profit from the changing Canadian oil industry.
