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.
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.
In 2013, Canadian National saw revenues in its petroleum and chemicals business increase by 18%. Moving oil was a virtually non-existent business in 2010, when only around 200 carloads of oil were moved across the company's rails. That number was over 34,000 by 2012 and was around 60,000 last year.
Clearly, while TransCanada is stuck waiting, Canadian National is taking advantage of the situation. As long as the approval process is stuck in Washington, Canadian National's oil business is in solid shape. Of course, if Keystone's upper half gets approved, Canadian National's Canada to Gulf Coast business has a relatively short shelf life. It won't go away, but this growing business will slow if not contract.
Democratic Senator Mary Landrieu of Louisiana has called the current XL setback "nothing short of an indefinite delay of the Keystone Pipeline." That's not what TransCanada wants to hear, even though it's got plenty of other growth projects. However, the longer the delay the better for Canadian National and its growing oil business.