Will Keystone XL's fate ever be resolved? A decision on whether to proceed with the controversial pipeline has been postponed once again. While companies like TransCanada Corp. (TRP 0.54%), Suncor Energy (SU 1.30%), and Canadian Natural Resources (CNQ 1.51%) would certainly benefit from a project go ahead, they will also prosper if the Keystone XL pipeline plan gets rejected. Here's why.
Keystone XL and another option
The Keystone XL project, first proposed in 2008, is very important for Canadian oil sands producers. The planned 1,179-mile pipeline would greatly relieve an oppressive product bottleneck by moving more than 800,000 barrels a day of Western Canadian crude oil to refiners on the U.S. Gulf Coast.
This free flow of product could increase oil sand producer profits significantly. Western Canadian heavy crude is currently priced at a severe discount to other oil benchmarks because of the difficulties in getting it to customers. The ability to move sand's oil in bulk would likely cut the discount noticeably.
But Keystone XL is not the only transport option. One viable alternative being considered is the Northern Gateway project. This planned 525,000 barrel per day pipeline would stretch from Alberta to Canada's Pacific Coast with the goal being to help get oil sands deliveries to Asian markets.
While running into opposition from some communities and environmental groups, the Northern Gateway has already cleared one major hurdle with a favorable ruling by energy regulators. Project-backer Enbridge now only needs an endorsement from Canada's federal government to proceed.
Thriving with or without Keystone XL
While approval of Keystone XL will surely benefit firms involved in Canada's oil sands, alternatives like the Northern Gateway suggest that the crude will eventually flow regardless.
TransCanada
TransCanada is the most directly tied to Keystone XL. As initiator and operator of the project, it would appear that the company might lose a lot if the pipeline is not approved. That doesn't appear to be the case, however. Since TransCanada makes roughly 85% of its pre-tax and pre-interest profits from natural gas pipelines and independent power production, oil transport is a relatively minor part of its business.
The company has been doing quite well without Keystone XL. Earnings increased 19% year over year in 2013, and funds generated from operations were up 22%. TransCanada also has other growth projects lined up. The proposed Energy East Pipeline development, which plans on delivering 1.1 million barrels of Western Canadian crude oil to refineries in the East, looks especially intriguing.
Given potential upside from a Keystone XL approval but seemingly limited long-term downside risk, TransCanada shares may be worth considering. Trading at around 8.8 times last year's operating cash flow, the company looks moderately inexpensive compared to U.S. peers Kinder Morgan Energy Partners, which trades at roughly 8.9 times cash flow, and Spectra Energy Corp., priced at near 12.9 times cash flow.
Suncor Energy
Suncor may have the most to gain from an operational Keystone XL. This Canadian integrated oil giant delivered 562,000 barrels of oil equivalent production per day (boepd) last year with 70% of that coming from the oil sands. Any reduction in the Canadian crude discount will have a substantial positive impact on the company's results.
While waiting for a Keystone decision, Suncor has improved upon current transport while also investing for production growth. The company has bettered product flow by enhancing rail service toward Eastern Canada and continues to develop long-life reserves at their Fort Hills sands site. Fort Hills is expected to deliver 180,000 boepd within five years -- an over 45% increase to total company current oil sands production.
A price rise for Canadian crude would be a big boost for Suncor finances and either the Keystone XL pipeline or the Northern Gateway alternative will eventually provide that rise. Under that assumption, the company's shares look very attractively priced at about 5.7 times last year's cash provided by operations -- a discount to integrated oil peers such as ExxonMobil Corp., which trades at 9.4 times cash flow and Chevron Corp., valued at 6.8 times.
Canadian Natural Resources
Canadian Natural Resources should be another beneficiary from a rise in product pricing. The company, an oil and gas producer with assets in Canada, the North Sea and Offshore Africa, generates 94% of its production from Western Canada.
Focusing on its long-life, low-decline oil sands holdings, the company's Horizon mining site looks a main growth driver. Horizon produced over 100,000 boepd of high quality crude during 2013, an increase of 17% year over year. With a boost to $2.5 billion in site capital spending, the company expects to deliver another 12% increase this year and ultimately meet the site's 250,000 boepd capacity.
Priced at about 6.2 times last year's cash provided by operations, Canadian Natural Resources shares may currently be trading fairly when compared to U.S. based oil producer ConocoPhillips' 5.7 times operating cash flow valuation and Chevron Corp's 6.8 times worth. Though the likely benefits from future pipeline product flow, just as its oil sands production is blooming, might argue that a higher Canadian Natural Resources multiple would be justified.
Conclusion
Keystone XL's fate has been delayed once again. While companies involved with the Canadian oil sands would certainly benefit from the controversial pipeline's approval, firms like TransCanada, Suncor Energy and Canadian Natural Resources will likely prosper with or without Keystone XL. Given the potential upside, long-term investors may want to look into these reasonably priced shares.
