Can Veresen Inc Outfox Its Canadian Competitors?

Canada has struggled to find a solution for exporting liquefied natural gas to Asia. Will Veresen's strategy to export Canadian gas from the United States help it beat its competitors to the Asian market?

Robert Zimmerman
Robert Zimmerman
Apr 29, 2014 at 3:52PM
Energy, Materials, and Utilities

Canadian natural gas presents a dilemma: There's lots of it with relatively few places to go. At least, not yet. Over the years, the Canadian government and various energy companies have worked to export natural gas in the form of liquefied natural gas (or LNG) to Asia. Asians pay top dollar for natural gas; and with the U.S. natural gas market all but disappearing, exports to the Far East look like a good idea.

Alas, hurdles abound for Canadian LNG exports. Despite a great export location in Kitimat, British Columbia, pipelines need to be built to connect gas fields to the coast, and these need to go through the lands of indigenous peoples (called First Nations). Some of these folks take exception to a pipeline going through their traditional lands.

Then there's the environmental concerns over a possible spill. Lastly, the Canadian government wants its cut in this export business, namely in the form of a 7% tax. By some estimates, all this dickering has pushed Canadian LNG exports back to 2020.

East by South
One Canadian company may have found a way out. Veresen (TSX:VSN) received approval from the Canadian government to export natural gas to the U.S. and from the U.S. government to export LNG to Asia from Jordan Cove.

The current plan will have natural gas from Canada come into the U.S. in pipelines operated by TransCanada (NYSE:TRP). Williams Companies (NYSE:WMB) will join Veresen in building an additional pipeline, the Pacific Connector, to feed directly into Jordan Cove. All in all, this is a $7.7 billion project orchestrated by a company with a market capitalization of $3.3 billion.Which is not to say the export facility will be built on time: Plenty of American environmentalists oppose the plan and no doubt will work to stop the project.

How to invest in this export project
Veresen presents the obvious direct investment. The company currently owns the entire export terminal site and a 50% stake in the Pacific Connector pipeline. Veresen operates pipelines, midstream services, and power generation as well. Its Alliance pipeline connects major gas-producing fields in Western Canada and the Bakken to major hubs in Chicago. The company projects growing gas and gas liquids production along the Alliance pipeline but limited additional pipeline capacity. This should bolster Veresen's pricing power.

Financially, Veresen's earnings before taxes, depreciation, and amortization have grown for the past five years -- but not distributable cash. Lower revenue from ethane and propane, particularly in the early part of the fiscal year, offset improved earnings from pipeline operations. While the fourth quarter ended with higher prices for gas and liquids, the company doesn't see these prices persisting through the year.

As mentioned above, Williams Companies will join Veresen in building the Pacific Connector pipeline to Jordan Cove. This pipeline will connect to Williams' Northwest pipeline, which connects the Pacific Northwest to the Rocky Mountains. This is one of multiple projects Williams plans for the future. While not the most direct investment in LNG exports, Williams will certainly benefit from future export activity.

One example of future export activity involves a joint venture with Boardwalk Pipeline Partners to develop an export facility for liquefied petroleum gas in St. Charles, La. This project will allow Williams to export more butane and ethane. The company's Transco pipeline running from northern New Jersey and Pennsylvania down the Atlantic and Gulf coasts could also supply natural gas to export terminals operated by Cheniere and Dominion Resources.

Lastly, TransCanada, a supplier of Canadian natural gas to Jordan Cove, is another investment angle. TransCanada is better known for its proposed Keystone XL pipeline project. The company also operates one of the largest natural gas pipeline networks in North America as well as oil pipelines and power plants. The company has $38 billion in expansion projects through 2020 that it hopes will double its current earnings.

TransCanada grew its earnings by 30% in 2013. Its dividends have increased for 14 consecutive years, with a current yield of 3.8%. However, TransCanada's earnings have fluctuated over the years, with that growing dividend sometimes eating up more than 90% of its earnings. That goal of doubled earnings by 2020 is predicated on more than 40% of its revenue coming from moving oil, up from 16% today. The ongoing delays in the Keystone XL pipeline won't help the company meet that goal.

Final Foolish thoughts
Veresen may have figured out how to ship LNG to Asia without the hassles of large new pipelines and export taxes. Whether it can pull off this grand project remains to be seen, but so far, so good. It's a lot of money for a company with only $3.3 billion in market capitalization. Williams and TransCanada offer investors the benefits of bigger, more diversified companies in the midstream natural gas business. Of these, I like Williams best. The company should benefit from its growing presence in the Marcellus and Utica shale plays and its multiple gas or gas liquids export opportunities.