To Be Profitable, We Need More Regulation

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Recently, a Canadian train carrying oil crashed in a small town and killed 50 people. This shouldn't be a great surprise, as more oil is being transported by trains, and statistics show that the risk of a spill by a train is around six times greater than a spill by a pipeline. There is strong opposition to new pipelines like the Transcanada (NYSE: TRP) Keystone XL, but recent events show that the government could easily make crude oil transportation safer by approving more pipelines, requiring better monitoring techniques and increased maintenance. 

Train proponents are quick to point out that even though trains leak more often than pipelines, pipelines spill on average three times more oil than trains for the same distance. In 2010, Enbridge (NYSE: ENB) was a prime example. It caused a huge heavy oil spill of more than 1 million gallons. This spill is not completely surprising, as the pipeline section had a history of corrosion problems that federal agencies did not require Enbridge to repair. 

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The Call for More Regulation

If regulatory agencies had required Enbridge to repair more of the issues it found with its pipeline, then there is a lower possibility that the spill would have occurred. There were multiple warning signs that Enbridge choose not to listen to. 

Another critical part of preventing and decreasing spill volume is better monitoring. Unmanned Aerial Vehicles (UAVs) are slowly being commercialized. They can easily be outfitted with inferred cameras and remotely piloted to visually inspect potential spill sites. This would allow companies to detect spills without spending the time or money to dispatch human inspectors. If the federal government were to require the use of UAVs for pipeline inspection, pipelines would become an even safer form of transport. 

The Benefits for the Bottom-Line

Pipeline operators stand to benefit from greater pipeline regulation. Increased regulation will increase maintenance costs, but the improved safety record would make it easier to get new projects built. Transcanada is fighting tooth and nail to get the Keystone XL pipeline approved, and it continues to be difficult battle. Enbridge is in a similar situation with its Northern Gateway Pipeline. Local aboriginal and environmental groups are worried about the effect of potential spills and continue to fight the project. 

The benefits are not limited to midstream players. Upstream companies like Total (NYSE: TOT) have significant investments in fields that are far away from refineries or ports.  In the Canadian oil sands, Total holds a 40.8% in the Fort Hills asset, 50% interest in the Northern Lights asset and a 50% interest in the Surmont Asset. Eventually these reserves and producing assets need to be transported to market, and pipelines offer a very cost effective method. 

Conclusion

Transcanada is an attractive company with the capital and profits to fund new pipelines, if they are approved. Its total debt to equity ratio of 1.32 is far more reasonable than Enbridge's total debt to equity ratio of 3.25. Transcanada is profitable with an earnings before interest and taxes (EBIT) margin of 35.1% and a profit margin of 18.2%. Enbridge offers a much thinner EBIT margin of 6.8% and a profit margin of 2.9%.

Total is another good company to look at. While its EBIT margin of 10.6% and profit margin 4.4% could be stronger, its total debt to equity ratio of 0.46 is healthy for a major oil company. As the market waits for the final say on Keystone XL and the push for tighter regulation, Transcanada and Total are two good companies to look at.

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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