The Future Looks Bleak for Keystone XL
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On June 25, President Barack Obama said the pipeline would only extend from Alberta to Texas if it "doesn't significantly exacerbate the problem of carbon pollution."
That casts serious doubts on TransCanada's ability to extend the major project from Canada to southern United States. However, the State Department still has a say about whether the project will go through, and their report is expected to determine whether the project would benefit America.
However, the President's speech cast serious doubts on TransCanada's ability to execute the pipeline, and that should have shareholders concerned. The pipeline extension would cost about CAD$7.6 billion, and the firm is counting on the project for major revenue expansion.
TransCanada is a mixed bag
Now that the XL Keystone pipeline looks to be a dead duck, those holding out to see what will happen before buying the stock should somewhere else for their investment. And those who are invested in the stock with the hopes that the major project gets the green light should pull out, and many most certainly will. That means it could take a while for the share price to recover. However, the company has other projects on the go that could generate CAD$12 billion in 2015, and CAD$50 billion in total. Part of that revenue includes the Bruce Power nuclear plant in Ontario. That project could generate up to 25% of the province's electricity.
The growth expectations at TransCanada are moderate. Compared to the industry's average 21 P/E ratio, TransCanada is at 21. Analysts believe the company will have a PE ratio of 18.2 going forward, according to RBC Direct Investing.
Enbridge faces its own challenges
Late in May, the B.C. government opposed Enbridge's proposal to run a 730-mile pipeline to the B.C. coast from oil-rich Alberta. More recently, on June 25, protesters set up at Enbridge's North Westover pump in Hamilton, Ontario. They said they will stay there as long as they can in order to speak out against a flow reversal at the pipeline. This type of revolt could lower shares.
While Enbridge looks relatively strong with the number of projects on the go, it might only see a fraction of those come to fruition. Furthermore, the firm has a low profit margin of 2.9%. Also, the firm has nearly 59% debt to total capital, which is a lot of leveraging. In fact, it is one of the most highly leveraged companies in the natural gas utilities industry. That's enough to make me stay away from this firm.
Kinder Morgan Energy Partners (NYSE: KMP) is in a similar situation as Enbridge, but this company wants to expand an existing pipeline to Canada's west coast. That will facilitate the delivery of oil to Asian markets, and potentially boost sales. The company is the largest energy storage and pipeline transportation firm in North America, and currently has about 46,000 miles of pipeline. That means Kinder Morgan isn't relying on the expansion to the B.C. coast, making this company a better bet for investors. Right now, the firm has about $11 billion in joint venture and expansion projects, and another $3 billion are planned this year.
Risks in oil firms
While there will be a steady stream of revolt against each of these companies for environmental reasons, oil firms have continued to show that they make sound long-term investments. If TransCanada is eventually denied entry into the United States, the firm will face a serious blow, and any investor currently owning shares of the company should sell due to the likelihood of a denial. However, those who hold strong, in any of these firms, will likely see a gradual rise in share prices due to the financially sound books and potentially fruitful long-term projects at each company.
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