TransCanada Boosted by Government Commitment
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TransCanada (NYSE: TRP) gained some solidarity on July 4 when Alberta Premier Alison Redford announced a $5 billion commitment to send oil to Canada's east coast over the next 20 years.
The memorandum of understanding struck by the province aims to transport up to 100,000 barrels per day along TransCanada's proposed Energy East pipeline. This shows the government's commitment to supporting the province's pipeline operators, and it gives investors a boost of confidence in the company amid doubts about the firm's massive Keystone XL pipeline. President Barack Obama cast doubts on that project recently when he said the pipeline would only gain approval if it "does not significantly exacerbate the problem of carbon pollution," though the State Department has final say in whether the project will proceed. Keystone XL would transport oil from Alberta to Louisiana and Texas.
Even if the pipeline isn't approved, the firm may still have the option to ship by rail. Despite bitumen prices increasing and oil sands companies shipping more barrels than ever before on railcars, investors are selling shares in Canadian oil companies due to economic concerns in the United States and China. The growing doubt about Keystong XL isn't helping, either.
Oil keeps flowing even without the pipelines
Oil continues to be pumped out of the ground at a steady pace, and that makes it difficult when companies don't have the pipeline option to transport it. Cenovus Energy (NYSE: CVE) is aiming to ship up to 30,000 barrels by rail from oil sands projects by the end of next year. That's an increase from about 6,000 barrels per year that are shipped on tracks by the company now.
Cenovus' success depends on its ability to focus its operations. In May, the company sold its Shaunavon assets in Saskatchewan to Surge Energy because it is focusing its efforts on the Alberta oil sands. Part of the firm's success depends on making its operations more efficient, and that includes selling its Bakken oil field assets which have been for sale since February. While I don't see the sale as vital to the company's profitability, streamlining operations will make this firm a more solid money-making vehicle.
Suncor also looks to transport by rail
Suncor Energy (NYSE: SU) also looks transports a large amount of oil on tracks. The firm is Canada's largest oil company and is looking to ship high-sulphur blends of Alberta crude to its refinery in Montreal. This option is largely due to record-setting oil production and the lack of an alternative option to ship such a large amount of oil.
Suncor's chief executive, Steve Williams, said in February that transporting crude on trains "gives you a great deal of flexibility, particularly around some of the poorer quality streams from Western Canada, where you could get those in sooner than pipelines could be reverse. You will see us talking about rail facilities, particularly into Montreal."
Before buying stock in Suncor, I'd wait to see how the rail option plays out and whether the costs dig into profits. The company is facing a possible $1.2 billion tax hit in relation to losses on derivative contracts linked to its involvement in the North Sea oil field. The company is disputing the claim, however, since it could be a major expense and decrease the firm's net profits.
Viability of rail could be a deciding factor in profits
According to an article in the Financial Post, moving oil via rail could be more damaging to the environment than transportation through a pipeline. That fact could weigh heavily on the State Department's decision about whether to allow the Keystone XL project to move forward. As we have seen with Cenovus, even when a pipeline isn't available, the company is still determined to transport its product, and rail is the next viable option. Transportation by track costs much more than by pipeline, however, putting into question whether TransCanada would transport by rail even if the pipeline isn't approved. For now, the firm's investors can rest easy given the $5 billion pipeline support from the Alberta government.
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