The narrow-moat firm's Keystone XL project still faces several obstacles.
Joe Gemino, CPA
09:52 AM | Email Article
On March 24, President Trump issued the much-anticipated presidential approval of TransCanada
’s Keystone XL project. The approval has been expected since Trump urged TransCanada to reapply for the permit in January. However, construction of the controversial pipeline is far from assured. Another approval is needed from the Nebraska Service Commission and is expected to take an additional six months to a year. The project is also expected to face legal opposition from environmentalists and local land owners, which could further lengthen the process.
Joe Gemino, CPA, is an equity analyst for Morningstar.
Even if TransCanada is successful in clearing its final hurdles, the pipeline’s economics could preclude the company from going forward with the project. Before TransCanada begins construction of the project, it will need to have 80%-90% of the capacity contracted under long-term agreements. Competing with the Keystone XL is Kinder Morgan’s Trans Mountain Expansion, which is expect to add approximately 590 mbbl/d of pipeline capacity to the west coast of Canada, and Enbridge’s Line 3 restoration, which is expected to add approximately 370 mbbl/d of pipeline capacity to Canada’s east coast refineries. Combined, the three pipelines are expected add approximately 1.8 mmbbl/d of incremental capacity, which may be difficult to fill in a low-growth environment. To make matters worse for TransCanada, producers appear to favor the Trans Mountain Expansion since it transports production to the west coast, helping to reduce the reliance on the U.S. market.
At this time, we are maintaining our $48 (CAD 63) fair value estimate and our narrow moat rating.
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