The proposed Keystone XL pipeline is very controversial. The oil industry supports the project as an effective way to deal with midstream constraints within the North American crude market. Environmentalists dislike Alberta’s heavy crude and they criticize Keystone XL because it will bring heavy crude to U.S. refineries. The controversy surrounding Keystone XL’s required presidential approval makes investing in the pipeline very volatile, even if it is likely to be approved.
Little Known Facts in the 2010 Keystone XL Assessment
The pipeline is expected to have little impact on the total level of U.S. crude imports. Increased efficiencies in the American transportation sector would be a more effective way to decrease total U.S. crude imports.
In the case that Keystone XL is not approved, TransCanada has some other crude pipelines on the drawing board. The downside is that these pipelines wouldn’t let TransCanada become the energy gateway to the west. These pipelines head eastward toward Montreal, away from the Asian markets.
Enbridge Inc (USA) (NYSE:ENB) is the company that has jumped the gun on Canadian crude oil pipelines that head west. The proposed Northern Gateway Pipeline would bring 525,000 barrels of oil per day (kbd) from Alberta to an export facility in Kitimat, BC. It would also bring 193 kbd of condensate from the coast to Alberta. A related project has been proposed to put a refinery in Kitimat so that Canada could sell refined crude from Enbridge Inc (USA) (NYSE:ENB)’s proposed pipeline. China has already said it would put up a large portion of the necessary capital for the refinery.
How do These Firms Compare as Investments?
TRP Return on Invested Capital data by YCharts
TransCanada Corporation (USA) (NYSE:TRP) is a diversified company with a number of natural gas pipelines, oil pipelines, and electrical power plants. The firm has $19.1 billion in long-term debt and a total debt to equity ratio of 1.27. The company is also looking at building a natural gas pipeline to Canada’s west coast for liquefied natural gas (LNG) exports to Asia.
With an expected 2014 earnings per share (EPS) of $2.51, the firm trades at a forward price to earnings ratio (P/E) around 19. This is rather expensive and shows that the market expects Keystone XL to be approved. The company is in a good industry with huge capital requirements that form strong barriers to entry. Its profit margin of 17.8% is also encouraging.
Enbridge Inc (USA) (NYSE:ENB)’s total debt to equity ratio of 3.23 is much higher than TransCanada Corporation (USA) (NYSE:TRP)’s. Also, Enbridge’s return on investment of 3.1% is lower than TransCanada’s 4.1%. It is important to remember that over the coming years, Enbridge is expanding its network to move more crude through the congested North American market and boost earnings. With expected 2014 EPS of $2.07 it has a forward P/E ratio around 22.
How do these firms compare to large integrated oil firms like Exxon Mobil Corporation (NYSE:XOM)? ExxonMobil is one the vanguards of the 20th century. Its experience and legacy assets have helped to create a return on invested capital of 25.5%, a rate far above the TransCanada Corporation (USA) (NYSE:TRP)’s 3.5% and Enbridge Inc (USA) (NYSE:ENB)’s 2.3%. ExxonMobil is huge company and can’t grow as quickly as smaller firms. Regardless, its mix of oilfields, pipelines and refineries give it steady profits. With an expected 2014 EPS of $8.15 it is trading at a forward P/E ratio around 11, a great deal.
Conclusion
There is a good probability that Keystone XL will be approved. The reality is that pipelines are safer than the alternatives, trains. Overall TransCanada Corporation (USA) (NYSE:TRP) and Enbridge Inc (USA) (NYSE:ENB) are promising investments for energy investors looking for growth. With that being said, they have a huge amount of political risk. The approval of new pipelines is always a political hot potato. Energy investors looking for a more stable investment will find a better fit with Exxon Mobil Corporation (NYSE:XOM)’s diversified global operations.
The article Is it Time to Invest in Keystone XL? originally appeared on Fool.com and is written by Joshua Bondy.
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