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Keystone: A Key to Senate Races?

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After the geopolitical tensions between Russia and the West over the fate of a referendum in the Ukrainian region of Crimea, another entrant into domestic politics has added more spice to the run-up to this year's Senate elections. The proposed Keystone XL oil pipeline expansion has got both Democrats and Republicans fired up. The choice between Republican pragmatism and greener Democrats is a tough call for the incumbent White House.   

The Keystone XL pipeline, if approved, would connect the oil sands of Alberta to the US Gulf. Proponents of the project cite job creation and economic benefits, while detractors point at environmental costs as well as the dangers associated with pipelines. The construction phase would generate more than 40,000 temporary jobs but fewer than 100 permanent positions after the pipeline is put in place. Critics have also pointed out that if a pipeline extension is not permitted, the U.S. would have to rely more on foreign sources like Venezuela.

The pipeline tussle is actually part of the ongoing proxy war between the Democrats and Republicans. With Republicans holding sway over the House of Representatives, a Democratic Senate is of utmost importance to President Obama. Republicans need to gain six seats to take control of the Senate.

Regardless of whether or not the pipeline is approved by President Obama, there is busy trade between the Western Canadian Select (WCS) hub and the U.S. Gulf Coast. Most of this capacity is moving by accident-prone rail route.

However, the Obama administration’s focus on clean energy, at a time when the domestic economy has just about started to turnaround, has repeatedly come under fire from Republicans. The apprehension about wrinkles in the economy is also shared by us as the Federal Reserve indicated a possible hike in key lending rates sooner than expected.

The Republicans, along with a cross section of Democrats, are pushing for approval of the pipeline which they feel would pump the U.S. economy with multi-millions in revenues. They also advocate that the pipeline would drag down U.S. energy costs and trim the energy import bill.

While the political impasse over Keystone XL deepens, we remain apprehensive about necessary approvals for the pipeline project.

Let's look at some companies whose fortunes are closely tied to the political game of Keystone.

San Antonio, Texas-based Valero Energy Corporation (VLO - Free Report) is the first name that comes to mind. The Zacks Rank #1 (Strong Buy) company is slated to benefit immensely as a key customer of the Keystone XL Pipeline. Our bullishness stems from the company’s refiners in the Gulf which would see its margins skyrocket once the tide of crude is shifted to Canada from dearer overseas sources.

Further in Dec 2013, the company came out with an initial public offering for its logistics master limited partnership (MLP) – Valero Energy Partners LP (VLP - Free Report) . The Zacks Rank #3 (Hold) MLP enabled Valero to monetize its existing infrastructure, and would also offer a favorable financing option for future logistics projects.

The spin-off was a master’s stroke by the company for it holds the option of acquiring 15% of the pipeline. In case the deal is approved, the tax advantages alone, we feel, will have another surefire winner in our ranks.

Apart from Valero, the world’s largest publicly traded energy company ExxonMobil Corporation (XOM - Free Report) is another stock we will keep our eyes peeled. The Zacks Rank #3 (Hold) energy giant’s significant refining presence in the Gulf stands to clock northward margins once the flow of Canadian sour crude rises. We feel that even if the spread between WSC and WTI returns to a more historical range, the company would still be able to boost its refining margins.

ExxonMobil also holds an approximately 70% stake in Canadian oil sands producer Imperial Oil (IMO - Free Report) . Imperial’s Kearl project oil sands mine in Alberta is producing approximately 110,000 barrels per day (bpd). With company estimates taking the tally to 345,000 bpd by 2020, we feel this could well improve margins of the duo in the future.

Our focus would also be on leading energy transportation and distribution company Enbridge Inc. (ENB - Free Report) . The company recently received approval from Canada's pipeline regulator, National Energy Board (NEB), for flow reversal and expansion of its Line 9B between Westover, Ontario and Montreal, Quebec. Combined with the previously approved project to reverse Line 9A across Sarnia, Ontario and Westover, this project will enable the delivery of North American crude oil to Ontario and Quebec based refineries. The reversal and expansion are expected to be in service by the fourth quarter of 2014.

For investors with high-risk appetite we would suggest TransCanada Pipelines (TRP - Free Report) . This Zacks Rank #5 (Strong Sell) is now out of investors focus owing to political rumblings over the pipeline. However, any positive development over Keystone could turn out to be a bonanza for investors. This is due to the simple fact that TransCanada would be the company building the pipeline, which would run up to 1,179 miles and carry up to 830,000 barrels of oil per day.

End Note

The Keystone project seems to be the sword of Damocles for Obama’s climate change plan. As Obama battles Republican majority House of Representatives, the only solace is the wafer thin majority of Democrats in the Senate. However, any political misstep on his part may well give the Republicans the needed half a dozen seats in the Senate, ending the Democratic majority there too.

If this happens, it would bring a fair share of opposition to Obama’s greener climate agenda as the White House looks toward the next round of climate talks in 2015.

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