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TransCanada Lines Up Enough Customers to Start Keystone XL

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TransCanada Corporation (TRP - Free Report) recently obtained 20-year commitments from various oil companies to ship around 500,000 barrels a day through its Keystone XL pipeline. The commercial commitment amounts to around 60% of the total capacity of 830,000 barrels a day, reflecting gradual increasing customer support for the pipeline.

The company received strong support from the Alberta government which has committed 50,000 barrels a day. The move has provided TransCanada the much-needed impetus to move forward with the project; however, the company has not made any official announcement yet. 

Late last year, the company declared that it needed to obtain shipments of at least 500,000 barrels for the project to be feasible. The company was to make its final decision regarding the construction and completion of the project by December 2017. However, it has not green-lit the project yet and is currently evaluating Nebraska’s decision to examine the economics of the project.

Significance of the Project

The $8-billion Keystone XL pipeline with 830,000 barrels capacity is designed to improve oil extraction from Alberta’s oil sands and the Bakken region in the U.S. refineries. Both these areas have witnessed huge production growth over the last decade.

The pipeline will ultimately reach Gulf of Mexico refineries. Western Canadian crude producers primarily use the train route to move their oil, which is costlier than movement through a pipeline. Completion of this project is expected to reduce crude shipment prices for producers and enhance their bottom line.

In November 2015, President Obama turned down TransCanada's application to construct the Keystone XL pipeline on fears that it would weaken United States’ position in the international climate change negotiations. Obama had backed the argument of environmental groups that Keystone would encourage use of carbon-heavy tar sands oil, increasing global warming. However, in 2017, the project was cleared by President Trump as he was of the opinion that development of such pipelines can revive the economy.

Hurdles Remain

Despite Trump administration's clearance, the pipeline has been facing regulatory obstacles, and opposition from landowners, environmentalists and Native American tribes.

Some environmental groups in Montana filed a lawsuit in March 2017 who claim that President Trump violated federal environmental law by approving the Keystone XL construction permit without updating the project's 5-year-old environmental impact report.

Further, after TransCanada had spent months negotiating with shippers, 60% uptake — though providing some encouragement to the company — seems relatively modest as compared to Kinder Morgan's (KMI - Free Report) Trans Mountain Expansion Pipeline which secured shipments for 80% of its total capacity. 

Notably, the company cleared a major regulatory hurdle in November 2017 when Nebraska commissioners approved the project, but on an alternative route instead of the company’s proposed route. This has only created new set of problems for the company.The alternate route will likely balloon costs and delay the disputed pipeline project further.

The alternate route calls for a 63-mile detour and attempts to add 5 miles of pipeline along with additional transmission lines and pumping stations. Hence the company is currently busy in reevaluating the project’s viability and schedule.It also engaged in negotiations around easements with landlords along the new route.

Additionally, the Keystone project has been booked several times for causing oil spill. Federal investigators believe that constructional fault is the most likely reason for the oil spill. This has raised concerns among South Dakota regulators regarding the future operations and potential risks associated with the extension of the pipeline.

While the states’ objections may cause modest delays, the risk over commercial demand and commercial viability of the project will likely be the primary factors influencing the final investment decision on the project.

Despite the uncertainty and criticism that surrounds TransCanada’s major pipeline project, the company reaffirmed the forecasts of its profits and earnings growth on the Investor Day observed on Nov 28.

The North American pipeline operator expects EBITDA to grow at an average annual rate of about 10% between 2015 and 2020. Further the Calgary-based company has raised the upper end of its dividend forecasts from 8% to 10%, and extended that outlook by an additional year through 2021.

Zacks Rank and Key Picks

TransCanada currently carries a Zacks Rank #3 (Hold).

Few better-ranked players in the energy space are ConocoPhillips (COP - Free Report) and Royal Dutch Shell plc (RDS.A - Free Report) . Both companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ConocoPhillips delivered an average positive earnings surprise of 152.34% in the trailing four quarters.

Royal Dutch Shell is expected to witness year-over-year increase of 15.19% in its earnings in 2018.

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