Few projects carried forward by the oil and gas industry in the US have elicited such stronger reaction from the public as Keystone XL. Criticized by environmentalists and indigenous peoples, supported by conservative politicians and representative of the states involved, the project has not been able to secure favorable legislation yet. Most important, recent tar sand spills gave the public a chance to organize and form a united front to oppose the proposed project. Currently, the project counts with Canadian blessing and waits for the same to occur on the other side of the frontier. Meanwhile, TransCanada (NYSE:TRP) argues the new pipeline will be constructed with the highest safeguards in mind. The delay, however, has impacted over market performance and an ebb on stock value increases can be seen through the last year.
Same Story: Solid Production, and No Decision
TransCanada is today the sole owner of Keystone XL. As planned, the project is an extension for the Keystone pipeline already in place. The entails a new pipeline from Hardisty, Alberta, to Steele City, Nebraska. Additionally, the project plans to extend the Keystone Pipeline from Oklahoma through Texas to the Galveston Bay. It is this last part of the project the one which raised the eyebrows of Canadian legislators, because the project is destined to increase U.S. exports. Nonetheless, delays on the U.S. side are mostly blamed for the company’s recent share value depreciation.
- Warning! GuruFocus has detected 6 Warning Signs with TRP. Click here to check it out.
- TRP 15-Year Financial Data
- The intrinsic value of TRP
- Peter Lynch Chart of TRP
For the year 2013, TransCanada reported that comparable earnings increased 19 percent to $1.6 billion or $2.24 per share and funds generated from operations were up 22 percent to $4.0 billion. The strong year-over-year results reflect a return to an eight unit site at Bruce Power, higher Western Power volumes, an increase in New York capacity prices, growth in our NGTl System, and a higher Canadian Mainline return on equity. Also, several pipeline projects progressed during 2013, and key settlements and decisions were reached that will provide clarity and stability for the natural gas pipelines in the coming years.
The latest news concerning TransCanada relates to Barack Obama’s Good Friday non-decision to put Keystone XL on hold, yet again, possibly until next year, or perhaps indefinitely. Some commentators and analysts got upset with the president for his decision. However, the company itself should carry some blame also. In short, recent tar sand spills did not make the decision any easier. On the contrary, it enraged the public which has been gathering at the White House’s door step to make sure no approval is granted.
No Decision Tramples Growth
Looking forward, TransCanada has secured almost 2.0 billion cubic feet a day of firm natural gas transportation commitments on its Southeast Main Line at maximum rates for an average term of 23 years. "Essentially one hundred per cent of the existing firm capacity on the ANR Southeast Main Line system has now been subscribed and TransCanada is reviewing several options for further expansion to accommodate additional volumes," said Russ Girling, TransCanada's president and chief executive officer. Therefore, the gas side of the business will be pulling forward for some time.
On the oil side of the business, TransCanada could lose significant capital as well as opportunities for attractive future investment predicated on the Keystone XL pipeline project. Additionally, should the project be carried out and complete, there remains a significant regulatory risk. Most important, as volumes decline in Western Canada and new business opportunities are becoming tied to other projects, such as liquefied natural gas terminals, these pipelines represent a growing element of risk.
Currently trading at 21.2 times its trailing earnings, TransCanada carries a 48% discount to the industry average. Moreover, it pays $0.48 in quarterly dividends for an annual yield of 3.70%. And even though operating and net margins are some of the highest on the industry, revenue and net income growth stand on the opposite side. Most important, no guru has acquired the stock since mid-2013, and position reductions have abounded. Hence, the discount offered is only an enticement to attract investors into a declining business, and you are not recommended to acquire the stock.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.