Monday Mailbag: Keystone XL

I heard that Keystone XL did not receive approval. What does this mean for MLPs?

On Friday, President Obama announced that he would not allow Keystone XL to be built. In 2008, TransCanada (TRP) filed its first application to the US State Department for a permit. Since that time, the project has been wrapped up in red tape, drawing headlines as a symbol of President Obama’s stance on climate change.

In May 2012, TRP reapplied for the permit after having the pipeline formally rejected by the president earlier that year. The route was redirected to circumvent environmentally sensitive areas, and in 2013, President Obama said that allowing the pipeline to be built would require proof that “doing so would be in our nation’s interest” and that the project would not “significantly exacerbate” carbon pollution. The State Department eventually found in its final environmental assessment that building the pipeline wouldn’t exacerbate pollution, but this ultimately did not influence the president’s decision.

In early 2014, the southern portion of the pipeline, dubbed the Gulf Coast Pipeline Project, began operating between Cushing, Oklahoma and Texas. This 485-mile pipeline did not require a presidential permit since an international border wasn’t crossed. The version of the pipeline that President Obama ultimately rejected was a 1,179-mile crude oil pipeline that would have stretched from Alberta to Nebraska. According to TransCanada, the pipeline was “a critical infrastructure project for the energy security of the United States and the strengthening of the American economy” and would have transported 800,000 barrels of oil per day. President Obama did not mince words on Friday when he markedly disagreed. Environmentalists rejoiced.  Republican presidential candidate, Marco Rubio vowed to reverse the decision if elected.  And those who love the sensational enjoyed searching the internet for all the gossip.

While the decision may be noteworthy for a host of political and environmental reasons, the actual impact on the energy infrastructure investment market will likely be marginal. At the beginning of the year, we pointed out that most analysts and investors had already written the project off entirely. The president has been relatively upfront about his plans to veto the bill (so much so, that TransCanada requested a suspension of the permit in an attempt to take the decision out of the hands of the Obama Administration). Therefore, when the news came that the project would not move forward, it was unlikely a major shock.

That being said, TRP was down 5.2% on Friday. So, pretending that the news had no bearing on investor sentiment is probably unrealistic. TC PipeLines (TCP), the company’s MLP, was also down 3.0%. The impact is much more tangible for TRP and its investors, as the company had already sunk about $2.5 billion into the project with no cash flow return to show for it. For TCP, the impact is negligible, however. On Friday, TCP announced increasing earnings and cash flow compared with the same quarter in 2014. The company also reaffirmed their expectation to increase their annual distribution by at least 6% for the next 2 to 3 years.

If oil prices were $120 per barrel right now, we might be singing a different tune as the MLP space at large may have seen more adverse ripple effects from this decision. As it stands today, the overall market has less to lose. While it would have been great news for TransCanada had the decision gone a different way, this doesn’t mean that it’s the beginning of the end of infrastructure projects in the US or that MLPs will suffer greatly from the loss of this single project.

 

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