The joint monthly web chat for subscribers of The Energy Strategist (TES) and MLP Profits (MLPP) took place last week. The chat is conducted by Igor Greenwald, who is managing editor for TES and chief investment strategist for MLPP, and myself.
There were four energy sector questions remaining at the end of the chat that required an extended answer, or a bit more research. This week I will answer two of the four questions that were left: One on the importance (or lack thereof) of the Keystone XL pipeline, and one on Nordic American Tankers. Next week's issue will tackle the other two questions: One on Argentina's expropriation from Repsol in 2012 and one on Shell's massive floating liquefied natural gas project.
For answers to some of the remaining MLP questions from the chat, see this week's MLP Investing Insider.
Q: With the impending development of Canada’s own Western and Eastern pipelines, does the Northern leg of Keystone remain essential for Canadian E&Ps or is it just important to transport from the Dakotas?
Given the recent release of the US State Department's final environmental impact statement (EIS) for TransCanada's (TSE: TRP, NYSE: TRP) Keystone XL (KXL) pipeline, this is an opportune time for an update. The EIS concluded that "the proposed Project is unlikely to significantly affect the rate of extraction in oil sands areas…" This is something that I have maintained all along, but this also means that the importance of KXL has been incredibly overblown.
This pipeline project has gotten more attention than any pipeline project since the Trans-Alaska Pipeline of the 1970s. Many environmentalists have protested KXL out of the belief that it is the key to expanding oil sands production in Alberta, but this only demonstrates a general lack of understanding about how logistics projects are executed.
For a bit of perspective, see this partial map of ! just the largest pipelines that crisscross North America. There are presently pipelines crossing rivers and above the nation's aquifers, and there are pipelines crossing the US border to the north and south. According to the Canadian Embassy in Washington, D.C., there are 74 operating oil and gas pipelines that cross the border between the US and Canada. KXL would be the 75th.
Major North American oil, gas, and product pipelines. Source: Theodora
Before KXL, there were many pipeline proposals that would have exported Alberta bitumen. But the Keystone XL got a lot of commitments from the industry because it made the most sense to ship the heavy oil to US Gulf Coast refineries that were configured to refine it. Now that KXL is facing formidable opposition, TransCanada's competitors are dusting off old proposals, and coming up with new ones.
As you suggest, there are pipeline proposals going both east and west. Enbridge's (TSE: ENB, NYSE: ENB) Northern Gateway would provide an outlet to the Pacific Ocean, but there is significant opposition in British Columbia and from First Nations groups. More likely to be approved for a western route will be Kinder Morgan's Trans Mountain pipeline expansion.
Kinder Morgan Energy Partners (NYSE: KMP) has filed an application with Canadian regulators that would nearly triple the 300,000 barrels-per-day Trans Mountain pipeline capacity to 890,000 bpd, and would terminate in Burnaby, British Columbia. The $5.4 billion expansion would be along the existing right-of-way, greatly simplifying the environmental permitting for the project. Last year, 13 companies signed firm contracts, bringing the total volume of committed shippers to 710,000 barrels per day (bpd). The pipeline is scheduled to begin construction in 2016 with incremental product online in 2017.
TransCanada has its own K! XL altern! ative with its Energy East pipeline — a 4,500-kilometer pipeline that would carry 1.1 million barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada. Much of the project will involve conversion of an existing natural gas pipeline and modifications to enable it to transport oil. This project would be nearly 50 percent larger than KXL, and would give Alberta's bitumen an outlet to the East Coast.
Enbridge also has a pipeline project running south and east. Enbridge is expanding the capacity of its Alberta Clipper Pipeline from 450,000 bpd to 570,000 bpd. The Canadian portion of the pipeline transports oil from the Hardisty Terminal in southeastern Alberta to Enbridge's Gretna Station in southern Manitoba, then connects at the international border to the US portion of the system and continues to Superior, Wisconsin. The project is expected to be completed and in service by July 2014.
Whether KXL is approved is unlikely to have a big impact on any particular company. TransCanada would probably see the most significant share price movement, but the project isn't a make-or-break for the company. Oil sands producers like Cenovus Energy (NYSE: CVE, TSE: CVE) have signed up to ship on KXL, and could see some share price movement as well. KXL would probably be the low-cost shipping option for Cenovus and other oil sands producers, but during my visit to Fort McMurray in November Cenovus emphasized that whether KXL is approved or not, the outcome would have no effect on its growth plans given the ready availability of alternatives.
Q: What about Nordic American Tankers? I read that there are even more ships coming onto the market which should kill the latest rise in tanker rates, which would obviously be bad for tanker companies like NAT. Is this what you expect as well?
Nordic American Tanker (NYSE: NAT) is a Bermuda-based tanker company that acquires and charters double-hull tankers. Its fleet consists of 20 double-hull Suezmax tankers. Besi! des the f! actor you mention about more ships coming onto the market, NAT has underperformed — period. Shares have lost two-thirds of their value over the past five years, and the dividend has been cut multiple times.
The company was in one of our portfolios when Igor and I assumed responsibility for the newsletter, and we removed it in a purge almost exactly one year ago. Shares were trading at just under $9 when we removed it, and in the year since, the price has traded as low as $7 and as high as $12.61. Right now it is trading at about $10, around 15 percent higher than it was a year ago.
The reason we removed NAT is that the company has consistently failed to meet its own forecasts as well as investors' expectations. Last month, in a move familiar to Nordic American investors, the company once more cut the dividend from the previous quarter's $0.16 per share to $0.12 per share. (The quarterly dividend in 2012 was $0.30 per share). The share price had been rallying, but now has dropped 11 percent in the past three weeks.
This is one that I would avoid based on past management performance, regardless of the overall drivers in the tanker market.
Next week we will discuss Shell's massive Prelude project, which may help put that company in a dominant position in the world's LNG market, as well as the expropriation of YPF from Repsol by the Argentine government.
(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)
No comments:
Post a Comment