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By Matthew Coffina, CFA and David McColl | 03-19-2014 02:00 PM

Go North of the Border for These Energy Picks

Morningstar's Matt Coffina and David McColl share one low-risk idea to capitalize on Canadian oil sands and another with upside potential.

Matt Coffina: For Morningstar StockInvestor, I'm Matt Coffina. I'm joined today by David McColl, who is a senior equity analyst on our energy team. We're going to talk about opportunities in the Canadian midstream industry.

David, thanks for joining me.

David McColl: Great. Thanks for having me, Matt.

Coffina: Oil production is booming in Alberta, Canada, but we're currently short of pipeline capacity to get that oil to market. Can you briefly explain your outlook for oil production over the next several years and just how much pipeline capacity we're going to need?

McColl: Certainly. I think it's useful to think about the type of oil we produce: We have light oil and heavy oil, or bitumen. Production in Alberta right now is roughly 3 million barrels per day. That's going to increase to about 4.6 million barrels per day by 2017. So, that's a significant increase. Looking out even further, we expect it could easily eclipse 5 million or 6 million barrels per day.

The question becomes, well, how do you get that to market? How do you get it out of Alberta? Right now, our pipeline capacity is just a little bit short of that number. So, we're exporting by rail, roughly 100,000 to 200,000 barrels per day. But when we hit 2017, this is just a great example: If Keystone XL comes on line from TransCanada by 2017, we might have 3.4 million barrels a day pipeline capacity.

But we're still going to need to export roughly 4.1 million barrels per day. So, we're looking at a situation where we're going to be short maybe half a million barrels per day pipeline capacity for the next three to four years.

Coffina: There are a few major projects in the works to deal with this. You just mentioned Keystone XL, that's obviously garnered the most media attention. What's your outlook for Keystone XL? Do you think they'll ever get their presidential permit?

McColl: Keystone XL is TransCanada's project. We right now look at three scenarios. The first is the presidential permit is issued before the midterm elections in November 2014. We think that's highly unlikely.

The second scenario is presidential permit is issued after the midterm elections, so maybe that's early 2015. We think that's going to happen. That's our base-case scenario. So it's not a question of if it's approved, it's a question of when. If that happens, pipeline should come on line in 2017.

Probably you could say our worst-case scenario is no presidential permit is issued under the current administration, in which case we actually think it'll be issued in the next presidential administration, which really kicks Keystone XL out to 2018 or 2019. We thought it would come on line in 2014. So there is a lot of delays happening with this project.

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