New Permit Moves Keystone XL Forward
Our fair value estimates for TransCanada and Enbridge are unchanged.
President Donald Trump has rescinded his initial presidential permit for the Keystone XL pipeline and issued a new one for the project. The now outdated permit was based on a 2014 environmental impact study performed by President Barack Obama’s administration. In November 2018, a Montana judge ruled that the study was incomplete and halted construction on the project. The new permit, issued by Trump himself, does not require an environmental impact study and aims to undercut the legal proceedings that are holding up the project. We believe that TransCanada (TRP) can now proceed with the work necessary to begin construction once all permits are received. Accordingly, we think there is still time for construction to begin in the first half of 2019, and we still expect the Keystone XL to be placed into service by the end of 2021. Because of this, we are maintaining our $53 (CAD 70) fair value estimate and narrow moat rating for TransCanada.
While the news is welcomed by TransCanada, the market does not appear to see it as a positive for Enbridge (ENB). With the Keystone XL fully contracted at 90% of its capacity, it represents a risk to Enbridge’s Mainline utilization levels. However, we think that investors are mistakenly worried about underutilization of the Mainline while competing pipelines are placed into service. Even if the Keystone XL and Trans Mountain Expansion are placed into service as we forecast, we expect only minor underutilization of the Mainline until Canadian crude supply ramps up to our forecast levels. We expect all the major pipeline expansions to be operating near full capacity within the next decade. Accordingly, we are maintaining our $47 (CAD 62) fair value estimate and wide moat rating for Enbridge.
Joe Gemino does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.