Fate of Canada's Pipelines Could Hinge on U.S. Election

Energy infrastructure projects have been under fire lately, highlighted by project cancelations, legal challenges, permit denials, and political opposition. TC Energy's TRP Keystone XL and Enbridge's ENB Line 3 replacement are among the most controversial. The November U.S. presidential election could have a major impact on the future of energy infrastructure, especially on the Keystone XL. If Democratic candidate Joe Biden is elected, it's almost assured that he will revoke the project's presidential permit, shelving the project indefinitely. The Keystone XL also faces opposition from federal lawsuits that question the validity of its permits and challenges to obtaining water crossing permits after Nationwide Permit 12 was ruled invalid for new pipeline projects. On the other hand, President Donald Trump has shown support for the pipeline. It looks like a tossup whether the Keystone XL will be built or not.

The fate of Line 3 seems less dependent on the presidential election. President Barack Obama was supportive of the replacement, and Biden has been mum on his stance on the project, in contrast to his public opposition to the Keystone XL. Line 3 does face opposition from pending litigation, but a negative outcome is more likely to delay construction than cancel the project altogether. Accordingly, we assign an 80% probability that Line 3 will be replaced. Fortunately for Enbridge, safeguards are in place if the project is not built that allow the company to recoup expenses and earn a return on the capital that has already been spent.

We have adjusted our fair value estimates to account for the risk-weighted probabilities of the two pipelines. Wide-moat-rated Enbridge remains one of our top picks in the energy sector. It could be some time before Canada's egress landscape is settled, and investors must be prepared for further volatility in the interim. We advise investors to stay the course while getting paid a handsome 8.4% dividend yield. In the end, we believe Enbridge's long and winding road will lead to 40% upside. We also see upside in 4-star TC Energy coupled with dividend growth potential to add to its 5.8% yield.

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