Approval of Keystone Pipeline Will Pump Profits Out of Canadian Oil Sands

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With U.S. President Barack Obama expected to approve the long-delayed Keystone XL oil pipeline late this year or early in 2012, several companies already producing in the Canadian oil sand fields stand to benefit.

The 1,700-mile pipeline, which could be finished as soon as mid-2013, will carry 700,000 barrels of crude per day from the Canadian oil sands in Alberta to refineries in Port Arthur, TX.

That will make it easier for the oil-producing companies to get their product to market.

"It's a great idea," said Money Morning Global Resources Specialist Peter Krauth. "According to the EIA, Canada is the top petroleum exporter to the United States – delivering more oil than Saudi Arabia and Mexico combined and, for the most part anyways, Canadians don't hate Americans."

Approval of the Keystone pipeline, first proposed by TransCanada Corp. (NYSE: TRP) in 2008, has been delayed for more than a year because of environmental concerns.

In particular, Nebraska residents fear leaks from the pipeline fouling the Ogallala Aquifer, which supplies the drinking water for more than 2 million residents. Environmental groups say the complex methods required to extract the oil from the sands are destructive to the land and generate excess greenhouse gasses.

However, political pressure to "do something" about the high price of oil and a desire to create jobs almost certainly ensures that the pipeline will get built.

"For the Obama administration, having an answer to high prices will be much more important in 2012 than it is today," Kevin Book. managing director at the research firm ClearView Energy Partners, told CNN Money. "We think it will get approved."

Up to Obama

Because the Keystone pipeline crosses an international border, the U.S. State Department is responsible for approving it, but President Obama is expected to make the final decision.

The State Department issued a report in August that said the environmental impact would be limited, and is expected to recommend that the president approve it.

"We still anticipate State will approve the project by year end," Christine Tezak, an energy and environmental policy analyst at asset management firm Robert W. Baird & Co., wrote in a research note last month. "The White House will cite national energy security, trade with a close neighbor, new jobs, and historically strict permitting requirements as justification for approval."TransCanada has said the Keystone pipeline project will create 20,000 jobs directly and 118,000 jobs indirectly.

In an interview with KETV of Omaha on Tuesday, President Obama, wary of offending a group that supports him, appeared to reassure environmentalists while hinting that he plans to give the project the green light.

"We need to encourage domestic oil and natural gas production," President Obama told KETV. "We need to make sure that we have energy security and aren't just relying on Middle East sources. But there's a way of doing that and still making sure that the health and safety of the American people and folks in Nebraska are protected, and that's how I'll be measuring these recommendations when they come to me."

Vast Potential

The Canadian oil sands already produce 1 million barrels of oil a day, making it the largest single source of oil to the United States. Production is expected to increase to 4 million barrels a day within the next 10 years, which would put Canada among the world's top oil producers.

The reserves are estimated at 175 billion barrels – enough to supply the world's oil needs for a century.

The reason this resource went untapped for so long – the oil sands were discovered in the 19th century – is that it costs at least twice as much to extract this type of oil than it does conventional crude.

But the steady rise of oil prices has made even this method profitable. With global demand prices expected to keep rising, oil prices have nowhere to go but up in the long run.

Several companies with large operations in the Canadian oil sands fields already will be able to expand more rapidly once the Keystone pipeline is completed.

Three in particular are worth a look from investors:

ConocoPhillips (NYSE: COP): Its Canadian oil sands operations only constitute about 2% of ConocoPhillips' global production now, but it plans to increase production from 60,000 barrels a day to 1 million barrels a day over the next 20 years. Of course, there are several good reasons to own ConocoPhillips, such as its 3.82% dividend yield and the fact that it plans to split into two companies next year. And its Price/Earnings (P/E) ratio is also attractive, at 8.85.

Canadian Natural Resource Ltd. (NYSE: CNQ): This company currently produces about 110,000 barrels a day from the Canadian oil sands, with plans to reach 500,000 barrels a day within the next few years. CNQ owns the Horizon oil sands project, which has reserves estimated at 2.9 billion barrels of oil. Canadian Natural Resources offers a dividend, though its yield is just 1.06%. It's been trading in the $34 range, but the average one-year price target is $51.69.

Suncor Energy Inc. (NYSE: SU): Suncor is the purest play on Canadian oil sands, as the Alberta operations make up about 90% of its total oil production. Suncor expects current oil sands production of about 500,000 barrels a day to reach 800,000 barrels a day by 2020. It expects its oil sands production to grow 10% a year over the next decade. Suncor's earnings in the first half of 2011, when global oil prices were peaking, doubled from the previous year, so the company is well-positioned to benefit from future price rises. Suncor's dividend yield is 1.45%.

If that's not enough, another, even better play on "black gold" appeared in Monday's issue of Private Briefing, Money Morning's daily service that costs just $5 per month. According to former hedge-fund manager and Money Morning contributor Jack Barnes, this small refiner "has some really nice upside." For details on this promising stock and more information on Private Briefing, click here.

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  1. Venture Shadow | November 3, 2011

    Suncor is not the purest play on Canadian oil sands. The purest play is a company simply called "Canadian Oil Sands Limited." The US symbol is COSWF.PK, the Canadian exchange symbol is COS.TO . It is liquid (average daily volume 240,059), its PE is about 7.5, it has a 14% free cash flow yield, its dividend exceeds 5% per year, and its price is now (22.87) near its 52 week low and about 40% below its 52 week high. Beat that if you can!

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