TC Energy's decision to proceed with the help of the Alberta government will allow the oilpatch to hit the ground running when prices recover

CALGARY – TC Energy Corp.’s decision to proceed with the long-delayed Keystone XL pipeline with the help of the Alberta government would allow the oilpatch to hit the ground running when prices recover.

“This is absolutely critical for our economic future now more than ever,” Alberta Premier Jason Kenney said in an interview with the Financial Post.

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On Tuesday, TC Energy, formerly known as TransCanada Corp., said it has decided to build the controversial pipeline with a US$1.1-billion “strategic investment” from the Alberta government.

The province is making a preferred equity investment in the 830,000-barrels-per-day pipeline project that would carry oil from Alberta to the U.S. Gulf Coast, home to the largest concentration of heavy oil refineries in the world.

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“We appreciate the ongoing backing of landowners, customers, Indigenous groups and numerous partners in the U.S. and Canada who helped us secure project support and key regulatory approvals as this important energy infrastructure project is poised to put thousands of people to work, generate substantial economic benefits and strengthen the continent’s energy security,” TC Energy president and CEO Russ Girling said in a release Tuesday.

The project, first proposed in 2008, had been staunchly opposed by environmental groups and some farmers along the route, and has repeatedly been the subject of lawsuits and regulatory delays. Last year, the Nebraska Supreme Court approved the project, removing the last remaining obstacle for the project after a protracted legal battle with a group of opposed landowners in that state.

Girling said that the project “could not have advanced” without the support of both U.S. President Donald Trump and Alberta Premier Jason Kenney.

Photo by Ian Kucerak/Postmedia

Apart from a stake, Alberta will provide a $6 billion loan guarantee beginning in 2021, for the project which is now expected to cost US$14.4 billion. TC Energy has already spent US$6 billion trying to advance Keystone XL in recent years.

Both the Alberta and federal governments believe the project would provide material benefits to both the province’s government revenues and the wider Canadian economy.

“This is good news for our oil and gas industry. It comes at a time when the industry needs it. It means thousands of good, well-paying jobs for the highly skilled workers in the industry needs now and into the future,” federal Natural Resources Minister Seamus O’Regan said in an email.

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BMO Capital Market analyst Ben Pham said construction of KXL was “somewhat of a surprise” in the backdrop of sub-US$20 per barrel of U.S. crude and Canadian production cuts.

But “those are likely transitory impacts and the Alberta Government is effectively bearing the risk of the U.S. election this year while TRP shareholders retain upside to a materially accretive, long-term contracted oil pipeline project,” the analyst said in a note Tuesday.

Canadian oil stocks rebounded sharply Tuesday partially on news that the Keystone XL pipeline would break ground this week.

This is good news for our oil and gas industry. It comes at a time when the industry needs it Natural Resources Minister Seamus O’Regan

As West Texas Intermediate benchmark price for oil rose roughly 2 per cent to US$20.41 per barrel, shares of oilsands producers Suncor Energy Inc., Canadian Natural Resources Ltd., Cenovus Energy Inc. and others jumped 20 per cent as the market absorbed the Keystone XL announcement. TC Energy shares jumped 6.85 per cent to $62.26 on a rare positive day for the market this month.

The S&P/TSX Capped Energy Index has fallen more than 54 per cent this month, amid a Saudi-Russian price war, which has seen the Canadian heavy oil benchmark plunge below US$5 per barrel

“This decision provides a critical boost of confidence to the Albertan and Canadian economies. It is essential that Canada can contribute to attract major investments like Keystone XL, which will result in billions in government taxes and royalties and improved market access for Canadian resources,” said Chris Bloomer, president and CEO of the Canadian Energy Pipeline Association.

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However, the new project could strain TC Energy’s credit profile.

Moody’s Investors Service changed the credit outlook of TC Energy and its subsidiaries from stable to negative after the Keystone XL announcement over concerns about the costs of getting the long-delayed, hotly contested pipeline built.

Photo by Jeff McIntosh/The Canadian Press files

“The negative outlook reflects the very high level of execution risk related to environmental, social and governance factors associated with the Keystone XL pipeline project, which TC Energy has decided to move forward on,” Moody’s vice-president and senior credit officer Gavin MacFarlane said in a release.

“We do not assume that the project will be completed in our current forecasts for the company and will only incorporate cash flow when the project is complete. The decision to move forward is a material credit negative,” MacFarlane wrote.

The Keystone XL pipeline project had previously been a casualty of the larger fight around climate change in North America which led former U.S. president Barack Obama to veto the project before leaving office.

However, Kenney believes the political risk has subsided ahead of the 2020 U.S. presidential election as the Republican nominee, U.S. President Donald Trump, supports the project and the Democratic frontrunner Joe Biden has not opposed it.

Biden was vice-president under Obama, when the Keystone XL project was delayed multiple times and ultimately vetoed, a move which led TC Energy to file a US$15-billion lawsuit against the U.S. The company dropped the lawsuit when Trump came into office and and signed an executive order approving the project.

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BMO’s Pham noted in his report that US$4.2 billion of the remaining US$6.9 billion required to build the project will be covered by a credit facility guaranteed by the Alberta government. TC Energy could source US$2.7 billion from internal cash flow and hybrid securities. The company expects to purchase the government’s equity once project is complete.

The analyst raised the company’s share price target to $65 per share, from $62 previously, on the back of attractive US$1.3 billion of adjusted earnings underpinned by 20-year take-or-pay contracts for 575,000 of bpd.

“This will effectively almost remove all the commodity/volume exposure from TRP’s cash flows,” the analyst said.

Financial Post