Enbridge Inc (USA) (ENB), TransCanada Corporation (USA) (TRP): Betting on Keystone

Today, the Keystone XL Pipeline is the million dollar question. Without getting into the politics surrounding it, let’s examine what approval of the pipeline might mean for investors. In this post we’ll examine three companies that stand to benefit from the pipeline should it get approved. The first of these, Enbridge Inc (USA) (NYSE:ENB), is a Canadian pipeline operator that I’ve covered before. The company is one of the best in its sub-sector and even pays a 2% premium dividend to DRIP investors. However, its bonus must be counterbalanced to the 15% Canadian dividend withholding tax charged to American investors. TransCanada Corporation (USA) (NYSE:TRP), another key pipeline player several years back, had a DRIP-based premium dividend but recently abolished this benefit. Lastly, ConocoPhillips (NYSE:COP) owned a part of the pipeline in the beginning, but sold its stake to TransCanada Corporation (USA) (NYSE:TRP) in 2009 and was (and will likely be) among many integrated oil and natural gas companies to benefit given regulatory approval.

Enbridge Inc (USA) (NYSE:ENB)

Likely Approval Means Opportunity

Given the likelihood of Keystone XL being approved at some point, in my estimation it would be a good idea to get ahead of the curve. So, the pressing question is what’s the best company to invest in in order to do so? Would investors be best served by betting on a niche pipeline company or larger energy corporation? Well, the answer is two-fold. Would you like direct exposure to the sole owner of the pipes (i.e. TransCanada Corporation (USA) (NYSE:TRP)), diversified risk from betting on an integrated oil and natural gas player that will have some capital exposure to Keystone XL, or something in between (i.e. a partner company like Enbridge Inc (USA) (NYSE:ENB))? Obviously the disadvantage of investing in a company like ConocoPhillips (NYSE:COP) is indirect investment exposure; while it produces a margin of safety it also denies investors the potential significant upside provided by pipeline and transports companies (e.g. TransCanada Corporation (USA) (NYSE:TRP) and Enbridge Inc (USA) (NYSE:ENB)).

Recommended Action

Here’s what I’d do–invest in the major energy players. If an investor only has a finite amount of money to invest, then their objective should be to make the best use of this capital and achieve maximum ROI with an acceptable level of risk. When we examine the three above-mentioned companies, all on the surface have pretty healthy dividends. As in my other recent post, you’d want to apply the “dividend x-ray” to see their dividends (as well as fundamentals) merit prudent investment. And while we’re speaking of dividends, another aspect to note is payout ratio, closely scrutinize it. In order for dividends to be sustained long-term, quality companies need to hoard cash. If payouts are too large, then usually dividends tend to be cut or done away with altogether. I like to call this phenomenon dividend faux amis, or “false friends” as we say in English–essentially payouts are too good to be true.


In conclusion, I think betting on Keystone to be approved is pretty sound. In all likelihood the pipeline will get approved sometime going forward. In fact, it’s already completed in some locations, so it’s just a matter of pressing forward and finishing the job. In the end, which companies will benefit the most? I think a safe play in this area is any number of the major integrated oil and natural gas companies. I think pipeline corporations will get a quick pop and then quickly settle down back to Earth, but I could be wrong. That being said, investors may have to wait for considerable time before Keystone XL is fully approved and 100% operational, but for long-term investors I think that makes for an acceptable amount or risk. In the meantime, sit back and enjoy healthy regular payouts (if the company is solid), and as far as sustainable, long-term, quality dividends go the energy sector is hard to beat.

The article Betting on Keystone originally appeared on Fool.com and is written by David Mercer.

David Mercer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. David is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.