Short-term pain, long-term gain from TransCanada's Keystone purchase: analyst

Lauren Krugel
The Canadian Press
June 17, 2009

CALGARY - TransCanada Corp. (TSX:TRP) will suffer some "short-term pain" after buying the rest of the Keystone crude pipeline from ConocoPhillips' (NYSE:COP), but the purchase will be a beneficial in the long-term, an analyst said Wednesday.

"With the acquisition of ConocoPhillips remaining 20 per cent interest in Keystone and an associated C$1.6 billion equity offering, TransCanada has once again demonstrated its willingness to accept short-term pain in order to position itself for potential long-term growth," Desjardins Securities analyst Pierre Lacroix wrote in a note to clients.

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After markets closed Tuesday, the Calgary-based pipeline giant said it will pay about US$550 million and assume $200 million of short-term debt to buy out its partner in the massive pipeline project, which is currently under construction.

The deal, which is slated to close in the third quarter, means TransCanada will spend US$1.7 billion more on building the pipeline through 2012.

In separate release Tuesday, TransCanada said it raised C$1.6 billion in an equity offering.

A syndicate of underwriters, led by RBC Capital Markets, BMO Capital Markets and TD Securities, agreed to purchase 50.8 million common shares for $31.50 each - about five per cent below TransCanada's Tuesday closing price of $33.06, Lacroix noted.

TransCanada shares were down about five per cent, or $1.70, to $31.36 in midday trading on the Toronto Stock Exchange Wednesday.

"Over the near term, we believe that the dilution from the announced equity offering and short-term power market weakness are likely to constrain TransCanada's share price performance," he wrote.

"Thus, near-term concerns are likely to overshadow the potential positive long-term implications of an increased ownership interest in the Keystone pipeline project."

Lacroix downgraded his recommendation for TransCanada from "buy" to "hold" and lowered its share price target from $39 to $35.25.

He said, however, that TransCanada's full ownership of Keystone will be a good thing in the long run.

"Additional ownership in Keystone should provide TransCanada with full control over a valuable long-life asset, a stable source of primarily contracted earnings and cash flow, as well as a platform for future expansion in the crude oil pipeline industry."

In the release Tuesday, TransCanada chief executive officer Hal Kvisle said the purchase "represents a unique opportunity for TransCanada to become the exclusive owner of an important oil transmission system that will play a vital role in transporting a growing supply of Canadian crude oil to the largest refining markets in the United States for decades to come."

ConocoPhillips has been whittling down its stake in Keystone as a means to direct cash towards other projects.

The U.S. firm originally owned a 50 per cent stake in Keystone, but sold 30 per cent of its holdings to TransCanada last year.

When completed, Keystone will be one of the largest oil delivery systems in North America with the capacity to ship 1.1 million barrels a day of oilsands crude to refineries in the United States.

The first 3,456-kilometre phase of Keystone will carry crude from Hardisty, Alta. to markets in Illinois. That leg, which will have an initial capacity of 435,000 barrels per day, is expected to come into service later this year.

The pipeline will then be expanded to 590,000 barrels per day and extended to Cushing, Okla. Commissioning is expected late next year.

TransCanada envisions a further expansion of 500,000 barrels per day and an extension to terminals in Port Arthur, Texas. That portion will allow oilsands producers to send their crude to the Gulf Coast, the centre of North America's refining industry, by 2012.

The company is seeking approvals from Canadian and U.S. regulators on the final phase. Construction is expected to begin in 2010.

The total cost of the massive project is expected to be about US$12-billion.

Keystone has secured long-term commitments for 910,000 barrels per day for an average term of approximately 18 years which represents 83 per cent of the commercial design of the system.