Stalled Keystone XL Pipeline Project a Big Win for Gulf Coast Oil Refineries if Approved

Clarification: Tesoro operates refineries in the Mid-Continent and West Coast. 

NEW YORK ( TheStreet) -- With the newly empowered Congressional Republicans saying they now have the numbers to pass a bill that would lead to presidential approval of the long-delayed Keystone XL Pipeline project, there is a renewed focus on the energy industry and the companies that could win, or lose, if the pipeline is approved, allowing Canadian crude to be transported to the U.S. Gulf states.  

The Keystone XL Pipeline is expected to boost profits for refiners, take market share from overseas suppliers of heavy crude, and force railroads that currently transport heavy crude from Alberta’s oil sands to the U.S. Gulf Coast to look for new sources of revenue, analysts said.

Keystone XL, if approved by U.S. authorities, will run 1,179 miles from Alberta, through Montana and South Dakota to Steele City, Neb., before connecting with an existing pipeline that runs through Kansas and Oklahoma to the Gulf Coast of Texas. The planned pipeline will be owned and operated by TransCanada, which operates oil and gas pipelines and renewable energy facilities in the U.S. and Canada.

The U.S. State Department has to approve the pipeline because it crosses an international border between Canada and the U.S. And although the State Department determined in 2013 that it would have "no significant impact" if approved, Pres. Obama has yet to give his blessing on the project.

Gulf Coast refiners, such as Valero Energy (VLO) , are expected to benefit from the lower cost of transporting the Canadian crude compared with what they currently pay to ship it by rail, analysts said. Refiners like Tesoro (TSO) also may also reap cheaper transportation costs, given the Keystone XL Pipeline will feed into Nebraska before connecting to another Keystone pipeline that takes it to the Gulf Coast. Tesoro operates refineries in the Mid-Continent and West Coast. 

Fadel Gheit, an energy analyst at Oppenheimer and Co., estimates that refiners will save $2 to $3 a barrel for piping in crude oil than sending it across the country by rail.

"If we do the math, we’re talking half a million to a million dollars a day of cost advantage,” Gheit said. “The pipeline will cut the transportation cost by more than half."

The switch to piped crude is also expected to create excess capacity in rail cars, whose numbers have risen sharply in recent years to take surging crude supplies from Canada and the Bakken field to U.S. refineries.

The changeover will temporarily cause disruption while the rail industry looks for new customers, Gheit said, and that may mean lower transportation rates for makers of other commodities because of the large number of available rail cars.

"It will reduce rail shipment costs because you will have more capacity," he said.

Rob Desai, an analyst at Edward Jones, predicted the main casualty of the pipeline will be overseas exporters of heavy crude, such as Mexico and Venezuela, whose supplies would be offset by the piped oil from Canada.

"If we have more heavy oil from Canada, we could cut off Venezuela completely," Desai said.

Processing more of the Canadian crude will also help to cut costs for Gulf refiners because oil trades at a discount to the West Texas Intermediate, an oil price benchmark in the U.S., Desai said. 

After years of indecision by the Obama administration, and fierce opposition from environmentalists, the GOP’s seizure of Senate control in the mid-term elections now makes it likely that Keystone will be completed, said Daniel Clifton, head of policy research at Strategas, an investment research firm.

"We’re in a path to Keystone finally getting approved after five years, and it will likely happen in 2015," Clifton said.

Although the possibility of a presidential veto remains, and the Nebraska Supreme Court has yet to rule on the pipeline’s route through that state, Clifton argued that the increased number of Republican supporters, together with a handful of Democrats, makes it unlikely that President Obama will again withhold his approval of the pipeline, as he did in 2012.

"This isn’t just the Republicans just passing a bill and throwing it on the President’s desk," Clifton said. "This is a bipartisan bill."

In addition to U.S. refineries, beneficiaries of the completed pipeline would include Canadian crude producers Suncor Energy (SU) and Canadian Natural Resources (CNQ) , Clifton said.

Don Canton, a spokesman for Sen. John Hoeven (R-ND), a long-time backer of Keystone, said the pipeline now has the backing of all Senate Republicans, together with "six or seven" Democrats.

While the total would fall short of the 66 votes needed to override a presidential veto, it would demonstrate clear Congressional intent, Canton said.

A planned bill would claim that Congress has the authority to regulate Interstate and international commerce under the Commerce Clause of the U.S. Constitution, he said.

"The plan is to bring it up for a stand-alone vote and this is a good test to see if he is actually going to work with the majority," Canton said, referring to President Obama. "If not, down the road, we would attach it to some must-pass legislation that would be very difficult for him to veto."

Canton said Sen. Mitch McConnell (R-KY), who is expected to become the new majority leader, has "expressed support for a vote in January."

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates VALERO ENERGY CORP as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate VALERO ENERGY CORP (VLO) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, largely solid financial position with reasonable debt levels by most measures and attractive valuation levels. We feel these strengths outweigh the fact that the company shows low profit margins."

You can view the full analysis from the report here: VLO Ratings Report

 

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