What Northern Gateway approval means for Enbridge

Government approval had many conditions attached, and it may take years before shovels are in the ground, but this was already reflected in analyst David McColl's fair value estimate.

Ashley Redmond 26 June, 2014 | 1:00PM David McColl
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Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I'm here with David McColl, Equity Analyst.

David, thanks so much for joining me.

David McColl: Great, thanks for having me.

Redmond: So last week, the Northern Gateway pipeline project got the go ahead from the Canadian government. But it's not all roses, it comes with 209 stipulations and there is a lot of opposition in Canada right now. The Liberals are against it, the NDP is against it of course the Green Party is against it, BC residents are angry, First Nations are angry. So really, what does this initial green light mean for Enbridge?

McColl: At Morningstar we've seen this green light coming for years, but we've also assumed that the project isn’t going to happen for years. In many ways we view it as the Mackenzie Valley pipeline. And for those who aren’t familiar with that pipeline, it was proposed over 30 years ago to connect high Arctic gas to the North American market. It took about 30 years to finally get the last Aboriginal group on board and I think there were only 5 to 10 groups. So, within BC it's a bigger group of people and more dogmatic opposition. So we really don’t expect it to happen. It could be 30 years before everyone is on board. So, yes, it's good news, but it really isn't going to move the needle.

Redmond: So, you are not too positive on Enbridge meeting the 209 stipulations in the next year?

McColl: We think Enbridge could meet the 209 stipulations quite easily. When you look at the stipulations some of them are as simple like have a caribou rehabilitation plan and propose how you are going to deal with tankers. The stipulations really aren't that difficult, we think they'll achieve it. The challenge is dealing with all the other issues and all the various stakeholders. Can they do it? Yes. Do we think they will? We're still waiting to see.

Redmond: Okay. So does this change your fair value estimate of Enbridge?

McColl: It doesn’t. Our fair value is $56 per share. One important point is that Enbridge is [heavily] levered to long-haul pipelines from Fort McMurray all the way down to the U.S. Gulf Coast into Montreal. That's what's driving the fair value. If we see Northern Gateway come on, then that’s just a nice boost to our fair value estimate.

Redmond: Do you think other companies are going to be watching this very intently, like TransCanada?

McColl: Yes and no. I think the issue for someone like TransCanada is that they are watching it to see what the government is going to do. But their big proposal is Energy East and that’s from Alberta all the way out to Atlantic Canada. That's important because it's very different stakeholders. You have provinces that want oil; they need it for refineries in Montreal and they need it for refineries in Atlantic Canada.

They actually want this pipeline versus BC which is taking a very different approach enflamed by politics and money coming into it; so a little bit of a different situation.

Redmond: So when we take a step back and look at the landscape. What does this green light mean from a broader perspective for the Canadian oil and energy field?

McColl: What I think it does is send the message that the government through the regulatory agencies are listening to the technical experts. In other words, the people who are talking facts, not fiction and saying yes, this pipeline makes sense. It meets the needs based tests. It also meets safety tests. So that's a very important message, but what Canadians seem to forget and investors need to be aware of is that we need pipelines.

We need to move crude to Tidewater to export outside the United States to get higher prices. The lack of Enbridge proceeding with Northern Gateway at this time isn’t going to stop oil sands growth or crude oil growth. We are moving by rail. We went from 20,000 barrels a day exported several years ago to 160,000 barrels exported already in 2014 per day. And that could skyrocket to 500,000 to 700,000 barrels per day. What does all this mean? Well it's not going to slow the oil sands growth, so it's positive for oil sands companies. But it does mean higher transportation costs, lower tax revenue for governments and of course that basically implies a bit of a hit potentially to producers. But the offset is access to Tidewater.

So broadly speaking, it's an issue that we need to watch to see how it translates over time to the broader energy pipelines as we proceed with them. But, overall it's not going to slow things down, it’s just a speed bump.

Redmond: And my last question for you. As an analyst what's going to make you jump? What needs to happen—let’s use this Enbridge Northern Gateway Pipeline project as an example—to make you excited? What would make you jump as an analyst during the approval process?

McColl: I guess I'd want to see a shovel in the ground. At this point with the debate in Canada—and it is a vocal minority that seems to be pushing this issue—but I’d like to see is a shovel in the ground. It could be political will power, finally saying, this has to happen for the benefit of Canada. That would make me look at Northern Gateway’s fair value.

And with TransCanada's Energy East, we believe it's proceeding, and we believe it's proceeding because of a strong political support that exists right now. If the winds change then we might have to look at that project a little differently too. But that's really what we're looking for right now, a shovel in the ground.

Redmond: Okay, great thanks so much, David.

McColl: Thank you Ashley.

Redmond: For more information go to Stocks page of Morningstar.ca.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Enbridge Inc49.24 CAD0.88Rating
TC Energy Corp53.17 CAD0.36Rating

About Author

Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.

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