Two Overlooked Energy Stocks Shine While TransCanada Steals the Spotlight
When Barak Obama rejected TransCanada's (NYSE: TRP) application to build the Keystone XL pipeline, Mitt Romney jumped on the opportunity to slam the president for a move he claimed would keep unemployment high, slow economic growth, and keep America from being energy independent. Obama, however, insists that the decision was made for a lack of time, and TransCanada was free to reapply if it changed the pipeline's route to circumvent the Nebraska Sandhills, a prairie over 19,000 square miles that conservationists have been trying to preserve.
TransCanada fell nearly 5% in intraday trading on the news, although it has since recovered slightly. The recovery is partly thanks to Canadian Prime Minister Stephen Harper's response to Obama's decision, which was to suggest that Canadian energy producers increase cooperation with China to become less reliant on the U.S.
Energy hungry China hasn't been able to keep up with demand, and a recent drop in hydropower has made the country dependent on fossil fuel energy sources such as natural gas, oil, and coal. China's steady rise in oil demand rose sharply in the last decade, as you can see from the chart to the left. Energy demand is still climbing as manufacturing continues to dominate the country's export-driven economy. Despite a much overhypedrecent drop in GDP to 8.9%, China's energy demands are outpacing domestic production. GDP growth of 8.9% is still a near-fourfold increase on American GDP growth, and a growing GDP fuels growing energy needs.
The focus on China should not be overhyped, however. The United States accounts for nearly 80% of China's total exports, and Canada remains America's biggest oil supplier. While diversification of Canada's export markets is sorely needed, the country's current reliance on America means that it will take a long time for a focus on China to translate into revenue growth for TransCanada.
Another gas pipeline company facing tough times is Kinder Morgan (NYSE: KMI), whose EBITDA results fell below $1 billion, prompting analysts at Citigroup (NYSE: C) to downgrade the company to sell. The company's EPS also fell short of analyst estimates of 29 cents per share by a nickel. A jump in dividends from 29 cents a share to 31 cents a share was a silver lining for the stock, making it an attractive income play with a current dividend yield of 3.75%.
While investors are anticipating a China breakthrough for TransCanada that may never come, they are ignoring strong potential in Kinder Morgan thanks to its recent acquisition of El Paso Corp. (NYSE: EP), which is set to conclude in Q2 2012 and will prompt a strong rise in dividend payouts as well as a growth in assets that could help the company expand its market presence. Despite the company's promising upside, the stock dipped slightly after a spike in early trading on Friday.
Another under-appreciated player with strong potential is Boardwalk Pipeline Partners (NYSE: BWP), which plummeted in early trading Friday on the news that it would be offering a further 8 million shares at $27.55 per share, nearly a point below Thursday's close. The news just two weeks before the company is expected to announce a modest growth in earnings thanks to expanded natural gas production.
A more speculative but promising bet is coming from the eastern United States, where Boardwalk Pipeline is poised to profit. In December 2011, the energy company signed a 15-year contract with Southwestern Energy (NYSE: SWN) that would allow it to expand in the Marcellus Shale, a massive untapped natural gas resource that could yield billions of dollars worth of natural gas in the coming decade. Boardwalk's investment puts it in a stronger long-term position than the recent stock offering suggests.
While Obama's decision to reject the Keystone XL pipeline is making political waves and attracting headlines, other developments in the industry will resonate with investors in the long term. A closer look at Kinder Morgan and Boardwalk might give investors an opportunity that, at least for now, is under the politicians' radar.
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