Market Overview

Oh Canada: TransCanada Holding Up Well, Sort Of

It may another case of not bad all things considered, but that's one sentiment that can be applied to shares of TransCanada (NYSE: TRP) today. The stock is down just half a percent a day after the Obama Administration rejected plans for Keystone XL pipeline.

TranCanada has said it will reapply for approval of the now controversial project and that if it can find it's way into Uncle Sam's good graces by early 2013, the project could be operational by the end of 2014.

Keystone XL, if it ever sees the light of day, would move synthetic crude from the Canadian oil sands region (Western Canada) to various U.S. refineries and the Cushing, Oklahoma storage hub. Rejection of the project in an election year is curious to be sure as Keystone says it would create 20,000 U.S. jobs. From the TransCanada Web site:

"The $7 billion oil pipeline is the largest infrastructure project on the books in the U.S. right now.  It would create 20,000 jobs: 13,000 in construction, 7,000 in manufacturing. 

"Construction of the 1,600 mile pipeline is broken down into 17 U.S. pipeline spreads or segments, with 500 workers per spread - that's 8,500 jobs Keystone XL also needs 30 pump stations worth tens of millions of dollars.  Each station requires 100 workers - that's 3,000 jobs.  Add another 600 jobs that would be needed for the six construction camps and tank construction at Cushing, Oklahoma. A project of such magnitude needs construction, management and inspection oversight - that would create 1,000 jobs, bringing the overall Keystone XL total to 13,000 direct, on-site jobs."

Sounds good, but operating on the assumption that Keystone XL never comes to pass, is there still opportunity with TransCanada shares? The answer appears to be more "yes" than "no." RBC was out in in defense of the stock today, saying it should be scooped up below $40.

As a pipeline company, TransCanada sees considerable attention paid to its dividend. After all, it's dividends that drive investors to pipeline stocks in the first place. TransCanada yields 4% as of this writing, just above the five-year average yield, and the company has increased the payout for seven straight years. OK, that's not Procter & Gamble (NYSE: PG) at 50-something straight years of increased dividends, but TransCanada has been paying dividends for over four decades and the recent trend is favorable to income investors looking for some northern exposure.

The bear case of TransCanada, which needs to be acknowledged, comes by way of a weak near-term technical outlook. The stock is currently trading below all three of its critical moving averages (20-, 50- and 200-day), though only moderately so.

Mixing fundamentals and technicals together, TransCanada trades for almost 17 times forward earnings and a drop to $39, assuming that holds as support, would be an inviting place to get involved with the stock. Once headline risk diminishes and investors look value in this Canadian yield play, TransCanada could again challenge the $44-$45 area. And if Keystone XL gets approved at a later date, well then that's just the cherry on the Sunday.


ACTION ITEMS:

Bullish:
Traders who believe that pipeline stocks will rise, might want to consider the following trades:
  • Long Kinder Morgan (NYSE: KMP), a favorite on U.S. MLPs.
  • Long Oneok (NYSE: OKS), a more obscure MLP with a great yield.
  • Long the JPMorgan Alerian MLP Index ETN (NYSE: AMJ).
Bearish:
Traders who believe that pipeline stocks may decline, may consider alternative positions:
  • Short the U.S. Natural Gas Fund (NYSE: UNG)
  • Short TransCanada or buy put options on other MLPs.
  • Long the ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO)
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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