In a note to clients, Credit Suisse’s Andrew Kuske offers perspective on what to expect from TransCanada (TRP) regardless of whether Keystone XL is approved or denied. The analyst has a price target of $50 on the stock along with an outperform rating.
Mr. Kuske points out that Keystone only represents about 14 percent of TransCanada’s stated project backlog (though the figures may be a little dated), and as such, it is a “nice to have” but not a “need to have” project.
Credit Suisse’s base case is that the pipeline is approved in the last quarter of 2014, and becomes operational by the end of 2017. If so, Keystone, coupled with the potential for the Energy East pipeline to also come online around this time, “collectively translate into a significant jump in TransCanada’s 2018 EBITDA and EPS.” Under Credit Suisse’s most likely scenario, TransCanada’s revenues surge by nearly 30 percent from 2017 to 2018.
However, Mr. Kuske outlines what would happen in an alternative scenario where Keystone XL does not receive a Presidential Permit. The firm still projects a sizeable jump in revenues of 18.6 percent from 2017 to 2018, but also observes that the pipeline company’s near-term EPS outlook is brighter if Keystone XL isn’t constructed. The rationale is that TransCanada won’t need to take on debt in order to construct the pipeline, though it would likely need to write down $1 billion in engineering and regulatory work related to the project. The analyst writes that “the potential for an outright denial of Keystone XL is somewhat unlikely and would not be fatal to TRP’s existing and future valuations.”
In the event that the U.S. government will not grant a Presidential Permit for Keystone XL, Credit Suisse believes TransCanada may seek legal remedies based on certain articles in NAFTA that favour North American energy trade.