Keystone delays seen keeping investment away from junior energy space

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CALGARY – Uncertainty over the Keystone XL pipeline is a “black mark” that’s been keeping investors away from the Canadian junior energy space, says a Calgary investment banker.

The sentiment may not be entirely logical, with several other alternatives on the table to get oil to lucrative markets, such as rail and a host of other pipeline proposals.

But Sonny Mottahed, CEO and managing partner at Black Spruce Merchant Capital, said there’s a “big psychology component” at play.

“The psychology of this black mark against the Keystone pipeline has just kept a lot of investors away from looking at the Canadian story. On its own, just on an island, it doesn’t necessarily make all that much sense,” he said.

TransCanada Corp. (TSX:TRP) first applied to build the Keystone XL pipeline about five and a half years ago and has yet to receive the green light from the U.S. government. The $5.4-billion project has attracted enormous controversy, pitting environmental and landowner concerns against economic and national security benefits.

The project would enable 830,000 barrels of mostly Canadian crude per day to flow to Texas refineries — an attractive market for heavy crude, like that produced in the oilsands.

An approval could be the “light switch” that gives investors a reason to get into the Canadian market.

“We think that would attract a whole new set of capital,” said Mottahed, adding that Canadian juniors have generally been lagging their U.S. counterparts,

“We think that (an approval) would positively swing valuations… So, (it would be) very positive for sentiment, deal flow, capital flow into the Canadian market.”

Dirk Lever, managing director of institutional equity research at AltaCorp Capital, said junior producers have a lot fewer tools at their disposal than their larger counterparts when it comes to getting their crude to market.

Big players like Suncor Energy Inc. (TSX:SU), Canadian Natural Resources Ltd. (TSX:CNQ) and Cenovus Energy Inc. (TSX:CVE) have signed contracts to move their crude on multiple pipelines, whereas smaller ones would just take what they can get.

In December, Canadian Natural kept 10,500 barrels per day in the ground in anticipation of better market conditions ahead. But not all companies have that option.

“A junior has very little luxury when it comes to lower prices and shutting in. They all like to say they do, but unless they’re getting negative cash flows, they actually won’t.”

The Keystone XL uncertainty might have harmed investor sentiment a year ago, but that’s changed with the advent of crude by rail, said Lever.

“Certainly a (Keystone XL) approval would help certain stocks, but I think there’s a growing realization that if it doesn’t get approved, then there’ll be a workaround somehow,” he said.

Brian Pow, vice president of research at Acumen Capital Partners, said the outlook is bright for companies that provide temporary housing and other services to pipeline builders and oilsands producers — with or without Keystone XL.

“Hopefully we’ll get a decision that makes sense, but in the interim business moves forward.”

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