A major win for Western Canadian energy producers.

Nicholas Lupick, CFA

On June 18, 2019 the Federal Government has provided final approval of the Trans
Mountain Pipeline Expansion (TMX, the pipeline) with all shortcomings highlighted by the Federal
Court of Appeal (ruled in August 2018) now satisfied. Overall, we view the announcement as being a crucial milestone for one of Canada’s largest economic sectors and the first step to improving investor sentiment as it gradually improves Canada’s energy competitiveness in the global marketplace.

Highlights:

• Economic Prosperity Needed to Usher in a Green Transition: The basis for the
  Liberal Government’s approval of TMX was grounded in the importance of diversifying
  Canada’s natural resource customer base and strengthening the economy to allow for the
  financial strength to transition the country to a greener, more renewable economy. Under this mandate, the Liberal government estimates that the project can incrementally contribute ~$500 million per year of tax revenues once placed into service of which all proceeds (including any generated from the eventual sale of the pipeline) are to be redeployed towards green energy initiatives. We would note that the description, or criteria, for the clean energy projects that will receive investment remains unclear at this time.
  
  
• Ownership: At this time, the Federal Government has not agreed to divest any of the
  pipeline—electing to continue to de-risk the project before selling the asset. It was highlighted, however, that some level of Indigenous ownership in the pipeline will be negotiated. It was also noted that there will be no ceiling on the level of ownership allowed to be purchased by the Indigenous community, but that this negotiation is currently in preliminary stages.
  
  
• Equity Read-throughs—A Rising Tide Lifts all Boats: Given the long lead timeline
  for TMX to begin flowing barrels (with construction expected to last at least 30 months), today’s announcement is expected to be most positive for those entities with concentrated/leveraged exposure to the WCSB. However, we believe that the benefits from today’s announcement will be widespread as the improvement in sentiment should result in a ‘rising tide lifting all boats’ across the sector.
  
  Although not an outright negative for any producers of energy in Western Canada, integrated producers can be expected to see slightly weaker downstream margins due to a narrower crude differential as a result of the improved egress (albeit offset by the benefit for upstream operations).
  
  
• Not Out of the Woods Yet: Although today’s approval from the Federal Government is
  a major win for Western Canadian energy producers, there is still much that needs to be done to safely and efficiently construct the pipeline. Importantly, the re-mobilization of contractors and the securing of construction permits are still required and may provide near term delays/challenges for the project. At this time, it is unclear how challenging this process will be for the operator.