LNG Project Boosts Prospects for Canadian Energy Firms

10/23/2018 5:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

A recently announced LNG Canada development is the largest energy plan in Canadian history and has the blessing of the federal government, the British Columbia government, and all the affected First Nations, explains growth and income expert and Canadian stock specialist Gordon Pape, editor of The Income Investor.

What could go wrong? Being this is Canada, plenty. But let's keep our fingers crossed and hope this huge, $40 billion operation actually sees the light of day.

The first phase involves the construction of an $18 billion liquified natural gas facility in Kitimat, British Columbia, a region that is in desperate need of an economic shot in the arm. To supply the plant, a $6.2 billion pipeline, to be named Coastal GasLink, will be built to link Kitimat with the rich gas fields of the Montney region in northeastern B.C.

That's right; we're actually going to build a new pipeline and according to reports all the First Nations along the route have agreed. Environmentalists remain adamantly opposed, of course, so expect some court challenges along the way. But with all the major players onside, the odds seem in favor of this project proceeding.

If it does, the benefits to Canada will be huge. Output from the Kitimat plant (initially expected to produce 12 million tonnes of LNG a year) can reach Asian markets in just ten days -less than half the time of shipments from the U.S. Gulf Coast.

he result should be a significant improvement in the prices for Canadian natural gas, which have been at a discount because of lack of access to overseas markets.

The consortium backing the project is headed by Royal Dutch Shell and includes Petronas (owned by Malaysia), PetroChina, Mitsubishi, and Kogas of South Korea. Construction on the plant is expected to start immediately. The deal has important implications for two Income Investor recommendations.

TransCanada Corp. (TRP) will build the Coastal GasLink pipeline, which will run 670 kilometres from the Montney area (near Dawson Creek) to Kitimat. The pipeline will have an initial capacity of approximately 2.1 billion cubic feet per day (Bcf/day) with the potential for expansion of up to approximately five Bcf/day. Construction is expected to begin in early 2019 with a planned in-service date in 2023.

"Once constructed, Coastal GasLink will become a critical component of British Columbia's natural gas pipeline infrastructure, connecting our abundant, low-cost natural gas resources to global markets," said TransCanada CEO Russ Girling.

Of course, the company won't see any profits from the new pipeline for several years, but the stock moved modestly higher on the news. The shares closed in Toronto on Oct. 5 at $53.77 and yield 5.1% on an annual dividend of $2.76. We are upgrading our rating on the stock from Hold to Buy.

Another beneficiary of the deal is Pembina Pipeline (PPA), which has a significant presence in the Montney area with processing plants and pipelines. A few days before LNG Canada was confirmed, Pembina announced it plans to invest $120 million in the area to develop new pipeline and terminal infrastructure.

"Pembina's base business is performing well. We are seeing increased throughput on our conventional pipelines and fractionators, strong results from the assets acquired previously from Veresen and higher marketing revenues due to widening frac spreads," said Scott Burrows, senior vice president and chief financial officer.

Pembina's share price also moved higher on the news of the LNG Canada announcement. The shares yield 5% at this level.Pembina also announced that it has updated its 2018 adjusted EBITDA guidance range to $2.75 to $2.85 billion, up from $2.65 to $2.75 billion.

We have a capital gain of 207% on the stock since it was originally recommended. Pembina continues to remain a Buy and is our top choice right now in Canadian pipeline stocks.

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