The Business of Politics

Richard Croft
November 14, 2011
5 minutes read

It’s tempting, when big business and big politics do the waltz, to bet on some outcome or other. Trouble is, it’s often impossible to see behind the veils and curtains, to say nothing of smoke and mirrors, that obscure the true picture of events. It’s even more difficult when what’s at stake is counted in the billions of dollars.

So it is with recent events surrounding a couple of Canadian pipeline companies.

The Obama Administration delayed until 2013 the decision on whether to approve TransCanada Corp.’s Keystone XL oilsands pipeline through the US Midwest. That tripped up TransCanada shares last week, which retreated -3.7%.

The Keystone XL pipeline, for those who haven’t heard, is a proposed pipeline designed to transport Canadian oil to US refineries on the Gulf Coast. It is the current bête noire of “environmental activists,” who in principle oppose all development of the Canadian oilsands. Suffice it to say that vociferous on-the-street demonstration and quieter, but perhaps more persuasive, backroom opposition from President Obama’s core political base was enough to back-burner the multi-billion dollar TransCanada Corp. project, at least until after the November 2012 presidential elections.

Shares of TransCanada Corp. (TSX: TRP, Friday’s close $40.81) accordingly plunged last week as investors rapidly discounted the likely impact of the delay (or even outright cancellation) of the Keystone Kops pipeline on the company’s earnings. TransCanada has already invested $1.9 billion on the project, and the delay – perhaps as long as 18 months – may cost the company an additional $1 billion by some early estimates.

Trouble is, the Keystone project may not even survive, as shippers currently committed to the project opt out of their contracts and look for other channels, such as Enbridge Inc.’s (TSX: ENB, Fridays close $35.10) proposed Wrangler pipeline. If approved, the Wrangler line would transport crude oil from the clogged Cushing, Oklahoma storage hub to refineries on the Gulf Coast.

Shares of Enbridge have been climbing steadily all year, and closed the week just about flat, as investors transferred their affections from the beleaguered TransCanada. Indeed, investors have given their blessing to Enbridge since January, as the shares are ahead 25% year to date, compared with a loss of -9.7% year to date for the S&P/TSX Equal Weight Oil & Gas Index, of which both Enbridge and TransCanada are components.

Now, the question for options traders is whether TransCanada’s Keystone pipeline project is on the back burner…permanently. The real question is whether TransCanada can eat the estimated $1 billion-plus cost of an 18- to 24 month delay. Here’s where the political calculation comes in. If Obama wins in 2012, it’s very likely that the Keystone XL pipeline project will be dead. If he loses, the opposite will be true. If you think Obama will be a one-term president might consider bullish positions on TransCanada, given that shares have likely already been discounted for the at least $1 billion hit on capital over the next 18 months.

Certainly it would seem that until the Presidential election has been secured, covered call writing on RP would be the only bullish strategy that makes sense. Say selling the TRP January 41 calls at $1.20.
Ditto for Enbridge’s Wrangler pipeline. The Wrangler pipeline is not expected to face as much regulatory review or opposition, supposedly because it follows existing, already approved, rights of way. But again, the political calculation now becomes paramount, because Obama’s core left-wing base, having had a taste of victory over Keystone, will doubtless set its sights on all flows from Alberta’s oilsands – which is their stated objective. And that means that Enbridge, and its $2 billion pipeline, might just be in for a spot of bother in coming months.

Again, the best strategy might be to write at-the-money covered calls. Look at writing the January 35 calls at $1.20 per share.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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