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TransCanada may be 'dead money' after pipeline's rejection

HOUSTON -- TransCanada Corp. may lag other energy infrastructure companies as it seeks new growth prospects following President Barack Obama's rejection of its Keystone XL oil-sands crude pipeline.

The $7 billion project had the potential to add $10 a share to TransCanada's stock price in 2012 and continue the transformation of the Calgary-based company from a gas and nuclear utility to an oil-pipeline powerhouse, Carl Kirst, an analyst with BMO Capital Markets in Houston, said in a telephone interview.

"If the rejection is permanent, the stock becomes dead money for a time and the company may have to reposition for investors," he said. "The question would be, 'When does TransCanada come forward with enough projects to convince people that yes, indeed, there is growth on the horizon?' "

TransCanada will reapply for a U.S. permit to build the 1,661-mile pipeline after adjusting the route to avoid environmentally sensitive regions in Nebraska, Chief Executive Officer Russ Girling said in a statement.

The company said the pipeline might still be ready to open in 2014 if the federal government expedites review of its new application.

"While we are disappointed, TransCanada remains fully committed to the construction of Keystone XL," Girling said. "Plans are already underway on a number of fronts to largely maintain the construction schedule of the project."

More delays may lead producers and refiners to abandon the Keystone XL for competing projects, a development that might force TransCanada to scuttle the project, Kirst said. Many investors expect the U.S. government to approve the pipeline before that can happen.

Since 2006, TransCanada has poured many of its resources into the Keystone project because potential profits from oil pipelines far outstrip those in its natural-gas and powertransmission businesses, said John Stephenson, who helps manage $2.7 billion for First Asset Investment Management Inc. in Toronto.

"The most compelling story in the value chain is in oil transportation, not natural gas," said Stephenson, whose funds own more than 1.5 million TransCanada shares. "Unfortunately for TransCanada, this was going to be their big push."

New gas pipelines in Mexico and the Midwest helped TransCanada boost operating income 18 percent in the third quarter, but none of those opportunities compare to the profits that would flow from the Keystone expansion, Stephenson said.

Keystone XL is the second leg of a $12.5 billion pipeline project planned to move crude from Alberta's oil sands to U.S. refineries near Chicago and on the Texas Gulf Coast. TransCanada began operating the first leg of the pipeline, which brings oil from Canada to Illinois plants, in early 2011.

Revenue from oil pipelines made up less than 10 percent of TransCanada's revenue in the third quarter, according to data compiled by Bloomberg. The rest came from the company's gas pipelines and electricity businesses.

The price of gas has dropped 44 percent in the past 12 months as producers used hydraulic fracturing and horizontal drilling to tap oil and gas locked in shale rock formations across the country. Interest meanwhile has waned in expansions of nuclear power plants, in which TransCanada has invested, after reactors in Fukushima melted down after a March 2011 earthquake and tsunami in Japan.