Trudeau is set on saving oil pipeline

OTTAWA (Bloomberg) -- Canadian Prime Minister Justin Trudeau and Alberta Premier Rachel Notley have signaled they could put money behind Kinder Morgan’s Trans Mountain pipeline expansion as they vow to make sure it gets built.

Here are ways they could do it as the company threatens to abandon the C$7.4 billion ($5.9 billion) project amid steadfast opposition in British Columbia, the province that the line crosses to take crude from Alberta’s oil sands to the Pacific Coast.

Buying a piece of the project. Notley said her province would be willing to invest directly in the project, while Finance Minister Bill Morneau has hinted that a stake purchase by the federal government wasn’t ruled out.

After failing to convince British Columbia Premier John Horgan to end his legal battle against Trans Mountain, Trudeau said Sunday that he asked Morneau to begin a “formal financial discussion” with the company.

While buying a stake seems more like a last resort than the first option, it has raised the question of how much of taxpayers’ money that would cost. It would depend on how big a stake.

How much is Trans Mountain worth?  The expansion is valued at roughly C$1.2 billion, according to Bloomberg calculations based on a share price of about C$17.50 for Kinder’s Canadian unit, analyst valuations for the existing business at around C$14, and 345 million shares Kinder has spent C$1.1 billion so far on the project, according to a research note from RBC Dominion Securities Inc. analysts Robert Kwan and Tim Tong Kinder Morgan Canada was created in an initial public offering in May 2017 that valued the business at about C$5.8 billion. Its market capitalization is about C$6.5 billion.

“Any framework would allow Kinder Morgan Canada to retain the majority of economic upside while mitigating cost overruns related to delays,” Bank of Nova Scotia analysts Robert Hope and Arnav Gupta wrote in a research note Monday. “We do not expect a majority purchase of the pipeline is a likely scenario.”

If Kinder seeks to get a return on the money already sunk into the project, a buyout could be expensive, said Paul Bloom, president of Bloom Investment Counsel Inc. in Toronto, which owns about 300,000 shares of Kinder Morgan Canada. “Maybe I would like the project to be bought out,” he said in reference to how Kinder is potentially looking at it. “But only if it’s for a stupid price.”

Kinder Morgan said Sunday it won’t make further comments “until we’ve reached a sufficiently definitive agreement on or before May 31.”

Taking on extra construction costs. Canada could use legal powers to ensure the project is built and guarantee payment for extra costs, according to Michael Kay, a Bloomberg Intelligence senior energy analyst. British Columbia’s Horgan said after meeting Trudeau on Sunday that he will press ahead with legal challenges.

“Assurance that they won’t incur the extra costs of delays would probably be one place to start,” Kay said. “Kinder Morgan would take direct cash anytime, but I don’t know if that’s the direction we are going to go.”

Offering loan guarantees. Canada has offered loan guarantees on big projects such as the Maritime Link and Muskrat Falls electricity projects on the country’s east coast. Offering something similar to Kinder could lower the company’s borrowing costs, allowing the government to help without giving direct cash, said Fred Lazar, an economics professor who studies industrial policy at York University in Toronto. Whether the government buys a stake or offers other guarantees “is going to be a function of what’s less costly,” he said.

Bottom line. Trudeau has already taken a major stand by calling Trans Mountain vital, and about the only option he hesitated to speak about was nationalization. Past governments have aided the Hibernia oil project off Newfoundland and Labrador, aircraft maker Bombardier Inc., automakers and the forest industry.

“We are absolutely focused on making sure we make this construction season,” Trudeau said, adding Canada loses out on C$15 billion worth on revenues a year from selling Alberta’s landlocked crude at a discount because of transportation bottlenecks.

“I don’t think a stake in the project is where they are going to go, but crazier things have happened,” said Kay at Bloomberg Intelligence.