Most US investors have heard of TransCanada Corp (TRP), thanks to the Keystone XL pipeline controversy. But the rest aren’t as unfamiliar as you might think. As a brief example: Pembina Pipeline Corp (PPL) “transport[s] approximately half of Alberta’s conventional crude oil production, about thirty percent of the NGL produced in western Canada, and virtually all of the conventional oil and condensate produced in B.C.” and that’s just their conventional pipeline division. It also owns a gathering and processing business which has 73% take-or-pay contracts, as well as crude and heavy oil pipelines, plus growing its NGL fractionation capacity. PPL’s Vantage System even reaches into North Dakota.
However, US MLPs can also own assets in Canada. For example, Plains All American Pipeline (PAA) owns significant assets in the Canadian oil sands. (View their asset map for more detail.) Spectra Energy Partners (SEP) owns the Express Pipeline which carries crude oil from Hardisty, AB to Casper, WY.
In addition, keep in mind that in the Enbridge family of companies, when a pipeline crosses the border, the Canadian side is owned by ENB, while the US side is owned by Enbridge Energy Partners (EEP). Their asset map makes this readily apparent.
The nature of the hydrocarbon resources in Canada means that most of these assets will carry crude oil, NGLs, or potentially refined products.
Why Would Someone Want Exposure to These Assets?
In a single word: diversification. But that diversification includes: geographic, political, and basin diversification.
If an investor values an MLP which is active in many regions of the US, then that same investor would also see value in a company which owns assets north of the border. This spreads the risk of a location-specific incident (for instance, a hurricane striking a particular part of the Gulf Coast), as well as the risk of a single state or province enacting laws making it more costly to operate energy assets.
Additionally, while the Permian is the current darling of the energy space, the Canadian Oil Sands should not be too heavily discounted. We’ve previously written about the Montney, which is just north of the Oil Sands. As a small illustrative data point, in Alberta alone, there are about 168 billion barrels of recoverable oil.
Why Should US Investors Be Wary of These Investments?
Liquidity Risk. The Toronto Stock Exchange (TSX) where KML and other Canadian companies trade is approximately one tenth the size of the New York Stock Exchange (NYSE), and one third that of the NASDAQ. If a stock is too thinly traded, just the act of one investor selling or buying a large position could move the share price.
Currency Risk. Any asset valued in Canadian dollars is subject to fluctuations in the exchange rate between USD and CAD. Should the Canadian dollar strengthen or the US dollar weaken, this would benefit a US investor, but the fact remains that the investment carries exposure not only to these assets, but also to Canadian currency.
Taxation at the border. Generally, Canada will withhold taxes from dividends, interest, and royalties earned by any foreigner, including US citizens. While the normal rate is 25%, a special treaty with the US allows it to be lower (generally 15%). More (and exhaustive) information on this can be found via PwC. Further, the SEC has a list of considerations and risk factors for international investments. Investors are, as always, encouraged to contact their accountants for further details.
The Bottom Line
Energy infrastructure investors can invest in Canadian assets via Canadian companies, US MLPs, or a blended product. The benefits of diversification and access to lesser-known opportunities must be weighed against the potential risks and complications.