The proposed expansion of the Keystone pipeline is probably the most hated energy project in America.

The project has become a rallying cry for environmentalists who claim the harvesting of oil sands in Alberta poses unacceptable risks to the ecosystem.

Last week, The New Yorker published an extensive article describing how Tom Steyer, a California billionaire and former hedge-fund manager, is spending millions of his own fortune to defeat the measure.#-ad_banner-#

That’s interesting, especially considering that Steyer’s hedge-fund, Farallon, invested in fossil-fuel companies. From the New Yorker:

“After being criticized by some Republicans for holding some investments in the fossil-fuel industry, including stock in Kinder Morgan, which has proposed extending a rival pipeline to Keystone, Steyer said that he would fully divest his portfolio of its “dirty energy” holdings within a year.”

The pipeline has also become a political issue. During last year’s presidential race, President Barack Obama refrained from taking a strong stand on the project despite heavy pressure from the left, while Mitt Romney claimed that if forced to do so he would, “build it myself.”

But what much of the commentary on the topic fails to mention is that most of the Keystone pipeline has already been built and is currently in operation.

The existing line runs east from Alberta and then cuts south through the Dakotas and Nebraska. It then splits into two directions, with one route heading east toward refineries in Illinois and the other running south to Cushing, Okla.

The current controversy is really over a pipeline extension known as Keystone XL, which would create a more direct route from Alberta to Nebraska and from Oklahoma to the Gulf. If approved, the Keystone XL would increase Canada’s oil exports to the U.S. by as much as 830,000 barrels a day.

So, the question for investors is this: If Keystone XL is approved, which companies stand to profit?

The most obvious is TransCanada (NYSE: TRP), the company that has submitted the proposal for the expansion. 

TransCanada’s cash flow is derived from natural gas (62%), oil/liquids (16%), and energy (22%), which includes natural gas storage.

	Copyright © 2013 TransCanada Corporation
	TransCanada’s natural gas pipeline business is already one of the largest on the continent, with more than 35,000 miles of pipe transporting 15 billion cubic feet a day.

TransCanada’s natural gas pipeline business is already one of the largest on the continent, with more than 35,000 miles of pipe transporting 15 billion cubic feet a day. The company currently transports approximately 20% of North America’s natural gas.

Analysts expect earnings before interest, tax, depreciation and amortization (EBITDA) to increase from CA$700 million (about $679 million) in 2012 to more than CA$1.7 billion in 2017. This estimate would mean a mouth-watering 20% increase in the company’s compound annual growth rate (CAGR).

However, if the XL pipeline is delayed, that growth rate could be cut in half.

Some analysts have postulated that the crude could be shipped by rail. But Greg Gentry, Valero Energy’s (NYSE: VLO) general manager in Port Arthur, Texas, disagrees, saying Canadian producers “would have to drop the price of their crude” if they were to ship by rail, according to the New Yorker article.

If he’s right and the threat of rail competition is not economically viable, this bodes well for TransCanada.

Furthermore, with all the hoopla in the press about Keystone XL, a big new development for TransCanada has largely gone unnoticed.

In August, TransCanada announced plans to begin building its CA$12 billion, 1.1 million-barrel-per-day Energy East Pipeline project from Alberta to the Atlantic coast at Saint John, New Brunswick. The project is being supported by the Canadian government to the tune of CA$5 billion over 20 years.

So whether U.S. environmentalists like it or not, Alberta’s oil sands will be harvested and sold. How they are shipped, and to whom, are the only real questions.

While not exactly dirt cheap, TransCanada’s share prices have fallen 7% this year, and the stock is trading 11% below its 52-week high.

At a forward price-to-earnings (P/E) ratio of 18 and a current price-to-book (P/B) ratio of 2, shares of TransCanada are trading slightly below industry averages. I believe shares are fairly valued at today’s prices.

The current 4% yield is backed by a 90% payout ratio, which is higher than I would like to see. But to its credit, the company has been raising its dividend each year since 2008.

TransCanada is not the only company that stands to profit from the possible Keystone XL approval. Refiners such as Valero and LyondellBasell Industries (NYSE: LYB), as well as construction companies Deere & Co. (NYSE: DE) and Quanta Services (NYSE: PWR) all stand to gain if Keystone XL gets the green light.

Risks to Consider: Of course, if the pipeline extension is not approved, TransCanada will have to write off its investment in the project. As mentioned, the current dividend payout ratio of 90% is high, and the dividend may have to be cut in the future if profits decline.

Action to Take –> No doubt, this investment is a bit of a gamble. But investors who are willing to take the risk and invest now should see share prices soar if Keystone XL approval is granted. And even if the project isn’t approved, all is not lost. TransCanada’s existing pipelines already have long-term contracts at sold-out capacity that will provide steady income for at least the next 10 to 15 years.

Solid current income from “wide-moat” pipelines, combined with the potential boon from the Energy East project, should make TransCanada a long-term winner either way. For speculative investors, TransCanada rates a buy at today’s prices.

P.S. — If events break TransCanada’s way on the Keystone XL project, TRP investors will be sitting pretty. However, there’s another group of securities that have a wide moat, pay world-class dividends and buy back huge amounts of stock. These are securities solid enough to buy, forget about and hold — forever. To learn more about these “Forever Stocks,” click here.