Last week we noted that a deal between Delta Air Lines Co. (NYSE: DAL) and ConocoPhillips (NYSE: COP) might be getting closer to being done. The interesting thing about that deal is that JPMorgan & Co. (NYSE: JPM) would provide the crude oil for a Delta-owned refinery. Delta gets the jet fuel, JP Morgan trades the crude and the other refined products.

The Wall Street Journal reports that Sunoco is currently in discussions with soon-to-be-public Carlyle Group to form a joint venture to keep Sunoco’s 330,000 barrel/day Philadelphia refinery in operation. The reported deal between Sunoco and Carlyle appears to be very similar to the Delta-JPMorgan deal. Sunoco would contribute the Philadelphia refinery to the joint venture in exchange for a non-operating minority stake. The company would have no obligations to support the refining operations. Carlyle would adopt a role similar to Morgan’s proposed role with Delta.

The refined products that will be coming out of either refinery are almost incidental to this story. If the deals go through JPMorgan and Carlyle become commercial traders of crude and refined products, lowering their margin requirements, and potentially raising their returns from the sale and hedging of the refined products.

We’ll have to wait for the details if and when one of these deals gets done, but we could be seeing the start of something new in the refining business in the US.

Paul Ausick

Drivers won’t be the only ones affected. Canadian producers like Exxon Mobil Corp. (NYSE: XOM), Suncor Energy Inc. (NYSE: SU), Cenovus Energy Inc. (NYSE: CVE), and others will gain a substantial price hike on Canadian crude. We noted this when TransCanada announced a couple of days ago that it would go ahead with a plan to build a 423-mile section of the pipeline from Cushing, Oklahoma, to Port Arthur, Texas.

Refiners like Marathon Petroleum Corp. (NYSE: MPC) and HollyFrontier Corp. (NYSE: HFC), which currently benefit from their ability to get the cheaper oil from Canada, will take a substantial hit on prices. We wrote about this yesterday.

The reason for the higher prices is pretty basic: the Canadian oil is curretnly essentially stranded and was priced at an average discount to Brent crude of about $23.50/barrel in 2011. Moving Canadian oil to the Gulf Coast where prices are higher will not lower the price of Brent crude unless the new oil more than replaces the existing supply. The Gulf Coast imports around 5 million barrels/day and the Keystone XL pipeline and a couple of other pipelines proposed to move oil south from Cushing to the coast will transport less than 1.5 million barrels/day if and when all the current plans are realized.

The effect will be to raise the price of Canadian crude everywhere, including the Midwest and the Rocky Mountain regions, where Marathon and HollyFrontier do their refining. Their feedstock costs will rise and the price for their refined products will also rise.

Energy industry consultant Philip Verleger told Bloomberg News:

The Canadian plan [for the Keystone XL pipeline] was to use their market power to raise prices in the United States and get more money from consumers.

Verleger estimates that gasoline prices will rise $0.10-$0.20 a gallon in the Midwest and Rocky Mountain regions.

The Keystone XL pipeline is far from a free lunch. It will not make the US any more energy independent and it certainly will not lower gasoline prices. If US drivers continue to drive less, then Canadian oil will reduce the amount of oil imported to the US and help with the US trade balance. That’s a good thing, but is it enough?

Paul Ausick

TransCanada stands to lose the most if the project is denied. The entire Keystone pipeline system is nearly fully contracted for a total of 900,000 barrels/day for an average term of 18 years. That is a big loss if the pipeline isn’t built. The largest producer in the oil sands is Syncrude, a joint venture that includes Imperial Oil Resources (wholly owned by Exxon Mobil Corp. (NYSE: XOM)), Suncor Energy Inc. (NYSE: SU), and China Petroleum & Chemical Corp. (NYSE: SNP) — Sinopec — among others. Other producers include ConocoPhillips Corp. (NYSE: COP), Chevron Corp. (NYSE: CVX), Murphy Oil Corp. (NYSE: MUR), Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), BP plc. (NYSE: BP), and Devon Energy Corp. (NYSE: DVN).

These companies won’t lose everything because the bitumen from the oil sands will go somewhere, somehow. Unless, of course, the Canadian government decides to shut down every project in Alberta, and that simply will not happen. One of the big problems facing the producers now is that they’re crude is landlocked and sells at a substantial discount to WTI. For the week ending September 23rd, Heavy Hardesty grade crude sold for $78.28/barrel, while WTI sold for $80.29 and Brent sold for $109.17. Getting crude from Alberta to a coast, any coast, is critical for producers.

If the Keystone XL pipeline is killed, an expansion to an existing pipeline system to the US/Canadian west coast could take up some of the slack. Kinder Morgan Energy Partners LP (NYSE: KMP) is investigating an expansion to its Trans Mountain system and Enbridge Inc. (NYSE: ENB) has already begun the permitting process for a similar pipeline to the west.

Another interesting development are proposals from both of Canada’s major railroads to construct a pipeline-by-rail from Alberta to west coast. And while nothing officially like a pipeline-by-rail has been proposed for the run to the US Gulf Coast, rail traffic has already increased substantially from North Dakota south to Cushing and, eventually producers hope, to the Gulf.

In July weekly US rail carloads of petroleum and petroleum products hit a four-year high, and the August total of about 7,400 carloads is even higher. A rail tanker holds about 1,500 barrels, so every day about 1.6 million barrels of petroleum is moving around on the US rail network. Add to that another half a million barrels a day from the oil sands and that puts about another 2,500 tanker cars on the rails every day.

There were 750 reported rail accidents involving hazardous materials in 2010. The odds of a significant oil spill rise if we add more oil transport by rail.

The same is true if the Canadian crude is moved by truck. Truck transportation by surface road is even more expensive and prone to accidents. There were nearly 12,000 road accidents involving hazardous materials in 2010. Besides being much more expensive, more tanker trucks carrying up to 300 barrels of oil each raises again the odds on an environmentally significant spill.

So while pipeline spills are a concern, rail and truck accidents are far more common. The Keystone XL pipeline should be held to a very high safety standard, but it is probably the safest way to move the most Canadian crude.

The argument that Canada should stop development and extraction in the oil sands may make more environmental sense, but until a large-scale alternative transportation fuel is available at a reasonable price, oil sands development will very likely continue. And moving that oil by pipeline is really the only sensible option.

Paul Ausick

AerCap Holdings N.V. (NYSE: AER) Started as Outperform with $16 target at Credit Suisse.
AirCastle LTD (NYSE: AYR) Started as Neutral with $14 target at Credit Suisse.
Best Buy Co., Inc. (NYSE: BBY) Raised to BUy at S&P Equity Research (late Thursday).
BB&T Corporation (NYSE: BBT) Started as Hold at Citigroup.
Chipotle Mexican Grill, Inc. (NYSE: CMG) Raised to Outperform at Morgan Keegan.
Cree Inc. (NASDAQ: CREE) Cut to Market Perform at JMP.
Hewlett-Packard Co. (NYSE: HPQ) Cut to Neutral at UBS; Cut to Neutral at Baird.
JDS Uniphase Corporation (NASDAQ: JDSU) Maintained Buy but cut target to $17 at Argus.
LDK Solar Co., Ltd. (NYSE: LDK) cut to Neutral at Piper Jaffray.
Logitech International (NASDAQ: LOGI) Cut to Underperform as Bear of the Day at Zacks.
Lululemon Athletica Inc. (NASDAQ: LULU) Raised to Equal-Weight at Barclays.
Research in Motion Ltd. (NASDAQ: RIMM) Raised to Hold from Underperform at Jefferies.
Sears Holdings Corp. (NASDAQ: SHLD) Maintained Hold at Argus.
Sina Corporation (NASDAQ: SINA) Cut to Neutral at Credit Suisse.
Suncor Energy INc. (NYSE: SU) Raised to Buy at BofA/ML.
Tesoro Corporation (NYSE: TSO) Maintained Outperform as Bull of the Day at Zacks.
Verisk Analytics, Inc. (NASDAQ: VRSK) Raised to Outperform at KBW.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Alcatel-Lucent (NYSE: ALU) Cut to Hold at Deutsche Bank.
American Water Works Co. (NYSE: AWK) Reiterated Buy at Gabelli.
Aqua America Inc (NYSE: WTR) Reiterated Buy at Gabelli.
China Unicom (NYSE: CHU) Cut to Neutral at Credit Suisse.
City National Corporation (NYSE: CYN) Raised to Neutral at BofA/ML.
Commerce Bancshares Inc. (NASDAQ: CBSH) Cut to Underperform at BofA/ML.
Federated Investors, Inc. (NYSE: FII) Cut to Underperform as Bear of the Day at Zacks.
HollyFrontier Corporation (NYSE: HFC) Cut to Neutral at BofA/ML; Started as Outperform at Oppenheimer.
M&T Bank Corp. (NYSE: MTB) Raised to Buy at BofA/ML.
Microchip Technology Inc. (NASDAQ: MCHP) Maintained Buy but cut target to $40 at Gleacher & Co.
Pegasystems Inc. (NASDAQ: PEGA) Cut to Hold at Canaccord Genuity.
SeaCube Container Leasing Limited (NYSE: BOX) reiterated Buy as Value at Zacks.
Sealed Air Corporation (NYSE: SEE) Raised to Overweight at Barclays.
Suncor Energy Inc. (NYSE: SU) named as Bull of the Day at Zacks.
Tesoro Corporation (NYSE: TSO) Cut to Underperform at BofA/ML.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

The pipeline would be built by TransCanada Corp. (NYSE: TRP) and ConocoPhillips Corp. (NYSE: COP), but would benefit every company with a stake in the oil sands, including Suncor Energy Inc. (NYSE: SU), Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), Exxon Mobil Corp. (NYSE: XOM), and BP plc (NYSE: BP).

US approval for the pipeline has been delegated by the President to the State Department, which was supposed to conclude its review earlier this year.  Two State Department drafts have been found wanting by the US EPA, and a new draft is in progress.

While there is a substantial minority opposed to the pipeline, its construction was believed to have been nearly a foregone conclusion. The main opposition to the pipeline is not its routing through six US states (although there is some growing opposition there), but to the environmental damage caused by mining the oil sands in the first place.  When the US EPA relayed its concerns to Alberta, it was told to mind its own business.

Now, a group of activists have called for demonstrations this summer in Washington, D.C., to protest the pipeline. Their hope is to stop construction of the Keystone XL pipeline in an effort to stop the massive pollution attributed to the mining operation itself.

Those who favor the pipeline say that it will end US dependence on Middle East oil. That’s foolish. Those who oppose the pipeline call it the biggest carbon emissions threat on the planet. That’s at least arguable.

What’s not arguable is that there are very few issues left around which to galvanize the environmental movement. The Congress has shown itself to be unwilling or unable to make a commitment on the pipeline. Those who favor more exploration for oil can stymie any attempt to impose stricter regulation and review on fossil fuel energy projects.

Those who want to restrict exploration have been reduced to hoping for the best. They want to change that now, by forcing the State Department and the President to reject the necessary approval for the Keystone XL pipeline. This summer’s protest are being held to attract public attention to the issue, but the protest seems like nothing so much as a last-ditch effort to get the environmental movement back on track.

If Keystone XL is not built, Canada will figure out some other way to get that oil to market. It may be by truck, which is far more costly and environmentally harmful than a pipeline. It may be by a pipeline headed off either to the east or west coast for eventual shipment to the Gulf or elsewhere.

All this is not to say that the extraction process is environmentally harmless. But mining the oil sands could be achieved with more attention paid to the environmental impacts. Of course that would cost money, money that would eventually be paid by consumers.

In the long run, the high cost of the oil sands, and oil in general, will lead to new fuels for transportation. But without a national policy that offers guidelines to get there, we’re going to be fighting battles like this one for many years to come.

Paul Ausick

The coming week’s must see events for traders and investors alike in stocks is as follows: AnnTaylor Stores Corp. (NYSE: ANN), Audiovox Corporation (NASDAQ: VOXX), The Beckman Coulter Inc. (NYSE: BEC), Bristol-Myers Squibb Company (NYSE: BMY), Suncor Energy Inc. (NYSE: SU), Canadian Natural Resources Limited (NYSE: CNQ), DineEquity, Inc. (NYSE: DIN), Goldman Sachs Group Inc. (NYSE: GS), Market Vectors Egypt Index ETF (NYSE: EGPT), Internet Capital Group Inc. (NASDAQ: ICGE), OpenText Corporation (NASDAQ: OTEX), JDS Uniphase Corporation (NASDAQ: JDSU), Kinder Morgan Energy Partners LP (NYSE: KMP), Kinder Morgan Management LLC (NYSE: KMR), KV Pharmaceutical Co. (NYSE: KV-A), Lululemon Athletica Inc. (NASDAQ: LULU), Micron Technology, Inc. (NASDAQ: MU), NASDAQ OMX Group Inc. (NASDAQ: NDAQ), Orexigen Therapeutics, Inc. (NASDAQ: OREX), Questcor Pharmaceuticals, Inc. (NASDAQ: QCOR), and finally SIRIUS XM Radio Inc. (NASDAQ: SIRI).

We have outlined the issue underway or the event upcoming, offered color on each, and added in trading data on the shares if applicable.  Again, these are the non earnings events. A detailed earnings calendar with previews is available here.

AnnTaylor Stores Corp. (NYSE: ANN) was up 3.2% at $23.75 on Friday on 150% of normal volume with some 3.75 million shares traded.  What is interesting is that its options volume was off the chart and it was all one-sided call options trading.  It is possible that these were hedged calls, but the volume looked extreme for a sector that is inundated with consolidation.

Audiovox Corporation (NASDAQ: VOXX) turned in an impressive gain in the after-hours session after news that it will acquire Klipsch Group Inc. for $166 million.  Klipsch is a high-performance audio solutions company serving the residential, professional and personal listening markets.  Trading volume in Audiovox was 11,430 shares but the after-hours trading showed a gain of 7.8% to $8.30 versus a 52-week range of $6.17 to $9.74.  Here is where this gets interesting: Audiovox had a market cap at the close of trading of only $177 million.

The Beckman Coulter Inc. (NYSE: BEC) buyout process is nearing an end and we could have more details over its merger this coming week.  We argued before that the premium price should have been close to full value already.  Speculators will run shares higher and everyone hopes that private equity firms will over-pay.

Bristol-Myers Squibb Company (NYSE: BMY) has an FDA panlel review on FEB. 9 where BMS is seeking initial approval for ipilimumab (Imclone’s Erbitux) for patients who have previously received treatment for melanoma. Recent data showed that survival rates were indeed higher and this could be another blockbuster opportunity for the firm if ultimately approved.  We have a formal approval decision date tentatively set for March 26.  The market cap is roughly $44 billion here.

Canada and oil sands for safe defensive oil… Barron’s highlighted Suncor Energy Inc. (NYSE: SU) and Canadian Natural Resources Limited (NYSE: CNQ) and others this weekend.  These are being touted as larger Canadian oil sands project companies that offer safer oil without political tensions and growth ahead.

DineEquity, Inc. (NYSE: DIN) could have Goldman Sachs Group Inc. (NYSE: GS) as a partner.  Reports late Friday showed that Goldman’s private equity arm is close to buying Applebees’ largest franchise holder.  Who would have known that mediocre chain food restaurants would have such an appeal to billionaires.

The Keystone XL pipeline would be built by TransCanada Corp. (NYSE: TRP), utilizing a piece of its existing Keystone pipeline system that delivers crude to facilities owned by ConocoPhillips Corp. (NYSE: COP) in Illinois and to the Cushing storage facility in Oklahoma. By extending the pipeline to the Gulf coast, oil sands developers gain access to the largest concentration of oil refineries in the Us. They also gain access to Gulf coast ports that could be used to export any Canadian crude not purchased by those refineries.

Besides Conoco, other oil companies with operations in the Alberta oil sands include Suncor Energy Inc. (NYSE: SU), France’s Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), Exxon Mobil Corp. (NYSE: XOM) and BP plc (NYSE: BP). The existing pipeline transports about 435,000 barrels/day to Illinois and Oklahoma. The proposed extension would add up to 500,000 barrels/day to that total.

As we pointed out in an earlier article, because the proposed pipeline crosses an international border, the US Department of State must issue a permit for the line.  The State Department’s preliminary environmental impact statement was not deemed adequate by the US EPA, primarily because the document did not provide enough detail about greenhouse gas emissions related to the extraction of bitumen.

The government of Alberta has chided the EPA for sticking its nose into the province’s, and Canada’s, business. Canada’s Financial Post cites a letter to the EPA which states that Alberta “believe[s] that the impacts occurring outside your jurisdiction are not substantive to the assessment of the pipeline.”

The EPA Administrator has replied, “Given that the possible consequences of greenhouse-gas emissions are global in nature, they include potential impacts on the United States, and we believe that it is appropriate that the State Department consider these upstream greenhouse-gas emissions in its evaluation.”

There’s the argument in a nutshell. Canada believes that it is fully capable of determining the environmental impacts of oil sands mining on its own, and the US EPA thinks that Canada needs a little push to come to the right decision.

From a crude oil supply point of view, the Keystone XL pipeline does make economic and energy-source-stability sense. The US would like to increase its imports of crude from Canada, our largest and friendliest trading partner. The pipeline, though, depends on expanded production and that production won’t be expanded until the pipeline receives its required permits. Delaying the pipeline permits for two or three years could effectively kill the $12 billion project

From an environmental point of view, the data is mixed. The Royal Society of Canada study cited in our earlier article found no current threat to the regional water supply and no impact on the health of downstream residents. But the study did note several areas that need additional oversight, such as handling tailings, greenhouse gas emissions levels, and inadequate regulatory oversight.

The Canadian government, and the companies involved in mining and transporting bitumen, want to forge ahead with the Keystone XL project and fix whatever problems there are along the way. Waiting for detailed environmental impact studies could take another two or three years. The US EPA and other citizen environmental groups want to hold off on permits until the detailed studies are complete and a plan is in place to minimize environmental impacts.

We concluded in our previous article that the chances that environmental concerns would trump energy supply were slim and none. There’s really no reason to change the odds at this point.

Paul Ausick

Total will pay about $1.74 billion to Suncor to gain an additional 19.2% stake in Suncor’s Fort Hills project and a 49% stake in Suncor’s Voyageur upgrader project. The deal bumps Total’s interest in the Fort Hills project to 39.2%. Suncor owns 40.8% of the project and is the operator. Teck Resources Ltd. (NYSE: TCK) owns the remaining 20% and is not involved in this deal.

In exchange for the stake in the Voyageur project, Total passes a 36.75% stake in its Joslyn project to Suncor, retaining 38.25% for itself. Total will be the operator at Joslyn. Occidental Petroleum Corp. (NYSE: OXY) owns 15% of the project and Japan’s Inpex owns the remaining 10%, and neither is involved in the announced deal.

Total will also cancel work on an upgrader it had planned as part of the Joslyn project. Instead the Voyageur upgrader will process the bitumen from both Fort Hills and Joslyn at a rate of 200,000 barrels/day once the upgrader is completed, now scheduled for 2016. Suncor expects to more than double its output by 2020, to more than 1 million barrels of oil equivalent per day.

Total’s history in the oil sands is a bit rocky. The company tried in 2009 to acquire UTS Energy, a partner with Suncor and Teck in the Fort Hills project, for about $830 million. Finally in July 2010, the French company coughed up about $1.5 billion for UTS to get its initial 20% stake in the Fort Hills project. Now Total owns nearly 40% of a deposit estimated to equal 3.4 billion barrels of oil equivalent. Total also owns 50% stakes in two other oil sands projects, Surmont (a 50/50 joint venture with ConocoPhillips Corp. (NYSE: COP)), and Northern Lights, another 50/50 joint venture with China Petroleum & Chemical Co., or Sinopec, (NYSE: SNP).

Oil sands development has gotten hammered by environmental groups for its destruction of the environment, its greenhouse gas emissions, and its nearly unquenchable thirst for water. However a report issued by Royal Society of Canada scientists downplays the impacts of oil sands mining but does note that the development accounts for 5% of Canada’s greenhouse gas emission and that as the industry grows so will emissions. The report also states that there is a need to review the adequacy of the financial reserves meant to pay for environmental disasters and to repair damage when projects shut down.

Total committed itself to oil sands development as a way to build its proved reserves at a reasonably affordable price. Even the massive costs of developing an oil sands project pales compared with developing ultra-deepwater reserves.

Paul Ausick

BP has also said that it plans to commit $2.5 billion to the Sunrise oil sands project it owns in a joint venture with Husky Energy Inc. (OTC: HUSKY). Husky is majority-owned by Hong Kong tycoon Li Ka-shing and his conglomerate, Hutchison Whampoa. Husky recently paid about $841 million to Exxon Mobil Corp. (NYSE: XOM) for additional oil and gas properties in Alberta and British Columbia.

BP is getting a late start in the Canadian oil sands, mainly because former CEO John Browne had concerns about both production costs and environmental damage. Suncor Energy Inc. (NYSE: SU) has been producing synthetic crude from the oil sands since 19XX. Earlier this month Suncor said it was producing an average of 275,000 barrels/day in 2010. Husky and BP expect to produce 60,000 barrels/day of bitumen after production begins in 2014 at the Sunrise project. Production could reach 200,000 barrels/day by 2020.

BP claims that by integrating production from the Sunrise project with its refinery in Toledo, Ohio, the company can make the economics of oil sands mining work. To make that idea a reality, BP/Husky needed a pipeline, and Enbridge Inc. (NYSE: ENB) has agreed to build a $475 million pipeline to move the bitumen to its Alberta distribution hub, from where it can flow to Toledo.

That takes care of the economics, but what about environmental damage? BP’s record here is, in a word, awful. Pipeline leaks in Alaska, the Gulf disaster which killed 11 workers, the 2005 Texas City refinery explosion that killed 15 workers, none of these inspires trust in BP’s commitment to safety or environmental concerns. In fact, at the company’s annual meeting in March of this year, about 150 investors charged the company with conducting an insufficient assessment of the environmental risks of developing the Sunrise project. According to the Financial Times,  the projections for development of Sunrise “entail catastrophic consequences for the climate.”

Having gotten rid of some of its Gulf of Mexico holdings and with its reserves in Alaska dwindling, BP wants to stay in North America any way it can. The US Congress has threatened to make it very difficult for BP to operate in the US. Now it’s up to Canada to decide if the company gets the chance.

Paul Ausick