Obama, McConnell, and JR Ewing

In case you missed it there were big midterm election results the other day that saw a huge victory for the GOP on both a national and state level all over the country. The key victory was retaking the Senate, which will put Mitch McConnell in charge of the upper chamber of Congress.

Why is this important for investors? If one tries to look into the crystal ball to early 2015 and possible legislation that could now pass through the GOP-led House and the Senate with ease in order to force President Obama to make a decision (such as a veto), one should look hard at the Keystone XL Pipeline. President Obama may have to placate Congress on this one, much to the dismay to the ‘green’ contingent in his party, in order gain some points for other issues later on.

At a quick glance there are a handful of stocks that represent stakes in the future of the project in the U.S. The major player is TransCanada Corporation (NYSE – TRP - $49.94). Others include Exxon Mobile Corporation (NYSE – XOM - $95.07), Valero Energy Corporation (NYSE – VLO - $49.64), Canadian Natural Resources Limited (NYSE – CNQ - $33.62), and Suncor Energy, Inc. (NYSE – SU - $33.85). This list is by no means exhaustive.

No doubt oil has been beaten up over the past several months. In our special Goldman Guide newsletter yesterday we stated that we expected oil to stabilize and make a big return in 2015. This raises a dilemma. All of the plays mentioned above are both out of our normal small cap price range, and additionally, adding all of them to your portfolio may be too pricey. It may be time to play some calls either as a covered strategy or straight up.

Below is a chart that depicts some information related to future call contracts and simple valuation metrics for our 5 Keystone players. On the call side, we selected options with expiration dates 4-6 months ahead that are out of the money yet enabling a 7% to 9% gain over the current price, rounded up to the closest tick.

Keystone XL Pipeline Stock Plays – Option and Simple Valuation

(Source: Yahoo! Finance)

Since President Obama is inevitably going to be concerned with his legacy and wants to appear to be able to compromise on the least important segments of his agenda, we believe that the Keystone XL pipeline is on the table and these calls offer real potential.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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