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Summary

  • Buried deep within a response the company filed with regulators this month was a design for the company’s plan to expand the Trans Mountain pipeline.
  • The expansion would increase capacity making room for another additional 240,000 barrels per day throughput of the Edmonton-to-Vancouver oil transportation pipeline.
  • This is one piece of the puzzle regarding a $5.4 billion plan to increase capacity of the Northwestern oil pipeline to 890,000 barrels per day throughput from 300,000.
  • Nonetheless, the project is not without its detractors and obstacles. A significant amount of local opposition is mounting.

For Kinder Morgan Inc. (NYSE:KMI) and Kinder Morgan Energy Partners L.P. (NYSE:KMP) to continue to deliver on the growth of distributable cash flow and increased dividend yields, the company will need to bring to fruition new expansion projects on time and under budget. This is key for the future success of KMI. Near the end of a long response Kinder provided to regulators regarding the company's $5.4 billion plan to nearly triple oil deliveries on the company's existing Northwestern midstream infrastructure was a "theoretical" plan for an expansion of the Trans Mountain pipeline segment. It is critical for Kinder to bring this expansion project to fruition. In this article I will analyze the prospects of the proposal being approved and the potential upside for the company as well as the downside risks associated with the project.

Trans Mountain pipeline expansion overview

The following is a breakdown of the size, scope, requirements and metrics of the expansion plan, the potential obstacles, and the main arguments of those for and against the plan.

Key metrics

  • The Trans Mountain pipeline expansion would add another 240,000 barrels per day of throughput capacity.
  • The expansion plan is currently only a "theoretical" proposition with no timeline provided.
  • The proposal was only included as a contingency based on the potential for increased production from upstream operators in the area.
  • The viability of the plan is dependent on a combination of market conditions and economic and technical feasibility.
  • The company has made no assessment of the practicalities related to transportation of expanded volumes at this time.
  • This expansion is only on small part of a $5.4B plan to increase capacity of the oil pipeline to 890,000 barrels per day
  • 987 kilometers of new pipeline will be needed to accommodate the expected total throughput.
  • The entire expanded blueprint would increase capacity on the pipeline network to 1.13 million barrels per day.

Challenges

  • The expansion would require additional pumping horsepower and new pipeline segments.
  • Further regulatory applications would have to be approved.
  • The availability of power along the route is not known at this time.
  • There is already space limitations for tanks and terminal infrastructure at this time.
  • There may be capacity issues relative to the Puget Sound pipeline.
  • The ability of Burrard Inlet in Vancouver to accommodate additional vessel traffic is questionable.

The Proponents and Opponents Chime In

There is already heated opposition among environmental groups and some municipalities with regard to the current midstream infrastructure in place. These opponents to the expansion are steadfastly against augmenting oil exports in the area. The following is a list of the current complaints by opponents followed by the assertions of proponents regarding the expansion.

Opposition's key arguments

  • Increased tanker traffic on the coast may cause various problems.
  • Kinder has not even gotten approval for the expansion and the company is already planning further expansion.
  • There is no reason to put at risk the pristine Northwestern environment for the economic benefit of Kinder Morgan.
  • Why take the risk just so we can export oil and gas to foreigners.
  • The increased risk of oil spills and emissions of toxic fumes related to a potential accident is not worth it.
  • We should keep the oil and gas for ourselves.

Proponent's key arguments

  • Kinder Morgan pipelines have been in the area for over 60 years with no major incidents.
  • The hundreds of thousands of miles of pipelines in North America form the backbone of the local economy.
  • The environmental impacts of the current infrastructure have been diminutive and unnoticeable.
  • The other option, rail transport, offers the same risks, maybe even more.
  • This is only an expansion of current infrastructure.
  • Lower power rates for local residents.

My take

I don't believe the case the opponents make holds water. I see the expansion plan being approved in its entirety. The key fact is Kinder has been operating in the area for over 60 years with no major issues and no discernible environmental impacts. Furthermore, whether Northwestern residents know it or not, the midstream industry expansion and operations in their area has provided them with low energy costs, plenty of jobs, and economic stability. I suspect the true size of the opposition is actually an infinitesimally small portion of the actual population. They just so happen to have the loudest voices. The expansion proposal will be approved.

Conclusion

Kinder Morgan has the potential for remarkable organic growth due to a profound revitalization of North American oil and gas production. This fact is evidenced by the $14 billion backlog of future projects due to be implemented within the next five years. This expansion project is a key part of that puzzle. I expect the proposal to be approved. Kinder Morgan will pull the proverbial rabbit out of its hat when it's all said and done. Moreover, the stock has been hammered based on a barrage of bear attacks recently. KMI appears undervalued by a significant margin as compared to its peers currently.

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(Source: Finviz.com)

Nevertheless, downside risks do exist for the company. Negative price trends or a decreased demand for petrochemical products and other bulk materials and chemicals in North America could hamper the company's prospects greatly. Shut-downs or cutbacks at major refineries, changes in laws or regulations, and unfavorable results of litigation may inhibit growth as well. Due to these facts, I would layer into any position over time to reduce risk.

Source: Kinder Morgan: About To Pull A Rabbit Out Of Its Hat?