Seeking Alpha
Dividend investing, dividend growth investing, master limited partnerships, oil & gas
Profile| Send Message|
( followers)  

Summary

  • Kinder Morgan’s Trans Mountain expansion project in Canada is facing increasing criticism and media scrutiny.
  • The company has been caught off guard by the degree to which politics on both sides of the border has muddled the debate.
  • There is strong demand for the project throughout Western Canada due to its economic benefits.
  • However, concerns over oil spills and their environmental impact remain.

Kinder Morgan [(NYSE:KMI), (NYSE:KMP), (NYSE:KMR)] has been staging quite the recovery as of late. All three stocks had one of their best weeks in recent history, posting solid 3 to 5% gains, buoyed by a surge in insider buying and the improving outlook for the US economy.

KMP Price Chart

KMP Price data by YCharts

Kinder Morgan's Trans Mountain Pipeline: The new Keystone XL?

(click to enlarge)

However, somewhat hidden in last week's news flow was an interesting article regarding Kinder Morgan's Trans Mountain Pipeline. Basically, it appears as if the company has been caught flat-footed by the level of politics surrounding the expansion.

According to the article, Kinder Morgan's plan to increase the pipeline from Edmonton to the Vancouver by 540,000 BBLs/D to 890,000 BBLs/D has faced a flurry of unwanted attention and is far from slam-dunk to be approved.

While the pipeline expansion project has strong popular support overall (only 34% of those polled want to block the project), there are concerns regarding its environmental impact and Kinder Morgan's ability to respond to a possible oil spill.

Ian Anderson, president of Kinder Morgan Canada, noted that the company has faced a "dizzying array of questions" from officials at various levels of government on both sides of the border, forcing the company to ask for an additional two weeks of time to answer the questions.

The City of Burnaby in British Columbia in particular has asked 1,700 questions, mostly regarding the company's emergency response plans. This seems very rational given that this city was on the receiving end of a large oil spill in 2007. Also voicing concerns is the City of Vancouver with 400 questions, and 700 detailed questions from federal agencies and other regulators. Furthermore, some First Nation tribes have also opposed the expansion, with The Tsleil Waututh First Nation refusing to meet with the company.

In addition, Kinder Morgan has hardly been acting in the most PR savvy manner. The company had to backtrack language in its original expansion proposal suggesting that oil spills could have positive economic benefits. As shown with the recent May 2nd Rachel Maddow show segment on MSNBC, this sort of boneheaded move can make a really bad impression.

However, Kinder Morgan does have its supporters. Thirteen large oil sands producers are signed up to ship crude on the expanded Trans Mountain pipeline. In addition, with the Keystone XL expansion being delayed, the Canadian federal government may be less inclined to scuttle a project which would decrease its reliance on energy exports to the US.

The Trans Mountain Pipeline is a major portion of Kinder Morgan's growth strategy

Make no mistake, Kinder Morgan would be hurt if its expansion plans for the Trans Mountain Pipeline were set back. As shown below, this project represents a significant portion of the company's growth capex backlog starting in 2017.

(click to enlarge)

However, as noted by Goldman Sachs, Kinder Morgan does have an ace up its sleeve with its organic natural gas expansion plans, many of which are still not on the backlog. Do note that many of these natural gas projects only make sense if prices hold at or around current levels ($4.50 to $5.00 per MCF).

(click to enlarge)

Conclusion

My readers will know that one of my biggest fears about Kinder Morgan is its exposure to subterfuge, misinformation, and manufactured controversy. The company has arguably had to face all of the above; with the Hedgeye/Barron's tag team bringing up issues regarding IDRs, maintenance capex, and their impact on growth. However, these issues are mostly old news, many of which have been known for at least a decade.

Regarding the Trans Mountain, this project will likely be treated no differently. Kinder Morgan needs to be more savvy in its messaging. In addition, the company may need better educate the Canadian public as to the major economic benefits of the pipeline expansion.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Source: Kinder Morgan: The Trans Mountain Pipeline Has Become The New Keystone XL