Kinder Morgan (NYSE:KMI) has been in the news a lot in recent months for all the wrong reasons. From cutting the dividend in late 2015 to seeing key pipeline projects delayed or cancelled, it has been a rough patch. However, on Thursday, Kinder Morgan got a major piece of good news -- Canada's National Energy Board is recommending approval for the Trans Mountain Expansion Project, though it is subject to 157 conditions. From the announcement:
Through the public hearing process the Board considered all the evidence and arguments made for and against Trans Mountain's application to construct and operate the Project, including information regarding the consultation undertaken with Indigenous groups, the potential impacts, and proposed mitigation measures. The Board then considered all of the benefits and burdens associated with the Project, balancing various interests and factors (such as the need for the Project), before determining whether, in its opinion, the Project is in the Canadian public interest.
Taking into account all the evidence, considering all relevant factors, and given that there are considerable benefits nationally, regionally and to some degree locally, the Board found that the benefits of the Project would outweigh the residual burdens.
Perhaps the most important aspect of this recommendation is that it clearly states that the expansion of the Trans Mountain pipeline is in the Canadian public interest. The government will be hard pressed to deny approval given that statement.
Furthermore, Canadian oil producers desperately need to reduce their dependency on the US market, which is where the vast majority of their oil exports are ending up. The Trans Mountain pipeline will help a portion of the production leave North America and open up growing markets in Asia.
The US is already oversupplied with its own domestic oil production from the fracking boom. As a result, the Canadian oil is sold at a massive discount to the WTI benchmark prices, costing the producers and government billions every year in lost revenues, taxes and royalties.
Keep in mind that the National Energy Board is only a regulator and final approval lies with the Canadian government whose final decision is expected by December 2016. Though, given that Prime Minister Justin Trudeau supported the pipeline in his election, approval seems very likely indeed.
One of the conditions from the National Energy Board that raised some eyebrows was that Kinder Morgan needed to detail plans to reduce and offset carbon emissions from the project. This is the first time the regulator has required this sort of a plan be provided. Though, this was likely done as a concession to assuage some of the environmental concerns from Trudeau's own party.
However, it was not specified how Kinder Morgan should offset its greenhouse gas emissions from the pipeline's construction. Nevertheless, Kinder Morgan could argue that transporting oil via pipeline is much safer for the environment that either via railcar or truck.
Why is this important?
The importance of this news cannot be understated. Kinder Morgan really needs the Trans Mountain pipeline expansion to go through as planned as it is a cornerstone of its capital budget. Projected to cost $5.4 billion, it represents ~40% of the $14.1 billion 5-year backlog. Given the focus on capex over dividends, not getting this projected approved would be a big blow and reduce the long-term growth potential. As a result, this news should provide a nice tailwind for Kinder Morgan's stock going forward.
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Disclosure: I am/we are long KMI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.