Kinder Morgan's (NYSE:KMI) shares have been going down for a couple of months now, and recent news about the Trans Mountain pipeline have pushed shares back under $20 for good. This is despite the fact that worries about Kinder Morgan's Canada projects seem overblown.
Kinder Morgan's shares trade at $18 right now, more than 20% below the 52 week high, and down more than 11% year to date.
The recent price action was a reaction to the elections in British Columbia, where the Green party and the New Democrats agreed to form a government. This ousts premier Christy Clark, who was in favor of the Trans Mountain pipeline, Kinder Morgan's biggest expansion project.
The Green party is a noted part of the opposition to the Trans Mountain pipeline expansion, thus the fact that the Green party will be part of the new coalition to head British Columbia has spooked the markets.
Fears about a potential termination of the Trans Mountain pipeline not only lead to a drop of more than 4% in Kinder Morgan's shares, the same story also was responsible for Kinder Morgan Canada's shares falling even further -- right on their first day of trading. The fact that Kinder Morgan sold its 25% stake in Kinder Morgan Canada just before these political news sent Kinder Morgan Canada's shares lower was very lucky, otherwise the proceeds KMI received would have been lower by around $100 million.
I believe that the fears about the Trans Mountain pipeline expansion are overblown, due to two reasons:
First, the fact that BC is now headed by a government that opposes the pipeline expansion does not mean that this government can stop the expansion of the pipeline: Alberta Premier Notley states that the authority about projects such as the Trans Mountain pipeline expansion lies with the federal government -- which is thinking positively about the Trans Mountain pipeline expansion. With the support of Prime Minister Trudeau, it thus seems likely that the Trans Mountain pipeline expansion will be built, independent on the opinion of the new British Columbian government.
The second reason investors need not worry too much is that a potential stop of the Trans Mountain pipeline expansion would not break Kinder Morgan's neck at all: The company would not be able to deliver on one of its key growth projects, but on the other hand that would leave a lot of money available for other purposes. As a pipeline operator, Kinder Morgan is not forced to construct new projects continuously, as its existing ones are not depleting -- unlike, for example, oil companies, which are forced to continuously spend money on capital expenditures to make up for declining production rates at its existing wells. Kinder Morgan, as well as other pipeline operators, could theoretically focus on maintaining its existing pipeline network and return all cash flows to its owners, without the company being in danger of being forced out of business.
With its project backlog Kinder Morgan targets a return of roughly 13% -- pre-tax. This means an after-tax return of roughly 10% the company is seeking to generate via its capital expenditures. If the Trans Mountain pipeline expansion does indeed get blocked (I believe that is rather unlikely due to the federal government supporting the expansion), Kinder Morgan would lose out on roughly $400 million in annual cash flow: $5.4 billion for the project * an after-tax return of 10% * Kinder Morgan's 75% ownership stake in Kinder Morgan Canada gets us to $405 million in potentially lost returns.
On the other hand, Kinder Morgan would save $4.1 billion if the Trans Mountain pipeline would not be expanded -- money that could be used for other purposes, such as share repurchases. If the company spent those $4.1 billion on buybacks at the current price of $18 per share, the company could retire 10% of the share count, which would mean that each remaining share's portion of the total earnings and cash flows would grow by 11%.
This would increase Kinder Morgan's funds from operations per share by $0.20 to $2.03 on an annual basis, which is relatively in line with what would happen if the Trans Mountain pipeline expansion gets build: $400 million in additional FFO for Kinder Morgan, Inc. would increase FFO per share by $0.18 per share.
Whether Kinder Morgan builds the Trans Mountain pipeline expansion or uses the money that would have cost to buy back shares would ultimately not really affect the company's FFO per share very much -- and since FFO per share is a main determinant for the dividends a company can pay, investors (especially those seeking income from their holdings) should not worry about the Trans Mountain pipeline expansion too much.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.