Shares of Kinder Morgan (KMI 1.78%) have fallen more than 13% this year. That decline comes despite the fact that the company's results have been right on target and it completed shoring up its balance sheet, which puts it in position to significantly increase cash returns to shareholders next year. Due to that drop, shares trade at a ridiculously cheap valuation these days.
That's because investors remain worried that the company's Canadian subsidiary Kinder Morgan Canada Limited (KML) won't be able to build its critical Trans Mountain Pipeline expansion, which is the largest project in either company's backlog. CEO Steve Kean addressed those fears during the company's most recent quarterly conference call, making three points that should help investors rest a bit easier.
Customers need this project
Kean started off his discussion on Trans Mountain by reminding investors that the company reached a crucial milestone on the project earlier this year. After revising its cost estimate from 6.8 billion Canadian dollars ($5.36 billion) to CA$7.4 billion ($5.83 billion) and raising its tolls to offset the higher costs, shippers had the option to return their previously contracted capacity to the company. However, Kean noted:
When all was said and done, all the capacity was placed, thus reaffirming the market need for this project based on 2017 shipper lineup and 2017 oil sands economics. I'm repeating this because I think it's worth bearing in mind as we go through the various ups and downs in this project that this project is vitally important to our customers.
Overall, shippers returned just 3% of their capacity to the company, which others quickly snapped up. This demand suggests that producers need this project to help get their oil to global markets. So, while there is plenty of opposition to this project, Kinder Morgan won't back down because of its vital importance to the oil sands region.
The most important approvals are already obtained
Another thing Kean reminded investors on the call was that "we also have our federal approval and our BC environmental approval in hand." Those were the most time-consuming and difficult approvals to obtain. As a result, it faces fewer obstacles that could permanently derail this project.
Furthermore, it's worth noting that Canadian Prime Minister Justin Trudeau continues to defend his decision to support the project. This May he said that "the decision we took on the Trans Mountain pipeline was based on facts [and] evidence, on what is in the best interest of Canadians." That timing is important because it came after the change in government in British Columbia, where the bulk of the construction will take place. While the two parties composing the new provincial government campaigned against the project, Trudeau said that "regardless of a change in government, in British Columbia or anywhere, the facts and evidence do not change. We understand that growing a strong economy for the future requires taking leadership on the environment." He believes that Kinder Morgan's project does just that, which increases the likelihood that it will be able to build this project.
Getting the necessary permits, just at a slower pace than hoped
Due to those factors, Kean said that right now the "key for us on this project is access to land and permitting so that we can be confident in the ability to efficiently construct this project." It has received some good news on this front in recent weeks, including obtaining permits in British Columbia for nearly half of the Crown land parcels it needed, which is government-owned land. Furthermore, it received permits in Alberta for many of that province's Crown parcels. That said, Kean did admit that the permitting process is off to a slower-than-expected start. As a result, the company warned of the possibility that the project's in-service date could be delayed up to nine months if it can't accelerate its progress.
It might be late, but it will get built
Despite the slow start to the permitting process and the concerns stemming from this spring's election in British Columbia, Kinder Morgan still expects to finish this project, with its aim to complete it by the end of 2019. That said, even if it is several months late, the company still believes it will be able to build this expansion. Driving that view is the fact that oil companies in Canada need this project, which has the full support of the federal government. That's why Kean doesn't think investors should lose any sleep worrying about its Trans Mountain Pipeline expansion.