Please ensure Javascript is enabled for purposes of website accessibility

1 Thing Kinder Morgan Inc. Has to Prove in 2018

By Matthew DiLallo - Feb 1, 2018 at 10:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The natural gas pipeline giant has delivered on all its promises last year, leaving it with only one thing to prove this year.

Kinder Morgan (KMI -0.95%) did everything it said it would do last year. The company completed its turnaround strategy by securing funding for all its major expansion projects, which allowed it to announce plans to begin returning more cash to investors. But despite all that progress, shares still sank by double digits last year because investors are worried about its ability to complete its largest growth project.

That uncertainty leaves the company with just one thing left to prove this year, which is that investors need not worry about its growth prospects. There are several ways it can do that even if its preferred route fails.

Pipeline on green grass and blue sky.

Image source: Getty Images.

Get the green light to begin building

Kinder Morgan ended 2017 with $11.8 billion of expansion projects in its backlog. Long-term contracts support about $10.2 billion of those expansions, and would therefore provide the company with very predictable cash flow. In fact, it estimates they could add $1.6 billion in incremental earnings in the coming years, which is a more than 22% increase from last year's total.

However, the bulk of that growth would come from the controversial Trans Mountain Pipeline expansion at Kinder Morgan Canada Limited (KML). The $5.7 billion project alone could supply the companies with around $900 million in annual earnings. Kinder Morgan initially anticipated that this cash would start flowing its way at the end of 2019, but permitting delays and other issues have now put it a year behind schedule. This project is no sure thing, though, since it remains highly contested and recently experienced another setback after the government of British Columbia proposed new rules that would restrict oil exports from the region. That said, if Kinder Morgan is successful in defending the project and gets the go-ahead to start construction this year, that will prove to investors that its largest growth driver can deliver as promised.

Taking a different route toward growth

On the other hand, if Kinder Morgan continues to face delays or, worse yet, decides to give up on the expansion project, it would be a blow to its growth prospects. It's not an insurmountable obstacle, however, since the company could still prove that it can grow by securing solutions that will replace the anticipated earnings from Trans Mountain.

For example, it expects to generate more than $500 million in excess cash this year, which it could use to repurchase shares or invest in high-return expansion projects. If it uses this money to secure additional growth projects or make a needle-moving acquisition, those initiatives will help replace some of what it would miss if Trans Mountain remains delayed or gets canceled.

Meanwhile, Kinder Morgan Canada currently has a debt-free balance sheet and a premium priced stock relative to its parent, giving it plenty of capital to make acquisitions. The company could target single-asset purchases such as storage terminals and pipelines around the oil sands region or make a needle-moving deal to acquire a rival. A large enough transaction could help offset a significant portion of Trans Mountain's anticipated income and ease concerns about the company's ability to grow, especially if it bought an entity that came with visible growth prospects.

Once the fog lifts, the stock could rally

A cloud of uncertainty continues to weigh on Kinder Morgan's stock because investors aren't sure how much it can increase cash flow in the coming years due to the issues with Trans Mountain. So, the company needs to prove to them that it can grow, either by starting construction on that project or finding other ways to fill the gap. If it can do that, then the stock might finally head higher.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$16.76 (-0.95%) $0.16
Kinder Morgan Canada Limited Stock Quote
Kinder Morgan Canada Limited
KML

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.