Kinder Morgan (NYSE:KMI) 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.
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 (TSX: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.
Matthew DiLallo owns shares of Kinder Morgan and has the following options: short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.