Kinder Morgan (NYSE:KMI) started 2018 off with a bang: The pipeline company recently reported expectation-beating results, boosted its dividend 60%, and expects to meet or beat its full-year forecast. But despite that strong start, a darkening cloud of uncertainty is looming over its biggest expansion project and casting a shadow over the company's future.
That issue was one of several the company's management team addressed on the accompanying conference call. One clear theme ran through those comments: While there is some increasing pessimism relating to that project, executives firmly believe the company's future remains bright.
Addressing the elephant in the room
After running through the first-quarter highlight reel, CEO Steve Kean switched gears to the company's Canadian subsidiary Kinder Morgan Canada Limited (TSX:KML) and addressed the recent decision to halt all nonessential spending on the Trans Mountain Pipeline expansion. Kean stated that while the company wants to invest in Canada, "it's become clear this particular investment may be untenable for a private party to undertake." He added that the developments following the company's announcement "confirmed those views."
While Kinder Morgan Canada plans to continue negotiating with stakeholders until the end of May, it will terminate the project if it can't solve its two most pressing issues: protecting shareholders and receiving a clear path to build in British Columbia, where the government is vehemently opposed to the project. While it's worth noting that Canada's Prime Minister Justin Trudeau stated last week that "this pipeline will get built," it's becoming increasingly less likely that Kinder Morgan will be the one building it.
Not giving up on Canada
Sticking with the Canadian theme, Kean made it clear that the company wants to continue investing in the country. He stated that "once we get a point of clarity" on Trans Mountain, Kinder Morgan Canada is interested in acquiring midstream assets in Western Canada. He noted that "it's not a large group of players there, but there are some very capable players with good midstream assets."
Continuing to generate exceptional cash flow
That uncertainty aside, Kinder Morgan's management team made it clear on the call that the rest of Kinder Morgan's operations were firing on all cylinders. Founder Richard Kinder stated, "As you can see from 2017 full-year results and from the results of the first quarter of '18 ... and from our full-year 2018 budget and outlook, KMI continues to generate strong cash flow." He added that "we intend to use that cash in a fiscally responsible manner to benefit our shareholders."
Kinder then ran through several options for the company's excess cash:
We can use them for expansion CapEx or selective acquisitions, either of which helps us grow the company. We can use the funds to pay dividends to our shareholders. We can buy back shares or we can pay down our debt. In my judgment, any and all of these options create value for our shareholders.
The company already earmarked some of that money to raise its dividend 60% this year and repurchase another $250 million of stock. It also secured several high-return expansion projects during the quarter and planned to spend an incremental $100 million in capital projects this year.
Still finding high-return projects
Speaking of those growth projects, CEO Steve Kean said on the call: "[W]e continue to find attractive new opportunities and added $900 million worth of projects to the backlog during the quarter. The vast majority of the backlog additions are in our natural gas segment." These projects carry very high returns, with one $30 million expansion expected to generate $15 million in incremental earnings.
The company noted that demand for natural gas pipeline capacity remains healthy, especially in the Permian Basin, where it recently filled up its $1.7 billion Gulf Coast Express project. Kean said that the company is already in early-stage discussions with interested parties on a second pipeline in the basin.
Holding off on more buybacks for now
Kinder Morgan's initial 2018 budget left it with about $550 million in excess cash that, as its founder noted earlier, it could allocate in a variety of ways. That led an analyst on the call to ask what the company planned to do with the roughly $200 million it has left after accounting for the $100 million in incremental growth spending and $250 million in repurchases, especially given how cheaply its shares trade at the moment.
Company President Kimberly Dang answered this question:
I think at this point, we're going to look and probably wait a little bit to see what the capital projects look like and see if there's any more of those. But depending on what happens with CapEx, there may be the opportunity to buy back more shares and or pay down debt.
Near-term uncertainty should soon give way to a clearer long-term outlook
It's impossible to predict the outcome of Trans Mountain right now. It's currently clouding the future of Kinder Morgan, but with a tight deadline, that fog should dissipate at the end of next month. Once it does, investors will have a much clearer picture of where Kinder Morgan grows from here. Its focus will likely be on building more natural gas pipelines and buying other assets in Canada, suggesting the company has plenty of ways to grow even if it scraps Trans Mountain.