After years of delays, Kinder Morgan (NYSE:KMI) finally gave up on trying to expand the Trans Mountain Pipeline in Canada, instead agreeing to hand over the pipeline and the associated expansion project to the Government of Canada. In exchange, the company, through its Canadian subsidiary Kinder Morgan Canada Limited (TSX:KML), will receive 4.5 billion Canadian dollars ($3.5 billion). Here's a look at how these companies might spend that cash hoard.
Get creative financially
Initially, the transaction will have "a positive impact on our consolidated balance sheet," according to CEO Steve Kean because it will boost the cash balance at Kinder Morgan Canada. However, since that entity has a limited amount of debt, it won't immediately address Kinder Morgan's leverage concerns since it can't take that money and use it to pay down debt at the corporate level. Because of that, the company will need to be creative if it wants to use the money to bolster its balance sheet without leaving the cash sitting in the bank.
One way it could do that is by authorizing a share repurchase program at the Kinder Morgan Canada level. Given that Kinder Morgan owns 70% of that entity's outstanding shares, it could exchange some of those shares for cash, which it could then use to pay down a portion of its corporate debt. The company also could use that cash to buy back more of its own stock, which would help offset some of the lost earnings from selling the existing pipeline.
Grow in a different direction
Another option would be to reinvest the proceeds to expand Kinder Morgan Canada's portfolio in a different direction. The company could accomplish this by making acquisitions or sanctioning additional expansion projects.
Kinder Morgan already has made it clear that it plans to continue investing in Canada, despite the fiasco with Trans Mountain. On the company's first-quarter conference call, CEO Steve Kean said that the company 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."
One asset that's reportedly on the block is Enbridge's (NYSE:ENB) Canadian midstream assets, which the company is looking to sell so that it can reduce debt. Enbridge reportedly already has received several bids from potential buyers including Keyera Corp and Pembina Pipeline, which valued the portfolio for as much as CA$4.5 billion ($3.5 billion). That price point would be right in Kinder Morgan Canada's wheelhouse since it just happens to be about what it will receive from the Government of Canada.
Another option would be to pursue the acquisition of a smaller midstream operator in the country, with analysts suggesting that Gibson Energy or Tidewater Midstream & Infrastructure would make sense. The company also could pursue a merger with a larger company like Keyera Corp, which is one of Kinder Morgan's joint-venture partners in the country.
Kinder Morgan also could use the funds to invest in new growth projects. The company pointed out that a $2 billion capital investment could generate about $300 million in annual earnings -- representing a more than 4% growth rate -- and that's assuming a slightly lower return on investment than the company will earn on the projects it currently has under construction.
Kinder Morgan should have no shortage of investment opportunities now that the oil market is starting to thaw out. One possibility is pursuing a funding joint venture with a company like Enbridge, since it still needs to secure financing for its growing backlog of expansion projects, which is getting harder to do as a result of its elevated debt level and low stock price.
Lots of ways to create value for investors
Kinder Morgan will walk away from Trans Mountain with a pile of cash, which is an excellent outcome from what had been a complicated situation. The money gives the company lots of options to create value for investors. That upside potential makes the stock look like a real compelling buy these days, especially considering how cheap it is versus rivals.