Please ensure Javascript is enabled for purposes of website accessibility

Kinder Morgan Inc. Has Come a Long Way

By Matthew DiLallo - Sep 5, 2018 at 2:34PM

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

With the company using the proceeds from the Trans Mountain Pipeline sale to repay debt, its balance sheet has gone from a liability to an asset.

As expected, Kinder Morgan (KMI 0.43%) announced this week that it plans to use the bulk of the proceeds it received from the sale of its controversial Trans Mountain Pipeline to repay debt. The decision will strengthen the company's balance sheet to such a degree that it should earn a credit rating upgrade further into investment-grade territory. That's a dramatic turnaround from the end of 2015 when the company was sliding down the slippery slope toward junk-rated credit.

Putting the proceeds to work

Kinder Morgan's Canadian subsidiary Kinder Morgan Canada Limited (KML) announced this week that it would return the bulk of the cash it received from the sale of the Trans Mountain Pipeline to investors. The Canadian government forked over 4.5 billion Canadian dollars ($3.4 billion as of Sept. 5, 2018) for the legacy pipeline and associated expansion project. After paying taxes on that amount, and retiring all its existing debt, Kinder Morgan Canada will return CA$1.2 billion ($910 million), or CA$11.40 per share ($8.65), in cash to investors in early 2019. Kinder Morgan will receive 70% of that money, or about $640 million.

Pipelines going over a blue sea and with a blue sky is over head.

Image source: Getty Images.

Kinder Morgan will use that cash to repay debt. When added to the debt reduction at the Kinder Morgan Canada level, it will reduce the company's consolidated debt level by $2 billion. That will push the company's net debt-to-adjusted EBITDA ratio to around 4.6 times by year-end. That's well below the company's initial 5 times target, which is why Kinder Morgan will revise its long-term leverage target to around 4.5 times. Company President Kim Dang noted in the press release unveiling this new aim that "we expect that [lower leverage ratio] to be recognized by the ratings agencies," implying that they believe a credit rating upgrade is in order.

From a liability to an asset

Kinder Morgan's balance sheet has come a long way in the last few years. The company's financial situation had deteriorated along with the oil market in 2015, which caused credit rating agency Moody's to change its outlook on the company from stable to negative in early December of that year. The rating agency's concern stemmed from the company's decision to team up with Brookfield Infrastructure Partners to buy out their partners and take full control of the Natural Gas Pipeline Company of America. That deeply indebted pipeline company added more weight to Kinder Morgan's balance sheet at an inopportune time, putting the company on pace to end the year with a 5.9 times leverage ratio, which was high for an investment grade company.

The warning ultimately led Kinder Morgan to slash its dividend 75% and use those cash flows to fund capital spending and reduce debt. This decision helped ease Moody's concern, which changed its outlook back to stable. From there, Kinder Morgan would go on to sell several assets and secure funding from joint venture partners to give it some more breathing room. Overall, Kinder has now reduced its net debt by roughly $7.8 billion, which dropped its leverage ratio close to 4.5 times, potentially lining it up for an upgrade, especially since Moody's recently boosted its outlook to positive.

A higher credit rating would likely lower Kinder Morgan's borrowing costs, enabling the company to get cheaper rates when it refinances maturing debt as well as when issuing new bonds to finance expansion projects or acquisitions. Further, it will provide the company with greater financial flexibility, since the company no longer needs to fund 100% of capital spending with cash flow but could shift to a more balanced mix of 50% debt/equity for new capital projects. That could enable the company to invest in more expansion projects or return a greater percentage of its cash flow to shareholders through an expanded stock buyback program.

It's time for investors to wake up and take notice

Kinder Morgan has dramatically improved its financial situation over the past few years so that it now has a much stronger balance sheet. However, despite all this progress, shares of the pipeline giant are down more than 40% in the last three years even though cash flow per share is only 4% off the peak. Because of that, the stock is absurdly undervalued and could have 40% to 50% upside from here, making it one of the top stocks to buy right now.

Matthew DiLallo owns shares of Brookfield Infrastructure Partners and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

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
$18.65 (0.43%) $0.08
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
403%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

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.