Kinder Morgan Canada Limited (TSX:KML), the publicly traded Canadian subsidiary of pipeline giant Kinder Morgan (NYSE:KMI), started off with lots of promise. Kinder Morgan created the company as the vehicle to fund the construction of the Trans Mountain Pipeline expansion (TMX), which would have been a needle-moving project for both companies.
However, with Kinder Morgan Canada recently selling that pipeline and the associated project to the government of Canada, its future direction isn't clear at the moment. That makes it tough to gauge whether the stock is worth buying.
The bull case on Kinder Morgan Canada
Kinder Morgan Canada closed the sale of Trans Mountain at the end of August, which shrank its asset footprint dramatically. CEO Steve Kean gave a rundown of what remains in that business at a recent investors' conference, stating that
Our Canadian footprint will consist of the Cochin pipeline system and it also consists of our significant merchant terminal position in Edmonton. Those are attractive assets. We've been experiencing good renewal rates there. And a great bulk terminal facility in Vancouver Harbor which we are investing in now and we are growing.
These assets generate about $200 million in annual earnings, which will enable the company to continue paying a dividend, though it will be at a lower rate going forward. Further, the company basically has no debt, which gives it significant financial flexibility.
Given its financial firepower, the company could make a significant acquisition, sanction new growth projects, or even help some of its cash-strapped peers finance their expansions by joining them as a funding partner. Any of those options could create value for shareholders, including Kinder Morgan, which owns 70% of the company.
The bear case on Kinder Morgan Canada
While Kinder Morgan could use Kinder Morgan Canada as a vehicle to expand in Canada, that's just one of many options. Kean noted that the company is looking at all its alternatives, since the business is "small" and its "original purpose was to take these assets and get the financing in place for TMX [which] no longer exists obviously." Because of that, it has hired an investment bank to explore selling off the rest of Kinder Morgan Canada's assets. While a sale could boost the value of the company, it's unclear if buyers will meet Kinder Morgan's asking price.
If Kinder Morgan doesn't find an outside buyer willing to pay a high value for these assets, the company could decide to take Kinder Morgan Canada private, potentially offering little to no premium since it already controls 70% of the company. Another option is that it could keep Kinder Morgan Canada public and manage it for cash flow until an attractive investment opportunity arises, which might take years to develop. Either of those outcomes could cause Kinder Morgan Canada's stock to underperform from here.
An even worse outcome would be if the company gets impatient and makes poor investment decisions on acquisitions or expansion projects. A bad deal or another controversial expansion project could end up destroying value as opposed to creating it.
Too many unknowns
While Kinder Morgan Canada has a solid foundation built upon a debt-free balance sheet and attractive cash-flowing assets, it's unclear what the company's future holds. Because of that uncertainty, it's not an appealing stock to buy right now, since investors would be blindly betting that it either gets acquired at a premium or makes a needle-moving investment, which might not happen. That's why investors are better off watching this one from the sidelines. Instead, they might want to consider buying Kinder Morgan, since it has more visibility into its future.