Kinder Morgan (NYSE:KMI) recently completed a "momentous" quarter according to CEO Steve Kean. Not only did the pipeline giant's financial results beat its expectations, but it was a pivotal quarter on a strategic front, because the company closed the sale of the Trans Mountain Pipeline and locked up another new growth project.
However, the company isn't planning to slow down its momentum, which was evident on the accompanying conference call, during which Kean outlined four priorities that he hopes will take the pipeline giant another step closer to its aim of enriching shareholders.
Laying out the plan
After running through the highlight reel for the quarter, Kean transitioned into a discussion about what lies ahead by outlining four priorities, saying that the company will:
- Complete the distribution of the Trans Mountain proceeds and continue our discussions on turning the positive indications that we now have from all three rating agencies into positive ratings actions.
- Continue executing on our project backlog, particularly the completion of Elba and the advancement of our Gulf Coast Express and PHP.
- Continue maximizing the benefit of our unparalleled gas network, seek to add attractive return projects to our backlog as we did this quarter with the addition of PHP.
- Continue returning value to our shareholders with a growing and well-covered dividend.
One central theme ran through those comments, which is that the company plans to continue its current strategy, which has included improving its balance sheet, building and developing expansion projects, and sending money back to investors.
On the balance sheet side, the company expects to receive a large cash infusion from its Canadian subsidiary Kinder Morgan Canada (TSX:KML) early next year, which is its share of the proceeds from the sale of Trans Mountain. Kinder Morgan plans to use that money to pay down debt, which will reduce its leverage to the point that it should be eligible for a credit rating upgrade. A higher rating will make it cheaper for the company to borrow money in the future, which will enable it to generate better investment returns and save on interest expenses.
At the same time the company remains focused on improving its financial profile, it continues to plow a large portion of its cash flow into expansion projects. It aims to complete its current slate as close to its budget and timeline as possible. Meanwhile, it's working to enhance its growth prospects by adding new expansions to its backlog, as it did last quarter by giving PHP the green light. Kean noted on the call that it's looking at a range of opportunities such as moving oil from the country's storage hub in Oklahoma toward the Gulf Coast, additional pipeline capacity out of North Dakota's Bakken Shale, and some opportunities in Louisiana's Haynesville Shale as well as Texas' Eagle Ford. Meanwhile, longer term, it could build a third long-haul gas pipeline out of the Permian.
Finally, thanks to the improvements in its balance sheet and growth prospects, Kinder Morgan expects that it can continue growing its dividend in the coming years, still aiming for 25% increases in both 2019 and 2020.
A potential enhancement to that plan could be coming down the pipeline
In addition to continuing to work on those initiatives, Kinder Morgan is also exploring its options for Kinder Morgan Canada. The company initially created that entity to be a self-funding vehicle for the Trans Mountain Pipeline expansion. However, with it selling that business, the company's original purpose no longer exists.
While Kinder Morgan Canada could continue operating its remaining assets, it also could sell them to another company or back to Kinder Morgan. If it sells the business to a third party, Kinder Morgan will receive another cash infusion, since it has a 70% stake in that entity.
"With our leverage target achieved, we would expect to use the additional available cash to fund the equity portion of attractive growth projects that we may add to the backlog or for share repurchases," according to comments by Kean on the call.
Either option would enhance its current plan, since it could add even more expansion projects to its backlog or return additional value to shareholders above the dividend. That second option looks particularly appealing given Kean's belief that "our current share price is an attractive value for share repurchases."
More of the same, which isn't a bad thing
CEO Steve Kean made it clear on Kinder Morgan's third-quarter call that the company plans to continue its four-fold strategy to create value for investors. While that plan has yet to lift the stock price, it should eventually, especially as the company's expansion projects start growing cash flow and it buys back more shares. In the meantime, investors can buy this top-notch pipeline company for a ridiculously cheap price.