To suggest that 2018 was a year of change for Kinder Morgan Canada (KML) (KMLGF) would be a massive understatement. But with a new year just beginning, some investors might wonder if now is the time to jump aboard this Canadian midstream energy company. If you are wondering if Kinder Morgan Canada could help you reach millionaire status, it's important that you understand what transpired in 2018 before you hit the buy button.
What's the big deal?
Kinder Morgan Canada was spun out of Kinder Morgan Inc. (KMI 0.27%), one of the largest U.S. midstream companies, in mid 2017. It owned a small collection of assets, including a few operating midstream businesses and a large Canadian project known as the Trans Mountain Pipeline. This was a multiyear, multibillion-dollar investment that was expected to backstop Kinder Morgan Canada's growth. Only that didn't happen.
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Although the capacity that would be provided by the Trans Mountain Pipeline appears to be greatly needed, the project faced serious pushback. Local residents and governments were against it. In the end, the headwinds forced Kinder Morgan Canada to sell the project to the Canadian government for 4.5 billion Canadian dollars ($3.4 billion) in late August of 2018. This was a mixed blessing.
Kinder Morgan Canada, and its parent Kinder Morgan Inc., got out from under a troubled project. However, Kinder Morgan Canada's growth prospects were materially altered. No longer did it have a clear sight to the future. What it did have was a huge chunk of cash sitting on its balance sheet.
That cash, however, was an asset coveted by Kinder Morgan Inc. With a 70% ownership stake in Kinder Morgan Canada, Kinder Morgan Inc. easily pushed through a massive CA$11.40-per-share special dividend (it was paid in early January 2019). That effectively allowed Kinder Morgan Inc. to get its hands on most of the money generated from the Trans Mountain Pipeline asset sale. Other shareholders benefited as well, since they, too, received the dividend. But the end result was that Kinder Morgan Canada was left with no major growth projects and much less cash to invest in its own future.
Where to from here?
This isn't to suggest that Kinder Morgan Inc. stripped Kinder Morgan Canada of any future. That's hardly the case, since some of the cash from the Trans Mountain sale was used to reduce leverage. In 2019, Kinder Morgan Canada expects net debt to adjusted EBITDA to be an incredibly low 1.3 times. And the remaining midstream assets it owns have modest growth potential, with the company expecting to invest CA$32 million in expansion projects in 2019 while it considers its longer-term future.
KMLGD Cash and Equivalents (Quarterly) data by YCharts.
So Kinder Morgan Canada is really resetting its business in 2019. It has a blank slate, including a very solid financial foundation, from which to begin. The few assets it owns will provide slow growth at best, so the real question here is what new projects and acquisitions will the company make? At this point, there are no solid answers. The next year or so will be important, as Kinder Morgan Canada looks to clarify its future for investors and, frankly, itself.
A millionaire maker?
As Kinder Morgan Canada stands today, there is little chance that it will make any investor a millionaire. It's a reliable income investment, perhaps, but it doesn't have enough growth potential built into its portfolio to back that kind of stock appreciation.
Kinder Morgan Canada is unlikely to sit still, and will probably try to find new ways to grow its business. Investors need to wait to see what management does before a better call can be made on whether or not Kinder Morgan Canada stock can be a millionaire maker.
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