Kinder Morgan (KMI 0.88%) firmly believes that the market isn't fully valuing the energy company. One evidence of this is the value that prospective buyers are willing to pay for the company's assets. It recently announced one deal at a significant premium to its current market valuation and has received "expressions of interest" from other buyers willing to pay even more for some of its other assets. Kinder Morgan could consequently continue selling off pieces until the market stops undervaluing the company.
A recent reference point
Kinder Morgan co-founder Richard Kinder has long believed that the market isn't fully valuing his company. He made his case again on the third-quarter conference call. This time, he pointed out the value the company received when it agreed to sell its stake in Kinder Morgan Canada and the related Cochin Pipeline to Pembina Pipeline. As Kinder noted, "On the financial front, I believe we continue to execute on our plans, and our decision to sell our 70% interest in Kinder Morgan Canada and our 100% interest in the U.S. portion of the Cochin Pipeline is indicative of that execution. As you know, we are receiving a 13 times multiple of EBITDA on our Cochin asset, which is well above the multiple which KMI is trading as a whole on the New York Stock Exchange."
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According to Kinder, the company sold Cochin for a premium to its current market multiple of about 10.5 times its EBITDA. The sale of its interest in Kinder Morgan Canada, likewise, came at a premium value. Combined, it sold both businesses for about 12.4 times their EBITDA. That sales price suggests that the market has significantly undervalued the company as a whole.
More proof could be coming down the pipeline
Richard Kinder made it clear that the premium value fetched by Cochin wasn't a one-off transaction of a highly valued asset. He stated that:
I should add that, we received expression of interest in other assets at similar or higher multiples of EBITDA. And let me say, there is absolutely no certainty as to whether these expressions of interest will result in transactions. That said, we will evaluate such interest as a matter of good governance and capital discipline. All this just indicates a substantial difference between the valuation of individual assets and that of the company as a whole, when expressed as a multiple of EBITDA.
With potential buyers offering to buy assets from the company at premium multiples of 13+ times EBITDA, it suggests that the market could be mispricing Kinder Morgan by as much as 30%. Because of that, it makes sense for the company to see if these expressions of interest will lead to more transactions.
One thing the company would "certainly entertain" is "selling a portion of an asset and maintaining operational control," said Kinder. Doing so would further affirm the underlying value of the company's assets. Meanwhile, Kinder Morgan could then use some of the cash it receives from those sales to buy back more of its undervalued stock. Those steps could help unlock the company's seemingly hidden value.
An interesting development to keep an eye on
Kinder Morgan has sold lots of assets in recent years to help shore up its balance sheet. However, with its financial profile back on solid ground, it doesn't need to sell any more assets. That's what makes the Pembina transaction different from previous ones because Kinder Morgan received an offer it couldn't refuse.
The company has since received more tempting offers from prospective buyers for some of its other assets. If these expressions of interest lead to more deals, it will because it received offers that highlight the value of the company's assets. That would further reaffirm the fact that the market isn't giving Kinder Morgan enough credit for its world-class portfolio of energy infrastructure assets.
