Kinder Morgan (NYSE:KMI) has undergone a dramatic transformation over the past few years. The energy company has gone from being in a very tight financial situation to having significant flexibility. Because of that, the pipeline giant has the potential to create additional value for its investors in the coming years if it uses its flexibility wisely.

The icing on the cake

Kinder Morgan has slowly chipped away at its debt over the past several years. Not only has it sold several non-core assets, but it has also used its retained cash flow to finance nearly all its expansion projects. The company has pushed its leverage ratio from a concerning 5.9 times debt-to-EBITDA at the end of 2015 to 4.7 at the end of the third quarter, which was just above its 4.5 times target.

Stacks of U.S. hundred dollar bills.

Image source: Getty Images.

The company, however, has since closed two more asset sales. It sold the U.S. portion of the Cochin pipeline to Pembina Pipeline (NYSE:PBA) for $1.546 billion in cash. Pembina also acquired Kinder Morgan's 70% stake in its former Canadian affiliate, Kinder Morgan Canada, in exchange for 25 million shares of Pembina's stock. It eventually plans to sell down its stake in Pembina -- which is currently worth about $925 million -- in an opportunistic, non-disruptive manner.

This transaction has further bolstered the company's financial profile. It's now on track to end the year with a 4.4 times leverage ratio, which should further improve to 4.3 in 2020.

The flexibility to do more in 2020

Even after factoring in the lost earnings from Cochin and Kinder Morgan Canada, Kinder Morgan expects to generate about $5.1 billion, or $2.24 per share, in cash next year, up about 3% from 2019's level. That's enough money to fund the company's dividend -- which it plans to increase by another 25% bringing the total outlay to $2.85 billion -- and all but about $150 million of its $2.4 billion expansion program.

Because of that, and the fact that its leverage ratio is now below its targeted level, Kinder Morgan will have significant financial flexibility in 2020. In the company's estimation, it could borrow an additional $1.2 billion and still keep leverage at its 4.5 times target. The company could use that money to repurchase shares or invest in growth-focused initiatives like expansion projects or acquisitions.

To put that borrowing capacity into perspective, Kinder Morgan could accelerate the growth rate of its cash flow per share to 5%-6% for 2020 if it put the entire amount to work right away. While the company does have the option to repurchase a big chunk of its stock so that it could quickly move the needle, it will likely remain patient and wait for the right opportunity to come its way.

That's because investing in expansion projects has the potential to create more value for shareholders over the long term. Whereas Kinder Morgan can repurchase its shares at a dirt cheap multiple of about 9 times cash flow, it can typically invest in expansion projects at an even more attractive 6 times earnings. The company will therefore probably keep an eye out for new expansion opportunities before using up its flexibility on share repurchases.

An interesting storyline to watch in 2020

For the first time in years, Kinder Morgan has some financial flexibility. The company plans to be opportunistic with how it uses this money, which makes it an interesting theme to watch in the coming year. If the company deploys this capital wisely, then it could create a lot more value for its investors over the long term. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.