Investors Back Kinder Morgan Canada's Trans Mountain Move

Kinder Morgan Canada shareholders on Tuesday backed the pipeline operator's decision to pause most work on its Trans Mountain expansion as a way to force the Canadian government to give final approval for the project.

The company said on Sunday it would scrap plans to nearly triple the capacity of its existing Trans Mountain pipeline, which extends from Alberta to British Columbia's coast, unless various legal and jurisdictional challenges could be resolved by May 31.

The project was approved by the federal government in 2016, but that approval is being challenged in court by First Nation groups and local municipalities, and British Columbia is eyeing whether it has jurisdiction to block increased oil shipments through its territory.

The Trans Mountain expansion, backed by Canadian oil producers, had an operational date of December 2019, but in October the company pushed that to September 2020 because of what it said was the difficulty in obtaining permits.

A survey of four analysts and investors showed Kinder Morgan (KMI) Canada's fair value without the project to be around C$13.50, or 20 percent lower than the stock's closing price of C$16.71 on Tuesday. Yet, Kinder Morgan's move found support among shareholders.

"They are trying to get something resolved over the next several weeks, protecting shareholders money," said Paul Bloom, chief investment officer at Bloom Investments Counsel Inc. His firm owns a 0.3 percent stake in Kinder Morgan Canada.

"If it doesn't go through, Kinder Morgan has other assets. The stock will go down, but it's not worthless," Bloom said. He pegs the real value without the expansion at C$14.00.

Kinder Morgan Canada Chief Executive Steven Kean told analysts on Monday the company had growth prospects and the potential to participate in mergers and acquisitions if the Trans Mountain project did not go ahead, and it would consider returning excess cash to shareholders.

Government Backing?
British Columbia, the province where the proposed expansion would run through a conservation area, is gunning to block increased oil shipments through its territory. Both Canadian federal government and the provincial government in Alberta have backed the project with Alberta's Premier Rachel Notley saying the province was prepared to be an investor in the pipeline.

"If they put money or provide loan guarantees to the project, that could be a very big win for the shareholders because they will have to put in less risk to receive the end result of a built pipeline," said Bloom.

According to Thomson Reuters data, intrinsic value for Kinder Morgan Canada's stock is C$16.93 and it trades at about 27.3 times their 12-month forward earnings compared with the energy sector average of 21.8 times.

"The company would have a very strong balance sheet and other potential options to deploy capital, so it wouldn't be a disaster for them, or us as investors," said Jim Hall, chairman of Mawer Investment Management. Mawer holds more than 1 percent in Kinder Morgan Canada and expects the stock to be valued at C$14.00-$15.00 without the expansion.

Moreover, reduced spending on the expansion project should improve parent Kinder Morgan's ratio of debt to earnings before interest, tax, depreciation and amortization, analysts at RBC Capital Markets said.

"The company has done the right thing, drawing a line in the sand, making it crystal clear where the company stands," Bloom added.


(Additional reporting by Karan Nagarkatti and Akshara P in Bengaluru; Editing by Richard Chang)