Kinder Morgan (NYSE: KMI) made a couple of moves this week that will enhance its growth prospects while improving its financial position. That's after the company secured enough customer contracts to sanction two small expansion projects, while one of its partners exercised its option to acquire a stake in a pipeline Kinder Morgan has under construction. These actions are another small step in the company's overall strategic plan, which aims to grow shareholder value over the long term.
Giving the green light to a new expansion project
Continue Reading Below
Kinder Morgan has now secured enough long-term contracts with customers to sanction the Roanoke Expansion of its Plantation Pipe Line System. As a result, Kinder Morgan will spend about $49 million to expand the capacity of the Plantation Pipe Line, by adding enough new pumping capacity to transport an incremental 21,000 barrels of refined petroleum products per day from origin points in Louisiana and Mississippi to Roanoke, Virginia. In addition to that project, Kinder Morgan will also invest $9 million to provide 10,000 barrels per day of incremental refined products capacity at its Southeast Terminals. The company expects to finish both projects by April of 2020.
While these projects are small in size, they will earn solid returns on investment for Kinder Morgan. They also demonstrate that the company does have expansion opportunities outside of natural gas, which currently makes up the bulk of its $6.5 billion project backlog.
Cashing in on an option
Speaking of natural gas expansion projects, Kinder Morgan and several partners are currently building two long-haul pipelines from the Permian Basin to the Gulf Coast: the Gulf Coast Express (GCX) and Permian Highway Pipeline. Kinder Morgan is leading the construction of these projects and will operate them when they're complete.
The company initially held 50% stakes in both pipelines. However, Altus Midstream (NASDAQ: ALTM) recently exercised its option to acquire a 15% stake in GCX from Kinder Morgan. As a result, it will reimburse Kinder Morgan for 15% of the $1.75 billion project's construction costs to date, as well as fund its share of the remaining amount, or about $262.5 million overall. That cash infusion and capital savings will free up more cash to enhance Kinder Morgan's financial profile, so it can fund additional expansion projects like those on the Plantation Pipe Line.
Meanwhile, Altus Midstream also has the option to acquire up to a 33% interest in the $2 billion Permian Highway Pipeline, which it would acquire from both Kinder Morgan and its development partner. If Altus and other shippers exercise their options, which Altus would need to do by next September, Kinder Morgan's stake in that pipeline could drop from 50% to 27%. If so, Kinder Morgan could reinvest those proceeds into additional expansion projects, pay down debt, or return the cash to investors through its share repurchase program.
Even by selling a portion of its interest in these two large-scale gas pipeline projects, Kinder Morgan still has a lot of growth ahead. The company had roughly $6.5 billion of expansions in its backlog, including $4.6 billion of natural gas infrastructure. Those gas-related expansions alone will boost earnings by 11% as they come online through the end of 2020. Add in some small projects in both its terminals and products pipeline business, as well as planned investments in its carbon dioxide segment, and Kinder Morgan's earnings and cash flow should grow at a healthy pace over the next few years.
Another step forward
By securing another expansion project while also selling a stake in its GCX project, Kinder Morgan continues the progress of its strategic plan, growing its earnings while maintaining a strong financial profile. That dual focus should increase the value of the company over the long haul.
10 stocks we like better than Kinder MorganWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Kinder Morgan wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of November 14, 2018