Last month, Kinder Morgan (NYSE: KMI) finally gave up on its controversial expansion of the Trans Mountain Pipeline in Canada by selling the entire system to the Government of Canada for 4.5 billion Canadian dollars ($3.5 billion). As a result, the company will lose out on the opportunity to invest $5.7 billion in expanding the system, which would have generated CA$1.1 billion ($850 million) of annual earnings for the company's Canadian subsidiary Kinder Morgan Canada (TSX: KML). That's a big blow to Kinder Morgan as well, since this one project represented 48% of its capital project backlog.
However, it's important to note that this move didn't completely wipe out Kinder Morgan's growth potential. The company still has several compelling expansion projects underway, and others in development with the potential to move the needle in the coming years.
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Down, but not depleted
As of the end of the first quarter, Kinder Morgan's long-term capital project backlog stood at $12 billion. That number will fall by $5.7 billion upon the removal of Trans Mountain, leaving the company with roughly $6.3 billion of secured capital projects. The bulk of what remains is natural gas pipeline projects, which totaled $4.3 billion. In addition, the company plans to invest $1.3 billion in growing its oil business, $400 million to expand its carbon dioxide assets, $200 million on its terminals business, and about $100 million on product pipelines projects. Overall, $4.6 billion of the company's remaining investment will be to build fee-based assets, which also should generate an incremental $850 million in annual EBITDA, representing about 12% growth from 2017's level.
One of the largest investments currently under construction is the Elba Island liquefied natural gas (LNG) export facility near Savannah, Georgia. The nearly $2 billion project -- partially financed by a joint venture with a private equity fund -- will begin coming online in the middle of this year, and continue starting up in phases through the middle of 2019. As those facilities commence operations, they'll liquefy natural gas that Kinder Morgan will sell to Royal Dutch Shell under long-term fee-based contracts so the global oil giant can export it to world markets.
Another major project for Kinder Morgan is the Gulf Coast Express Pipeline. The company owns a 50% stake in the $1.7 billion expansion, which will move natural gas from the Permian Basin to the Gulf Coast. This project should come online in October of 2019 and supply the company and its partners with steady cash flow for years to come, secured by long-term contracts with natural gas shippers.
There's more coming down the pipeline
In addition to the projects the company has already secured, it has several others in development. On Kinder Morgan's first-quarter conference call, CEO Steve Kean stated that after signing up enough shippers to fill the capacity of Gulf Coast Express, the company has turned its attention to a second pipeline and is already in early-stage discussions with shippers. Meanwhile, the company is working on several small but very high-return projects. One $30 million expansion could generate $15 million in incremental earnings, according to the CEO.
Among the many expansion opportunities it's pursuing is within Natural Gas Pipeline Company of America (NGPL), which it jointly owns with Brookfield Infrastructure Partners (NYSE: BIP). According to Brookfield, the two companies are making good progress on securing up to $300 million of proposed expansion projects that could generate $90 million in incremental earnings. The partners are also in advanced discussions on a potential second phase of NGPL's Gulf Coast Southbound Expansion Project.
On top of continuing to develop growth projects internally, Kinder Morgan could also partner with financially strapped peers to help them fund some of their expansions. After closing the sale of Trans Mountain, Kinder Morgan's Canadian subsidiary will have more than $3 billion in cash at its disposal. The company could use that money to buy another midstream company with a large expansion backlog, or partner with one to fund some expansion projects. At the corporate level this year, Kinder Morgan has about $200 million in unallocated free cash flow that it could use as seed money to help fund expansion projects developed by others, if it's unable to secure more projects internally.
Clarity will come in time
While the decision to hand over Trans Mountain to Canada will ding Kinder Morgan's growth prospects, it's important for investors to understand that the company has several other expansions underway that will move the needle over the next couple of years. Meanwhile, Kinder Morgan has other opportunities in the pipeline and still more options to explore. As the pipeline giant starts locking up these growth projects, it should help lift the weight of uncertainty that has pushed its stock down to a bottom-of-the-barrel valuation.
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