Where Will Kinder Morgan Canada Be in 5 Years?

U.S. energy infrastructure giant Kinder Morgan (NYSE: KMI) spent much of the past year reviewing options for its publicly traded Canadian subsidiary Kinder Morgan Canada (TSX: KML). Ultimately, the entity remained independent.

That decision clarifies its near-term direction. However, with only one small expansion project underway, it's unclear what the longer-term future holds for this company. Because of that, Kinder Morgan Canada could go many ways over the next five years. Here are three paths it might take.

1. Still independent but growing organically

Kinder Morgan Canada currently owns a solid portfolio of midstream assets in Canada that generate steady cash flow backed by long-term contracts. The company expects those agreements to supply it with about $109 million Canadian ($82 million), or CA$0.90 per share, of cash flow this year. That's enough money to support the company's CA$0.65 per share dividend with plenty of room to spare.

The company plans on using its excess cash to invest in expansion projects and bolster its already strong balance sheet. Because it has only one small CA$43 million diesel storage project under construction, which will come on line by the first quarter of 2021, it's on track to end this year with a low 1.3 net-debt-to-EBITDA ratio.

That strong financial profile gives it the flexibility to invest in more expansion projects in the coming years. Because of that, Kinder Morgan Canada could potentially grow at a healthy rate as it invests in additional projects that it either develops internally or joins as a funding partner. Thus, it could be a thriving independent company in five years.

2. Merged with a third-party midstream company

In addition to pursuing organic expansion opportunities, Kinder Morgan Canada could also combine with another midstream company in Canada. When the company explored this option in the last year, it didn't find a deal it liked. But that doesn't mean a compelling opportunity won't arise over the next few years.

It would make an attractive merger partner. Not only does it boast a solid portfolio of cash flowing assets, but it also has a strong balance sheet. Because of that, a merger would likely produce a much larger-scale company with an enhanced financial and growth profile.

3. Taken private by Kinder Morgan or a private fund

Another potential path is to accept a buyout offer from either its parent and 70% owner Kinder Morgan or a private fund such as a Canadian pension plan. Given the parent's controlling stake in the company, it would make sense to acquire the rest of its Canadian subsidiary eventually. That would eliminate some redundancy and the extra public-company costs.

Another option would be for Kinder Morgan to sell its stake to a Canadian pension plan for cash, with a follow-up deal from that fund to acquire the rest of the Canadian company from its public shareholders. This alternative would provide Kinder Morgan with some more cash that it could use to repay debt, fund expansion projects, or repurchase its stock.

My prediction: Kinder Morgan Canada goes private within five years

While Kinder Morgan Canada decided to remain independent for the time being, I don't think it will stay that way in the next five years. It would make more sense for the company to go private, with a Canadian pension fund the most likely buyer, in my opinion. These entities have invested heavily in the North American midstream sector in recent years because those assets provide them with steady cash flow, which they can use to meet their obligations to retirees. Meanwhile, an outright sale would provide Kinder Morgan with a cash infusion that it could use to pay down debt, buy back stock, or invest in other expansion opportunities.

But even though a buyout appears to be the most likely future for Kinder Morgan Canada, that doesn't mean investors should buy shares in anticipation. There are no guarantees that a buyout will ever come, let alone at a premium price. A better option, in my opinion, would be to buy its parent Kinder Morgan since it has a clear strategy to create value for its investors over the next several years.

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Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.