Kinder Morgan Inc. (NYSE:KMI) is moving forward with the largest project in its backlog and issued FID for the TMX expansion and priced its KML IPO in late May. Barclays would expect the project to act a bit as a double-edged sword in that it is going to be the driver for most of the growth through the end of the decade, which is positive, but the weight of this importance to the outlook also means the inevitable scrutiny and potential negative headlines could create some volatility for the two stocks, although the impact should be more contained at KMI vs. KML. From a bigger picture and longer-term perspective, the progression of the project over time should benefit both stocks as the story will continue to be one of execution. The firm remains Overweight on KMI with a PT of $25.
Earlier in June, shortly after the TMX IPO priced and closed, the firm had the opportunity to host David Michels, VP of Finance and IR, and Peter Staples, Director of IR, on a non-deal roadshow in Europe. Given the regulatory backdrop tied to the election at the time, much of the conversation unsurprisingly centered around the TMX project while the timing to announce revised dividend guidance in 2H of this year for 2018 was reaffirmed. Barclays has and continues to model in a doubling of the dividend to $1.00/share, but would note that given the stock underperformance, it thinks stock buybacks (at levels below $20/share) could also be on the table. The firm will have to see how the stock performs between now and the announcement, but wouldn’t rule out some combination of a lower dividend increase (something less than a double) and share repurchases if the stock is still around or below current levels.
Oil sands production is estimated to increase by 850 kbpd by ‘21 and with the utilization of the existing pipeline network roughly at capacity, the incremental output will have to be transported by rail until more pipeline capacity is brought online, in line with the statements made by the Federal Government that underpinned the approval of the TMX expansion project.