Kinder Morgan Inc. boss Steve Kean wasn’t bluffing Sunday when he threatened to kill the planned $7.4-billion Trans Mountain pipeline expansion.
The Houston-based CEO, a lawyer by training, spent recent months deftly building a case for keeping the faith of Kinder Morgan investors, while potentially walking away from the company’s controversial link between Alberta’s oil sands and Asian markets.
That link, of course, means running 1,000 kilometres of steel pipe across British Columbia mountains, rivers and ports. And B.C. Premier John Horgan is clearly not bluffing when he says he will do everything in his power to block Trans Mountain. Polling shows Mr. Horgan’s NDP government is gaining public support from opposing the pipeline.
For Mr. Kean, Trans Mountain was the centrepiece of a growth strategy that will see the utility spend US$11.8-billion on projects across North America over the next five years. That capital spending is expected to boost Kinder Morgan’s all-important earnings before interest, taxes, depreciation and amortization or EBITDA by US$1.6-billion annually, and inject a little pop into a stock price that lost its fizz, sliding from US$40 to US$15 over the past three years.
Of late, Kinder Morgan has begun preparing for life after Trans Mountain by talking up the size and potential returns from other large projects. Mr. Kean took the time to personally brief investors on his expansion plans at a session in late February organized by investment bank Barclays.
While Trans Mountain was part of that pitch, Mr. Kean was candid about the political headwinds facing the pipeline, an approach that laid the groundwork for Sunday’s announcement that Kinder Morgan halted all “non-essential spending” on the project.
Kinder Morgan’s CEO then went out of his way to highlight plans for new natural gas pipelines, liquefied natural gas terminals and oil storage and transportation networks. One common factor to all this infrastructure spending: None of it is taking place in B.C.
Kinder Morgan is now asking investors to focus on his US$3.8-billion plan to transport natural gas from the southern U.S. to rapidly expanding markets in Mexico, and a massive LNG facility on the Georgia coast. There were detailed maps showing US$1.6-billion in upgrades to oil pipelines in Texas. And Mr. Kean talked up a new US$550-million pipeline linking Ohio refineries to Windsor, Ont., chemical companies.
Analysts are buying into this pitch, in part by distancing Kinder Morgan from the costs associated with Trans Mountain. In a report Monday, investment bank Raymond James said while the U.S. parent has already dropped approximately US$1.1-billion on the Canadian pipeline, it also recouped US$1.2-billion last year by selling a 30-per-cent stake in its Canadian subsidiary in an initial public offering.
“We’ve held the view for some time that Trans Mountain expansion project’s impact on [Kinder Morgan] stock is often over-played,” said Raymond James analyst Darren Horowitz. He said Trans Mountain will only have “moderate EBITDA impact” at Kinder Morgan, and that the company’s fortunes will improve if it simply completes other projects, pays down debt and hikes its dividend.
By the end of May, Mr. Kean promises to make a go-or-no-go decision on Trans Mountain. By highlighting the potential of other infrastructure projects, Kinder Morgan’s boss is laying the groundwork for a graceful exit. Such a shift would be music to the ears of B.C.’s Premier.
However, the move would mark an enormous setback for the federal Liberals, who have made Trans Mountain a centrepiece of their energy strategy. Prime Minster Justin Trudeau’s national energy strategy calls for the pipeline to be completed, while the government rolls out carbon taxes as part of a long-term strategy to fight climate change.
On Sunday, there was brave talk from federal politicians, with Natural Resources Minister Jim Carr saying the government is looking at all options to get B.C. onside with the project. He said: “We will act in Canada’s national interest to see that this project is built.”
That does sound like a bluff. Kinder Morgan has shown it is willing to walk away from Trans Mountain. B.C.’s Premier Horgan is entrenched in opposing the pipeline. The federal government has little leverage as it tries to bring the two sides together.