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Better Buy: Kinder Morgan Canada vs. Chevron Corporation

Reuben Gregg Brewer, The Motley Fool

Kinder Morgan Canada Limited's (NASDAQOTH: KMLGF) market cap is around $400 million. Chevron Corporation (NYSE: CVX) has a market cap of roughly $230 billion, roughly 575 times larger. There are benefits to being small and nimble, but is that enough to give tiny midstream-focused Kinder Morgan Canada the edge over an integrated energy industry giant like Chevron?

A blank slate

In 2018 Kinder Morgan Canada agreed to sell the Trans Mountain Pipeline to the Canadian central government. That allowed the company to get out from under a giant growth project that was facing notable headwinds from local governments and residents, and left Kinder Morgan Canada with a heap of cash, much of which 70% owner Kinder Morgan, Inc. (NYSE: KMI) got pushed out as a special dividend.

A scale weighing blocks spelling out the words RISK and REWARD

Image source: Getty Images

Not all of the cash went out the door, however. Kinder Morgan Canada used some of the cash to strengthen its balance sheet. The midstream company is targeting a debt to EBITDA ratio of 1.3 times in 2019, which is incredibly low in the midstream space. It will easily be able to fund its $32 million in capital spending as well, which will support solid adjusted EBITDA growth of roughly 12%. Distribution coverage, meanwhile, is projected to be nearly 1.4 times, a very strong number in the midstream sector.

There are only two material problems. First, the yield, at roughly 4.2%, is a little miserly for the midstream space. Second, and perhaps more important, Kinder Morgan Canada's long-term growth outlook is hazy at best. It is in a strong financial position to expand, but it hasn't laid out any long-term plans, having just sold the one project that it was relying on to support its long-term growth. And then there's Kinder Morgan, Inc.'s 70% stake, which means that Kinder Morgan Canada's future isn't in its own hands.

An investment here likely means living with whatever is best for Kinder Morgan, not necessarily what's best for Kinder Morgan Canada shareholders.

Old reliable

That's why most investors will probably prefer Chevron: The company is the master of its own future. Its 3.8% yield is only slightly lower than that of Kinder Morgan Canada. It has a clear plan to maintain its over-30 year record of rising annual dividend payments. And, like Kinder Morgan Canada, Chevron has a rock solid balance sheet.

Chevron's growth is backed by a plan to spend roughly $20 billion a year through 2023. That spending is projected to increase production in the low- to mid-single digits each year, on average. Production growth in 2018 was an impressive 7%, driven partially by the company's investment in the U.S. onshore drilling space; it expects that area to be a major contributor in 2019 and beyond. However, it is also working on other major efforts, including liquified natural gas, which is expected to be a transition fuel as the world works toward a cleaner energy future. Although energy prices will be a key factor in Chevron's financial results, there's little question about where it is going as a company.

CVX Financial Debt to EBITDA (TTM) Chart

CVX Financial Debt to EBITDA (TTM) data by YCharts

Financially speaking, Chevron has one of the strongest balance sheets of its integrated energy peers. Total debt, for example, makes up a modest 18% of the company's capital structure, and it has roughly $9 billion of cash. Total debt to EBITDA is below one times. Like Kinder Morgan Canada, it won't have any trouble financing its future. The big difference is that Chevron actually has a material investment plan -- which it has complete control over -- laid out ahead of it.

The final takeaway

Kinder Morgan Canada is a clean slate. It is well financed, but long-term growth is hard to project because of the recent Trans Mountain sale. Adding a layer of complication is Kinder Morgan, Inc.'s 70% ownership stake. Most investors would be better off waiting until Kinder Morgan Canada has a clearer future -- and even then, that needs to be juxtaposed against the potential conflicts of interest that may arise between Kinder Morgan Canada shareholders and Kinder Morgan, Inc.

Chevron, with a yield that's only slightly lower than what Kinder Morgan Canada is offering today, is a much better option. It is financially strong. It has a long-term plan for growth. And the company is the master of its own future. For most investors, this one should be an easy call.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.