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Kinder Morgan Might Cash in on the Rest of its Canadian Assets

Matthew DiLallo, The Motley Fool

Kinder Morgan (NYSE: KMI) thought it had a bright future in Canada when that country approved the multibillion-dollar expansion of its Trans Mountain oil pipeline a few years ago. The company even created separate entity to operate its Canadian assets; it expected to use Kinder Morgan Canada Limited (TSX: KML) to finance that expansion effort as well as others.

However, intense opposition to the Trans Mountain pipeline expansion from indigenous tribes, environmentalists, and local political leaders, among others, ultimately led Kinder Morgan to sell the pipeline to the government of Canada for 4.5 billion Canadian dollars ($3.5 billion) in cash. Now, the company is considering putting the rest of Kinder Morgan Canada's assets up for sale and exiting the country entirely.

A petroleum storage tank farm with snow.

Image source: Getty Images.

Bidding adieu to Canada?

At a recent investment conference, an analyst asked Kinder Morgan CEO Steve Kean about his company's plans in Canada given the sale of its Trans Mountain Pipeline, which significantly shrunk the asset base of Kinder Morgan Canada. The company's remaining infrastructure in the country includes storage terminals in Edmonton and Vancouver as well as two pipeline systems. Kean called those assets "attractive," saying, "this is a business that we like and they're good midstream assets and we can certainly continue to invest in them and grow them."

However, he also said that "all alternatives will be considered." He pointed out that there's "an attractive sellers' market for those assets" and that "there are plenty of midstream players including people with complementary positions to ours, who we think will be interested."

Opening the bidding

Because of that, Kean said that the company would "explore that [interest] over the coming months." It took the first step in that direction by hiring investment bank TD Securities to explore the sale of these assets, according to a recent report by Reuters. Kinder Morgan put out an asking price of as much as CA$2.4 billion ($1.8 billion) and is open to selling the assets in one transaction or separate deals to maximize their value, according to the Reuters report.

While hiring a bank to lead the sales process doesn't mean Kinder Morgan will find buyers willing to pay its asking price, the report suggested that "interest in the assets would be robust, and bids are likely to come from both midstream companies, private equity firms, and infrastructure funds." Recent M&A activity in the country backs up that view. For example, in April, Canadian energy infrastructure giant Enbridge (NYSE: ENB) hired advisors to explore the sale of some of its natural gas gathering and processing assets in the western part of the country. That initial report said that Enbridge hoped to sell at least a portion of that business for more than CA$2 billion ($1.5 billion). By July, Enbridge agreed to a CA$4.3 billion ($3.3 billion) bid by an infrastructure fund-led consortium for its entire gas gathering and processing business in Western Canada. It was only one of several notable deals for midstream assets in recent years, in what has been a seller's market.   

A snow covered natural gas well.

Image source: Getty Images.

What this means for Kinder Morgan

While Kinder Morgan could continue holding its Canadian assets and benefiting from their predictable cash flows, a sale would provide two distinct benefits for the company. First, it could use the cash infusion to reduce debt, buy back stock, or reinvest in new expansion projects. That would further strengthen a company that has already reduced its leverage to a lower target level and is generating more than enough cash flow from its U.S. business to buy back stock, pay an increasingly higher dividend, and fully fund expansion projects. Second, it would eliminate the extra costs and the complexity that come with operating two separate publicly traded companies, since the sale would close the books on Kinder Morgan Canada.

Those two factors make a sale of these assets likely if Kinder Morgan receives bids close to its asking price. That outcome would put the company in a better position to create value for investors, which should eventually jump-start its stalled stock price.

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