KML announced the Canadian government will buy Trans Mountain and the expansion project for C$4.5B. Investor reaction was initially positive, but the stock fell 3% on the day. The sales price is highly attractive. We estimate that the assets being sold contribute about C$220M of EBITDA. If we apply a 12x multiple, it implies $2.6B of value with the remaining $1.9B attributable to TMX, nearly double the $1.1B spent to date for a project that could have been abandoned.
Search Coverage List, Models & Reports
Search Results1-10 out of 17
With U.S. production increasing fast, several big simplification announcements, and oil prices much improved, the fundamental tone was positive at MLPA. Turnout was reportedly higher than last year even with each of the large C-corps still sitting out of the event. That said, FERC and structure were clear overhangs. On FERC, we heard more questions than answers. Structure / simplification was discussed at nearly all our meetings and often overwhelmed the conversation. We think continued (and speedy) resolution around FERC / structural issues should help bring investor focus back to a strong fundamental set up, but there will be uncertainty in the meantime.
Last week we had the opportunity to meet with INGAA and the staff of FERC to review the latest on the changes on the pipeline regulatory policy front and the next steps to watch for. Overall we got a better understanding of the legal constraints FERC was under that led to the decision to change MLP tax policy to eliminate the tax allowance for cost based pipelines. We came away with the view that there is not much room to change the policy. In that context it is not a surprise that in front of the 501-G filings this fall that already many pipeline MLPs are moving toward corporate structures - SEP, EEP, WPZ, BWP, and TCP. Despite the MLP tax policy change being unwelcome, we still believe the acceleration of structural changes is a good thing for the sector.
The annual MLPA conference, newly renamed as the MLP and Energy Infrastructure Conference (MEIC), will be held May 22-24 in Florida. Many MLP management teams will be in attendance. This report is a helpful guide for investors attending and includes questions to ask for covered companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
KML remains highly disciplined and conservative around moving ahead on TMX. There are discussions ongoing with the federal gov’t around financial support (investment, backstop, etc). However, mgmt. made it clear that they also need other unspecified support – possibly legislation or other actions – to help mitigate B.C. risks and keep TMX going past the 5/31 deadline. Kinder has effectively created a crisis moment for politics in Canada forcing leaders to show their final hands, but we’re not confident there’s an easy fix. After plunging on KML’s announced suspension of TMX last week, the stock has rallied hard and is only 2.4% below its pre-announcement level. We stay Peer Perform rated but do worry investors may be getting ahead of themselves as a path forward is still uncertain and ongoing risks remain.
FERC’s proposed policy change to no longer allow MLPs to recover a tax allowance in pipeline rates is an unwelcomed overhang. The timing is bad. Fundamentals had just turned more positive and Q4 results were strong, but stocks have lagged due to a lack of sustained investor sponsorship and MLP fund inflows. Near-term, the new uncertainty and downward rate pressure created by FERC’s move hardly seems likely to now inspire new buying interest in the space. We think the 4.6% drop in the AMZ is a little overdone on a fundamental basis. That said, relative stock moves seemed generally rational with C-corps outperforming and more exposed MLPs down the most.
KMI’s pause on meaningful construction of TMX makes a lot of sense. The NEB should rule on KML’s request for a federal permitting backstop within a month and the federal court challenge of the project is ripe for decision by Q2. These are key risk hurdles and it would be imprudent for KML to spend significant money before attaining clarity. That said, another 3 month delay since the timeline provided just a month ago was discouraging and leaves us without much confidence. As discussed in our KML note, we have revised our TMX base case to a 2022 in-service (1 year delay vs. KML guidance).
Management language has become increasingly clear that KML will not move ahead with TMX until key legal / regulatory hurdles are resolved over the next several months. KML reiterated a “primarily permitting” approach to TMX spending and pushed back the in-service date another 3 months to December 2020 (assuming no mitigation). We think this strategy makes a lot of sense from a value standpoint and recognize it is not easy for the company even if it is the right thing to do. That said, we continue to recommend that investors wait on the sidelines. While KML may rally some if near-term risks are mitigated, there is still a long road to go and we think the risk-reward skew favors waiting. We’ve updated our base case for TMX to a 2022 in-service date (1 year delay vs. KMI guidance). Our valuation now gives a 55% weighting to this base case, a 20% weighting to a bull-case (COD 2021), and a 25% weighting to an abandonment scenario. Our TP remains unchanged at $18/share. See Ex. 5 / p. 3 for
We do not see a lot of direct benefits for the midstream space from corporate tax reform: MLPs already do not pay taxes and not many C-corps are cash taxpayers. This stands in contrast to other sectors that are positioned to see a meaningful improvement in both earnings and cash flow. That said, we still see a lot of positives for the sector in 2018 – resumption of DCF/unit growth, better commodity fundamentals, and a more attractive relative valuation to the market.
- 1 of 2
- next →