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Portfolio Update

First Reporters: Benefits of Low Valuation

By Roger S. Conrad, on Oct. 22, 2017

They’re off and running. The first two Lifelong Income Portfolio stocks have announced third-quarter results, as well as held conference calls to update guidance. The common theme: Low investor expectations embodied in low valuations are a major advantage when the spotlight is on.

Kinder Morgan (NYSE: KMI) has faced investor skepticism since last July, when the energy midstream company announced a 60 percent dividend boost for 2018, followed by 25 percent increases in 2019 and 2020. The primary reason: There are worries that the proposed Trans Mountain pipeline expansion will be delayed or even derailed by opposition from British Columbia’s provincial government.

As expected, management faced numerous questions during the call about the Trans Mountain project, which would triple the existing line’s ability to transport Alberta oil to Canada’s Pacific Coast. Canadian government approval is currently being challenged in court, a process that has an indefinite time horizon, though Kinder continues to push ahead with permits and approvals.

Management has pushed back its projected in-service date of the project to late 2019. That, however, didn’t prevent Kinder from topping guidance for distributable cash flow during the quarter. Strong pipeline performance, lower debt-interest expense and new tankers nearly offset the negative impact of asset sales (50 percent of the Southern Natural Gas Pipeline system and 30 percent of the Canadian asset), higher maintenance capital expenditures, lower oil prices on CO2 division profitability and fallout from Hurricane Harvey.

Kinder affirmed its full year discounted cash flow guidance of $1.99 per share, and projects debt-to-earnings to end the year at a target 5.2-to-1 ratio. Management reduced its full-year capital spending projection to $3.1 billion from $3.2 billion and affirmed Kinder Morgan Canada (TSX: KML) will not need any additional parent level-funding for the Trans Mountain project.

The bottom line from the results is that it was another solid quarter for Kinder–further evidence the company has adapted to the lower for longer energy price environment.

For us, the numbers affirm new investment and resulting dividend growth as powerful long-term upside catalysts for the share price. However, gains are likely to be held back so long as Trans Mountain appears challenged.

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