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Kinder Morgan (KMI) to Abandon Trans Mountain Expansion

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Kinder Morgan Inc (KMI - Free Report) states that it has deferred bulk of work on its C$7.4-billion ($5.8 billion) Trans Mountain pipeline expansion and is likely to abandon the project if Canada’s provincial and federal governments cannot reach an agreement by May 31.

Per Kinder Morgan Chairman Steve Kean, the plans to nearly triple the capacity of the Trans Mountain pipeline, which carries crude from Alberta's oil sands to a facility in the Pacific province of British Columbia, are likely to be scrapped if the ongoing legal disputes are not resolved by May 31. The Government of Canada approved the Trans Mountain expansion project on Nov 29, 2016. Since then, the company is struggling with approval issues and oppositions from various groups.

The pipeline expansion has been facing antagonism from various provincial governments of British Columbia as well as municipalities, native groups and environmental activists. These emphasize the uncertainty over the key energy projects in Canada.

The shortage of pipelines and rail transportations has disrupted the production schedule of the companies in Western Canada. The companies had to slow their activities due to obstruction in crude transportation. In view of this, Alberta's provincial government supports the project that has also received approval from Canada's federal government.

While the federal government has the authority to approve major pipelines, the 10 provinces have extensive responsibility for resource development. This is likely to lead to an impasse, if a province contests a decision made by Ottawa.

Canada is considered to hold the world's third largest proven reserves of crude and is the largest exporter of energy to the United States. About 97% of Canada’s proven oil reserves are located in the oil sands and 99% of the total extracts are exported to the United States.

Canada is expected to continue pumping from the oil sands over the next few years. However, constraints like pipeline approvals and ambiguity over the provision of export capacity is discouraging for the next phase of development. These hurdles are part of a wider capacity crisis developing in North America.
 
Kinder Morgan is very cautious in handling shareholder money. With that in mind, the company doesn’t want to risk the shareholders’ fund on the project as it is tangled in many legal cases.

Currently, Kinder Morgan is performing preliminary work and has not commenced construction. The company’s decision will further raise alarm in the energy industry about whether any new pipelines can be built in Canada.

There are other pipelines that are facing legal hurdles. Enbridge Inc.’s (ENB - Free Report) Line 3 replacement, starting from Hardisty, Alberta to Superior, Wisconsin, is expected to provide Canadian takeaway capacity over the next few years. However, the project is still awaiting approval from Minnesota. When operational, the pipeline will augment takeaway capacity by 125,000 bpd.

Even TransCanada Corp.’s (TRP - Free Report) Alberta-to-Nebraska Keystone XL pipeline is facing considerable objection.

Price Performance

Kinder Morgan’s shares have lost 19.7% in the last three months, compared with the industry’s 16.7% decline.



 

Zacks Rank & Key Picks

Kinder Morgan carries a Zacks Rank #3 (Hold).

Another better-ranked player in the same sector is Continental Resources, Inc , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Continental Resources is an independent oil and natural gas exploration and production company. It delivered an average positive earnings surprise of 64.9% over the last four quarters.

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