Why This Potentially Great News for Kinder Morgan Still Doesn't Make It a Buy

Source: Kinder Morgan Inc.

Kinder Morgan Inc (KMI 0.67%), long a beloved dividend blue chip, has suffered a terrible year thanks to the 80% dividend cut it was forced to enact in order to preserve its credit rating. 

KMI Total Return Price data by YCharts.

However, now it appears as if the worst may finally be over for Kinder. A major, needle-moving project the company has been planning for years might finally be ready to begin construction. 

However, investors need to remain careful about investing in this beaten-down pipeline giant because Kinder's turnaround is still far from assured. 

Trans Mountain might finally get the green light...

Back in 2012, Kinder Morgan announced a $5.4 billion expansion plan for its Canadian Trans Mountain pipeline system that would triple capacity, add storage capacity, and construct an export terminal on Canada's west coast to ship oil to Asia. 

On May 20th, the long-delayed project finally received final recommendation approval from Canada's National Energy board. Given that the expansion now makes up almost 40% of Kinder's fast-shrinking backlog of growth projects, this recommendation was badly needed if Kinder Morgan has much hope of growing its cash flows enough to pay down its massive debt burden and eventually resume dividend growth. 

...but don't celebrate too fast

For a project as massive and politically controversial as this one, no government approval occurs without strings attached. In this case, the National Energy Board is recommending 157 conditions for the federal government to give final approval, a decision expected to be made by the end of 2016. 

Thus, there's a risk that the project might still fail to get the final go-ahead. Even if it doesn't, those conditions could impose further delays on Kinder's timetable, which expects construction to begin in 2017. With final completion not expected until December of 2019, the Trans Mountain expansion isn't likely to help Kinder out of its current predicament of high debt and very little dividend growth over the next few years. 

Growth boost offset by loss of another giant project

On May 26th the company announced the cancellation of the the $3.3 billion Northeast Energy Direct pipeline due to lack of interest from gas distributors. 

Given that gas costs in New York and Boston have been as much as three times greater in recent years, this project would have likely faced far less political opposition, so its death signals a potentially major blow to Kinder's turnaround goals. 

Debt overhang could hurt returns for years

KMI Dividend data by YCharts.

Kinder Morgan's fast dividend growth through 2015 was done via an overly aggressive use of debt and ultimately proved to be short-sighted. That's especially true compared to peers such as Holly Energy Partners (HEP), Enterprise Products Partners (EPD 1.23%), Spectra Energy Partners (SEP), and Magellan Midstream Partners (MMP), who chose to prioritize slower, but ultimately more consistent payout growth, which allowed for significant retaining of cash flow and the preservation of strong balance sheets. That, in turn, prevented excessive interest costs from harming management's ability to generate attractive returns for investors and continue raising the company's distributions despite the ongoing oil crash.

Sources: Morningstar, Gurufocus.

Bottom line

Even if should Kinder receive final approval for the Trans Mountain pipeline, it will take many years for that cash flow to help Kinder fix its debt problems. Thus, Kinder Morgan investors could continue suffering years of inferior dividend growth and total return prospects over the next few years. 

That's why more conservative, better-managed midstream MLPs such as Holly Energy Partners, Enterprise Products Partners, Spectra Energy Partners, and Magellan Midstream Partners continue to look like far more attractive long-term income investments, both today, and likely for years to come.