Kinder Morgan Canada share target cut after deal to sell

Losing biggest current asset will affect valuation

Kinder Morgan Canada Ltd. stock stumbled again Wednesday after two banks cut their target share prices in the wake of the company ’s deal to sell its biggest current and growth asset — the Trans Mountain pipeline system — to the federal government.

The Calgary-based company’s shares closed about one per cent lower at $16.23, continuing the post-deal trend that saw it close nearly three per cent lower at $16.10 on Tuesday. It dipped as low as $15.62 in interday trading Wednesday on the Toronto Stock Exchange.

Kinder Morgan’s future is cloudy and it will be left cash-rich but prospect-poor from the deal to sell its existing 300,000-barrelper-day pipeline and the delayed 590,000-bpd expansion project for $4.5 billion, analysts at CIBC said in a report.

“While accretive options may be surfaced, we do not see a potential transaction as sufficient to offset the potential upside from the Trans Mountain expansion project,” the report said.

“Indeed, we question (parent company) Kinder Morgan Inc.’s willingness to retain Kinder Morgan Canada longer term as it only contributes about two per cent of EBITDA (earnings before interest, taxes, depreciation and amortization) and has reduced growth prospects.”

CIBC slashed its 12-month price target to $17 from $22 because of its lower expectations of future growth in revenue and dividends for Kinder Morgan shareholders.

The target price at National Bank Financial was also adjusted to $17 from its previous level of $19.

The assets remaining after the sale amount to about $5 per share, analyst Patrick Kenny said in a note.

He said he added the $12 per share Kinder Morgan attributes to the Trans Mountain sale to the $5 to arrive at the new valuation.

The company will continue to hold an integrated network of crude tank storage and rail terminals in Alberta.

It will also own a terminal in Vancouver and the Cochin Pipeline system, which transports light condensate from the United States to Fort Saskatchewan, just northeast of Edmonton.

It could look at buying Western Canada natural gas plants currently being marketed by Enbridge Inc. with the cash it’s getting from the sale, he said, while noting Kinder Morgan has also suggested it may distribute cash to shareholders.

Kinder Morgan Inc. created its Canadian subsidiary in a $1.7-billion initial public offering last year.

The company expects after-tax proceeds for the approximately 30 per cent of Kinder Morgan Canada not owned by its Houston-based parent company to be about $1.25 billion.

It didn’t specify how it would spend the proceeds of the sale but did say it plans to continue to invest in Canada.