Kinder Morgan's TransMountain Sale Triggers Bernstein Upgrade

Kinder Morgan Inc KMI announced the sale in May of its TransMountain Pipeline system and expansion project to the Canadian government for the U.S. dollar equivalent of $3.38 billion.

The Analyst

Bernstein analyst Jean Ann Salisbury upgraded shares of Kinder Morgan from Market-Perform to Outperform and increased the price target from $21 to $22, suggesting 28-percent upside.

The Thesis

The TransMountain sale brings Kinder Morgan from a 5.1 times multiple to 4.7 times and removes uncertainty for the company, Ann Salisbury said in a Tuesday note. (See the analyst's track record here.)

The upgrade is based on the following expectations, the analyst said: 

• The sale of the TransMountain expansion project, which has occurred, and an improved debt overhang.
• The sale of the enhanced energy recovery business for a 5 times multiple, thereby reducing leverage and removing the "most volatile business line." 
• The sale of any other non-core, non-take-or-pay assets.
• Refraining from M&A to fuel growth.

Kinder Morgan's declaration of itself as a safe, defensive, 80-percent take-or-pay equivalent, 4.5 multiple midstream company. 

Over the next year, Bernstein expects deleveraging from the TMX sale, the potential payment of a competitive dividen and investor demand for a diversified, non-Permian-focused play to act as multiple drivers for Kinder Morgan. 

The Price Action

Kinder Morgan shares were rallying 2.48 percent to $17.60 at the time of publication Tuesday afternoon. 

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Photo courtesy of Kinder Morgan.