Morningstar | Resolution of Mexican Trade Dispute Eases Worries About Kinder Morgan's Growth
We are reaffirming our $19.50 per share fair value estimate for Kinder Morgan after considering the implications of a potential trade war between Mexico and the U.S. With the Trump administration backing off its 5% import tariff threat, we think Kinder's plans to invest in new export pipelines and Permian basin takeaway capacity are safe for now.In a potential trade war with Mexico, we think gas is a likely target for retaliatory tariffs. The U.S. is a net gas exporter to Mexico and the Mexican government has been revisiting domestic gas market deregulation. Mexico represents about 5% of U.S. gas demand and about two thirds of gas exports to Mexico go through Kinder pipelines.
Kinder also is counting on Mexican export growth to support its investment plans. Kinder has quoted forecasts that Mexican gas exports would grow 39% between 2018-30 absent tariffs, trailing only LNG export growth. The most likely supply source for those exports is the nearby Permian basin.
Permian and Mexican export projects represent one quarter of Kinder's $6.1 billion capital investment backlog. Kinder's largest near-term growth is in Permian takeaway capacity expansion with investment in projects such as the $2.1 billion Permian Highway Pipeline. Tariffs could dampen demand for Permian projects. Kinder plans $200 million in 2019-20 for direct Mexican export projects.
We are reaffirming our no-moat and stable moat trend ratings. The potential trade impacts show how Kinder's long-term returns remain uncertain even though it has high-quality assets and a large share of contracted revenue in the near term.
We still expect Kinder to reach $1.25 per share annualized dividend next year. The most uncertainty for shareholders comes beyond 2021 when Kinder's backlog of growth investments tails off. This is when Kinder is most exposed to changes in macroeconomics, commodity markets, or gas supply-demand fundamentals.
Kinder Morgan is an energy infrastructure company. The company's segments are: Natural Gas Pipelines, which includes the ownership and operation of, among others, main interstate and intrastate natural gas pipeline and storage systems; Products Pipelines, which includes the refined petroleum products, crude oil and condensate pipelines; Terminals, which includes the ownership and/or operation of, among others, liquids and bulk terminal facilities; and carbon dioxide (CO2), which includes the production, transportation and marketing of CO2, ownership interests in and/or operation of oil fields and gasoline processing plants in West Texas.
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