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May 30, 2017

Ground shifts under $7.4B Trans Mountain pipeline amid NDP-Green alliance in B.C.

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The shifting political landscape in British Columbia has injected further uncertainty into Kinder Morgan’s Trans Mountain expansion project. The provincial Green Party struck a deal late Monday to support John Horgan’s New Democrats, a move which would shift the balance of power in the province to a pair of parties that have opposed the controversial twinning of the pipeline. Horgan has been outspoken on the development, taking issue with the potential for a catastrophic spill due to the jump in capacity to 890,000 barrels a day from the current 350,000.

The shift came mere hours before Kinder Morgan’s initial public offering of a parcel of Canadian assets, including the Trans Mountain pipeline. The midstreamer raised $1.75 billion in its initial public offering. Kinder Morgan cut the offer price to $17 a share from a range of $19-$22 late last week in a bid to get the offering off the ground. 

Shares in Kinder Morgan Canada Ltd fell as much as 7.4 per cent on their debut in heavy trading on Tuesday before recovering ground to close down 4.4 per cent at $16.24.

In an interview on BNN, Middlefield Capital Chief Investment Officer Dean Orrico said political uncertainty could create near-term headwinds for the stock, but investors are likely to take a holistic long-term view of the assets bundled in the IPO.

“We all know it’s been off to a very rocky start all because of Trans Mountain, and the deal got repriced, as we all know, in the last few days,” he said. “For Kinder Morgan Canada, Trans Mountain is only a portion of it: there’s really a business there, a very valuable business. Based on the re-pricing, you’re basically getting Trans Mountain for free.”

Other assets included in the IPO are Kinder Morgan’s Jet Fuel pipeline system serving Vancouver International Airport, the Canadian Cochin system spanning from Alberta to Windsor, Ontario, and the Puget Sound Pipeline System serving the U.S. Pacific Northwest. Trans Mountain itself will cost $7.4 billion to build, roughly equal to the projected market cap of the newly-formed company.

Any efforts by the proposed alliance to scuttle the expansion would put British Columbia squarely on a collision course with their neighbours to the east. Alberta Premier Rachel Notley has vowed to take the issue to the courts if British Columbia tries to block the development, after gaining intervener status on May 16. Notley has argued opposition to energy infrastructure development sends a message to foreign investors that Canada is not open for business.

Middlefield’s Orrico echoed Notley’s sentiment, but said value-focused foreign investors may sort through the noise and take a flyer on the IPO due to the other assets bundled into the offering.

“It tells them, this is a project, not necessarily a sector, but this is a project that is at risk and this company is going to be at risk,” he said. “But value investors, and there’s a lot of foreign value investors, should look at this and say ‘This is still a pretty good opportunity’ given the fact that you’re not paying for Trans Mountain.”

With files from Reuters