Jameson Berkow

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If Kinder Morgan Canada walks away from the Trans Mountain pipeline expansion project, at least one of its largest shareholders will walk away from the company’s stock.

“We would be gone if they don’t get a deal done,” David Burrows, president of Barometer Capital Management, told BNN Bloomberg via telephone. His firm held roughly 500,000 shares of Kinder Morgan Canada as of last month, though Burrows said that position has since been reduced to account for the risk of the $7.4-billion project being cancelled. Barometer held more than 900,000 shares of KML as of June 2017.

“[Kinder Morgan Canada] has put a brave face on to say we are here to stay and we will grow other parts of our business,” Burrows said, “but there is no other pipeline like this one.”

British Columbia Premier John Horgan has vowed to use “every tool in the toolbox” to block the plan to roughly triple capacity of the half-century-old Trans Mountain pipeline. The pipeline, which currently transports roughly 300,000 barrels of oil sands bitumen and other fossil fuels per day from northern Alberta to the Vancouver area, received federal approval in 2016 and won full provincial approval from Horgan’s predecessor, former Liberal Premier Christy Clark, the following year.

Facing mounting protests and a narrowing window to begin construction, the company issued an ultimatum last month, threatening to abandon the project if it does not receive clarity by a May 31 deadline. Rich Kinder, founder of Kinder Morgan Canada’s Texas-based parent company, told analysts on an April 10 conference call the company would not be “some sort of wounded duck or something” if the project was cancelled.

“We would think [Kinder Morgan Canada] would remain a very viable entity with all kinds of possibilities,” Kinder said.

It is true that Kinder Morgan Canada has other assets beyond Trans Mountain. It owns three oil tank farms in the Edmonton area capable of holding up to 15 million barrels of crude and has interest in two crude-by-rail loading terminals that can put the equivalent of 300,000 barrels of crude on trains every day.

Yet the company’s “fortunes revolve around executing” the Trans Mountain expansion project, Andrew Kuske, who covers Kinder Morgan Canada with a hold rating for Credit Suisse, said in at least three reports sent to clients over the past six months.

“It is highly unlikely they find something on a similar scale [to the Trans Mountain pipeline expansion project],” Robert Catellier, who also covers Kinder Morgan Canada with a hold rating for CIBC, told BNN Bloomberg via telephone. “And I can’t even imagine what it might be.”

Several analysts contacted by BNN Bloomberg for this story suggested Kinder Morgan Canada might attempt to acquire natural gas assets from Enbridge in hopes of replacing some lost growth potential. Asked whether Enbridge would consider selling its western gas plants, the company pointed BNN Bloomberg to a May 10th conference call where CEO Al Monaco boasted of “very, very strong interest” in those assets.

Such a move would pale in comparison to expanding Trans Mountain. Patrick Kenny, who covers Kinder Morgan Canada with a hold rating for National Bank Financial, estimates that transaction would cost about $3 billion, but would only represent $3-per-share in upside to his $13-per-share valuation of Kinder Morgan Canada without the Trans Mountain expansion going ahead.

For perspective, Kinder Morgan Canada shares were worth $16.59 apiece when markets closed on Thursday.

“There is no way KML will keep its shareholders happy if it outright abandons [the Trans Mountain expansion],” Darryl McCoubrey, who covers Kinder Morgan Canada with a buy rating for Veritas Investment Research, told BNN Bloomberg via email. “They would not be capable of generating TMEP-like returns by investing in assets like [Enbridge’s] Canadian gas franchise.”

Barometer’s Burrows believes it is possible Kinder Morgan Canada’s stock will fall as low as $10 per share if the company does walk away from the project.

“There would certainly be an emotional response,” he said, adding he remains hopeful a deal will be reached before the deadline.

In the meantime, CIBC’s Catellier warns investors are underestimating the odds of cancellation.

“People are taking for granted that some solution will be found and I think the company is far more serious about not spending any more shareholder money recklessly than people realize,” Catellier said.

“It could come as a big shock to the market.”