Kinder Morgan Continues to Be Prudent in Hot Gas Market in Q2

Business Strategy & Outlook:

Kinder Morgan’s assets span natural gas, natural gas liquids, oil, and liquefied natural gas. The company’s U.S. gas pipeline business is particularly impressive. Management claims its daily gas transportation capacity is equivalent to 40% of average U.S. gas consumption and it handles 50% of the LNG market. Kinder serves most major U.S. gas supply and demand regions. Kinder Morgan’s size is both an opportunity and a challenge. Its expansive asset footprint provides numerous investment opportunities if supply or demand bottlenecks develop. Kinder has the financial and commercial heft to execute any project, no matter the size. However, large-scale projects have been fleeting in the past few years, particularly as legal, regulatory, and stakeholder protests have successfully delayed and canceled major U.S. and Canadian pipelines. The shift forced Kinder out of Canada, particularly as Trans Mountain pipeline costs have soared since Kinder’s exit. With limited growth prospects, management has slashed investment, strengthened the balance sheet, and focused on returning cash to shareholders through the dividend and stock buybacks. For example, it has bought back $270 million in stock so far in 2022 with some of the cash generated by better-than-expected results. With ample excess free cash flows, Kinder is pursuing more clean energy investments. It already considers about 70%-75% of its backlog to be low-carbon investments, and it has formed an energy transitions group to pursue investments in renewable natural gas, biofuels, and carbon capture projects.

The Kinetrex deal added several renewable natural gas projects at a highly attractive multiple in 2021, and it built on this success with the Mas CanAm deal in mid-2022. Given Kinder’s extensive experience with CO2 pipelines and processing facilities, it is better positioned than most U.S. peers to evaluate and invest in carbon capture and storage opportunities across its footprint, as well. Methane reduction is another opportunity, and Kinder has been working on this area since 2014 via its ONE Future efforts.

Financial Strengths:

After stretching the balance sheet to consolidate in 2014, Kinder Morgan has completed its plan to strengthen its balance sheet and achieve investment-grade credit ratings while buying back stock and bringing the dividend back to a level in line with peers’. Kinder has channeled most of its cash into debt reduction recently. Debt/EBITDA peaked at 5.5 times following the 2014 consolidation, but Kinder has reached management’s 4.5 times target and should be able to maintain that on a normalized basis. Leverage is expected to be about 4.3 times in 2022. Beyond 2022, leverage will eventually fall below 4 times. Kinder’s stable cash flow can support an investment-grade balance sheet, $1.5 billion of annual growth investment factoring in contributions from joint venture partners (or $2.35 billion factoring in sustaining capital spending), and a growing dividend. A drop in growth investment gives management more financial flexibility. Kinder’s dividend is expected to hit $1.25 per share in 2020, in line with management’s plan announced in 2017 after a 75% cut in 2016. But management abandoned that target, paying $1.05 per share in 2020 and $1.08 annualized in 2021. The dividend will eventually reach $1.20 a share in the next few years. Kinder’s share-buyback plan could expand as management looks for ways to deploy excess free cash flow, now that its balance sheet goals have been met and its growth investment has normalized. Management doesn’t expect to pay federal cash taxes for several more years even if the 2017 tax cuts are reversed.

Bulls Say:

Kinder Morgan’s natural gas midstream footprint is unrivaled in North America, giving it high-return investment opportunities as gas supply/demand fundamentals shift.
The Kinetrex deal shows that Kinder is willing to aggressively pursue clean energy efforts, putting it well ahead of most peers.
After paying down $12 billion of debt since 2015, Kinder Morgan now has the financial flexibility to invest in growth projects, raise the dividend, and repurchase stock.

Company Description:

Kinder Morgan is one of the largest midstream energy firms in North America, with an interest in or an operator on about 83,000 miles in pipelines and over 140 storage terminals. The company is active in the transportation, storage, and processing of natural gas, crude oil, refined products, natural gas liquids, and carbon dioxide. The majority of Kinder Morgan’s cash flows stem from fee-based contracts for handling, moving, and storing fossil fuel products.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.