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Growth in the Pipeline

By Robert Rapier on July 21, 2016

For the past 20 years, the Kinder Morgan name has been a bellwether for midstream MLPs. Between 1997 and 2012 Kinder Morgan Partners invested more than $30 billion in projects, joint ventures and acquisitions, and delivered an astounding average annual return of 24% to unitholders.

But in 2014 general partner Kinder Morgan (NYSE: KMI) bought out its affiliated master limited partnerships in a $71 billion deal, bringing their depreciation tax benefits under its corporate umbrella while sticking many limited partners with big tax bills. These events were heavily covered in The Energy Strategist and MLP Profits.

Backed by promises of rapid dividend growth, KMI shares outperformed admirably through April 2015. But they finished the year down two-thirds from that month’s high as high debt leverage and the effects of the energy slump forced Kinder Morgan to slash its dividend by 75% in order to protect an investment-grade rating crucial to financing capital projects.

Though its reputation has suffered in recent years, Kinder remains the largest energy infrastructure company in North America. It owns an interest in or operates 84,000 miles of pipelines transporting natural gas, refined petroleum products, crude oil and carbon dioxide. The company also has 180 terminals that store or handle gasoline, jet fuel, ethanol, coal, petroleum coke and steel. So when KMI reports earnings it pays to listen closely to what the company says about the midstream segment.

This week KMI reported second-quarter earnings that were mostly in line with estimates. It posted net income of $333 million, unchanged from a year earlier, and distributable cash flow of $0.47 per share, down from $0.50 per share in Q2 2015 and $0.58 per share in the first quarter of this year. The decrease in distributable cash flow was primarily attributable to lower contributions from the carbon dioxide segment, which uses the gas to stimulate crude production from mature fields.

KMI reduced its 2016 capex forecast by $500 million to $2.8 billion after previously cutting its capital budget in January and April. Its current project backlog is $13.5 billion, down from $14.1 billion at the end of Q1 as a result of projects going into service. The company expects to continue to fund capital expenditures from cash flow and does not expect to access the capital markets this year. Kinder Morgan expects to end the year with debt down to 5.3 times EBITDA, an improvement on earlier forecasts tied to the recent sale of a pipeline stake to a utility partner.

KMI announced a quarterly dividend of 12.5 cents a share in line with the cut announced last December, which works out to a 2.3% annualized yield at yesterday’s share price. Management indicated that the dividend would stay at that level for the rest of this year at least as it funds projects and further strengthens its balance sheet.

Significantly, the company mentioned the strength of its natural gas business. Transport volumes were up 5% year-over-year, with especially strong growth coming from the power sector as natural gas increasingly replaces coal as the fuel of choice. The company also noted that total U.S. gas exports to Mexico have grown to 3.3 billion cubic feet (Bcf) a day, with three quarters of that volume moving on Kinder Morgan pipes.

Overall it was a solid quarter for Kinder Morgan. The company continues to gradually deleverage and is now self-financing growth projects. Shares have rallied this year along with the rest of the MLP sector, up 48% year-to-date. But the dividend cut has left the stock yielding significantly less than comparable MLPs, so it may not be the best destination for your investment dollars.

Kinder’s quarterly results suggest the pipeline sector is returning to health, especially for companies involved in natural gas transport. To learn more about those with the best prospects, please consider subscribing to MLP Profits.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


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