Kinder Morgan: This Isn't An Oil Company
05.25.2020 - NEWS

May 25, 2010 [Seeking Alpha] – Kinder Morgan isn’t an oil company – it’s a natural gas company. That means that the reaction of investors to the collapse is overly strong.

 
The company has a strong financial portfolio and has continued to perform. It has paid off a significant amount of debt. Going forward, the company will be able to increase dividends to $1.25/share, a more than 8% yield. That’ll be supported by growth.

Kinder Morgan is one of the world’s largest midstream companies in the United States with a market capitalization of more than $30 billion. The company has a dividend yield of more than 7% and operates primarily as one of the largest transporters of natural gas in the United States. Given natural gas’ primary demand is electricity generation, the company is much less connected to oil markets and the decline in transportation that the markets might lead you to believe.

The company’s steady cash flow, growth potential, and strong insider support, along with the lessons learned in 2015, make it a quality, long-term investment.
 

Infrastructure

Kinder Morgan has an impressive infrastructure of natural gas assets that have the potential to generate significant cash flow. Kinder Morgan has 70 thousand miles of natural gas pipelines and 659 billion cubic feet of natural gas storage capacity. Putting this together, the company is connected to every major U.S. natural gas play. Additionally, the company moves 40% of U.S. natural gas consumption and exports with an additional 1,200 miles of natural gas liquids.

The company’s unparalleled exposure to American natural gas demand and consumption supports its financial strength. Natural gas is expected to significantly outperform oil, which will support the company’s continued performance.

The company is also the largest independent terminal operator and the largest independent transporter of refined products. It has many refined product and crude pipelines and transports an astounding 1.7 million barrels/day of refined products. The company also has 147 terminals and 16 Jones Act vessels.

These significant storage assets have actually seen demand increase significantly in response to COVID-19, helping to bridge the loss in revenue from other assets.
 

COVID-19 Response

Kinder Morgan has responded proactively to COVID-19, mostly from a corporate PR standpoint, like all other companies, but partially from a financial perspective. Investor Presentation

Fortunately, Kinder Morgan has been in more difficult times in the past than other companies. In 2015-2016, the company saw its share price collapse over fears about the first oil crash and its necessity to access capital markets. As a result, the company, financially, has been much better prepared for COVID-19

Additionally, from a people perspective, the company is incredibly well prepared. It’s focusing on telecommuting and safety for the company’s workers. Another potential benefit is that construction has been slowed down supporting lower capital spending.
 

Financial Portfolio

Kinder Morgan has a strong portfolio that it’s working to maintain for the downturn. Debt and Capital Expenditures – Investor Presentation

Kinder Morgan has managed to significantly reduce its net debt/adjusted EBITDA over the past four years and will be able to continue reducing it going forward. Over the past five years, the company has decreased net debt/adjusted EBITDA from 5.6x to 4.3x. That’s a massive $10 billion reduction in the company’s net debt and it highlights its overall financial strength.

Additionally it is working to maintain its cash flow position. That’s from the perspective of the CFFO – capital expenditures – dividends paid or the net FCF. The company was FCF positive from 2016 to 2019, meaning it managed to achieve growth while paying out its dividend to shareholders.

This will enable continued shareholder returns going forward.
 

Natural Gas vs. Oil Diversification

Overall, Kinder Morgan’s financial strength is supported by its natural gas vs. oil diversification. Adjusted EBITDA vs. Oil – Investor Presentation

Adjusted EBITDA has remained remarkably constant despite oil prices experiencing a number of different significant declines. Those significant declines are less of an issue because of the company’s contracts and exposure to natural gas.
Kinder Morgan’s consumption and exports of natural gas are shown here. One of the primary things worth paying attention to here is that the primary sources of natural gas consumption is residential and commercial power/heating along with general electric power consumption. Industrial consumption for a variety of uses is also enormous.

These are sources of demand that remain fairly constant. COVID-19 has caused a record natural gas demand drop, however, that drop has only been 5% of demand. For reference, the record oil demand drop has been more than 25%. That has supported much more stability in natural gas prices, and volume, which supports demand for Kinder Morgan’s assets.

The sources for natural gas demand will continue to support Kinder Morgan as the largest mover of natural gas assets. That basis of the company’s business versus oil supports its ability to reward shareholders going forward.
 

2020 Guidance

Kinder Morgan’s 2020 guidance supports its ability to continue rewarding shareholders. Investor Presentation KMI is forecasting an 8% drop in adjusted EBITDA and a 10% decline in DCF. That’s a respectable decline, but it’s well within the company’s guidance for its accomplishments. The company has taken the important step of decreasing its discretionary capital significant and is focused on supporting its cash position.

It’s worth noting that the year-end net debt to adjusted EBITDA is expected to increase some; however, the dollar value of debt will still increase some. That’s because the actual increase in ratio is because of the drop in the company’s adjusted EBITDA. No other thing shows the company’s financial strength outside of its increase in dividend since the collapse started.

Overall, the company is planning to adjust its debt increase to a $1.25/share dividend in early-2021. Given the share price of near $15, a $1.25/share dividend is incredibly respectable. The financial strength is strong and I’ll support increased future shareholder rewards.
 

Growth

Through all of this, Kinder Morgan is taking advantage of the downturn to invest in growth. Backlog – Investor Presentation. Kinder Morgan invested a staggering $12.3 billion from 2015 to 2019 at a respectable 5.9x investment / Year 2 adjusted EBITDA. The company’s remaining $3.3 billion in growth spending over the coming several few years will generate more than $500 million in adjusted EBITDA growth. That’s mid-single-digit growth in adjusted EBITDA.

That will support increased FCF and increased ability for the company to generate shareholder rewards.
 

Risks

Kinder Morgan’s most significant risk is the risk of a shift in demand to a newer and lower pollution source. In the immediate term, the company should be able to perform quite well from its existing asset base. However, there are some risks that going forward a new and lower cost fuel source will come around and replace natural gas.

The world is constantly changing and that threat to Kinder Morgan’s business focused on natural gas is a consistent risk.
 

Conclusion

Kinder Morgan has an impressive portfolio of assets. The company is one of the leaders in moving natural gas across the United States, and despite the volatility from COVID-19, natural gas demand has only dropped 5%. As a result of this small drop in demand, KMI has seen its cash flow remain stable with DCF only expected to drop 10% in 2020.

The company has already increased its dividends by 5% since the start of the COVID-19 collapse and is planning to increase them by another near 20% in early-2021. That will mean a dividend yield of more than 8%. Simultaneously, the company is investing heavily in growth. That investment in growth will mean continued long-term shareholder rewards.

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