Pipeline master limited partnership Kinder Morgan (KMP) reported strong fourth quarter results Wednesday afternoon. Revenue surged 31% year-over-year to $2.5 billion, exceeding consensus estimates. Operating earnings per share grew 74% year-over-year to $0.61, also ahead of expectations. Distributable cash flow per share increased 6% year-over-year, to $1.35, more than covering the firm's payout during the fourth quarter. This led the company to raise its fourth quarter distribution to $1.29 per share (payable February 14, 2013), three cents higher than the previous payout. The firm's full-year distributable cash flow of $5.07 per share was significantly higher than in 2011, but more importantly, it easily covered distribution payments of $4.98 per share.
Aside from solid earnings, we think the company's excitement surrounding expansion opportunities in the pipeline business is particularly notable. The firm provided specific commentary with respect to its expansion opportunities:
KMP invested $2.1 billion in expansions and acquisitions during 2012 (not including dropdowns), which exceeded our budget of $1.7 billion. We see exceptional growth opportunities across all of our business segments, as there is a need to build additional midstream infrastructure to move or store oil, gas and liquids from the prolific shale plays in the United States and the oilsands in Alberta, along with increasing demand for export coal and CO2. We currently have identified approximately $11 billion in expansion and joint venture investments at KMP that we have, or are confident that we will soon have, under contract and we are pursuing customer commitments for many more projects.
Shale oil growth in the US could outpace current expectations, in our view, as it appears capacity ramp-ups are going better than planned (and drillers may find more oil than previously anticipated). It's hard to estimate exactly how much more capacity is needed, but if we use the growth in the amount of rail traffic dedicated to moving oil and gas during the past year as an indicator, there certainly appears to be a supply-chain bottleneck.
Demand for natural gas, which has been bolstered by its relative price weakness, drove earnings in the firm's Natural Gas Pipelines segment to surge 64% year-over-year to $474 million. Although price parity versus coal could ease in 2013, we think strong production should endure, driving segment earnings upward.
The firm's Terminals business segment performed well in the fourth quarter, with earnings jumping 7% year-over-year, to $198 million. Although domestic coal consumption was relatively weak, export coal volumes jumped 18% compared to the same period a year ago. If the global macroeconomic situation improves in 2013, we think coal export volumes could jump materially. However, coal always faces the not-so-hidden risk of heightened regulation that could cripple demand.
The firm's CO2 segment performed incredibly well in light of lower-than-expected natural gas prices. Earnings surged 20% year-over-year, to $337 million, as some of the weakness in natural gas prices was offset by better crude oil prices.
Overall, we thought the quarter was strong, and we like management's confidence in future expansion opportunities. Debt-to-EBITDA, a useful measure for solvency, fell to 4 times at the end of 2012 compared to 4.2 times at the end of 2011, suggesting the company is in slightly better financial shape even after adding $400 million in additional debt last year. In our view, shares of Kinder Morgan are fairly valued, though its juicy distribution yield in excess of 5.6% keeps it a constituent in the portfolio of our Dividend Growth Newsletter.
Additional disclosure: KMP is included in our Dividend Growth portfolio.