Kinder Morgan is the largest midstream and the third largest energy company (based on combined enterprise value) in North America. It owns an interest in or operates approximately 75,000 miles of pipelines and 180 terminals. Its publicly traded companies include Kinder Morgan, Inc. (NYSE:KMI), Kinder Morgan Energy Partners, L.P. (NYSE:KMP), Kinder Morgan Management, LLC (NYSE:KMR) and El Paso Pipeline Partners, L.P. (NYSE:EPB).
KMI owns the general partner and limited partner interests in both KMP and EPB. KMP is one of the largest publicly traded pipeline master limited partnerships in America. KMR is a limited liability company and its only significant assets are the partnership units it owns in KMP. EPB is a publicly traded pipeline master limited partnership.
The company operates mostly fee-based assets that are core to North American energy infrastructure. These assets generate large stable cash flows.
Kinder Morgan has a large footprint of diversified and strategically located assets, and is the market leader in its core businesses. For example, the company can claim it is:
- The largest natural gas pipeline and storage operator in the U.S.
- The largest independent transporter of refined petroleum products in the U.S.
- The largest independent terminal operator in the U.S.
- The largest transporter and marketer of CO2 in the U.S.
- The only oilsands pipeline serving the West Coast of Canada.
The company continues to build on its dominant position through acquisition. A year after the company spent $23 billion to buy El Paso, it purchased gas pipeline operator Coprano for $5 billion. The acquisition gives Kinder Morgan access to shale locations where production is booming.
Capitalizing on Increased Demand
Having the largest natural gas operation should pay off as the availability and demand for the fuel grows. According to data released by the U.S. Energy Information Administration, the production of natural gas in the U.S. is expected to rise by almost 44% to 33.1 trillion cubic feet by 2040 in comparison to 2011.
More production will mean more movement of natural gas from the site of production to different processing units and export facilities. This is what Kinder Morgan is looking to cash in on. Moreover, the demand from Asian countries for natural gas has opened up new opportunities for Kinder Morgan, as more gas needs to be carried and processed.
Furthermore, Kinder Morgan said in its latest earnings release that it has currently identified approximately $11 billion in expansion and joint venture investments that it has, or is confident it will soon have, under contract.
Current Stock Price
Shares of KMP are trading at about $85 a share. In the past year, shares have traded between $74 and $90. Shares of KMI have moved little in the past year. Its current price of $37 is nearly identical to where it traded a year ago. It is also trading at a sky-high price to earnings ratio of 108. Over the past year, the stock price has hit a low of $30 and a high of $40.
KMI reported fourth-quarter revenue of $3.08 billion, which was 53% higher than the prior-year quarter of $2.02 billion. Its earnings per share rose from $0.10 in the fourth quarter of 2011 to $0.33 a share in 2012. For the quarter, KMI's gross margin was 51.2%, its operating margin was 31.6%,and its net margin was 11.3%, all improvements over the previous year.
KMP has delivered a compound average annual return of 25 percent to shareholders over the past 15 years.
KMP generated $4.38 billion in revenue for the fourth quarter, up 20 percent from the year before. Net income rose from $479 million in the fourth quarter of 2011 to $619 million in 2012. That takes into account $50 million in losses related to Hurricane Sandy.
Kinder Morgan has minimal exposure to commodity price volatility because it typically does not own the energy products it transports, stores or handles. As a result, its businesses have been relatively stable in almost all types of market conditions. Where it does have exposure to commodity price risk, such as in its CO2 business segment, the company uses a long-term hedging strategy to partially mitigate that risk.
Kinder Morgan recently increased its quarterly dividend to $1.29 a share, an 11% increase from the fourth quarter 2011 dividend. The current yield is about 4%. The company has increased cash distributions 46 times since February 1997.
Large Debt Load
Scanning the balance sheets of its two primary companies -- KMP and KMI -- leads one to wonder if that trend can continue. KMI's recent payout ratio was a whopping 335%. Meanwhile its debt-to-equity ratio is 2.31, meaning it has more than twice as much debt as equity. What's more, its quick ratio is a paltry 0.40, meaning all of its liquid assets could only cover 40% of its current liabilities. KMI's balance sheet shows $714 million in cash and a massive $32 billion in debt.
Management effectiveness ratios are also relatively low. KMI's most recent performance shows a return on equity of 3.1%, while return on assets and return on investments both fell under 1%. KMP's are a little better, with an ROE of 12%, and ROA of 4.2% and ROI of 4.9%.
But as is the case in the oil and gas business, today's sizable investments are meant to yield results later in the future. For example:
- The company has recently announced a $112 million expansion of a terminal in Edmonton, a $170 million investment in a terminal network in Houston, and major improvements to a facility in Wilmington, Delaware, among $1.4 billion of projects in this segment. These moves are meant to increase revenue in its terminal operations, which grew earnings by 7% last year, and has increased revenue by approximately $50 million over the past three years.
- KMP is also investing $2.7 billion in its fastest-growing segment: natural gas pipelines. The unit grew 64% year-over-year in the fourth quarter.
- Investments in its products pipelines include $77 million in Carson, California, $220 on the Parkway Pipeline in Louisiana and Mississippi, and the construction of a new $90 million pipeline in Texas.
Kinder Morgan has set ambitious goals for 2013, including a 20% increase in earnings over last year to $5.4 billion. It also has plans to spend $2.9 billion on expansions, acquisitions and joint ventures, $2 billion in distributions to shareholders and $30 million in cash flow after distributions. With these plans and its expansion and investment efforts, Kinder Morgan makes a great long-term investment for any portfolio.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was written by an analyst at Catalyst Investments.