Kinder Morgan Inc (KMI) most certainly had a volatile quarter. The company was the target of a series of negative tweets and reports from the independent research firm Hedgeye. These attacks took a bite out of Kinder Morgan's stock price and have left the stock trading at an attractive valuation. Kinder Morgan also released its Q3 2013 earnings recently. Kinder Morgan is the general partner, or GP, of both Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). Combined, the Kinder Morgan family of companies constitute the 3rd largest energy company in North America by enterprise value.
Kinder Morgan's Q3 2013: A memorable Quarter
In the normally sleepy midstream energy sector, few stocks have generated as much discussion as Kinder Morgan. Hedgeye's bear attack on Kinder Morgan took many by surprise. Hedgeye has been successful in bringing down the share price of other energy related stocks, most notably upstream MLP Linn Energy (LINE).
In essence, Hedgeye argued that Kinder Morgan was under spending on maintenance on its pipelines to boost DCF. In addition, Hedgeye argued that Kinder Morgan was more reliant on its upstream segment than implied by the company's investor presentations. Barron's has a very good article on the whole matter. Also, you can read my earlier article which has a more in depth summary.
However, Kinder Morgan was not one to take these attacks lying down. Soon after Hedgeye released its critical report, Kinder Morgan hosted a mid-quarter conference call to clarify many of the points raised in Hedgeye's report. In addition, Rich Kinder, the CEO and Chairman of Kinder Morgan, had already responded to Hedgeye's assertions by buying nearly $18M in KMI stock.
A Look at Kinder Morgan's Earnings
While the drama caused by Hedgeye is interesting, investors should probably focus more on Kinder Morgan's actual operating results. The combined Kinder Morgan companies recently released their Q3 2013 earnings. The focus of this article will be on KMI, its results, and the update to guidance provided by the company.
For the quarter, KMI saw its cash available to pay dividends increase to $424M, up 17% from last year. On a per share basis, cash available to pay dividends increase to $0.41, from $0.35 last year.
As a result of the increase in cash available to pay dividends, KMI announced an increase to its quarterly dividend to $0.41 per share, up 14% from last year, and 2.5% from last quarter. This increase keeps KMI on track for its long-term dividend increase target range of 9% to 10% per year.
Also note that KMI's new quarterly dividend would result in a 1.00X coverage ratio for the quarter. This is an improvement from last quarter's 0.70X coverage ratio. As I noted in my previous article, KMI's coverage ratio various greatly quarter to quarter due to interest expenses relate to KMI's acquisition of El Paso and the timing of cash taxes. YTD, KMI's coverage ratio has been very slightly above 1.00X.
Rather than focus on the gyrations of KMI's coverage ratio, investors are better off looking at the overall cash generation. For the quarter, KMI generated around $623M from its limited partner and General partner interests in KMP, KMR, and EPB. This is an increase of 19.5% from last year. YTD, KMI has generated more and more cash each quarter from its various holdings. Due note that KMI's GP interest in KMP is by far its largest source of cash, at around 72% of the total.
Update on Guidance and Repurchase program
As I mentioned above, KMI is on track to pay at least $1.60 per share in dividends in 2013, inline with previous guidance.
The biggest news in KMI's new outlook is that is has authorized an additional $250M for share and warrant buybacks. KMI's previous $350M buyback was almost completely spent, with only around $16M left on the authorization. The majority of these funds have been used to buyback warrants, which were issued in the purchase of El Paso. KMI has repurchased approximately 158M warrants, with around 348M remaining outstanding. Last quarter, KMI had around 414M warrants outstanding, implying that it bought back around 66M in Q3.
Overall, KMI reported a strong quarter. Cash generation from its various assets increased significantly, with these funds being put towards higher dividends. However, shares of KMI actually declined on the earnings news. This may be a result lingering Hedgeye related fears or even a shift towards the higher yielding KMP.
For dividend-growth investors, KMI remains a solid choice. At current prices and at the new quarterly dividend of $0.41 per share, KMI now yields 4.65%. With a dividend growth rate of 14%, you'll be hard pressed to find a better combo of both yield and dividend-growth.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.