Kinder Morgan (NYSE:KMI) is one of our favorite picks in the energy sector when it comes to steady income stocks. We have been tracking its progress over the last few months and believe the company has much more room to grow. Our optimism stems from the strong asset base, contract-based revenue, and the expansion projects in assets over the next few quarters that will considerably enhance the revenues and cash flows of the company. As KMI is the general partner of Kinder Morgan Energy Partners (NYSE:KMP), its growth mainly comes from the progress of KMP.
Growth remains strong for KMP, and we remain confident about the growth prospects of the partnership as the expansion projects coming online over the next two-three years will substantially enhance the revenues of the partnership - we have talked about these growth opportunities in detail here. KMI also raised its second quarter profits by 2.53% and anticipates benefiting from the rising pipeline capacity demand to handle booming shale production in the U.S. Moreover, the dividend performance of the company remained consistent with 7.5% dividend increase compared to the same period last year. The strong growth prospects arising from KMP and EPB are also evident from the rising stock price of the company - which is up about 5% year-to-date.
KMP: The Main Growth Driver
KMP is the main growth driver for KMI - since natural gas accounts for about 54% of Kinder Morgan's cash flows, the company is focusing on the segment to further increase its footprint. The rising demand and improved prices of natural gas has prompted Kinder Morgan to substantially invest in and expand its natural gas assets. Moreover, the immense growth of U.S. natural gas production along with an increase in international demand further highlights the growth prospects in the sector. KMP is well-positioned to benefit from the rising natural gas demand in the coming years. The partnership has an extensive natural gas pipeline network across the U.S., and a huge backlog of more than $15 billion of upcoming natural gas pipelines expansion projects. You can read about our detailed analysis of KMP's natural gas assets here and here.
Source: Investor Presentation, June 2014
KMP has entered into new firm transport capacity commitments for 2.3 Bcf/d, with majority of this capacity expected to come online between 2014 and 2017. Moreover, a significant portion of this capacity is to transport natural gas from Marcellus and Utica shale plays to growing demand centers on the Gulf Coast and the huge petrochemical industry. Further, KMP can benefit from the huge potential growth in Mexico where the total growth is projected to be up by 2.1 Bcf/d by 2025.
Source: JPMorgan 3rd Annual Energy Infrastructure Corporate Access Day
Further, the increasing demand of natural gas liquids [NGLs] such as propane, butane and ethane, have also increased the importance of the natural gas assets to the energy companies. KMP is also expected to develop new products pipelines from the resource rich Utica shale under which it constructs and expands its 210-mile Cochin pipeline in Harrison County, which will substantially increase the fractionation capabilities of the partnership. Moreover, KMP is also increasing its Liquefied Natural Gas [LNG] assets, due to increasing domestic and international demand over the last few years. Therefore, natural gas and its derivatives are going to be a major growth driver for the partnership over the next few years - as the expansion projects come online, we will see robust growth in revenues as well as cash flows from the natural gas segment of KMP. With such anticipated strong growth prospects of the underlying limited partner companies, Kinder Morgan will surely grow in the coming years recording substantial gains in revenues and profitability.
KMP has been one of the best in the sector when it comes to growing cash distributions - the partnership has been growing its cash distributions at around 5%. There are a few partnerships that can boast such a high growth rate of cash distributions to its unit holders. Such stellar growth in KMP's revenues and distributions also resulted in increased Incentive Distributions Rights [IDRs] and higher general partner interests to Kinder Morgan. As mentioned earlier, KMP increased its general partner interest payments by 11% in the second quarter, eventually increasing the total KMP distributions to $542 million to the company. Moreover, during second quarter, EPB also increased its distributions by 10% to the company.
Source: KMI Second Quarter Earnings Release.
The increased cash inflow from limited partner companies enabled Kinder Morgan to increase its dividends during the period. The company paid $332 million as cash dividends to its shareholders, which is up 13% compared from $294 million for the same period last year. Moreover, the company increased its quarterly cash dividend to $0.43 per share - $1.72 annualized which represents an 8% increase over the second quarter of 2013 cash dividend of $0.40 and is up to the company's desired mark of $1.72 per share for 2014. This is due to the strong second quarter performance and continued solid growth at KMP and EPB, which is further supported by the expanded project backlogs and joint venture investments under the Kinder Morgan umbrella. Further, Kinder Morgan proved to be a solid choice for dividend growth investors, with a promising 4.6% yield and 8% dividend growth, the stock remains one of the best investment choices in the industry.
As we stated at the start of the article, we believe KMI is one of the best picks in the sector and the growth prospects of the company remain strong. We believe the expansion projects going on at KMP will considerably enhance the footprint of the partnership and grow its revenues and cash flows. These growth projects will in turn enhance the cash distributions to KMI, which will certainly have a positive impact on the dividends of KMI.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.