Kinder Morgan: Game Changer?

| About: Kinder Morgan, (KMI)


Kinder Morgan released much-awaited fourth quarter results last week.

Q4-15 results included a quarterly loss and impairment charges totaling ~$1.4 billion.

Regardless, investors sent shares higher on Thursday and Friday after the company mentioned the possibility of a higher dividend and/or stock buybacks down the line.

KMI yields 3.26%.

Oil and energy stocks did a little better on Thursday and Friday after they got clobbered again on Wednesday. On Friday, the Dow Jones Industrial Average gained 211 points, or 1.33% and closed at 16,094. The S&P 500 advanced 38 points, or 2.03% and finished the day at 1,907. Regardless of the rebound in stocks and oil prices at the end of the week, there are reasons to believe that the market slide will continue over the next couple of weeks as investors digest oil companies' fourth quarter earnings which are widely expected to be dismal.

Kinder Morgan, Inc. (NYSE:KMI) released its fourth quarter and full-year results last week, but sentiment in the energy sector is likely going to remain weak with investors using any excuse they can to sell energy stocks in the weeks ahead.

Kinder Morgan: Mixed fourth quarter results

Kinder Morgan said it had revenues of $3.64 billion in the last quarter which represented a decline of ~8% Y/Y. The results missed the consensus revenue estimate of $3.81 billion.

Despite a relatively small Y/Y decline in revenues, Kinder Morgan reported a fourth quarter loss, including preferred dividend payments, of $637 million, or $0.29/share. In the year ago quarter the company earned $126 million, or $0.08/share.

Kinder Morgan's fourth quarter loss was driven by higher expenses that included a $1.15 billion loss on impairment on goodwill and a $255 million loss on impairment/disposal of long-lived assets. As a result, Kinder Morgan's operating income slumped from $956 million in the fourth quarter of 2014 to $(69) million in the fourth quarter of 2015.

Kinder Morgan's distributable cash flow, on the other hand, remained remarkably stable, declining only ~4% Y/Y to $1.23 billion. On a per-share basis, KMI said its distributable cash flow before certain items was $0.55 as compared to $0.60 a year ago. Excess cash coverage in the fourth quarter was $953 million.

Potential dividend hike and stock buybacks are a positive, but energy environment is going to remain challenging

Kinder Morgan said in its fourth quarter earnings press release that it is cutting its capital budget once again, this time by $900 million to $3.3 billion, which will help, together with the cash conserved from dividend payments, to improve Kinder Morgan's balance sheet and allow the company to fund its growth projects. At the end of the December quarter, Kinder Morgan's debt load was ~$41.5 billion which includes both short and long-term debt.

Investors liked Kinder Morgan's fourth quarter earnings AND what they heard on the conference call, especially the bit about the potential for dividend hikes and stock buybacks, and they sent KMI through the roof on Thursday, +16%, and Friday, +11%. According to Reuters:

We can deliver the balance sheet, internally fund our growth capital needs and/or return cash to our shareholders through either increasing the dividend and/or buying back shares.

~ Richard Kinder, Q4-15 Conference Call

Kinder Morgan said that it expects to be able to fund its growth projects in 2016 with excess cash, which has a higher priority for the company right now than reinstating a higher dividend just shortly after it cut it. As far as I am concerned, Kinder Morgan will stick to its capital budget and make no changes to its annual dividend payout of $0.50/share in 2016, but may retain the option to buy back shares.

Accessing capital markets at this point in time is highly unattractive (and expensive), and as long as Kinder Morgan can fund its growth projects with excess cash, that's what the company should do. In any case, a potential dividend hike in the future is good news and has been received well by investors. Based on Kinder Morgan's new quarterly dividend cash payout of $0.125/share, KMI yields 3.26%.

Your Takeaway

The prospect of a higher dividend and/or cash returns through stock buybacks down the line sent Kinder Morgan's shares through the roof at the end of last week. Since Kinder Morgan just cut its dividend, investors will very likely not see a dividend raise in 2016. Kinder Morgan is going to want to fund its capital budget with excess cash in order to avoid having to access the capital markets or taking on even more debt. A dividend raise, maybe in 2017, however, would be a game changer and attract new income investors back into the stock.

Disclosure: I am/we are long KMI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.