Kinder Morgan: Likely Not A Lot Of Dividend Growth Over The Short Haul

| About: Kinder Morgan, (KMI)


Kinder Morgan's Q1-16 results were affected by weak commodity prices.

Energy sector weakness made Kinder Morgan reduce its EBITDA, DCF outlook for 2016.

Distributable cash flow and excess coverage are nonetheless going to be solid this year.

KMI yields 2.77 percent.

Pipeline operator and energy behemoth Kinder Morgan's (NYSE:KMI) 1st quarter financial results continued to be negatively affected by tailspinning energy prices. And the company reacted: It reduced its distributable cash flow, EBITDA, and investment spending guidance for 2016, which was sort of a surprise for shareholders in April.

A short while ago I penned a piece on Kinder Morgan, titled "Why I Sold 1/3rd Of My Position In Kinder Morgan", in which I explained that the lack of dividend growth in the near future was a reason for me to reduce my position in the pipeline company. I still think the prospects for dividend growth are not very appealing in the immediate future.

That being said, though, Kinder Morgan is nonetheless going to be a cash flow powerhouse in 2016, and its distributable cash flow will more than handsomely cover the company's quarterly dividend of $0.125/share. For the 1st quarter, for instance, Kinder Morgan reported distributable cash flow before certain items of $0.55/share, while the pipeline company's 1st quarter excess cash coverage was a whopping $954 million.

Lower Commodity Prices Lead To Reduced Investment Spending

Lower commodity prices have had a negative effect on Kinder Morgan's revenues and earnings for a while now. For instance, Kinder Morgan's realized weighted average price for oil was $59.55/barrel in the 1st quarter, which does not compare favorably to the $72.62/barrel realized price a year ago.

Therefore, it doesn't come as a surprise that Kinder Morgan's revenues slumped ~11 percent Y/Y to ~$3.2 billion while its operating income slid ~24 percent from ~$1.1 billion a year ago to ~$816 million in Q1-16. Kinder Morgan's total 1st quarter profit slumped from $429 million, or $0.20/share last year to $276 million, or $0.12/share in Q1-16.

Because of the experienced commodity weakness in the 1st quarter and because of project removals, Kinder Morgan reduced its investment spending forecast for 2016: The energy company now expects to spend about $2.9 billion in growth capital, a ~$400 million reduction compared to its capital budget.

Lower 2016 EBITDA/DCF Outlook

Probably the biggest takeaway from Kinder Morgan's 1st quarter earnings release was that the energy company guided for a slightly lower EBITDA and distributable cash flow on the back of lower commodity prices:

KMI's budgeted distributable cash flow available to common equity holders (i.e., after payment of preferred dividends) is approximately $4.7 billion and budgeted EBITDA is approximately $7.5 billion. Due to continued weakness in the energy sector in 2016, the company now expects EBITDA to be about 3 percent below its plan and distributable cash flow to be about 4 percent below its plan. KMI expects to generate excess cash sufficient to fund its growth capital needs without needing to access capital markets and expects to achieve its targeted year-end debt to EBITDA ratio of 5.5 times.

Kinder Morgan's cash flows are largely fee-based, and therefore high-quality. While the reduction in EBITDA and DCF forecast is not encouraging, it is not a big issue for Kinder Morgan. The company is on track to pull in a substantial amount of distributable cash flow this year, and will most likely achieve a high degree of dollar excess coverage, too, so that Kinder Morgan will not have to tap the capital markets for money.

Your Takeaway

Kinder Morgan's revenues, operating income and bottom line profits all declined Y/Y, but commodity prices have rebounded in the 2nd quarter. For instance, crude oil prices have edged back to $50/barrel. Kinder Morgan's reductions in growth capital backlog and EBITDA/DCF outlook are not a big deal. That being said, Kinder Morgan has limited dividend growth potential over the next one or two years IMO since the company will be more concerned with funding its capital projects and improving its balance sheet than growing its dividend. Given Kinder Morgan's priorities, dividend investors will likely not see a lot of growth over the short haul.

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.