Kinder Morgan Dividend Hike Around The Corner?

| About: Kinder Morgan, (KMI)

Summary

Valero Energy Corporation acquired the remaining 50 percent interest in the Parkway Pipeline from a Kinder Morgan subsidiary.

The pipeline asset sale comes after Kinder Morgan announced the sale of another 50 percent pipeline stake to Southern Company earlier this month.

Kinder Morgan continues to focus on shoring up its balance sheet and improving its liquidity situation.

Odds of a dividend hike are gradually increasing.

Just last week I penned an article on pipeline operator Kinder Morgan, Inc. (NYSE:KMI) on the back of the announced asset sale to Southern Company, "Kinder Morgan: Dividend Hike In The Works?". The back story to this article was that Kinder Morgan was selling a 50 percent equity interest in the Southern Natural Gas pipeline system to Southern Company in a deal worth $1.47 billion. Kinder Morgan planned on using the transaction proceeds to relieve its burdened balance sheet.

I discussed the positive implication of the transaction at the time, saying that freed up cash and cash infusions from asset sales also raise the probability of a near-term dividend hike. I said this:

A return to dividend growth would be a major game changer, and certainly attract more income investors into the Kinder Morgan name over the short haul, even though the dividend cut last year burned a lot of investors.

The announcement of a higher quarterly dividend would, with virtual certainty, be a positive event for Kinder Morgan's shares, too.

Hopes of a near-term dividend increase were stoked a little more last week when a subsidiary of Valero Energy Corporation (NYSE:VLO) said that it acquired 100 percent ownership of the Parkway Pipeline, "a 141-mile, 16-inch products pipeline with 110,000 barrels per day of capacity, with the ability to expand to more than 200,000 barrels per day".

Valero Energy already owned 50 percent in the pipeline project Parkway Pipeline LLC, while a Kinder Morgan subsidiary owned the other half. The pipeline sale to Valero Energy Corporation came only days after Kinder Morgan announced that it would sell another 50 percent stake in another pipeline to Southern Company. The deal was widely received positively by analysts and investors.

Kinder Morgan's recent pipeline asset sales underscore the company's desire to shift gears, and focus on repairing its balance sheet and improving liquidity instead of growing its pipeline empire. As a consequence, Kinder Morgan is much more likely to return to dividend growth sooner-than-expected, something that I said before, would be a positive event for Kinder Morgan's shares.

Investor Sentiment Is Improving

Investor sentiment with respect to Kinder Morgan has very much improved lately, largely thanks to the announced pipeline sales and expectations of a near term dividend hike. Kinder Morgan's shares have advanced ~18 percent last month.

Your Takeaway

The asset sales are a significant shift in direction for the energy company which has grown rather aggressively in the last decade. The pipeline asset sales mean significant cash infusions for the energy company, even though the transaction price for the Parkway Pipeline deal hasn't been announced (at least I am unaware of it). The cash from the pipeline sales will most certainly be used to shore up Kinder Morgan's balance sheet and improve its leverage profile. Further, improving liquidity and a safer balance sheet tilt the odds in favor of a dividend hike in the not too distant future.

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.