Kinder Morgan Came Up Short... Or Did It?

| About: Kinder Morgan, (KMI)
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Summary

After the market closed on January 18th, the management team at Kinder Morgan released fourth quarter data for the company.

Unfortunately, management failed to live up to sales and earnings expectations, and I was personally wrong about changes to its cost structure.

However, the firm did report some rather favorable data that, in my mind, more than offsets this disappointment and makes me that much more interested in the business.

In an article I published the other day, I discussed not only what analysts' expectations were regarding Kinder Morgan (NYSE:KMI) for the fourth quarter of its 2016 fiscal year; I gave my own thoughts on what investors should anticipate given everything that's happening both at the company level and at the economic level. Now that management has finally released results for the quarter, I figured that now would be a wise time to go back and re-evaluate what I wrote about at the time and to see how close I was and how close analysts were.

A look at analysts

In my article on the company, I stated that, if analysts were correct, Kinder Morgan would report revenue for the quarter of about $3.53 billion, a modest decrease from the $3.64 billion seen the same quarter a year earlier. Due, in part, to lower volumes year-over-year, revenue in the fourth quarter disappointed, coming in at approximately $3.39 billion. This represents a decrease compared to the same time in 2015 of about 6.9%.

On the bottom line, the picture was even worse. During the quarter, analysts were expecting Kinder Morgan to report earnings of $0.19, a significant increase over the adjusted earnings for the fourth quarter of 2015 of $0.13. This, unfortunately, never materialized. Significant writedowns, including a $250 million writedown of the company's Ruby Pipeline, resulted in earnings hitting just $0.08 per share. However, if you were to take out impairments and assume the same tax rate as what the firm did see for the quarter would hold, then earnings would have come in at about $0.16 per share. This is still a miss but isn't so bad in the grand scheme of things.

I got two right and one wrong

Now that analysts are out of the way, it's time to discuss what I expected from Kinder Morgan for the fourth quarter of last year. First, allow me to start on something I was very, very wrong about. In my article, I showed that, during the first three quarters of its 2016 fiscal year, Kinder Morgan managed to keep some of its key costs lower than they were in 2015 (though some, like general and administrative costs, as well as operating and maintenance costs, managed to increase). In particular, I was interested in the firm's cost of sales.

In light of seeing falling sales, I figured it was a major priority of management to continue to focus on lowering costs as much as possible. Unfortunately, this ended up not being the case and, during the fourth quarter, the company's cost of sales came out to 30.8% of sales, a meaningful increase over the 22.9% seen the same time a year earlier. Thankfully, even with this increase, total cost of sales for the company's 2016 fiscal year came out to 26.8% of sales, down from 28.6% in 2015, but that still doesn't do anything about the fact that I was wrong.

Based on all that you've read so far in this article, there's a decent chance that you're thinking that Kinder Morgan may not be a good prospect after all. Certainly, after seeing these numbers, I was also dismayed until I looked at the other key items I was curious about. Take, for instance, the firm's debt picture. In the third quarter of Kinder Morgan's 2016 fiscal year, the company's total debt (excluding fair value adjustments on debt) came out to $39.65 billion. My thought was that, especially after seeing the sale of 50% of its SNG pipeline stake, management would lower costs but they did so more than I expected.

For the fourth quarter of 2016, total debt for the company came out to $38.80 billion. This represents a falloff of $850 million over the course of just one quarter and brings total debt down $2.65 billion during only one year. There is, however, even better news to add to this. In addition to paying down a nice chunk of debt, management also increased its cash position from $229 million during the end of 2015 to $684 million at the end of 2016. If you take this and some other adjustments into consideration, net debt at the firm dropped $3.06 billion for the year. Either way, this was clearly a point I was correct about.

The last item I looked at related to Kinder Morgan's DCF (distributable cash flow) for the quarter. In my article on the topic, I said that investors should expect the firm to see a number of around $1.10 billion, give or take about $50 million. However, for the year as a whole, the company's DCF came out to $4.51 billion (they expect $4.46 billion next year). This nice chunk of cash flow for the business resulted in DCF for the quarter of just under $1.15 billion ($1.147 billion to be precise) so my estimate, while factoring in the plus or minus amount, was also right and in a positive way as opposed to a negative one.

Takeaway

Right now, I must say that, although I would have liked management to perform better in some key areas (sales, earnings, and cost of sales), the business's strong cash position at the end of the quarter, its meaningful debt reduction over the quarter and year as a whole, and its strong DCF more than offset these negative aspects in my mind. Next year, the financial picture of Kinder Morgan should, from a DCF perspective at least, worsen a little (unless energy prices rise or additional cost-cutting can be implemented) but with all the progress management has achieved, I'm liking the company a little more each day.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.