Kinder Morgan: Not Investing In This Company Would Leave You 'Kindered'

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About: Kinder Morgan, Inc. (KMI)
by: The Value Portfolio
Summary

Kinder Morgan operates in a rapidly growing environment with significant investment opportunity. The company invests $2-3 billion annually in growth.

The company has started a significant buyback program. At the same time, the company will be increasing its dividend to $1.25/share next year.

The company will continue to generate strong cash flow for investors, not investing in this company would leave you "kindered."

Kinder Morgan (NYSE: KMI) is one of the largest publicly traded energy companies in the United States with a market capitalization close to that of Enterprise Product Partners (NYSE: EPD). I have previously analyzed these companies, and recommend both of them as an investment (you can read more about KMI here and EPD here). In 2015, the company cut its dividend dramatically, after telling investors it wouldn't, hurting investors who created a new term about how they had been "kindered." Despite this troubled past, as we'll see in this article, I believe investors who don't invest today will be the ones left "kindered."

Kinder Morgans Pipeline - Reuters

Global Energy Demand

The crux of Kinder Morgan's business is global energy demand, especially in the United States. Despite being a fossil fuel, natural gas demand is growing due to its low cost, how easy it is to move around, and the fact that it's still cleaner than other forms of energy such as coal.

Kinder Morgan Energy Demand - Kinder Morgan Investor Presentation

More than 650 million people will still lack electricity access in 2030. As people's living standards increase, energy demand should continue to grow going forward. As a result, energy demand is expected to grow steadily, especially natural gas. A significant portion of this demand growth will be from developing economies, which will drive additional exports from the United States as production grows.

These additional exports should support demand for Kinder Morgan's assets, and therefore its earnings. This shows the strong macroeconomic factors that will be supporting Kinder Morgan for the long-term.

U.S. Energy Growth - Kinder Morgan Investor Presentation

Given Kinder Morgan's primary market is the U.S., it's especially important to pay attention to the company's American asset portfolio. U.S. oil and natural gas production are expected to grow by 33% by 2025. That is unmatched growth, which will make the U.S. the single largest oil and natural gas producer in the world, a position that it has recently achieved.

The U.S's growth will result in significant export opportunities for the company. By 2025 the country will produce 1 out of every 5 barrels of oil, and 1 out of every 4 cubic meters of gas. The country will consume significantly less than this, and as a result, much of it will need to be moved to export ports. At the same time, the amount consumed in the U.S. will need to be spread across the U.S. through pipelines.

As a result, all of this together, will support significant long-term demand for Kinder Morgan's assets and provide growth opportunities for the company.

Kinder Morgan Infrastructure Overview

Growth in global energy demand are supported by Kinder Morgan's incredible portfolio of infrastructure.

Kinder Morgan Infrastructure Portfolio - Kinder Morgan Investor Presentation

The company has an astounding 70 thousand miles of natural gas pipelines along with 657 billion cubic feet of working storage capacity. The company touches each molecule multiple times as it moves throughout the system, and moves 40% of the natural gas consumed in the United States. At the same time, the company has managed to be connected to every major natural gas play in the United States.

After the same time, after moving natural gas and oil from the production site to a refinery, the company is also a major player in moving it to an export location. The company transports an astounding 1.7 million barrels per day of refined products through more than 12 thousand miles of pipelines for different liquids. The company is also the largest terminal operator with 16 ships and 157 terminals.

Personally, I would be interested in seeing the company acquire some downstream assets such as refineries. The company could utilize these assets, and while it would add some more variability to the company's cash flow, it could support the company building a more vertical portfolio.

Kinder Morgan Capital Investment

Having a significant infrastructure portfolio throwing off reliable cash flow, along with the overall growth of the energy markets, especially in the U.S., means there is significant opportunity for capital investment for the company.

Kinder Morgan Project Investment - Kinder Morgan Investor Presentation

The company has $6.1 billion of commercially secured capital projects underway that are expected to come online over the next few years. These assets are primarily in the natural gas segment, and should result in hundreds of millions in annual cash flow growth for the company going forward. That means as these projects come online over the next 1-2 years the company's cash flow should grow by double-digits.

The company managed to add a respectable $400 million of backlogs in 1Q 2019. Going forward the company expects roughly $2-3 billion in annual investment opportunities annually, which should result in mid-single digit long-term cash flow growth.

Among the most significant of the company's growth opportunities is its work out of the Permian Basin. The Permian Basin has seen prices impacted negatively by a lack of takeaway capacity, and as a result there is a massive demand for new takeaway capacity. The company building this new takeaway capacity, Kinder Morgan, will see significant demand for its assets.

The company is building two new massive pipelines out of the Permian Basin. These are both massive pipelines, with a diameter at an astounding 42". Kinder Morgan has a 35% ownership in the first one, which should have the ability to move 2.0 Bcfd of natural gas, and it has a 27% ownership of the second one, which should move 2.1 Bcfd of natural gas.

Together these two projects should cost the company close to $1 billion. They will come into service in Oct 2019 and Oct 2020 respectively, and when they do they will provide Kinder Morgan >$100 million in annual cash flow with a minimum contract term of 10 years. More so, these new pipelines will connect to Kinder Morgan infrastructure on the other end, providing even more opportunities for the company.

I would have liked to see the company invest in a larger stake here, however, I understand the company's decision to invest within its cash flow given how rough 2015 was.

Kinder Morgan Financials

The last major aspect of the company, how all of this ties together, is the company's financials. These financials are what make Kinder Morgan such a great investment.

Kinder Morgan Financials - Kinder Morgan Investor Presentation

Kinder Morgan has been generating a very significant amount of DCF and CFFO, and it has used that to support a rapidly increasing dividend for shareholders. The company's 2019 budget should have a 2.2x dividend coverage, while yielding shareholders close to 5%. These yields, which should continue to grow going forward, are indicative of the company's earnings power.

Kinder Morgan has already announced it plans to increase its dividend to $1.25 per share in 2020. This will mean next years yield on cost for someone who invests today will be more than 6%. While 2015 was difficult for the company, it was because of a unique combination of factors that caused investors to be "kindered." This time, I believe the company will meet its plans for dividend raises.

At the same time, the company has announced a $2 billion share repurchase program. Since 2017, it has repurchased half a billion of these. The share program is beneficial because not only does it save the company $100 million in annual dividend expenditures, which covers 20% of its planned dividend expenditures, it helps increase the value and cash flow for remaining shares.

More importantly, the company has achieved its debt level goals, meaning it can use remaining cash flow for both dividend and growth. The company's impressive financial income should result in double-digit return on equity for shareholders going forward. This should result in incredibly strong returns for shareholders going forward.

Conclusion

Kinder Morgan has an incredibly strong asset portfolio. The company is operating in a market that is seeing significant growth. Natural gas is a growing part of our energy makeup, and natural gas production and demand should only grow into the future. All of this growth will need midstream assets, and Kinder Morgan is in a good place to serve the community.

Kinder Morgan's impressive asset portfolio is undergoing expansion. The company has found a significant number of opportunities related to the Permian Basin and is investing close to $1 billion here. Going forward the company expects to spend $2-3 billion on annual growth opportunities, which should result in significant long-term earnings growth for shareholders.

The company's impressive asset portfolio and its growth, along with the company's commitment to shareholders make it a strong investment decision.

Disclosure: I am/we are long KMI, EPD. 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.