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Kinder Morgan: Get Paid To Buy This Stock

May 03, 2020 4:12 PM ETKinder Morgan, Inc. (KMI)57 Comments


  • KMI is undervalued with some risks attached.
  • The 7% yield can ease your worries.
  • I give KMI a fair value of $19.47 in today's economic climate.

Investment Thesis

Kinder Morgan, Inc. (NYSE:KMI) is currently undervalued which was caused by a combination of the pandemic and the oil plunge. I believe the stock has lots of potential, given it can continue its projects and commodity pricing returns to pre-pandemic levels in the coming months.

Company Background

Source: Kinder Morgan Home Page

Kinder Morgan is one of the largest energy companies in North America and a leader in each of its businesses: natural gas pipelines, product pipelines, carbon dioxide, and terminals. It owns or operates a total of about 84,000 miles of pipelines and 147 terminals. Within its businesses that make up the company, they are the:

  • Largest natural gas network with approximately 70,000 miles of natural gas pipelines. We are connected to every important U.S. natural gas resource play, including the Eagle Ford, Marcellus, Utica, Uinta, Haynesville, Fayetteville and Barnett. We move about 40 percent of the natural gas consumed in America.
  • Largest independent transporter of petroleum products, transporting about 2.1 million barrels of product per day. We move gasoline, jet fuel, diesel, crude, natural gas liquids and more.
  • Largest transporter of carbon dioxide (CO2), transporting about 1.3 billion cubic feet per day. Most of the CO2 is used in enhanced oil recovery projects in the Permian Basin of West Texas.
  • Largest independent terminal operator. Our liquids terminals store refined petroleum products, chemicals, ethanol and more, and have a capacity of 147 million barrels. Our dry bulk terminals store and handle such materials as coal, petroleum coke and steel, and we handle over 53 million tons per year. We also have a strong Jones Act shipping position with sixteen vessels in service.

Source: Corporate Profile

The company has some big competitors in its space including but not limited to EPD, ET, and ENB. All

This article was written by

I graduated in 2020 with a B.S. in Chemistry w/ an Emphasis in Biochemistry. I currently hold my SIE, Series 6, Series 7, Series 63, Series 65, and Series 9 FINRA and NASAA examinations. I work on the Trade Desk as a Trader for one of the largest banks in the U.S. I am a husband to a beautiful wife, dad to two beautiful boys, and have a keen understanding of equity and fixed income markets - always looking for investment opportunities and growing my knowledge. Combining my knowledge and experience, I will publish investment analysis and investment ideas that are my own. These are opinions and not financial advice.

Analyst’s 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.

I am not a financial advisor and do not claim to be one. I am only providing my own insights into a stock and should be taken with caution. Do your own research before making any decisions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (57)

crrj profile picture
Exxon just issued Billions of debt-- 3.5% range---vs dividend of say 8% for rounding purposes.

So, I can borrow Billions at 1/2 of what my stock dividend is paying?--basically, so if exxon buys back its stock---would that not mean an automatic 3.5%+ return?

KMI would do well to consider buying back all the stock they can, no?
crrj profile picture
Just halt any new project spending....STOP SPENDING ON ANY NEW ASSETS.....Assets do not perform in this environment.
Kindered once!
Justin Stempel profile picture
KMI has one of the ugliest charts you'll ever see for such a big company. Only GE has a worse one!
To invest in Kmi you have to be convinced that :

O global demand for fossil fuels will increase ( mostly nat gas)
O conversion of coal generation power plants continue to be retired and some or most replaced by gas generation
O growth in global
Use of lng and nat gas will continue

All the experts say these things will happen. Even if growth projects slow down Kmi can take all excess cash and buy back shares and or pay down debt.
Good insight regarding KMI. Thanks.
cachinga profile picture
I'm beginning to think if you have 2 nickels to rub together in this country, you are somebody's target to get sued. Even the gov't drools at your $.
Manufacturers need greater legal protection and encouragement. The corporate tax rate should be reduced to 17%. Manufacturing in China is no longer an option for pragmatic, realistic and national security reasons.
Chancer profile picture
@ Cody Perez:

How do you get from fair value of $19.47 to $23.39 or $31.54?
Southern Investment Strategies profile picture
Great question, I took an average of each valuation I calculated to estimate the value of the stock.
Mark Krieger profile picture
the $35 billion of debt on their balance sheet, freaks me out.
Southern Investment Strategies profile picture
It is scary! However, most businesses in this sector and industry take on lots of debt for projects and growth.
Mark Krieger profile picture
their cash hoard of $360 million is too tiny.

Look for them to slice their cash dividend in half, very soon.

In fact, they could even drop it to 1 penny a quarter
Southern Investment Strategies profile picture
Well, they just recently increased the dividend by 5%. It would be counterintuitive to go back on their word to shareholders and cut the dividend.
HomeBoy201 profile picture
Technical question on the DCF model... How did you arrive at a discount rate of 12%? That kind of model is pretty sensitive to that parameter, and 12% just seems excessive in the current economy. Long KMI via longtime KMP shares, and still drinking the Koolaid, I guess.
Southern Investment Strategies profile picture
DCF requires a lot of assumptions. A lot. So, I know I’m not going to get it perfect that’s why I used it in conjunction with other valuation methods. I got to a discount rate of 12% through optimistic assumptions.
smurf profile picture
It looks like no dividend cut or suspension is calculated in as a potential risk?

I think that has to be taken into account for any company in the o/g business, even transmission.
smurf profile picture
P.S. EPS aren't covering the yield, Free Cash Flow barely so.
Distributable cash flow per share: $2.02
Dividend per share: $1.05
Show your math smyrf
One of the first that we purchased coming out of the FC in 2009. Nice for a long time. Now would be hesitant doing anything with oil other than MPC as a stand alone or with FENY / IYE ETF's. Long aforementioned.
Buyandhold 2012 profile picture
I view KMI as a BUY at $11 or lower and as a HOLD above $11.
Mainedivguy profile picture
yep, I'd buy at 11
Southern Investment Strategies profile picture
I think anybody would!!
Mr. BAH-

I apologise if this is not appropriate, but I made an account to ask you, since I cannot find it on your profile posts. How do you receive stock certificates without paying very large fees, or is there no way? I am interested in buying stocks for my grandson but he has a money spending problem, so I'd like to purchase him physical certificates. What would you recommend in this regard?

Thank you much-
I do own this dog, but currently the underlying value of the assets broken up and divested individually is currently much greater than the sum of the parts.
sold @22 got back in @14
Good Job. I just missed doubling down around 10 which would have been sweet but I couldn't unload some options in time and at the right price to catch it, I did get some KMI at 14 too.
"I believe the stock has lots of potential, given it can continue its projects and commodity pricing returns to pre-pandemic levels in the coming months."

Does anyone see some kind of bright future with pipeline companies continuing their projects as they have been for the last 4 or 5 years? Wrap up the projects that are under construction, but there should be almost nothing new in the works. The export phase of the shale revolution has just about stopped in its tracks. The world needs less oil and gas than is currently being produced. Much less now of course, due to the virus, but less even after the current health crisis. There should be nothing new to build for the foreseeable future.
I believe LNG remains an opportunity both on the Gulf Coast & East Coast. The demand is there, whether Oil-linked or HH-linked price.
@HaroldL - The future of the pipeline companies exists solely in the dividend stream. Which will not grow very much, if at all, from here. The shale revolution is done until crude is back over $80/barrel. The Marcellus gas area should continue with modest drilling and very modest pipeline extensions. The Permian area might see a little in the way of pipeline extensions but as far as any major projects, zip, zero and nada. Stick a fork in it.
Oil production in the Permian will decline, and consequently, associated gas production from that region will decline in volume. US natural gas prices should rise, but hopefully remain competitive enough with other global gas and LNG suppliers.
Stephen Mayo profile picture
The economy provides every excuse to cut the dividend.

Given the history, I can find friendlier places for my capital.
Auto travel will boom as early as mid May; not all subjects are being cowed by their power hungry masters and are getting ready to break out everywhere.
smurf profile picture

If you were stricken with this virus, you'd be the first one crying the blues and demanding that action be taken.
Ron Burgundy’s Hair profile picture
But POTUS (& some good Governors - not the progressive’s) took action.
Great analysis! Thank you for covering most if not all possibilities. KMI looks promosing going forward.
"The company has had lots of opposition for its Permian Highway Pipeline. This should be concerning for investors since this pipeline is expected to bring in a combined 4.0 Bcf/D with the help of TX Intrastates and NGPL..."

"Bring in" ? I wonder if the author could explain a bit more about what idea he is trying to get across regarding PHP, the Intrastates, and NGPL?
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