Kinder Morgan - Increasing Dividends In A Downturn
Summary
- Kinder Morgan has an impressive portfolio of assets. Despite COVID-19 difficulties, its cash reductions more than account for that.
- Kinder Morgan's capital program has the potential to more than cover the company's COVID-19 losses. That should help the company recover even faster.
- I recommend investors, potentially with options, invest in Kinder Morgan for the long run.
- I do much more than just articles at The Energy Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
Kinder Morgan (NYSE: NYSE:KMI) is one of the largest publicly traded midstream companies, with a market capitalization of more than $30 billion. The company has a dividend of more than 7%, and is one of the few companies, let alone companies in the oil patch, to have increased its dividend since COVID-19 began. As we’ll see throughout this article, the company’s impressive asset portfolio, comfortable ability to weather the downturn, and cash flow make it a solid investment.
Kinder Morgan Asset Overview
Kinder Morgan has an impressive portfolio of assets that support its core businesses and earnings potential.
Kinder Morgan Assets - Kinder Morgan Investor Presentation
Kinder Morgan has ~70 thousand miles of natural gas pipelines, with a massive storage capacity capable of holding billions of dollars of natural gas. At a time when all storage is trading at a premium, the company’s storage is something that can help isolate it from the other effects of COVID-19. The company is also a significant transporter of refined products and one of the largest independent terminal operators.
Overall, the company has an impressive portfolio of oil and natural gas assets balanced out across the different components of the market.
Kinder Morgan COVID-19 Effects
Kinder Morgan has been working hard to handle the effects of COVID-19.
Kinder Morgan COVID-19 Results - Kinder Morgan Investor Presentation
Kinder Morgan is forecasting $7 billion in 2020 adjusted EBITDA, an 8% decline YoY. That will result in the company’s distributable cash flow dropping to $4.6 billion or a 10% YoY decline. Both of these declines are incredibly significant for a company like Kinder Morgan. However, they are also much better than the declines many other companies will experience.
Kinder Morgan has chosen to respond by not increasing its dividend as much as previously forecast, only utilizing a 5% instead of 25% forecast. Simultaneously, the company’s discretionary capital is being cut significantly. The cuts in discretionary capital and dividends from previous planned levels are both significantly more than the company’s DCF decline.
However, the company’s year-end net debt / adjusted EBITDA is expected to increase. It is worth noting, though, that level is much less than what it’d be normally, and the decline is actually the result of the company’s adjusted EBITDA declining significantly. Previously, the company’s forecast net debt, at a 4.3x ratio, would be 4.7x, accounting for the decline in adjusted EBITDA.
So, the company will actually, after everything, be paying down debt in 2020.
Kinder Morgan New Margins - Kinder Morgan Investor Presentation
Kinder Morgan has provided its updated sensitivities for the year. The company is now estimating ~$30 / barrel WTI with sensitivities across the board to various things. The company’s biggest sensitivity is towards refined products, which fundamentally depends on when the markets re-open. This is something that we’ll discuss later, however, it’s incredibly difficult to predict.
I would guess in a worst case scenario the company will see another $100 million decline in adjusted EBITDA. However, in that case, even that is fully manageable by the company.
Kinder Morgan Capital Growth
Going forward, Kinder Morgan is also investing in capital growth.
Kinder Morgan Capital Plans - Kinder Morgan Investor Presentation
Kinder Morgan has a planned $3.3 billion capital program fully funded by the company’s DCF. Out of this, $2.3 billion is the company’s natural gas projects, which represent 70% of the total at a 5.6x EBITDA multiple. Across the company’s projects, $3.3 billion in projects means the potential for ~$600 million in new adjusted EBITDA, near 10% growth.
That’s significant because not only would these projects remove a significant part of the company’s COVID-19 losses, but the company’s return to shareholders, for something it’s not borrowing money to make, would be much more significant.
Kinder Morgan Financial Portfolio
Overall, Kinder Morgan’s financial potential is remaining incredibly strong and that is, what will ultimately, enable the company to potentially reward shareholders.
Kinder Morgan Debt Reduction - Kinder Morgan Investor Presentation
Kinder Morgan has steadily decreased its net debt / adjusted EBITDA as the company has both grown earnings and spent within its means. It’s one of the few midstream companies to, since 2016, have had positive CFFO after counting both dividends paid and the company’s significant capital expenditures. That’s significant when you account for how capital expenditures have supported continued growth.
Kinder Morgan has reduced net debt by $10 billion over the past 5 years. The company is one of the best positioned midstream companies, financially, and that strength will enable the company to generate significant shareholder returns. Specifically, Kinder Morgan clearly has the financial portfolio to handle a drawn out collapse in the oil markets.
Kinder Morgan Investor Recommendation
Kinder Morgan has the potential for significant shareholder returns going forward as a result of this financial portfolio.
Specifically, Kinder Morgan currently has an annual dividend of $1.05 / share. Interested investors, instead of investing, should sell cash secured PUTs with a $15 / share strike price and a current premium of $2.7 / share. The expiration of these shares is Jan. 21, meaning the annualized premium on these shares would be an astounding $4 / share.
You can either invest today at $1.05 / share in annualized dividends, with the potential to reach $1.25 / share by early-2021. Or you can sell cash secured options. If the share price goes above $15 / share, then you’ll get to keep a more than 25% premium. If the share price doesn’t recover then you get your shares at a $12.3 strike price. Given a new $1.25 dividend potential, that’s a double digit yield on cost potential.
Putting this all together, we can see how Kinder Morgan, either through options or dividends has the potential for significant shareholder rewards.
Kinder Morgan Risk
Kinder Morgan’s largest risk is obviously the continued decline in the markets. The company is incredibly well protected with fee-based cash flow and contracts. However, that doesn’t guarantee success in markets where your customers are going bankrupt or in long-term markets where volumes decline and contracts get re-negotiated for the same price.
Optimistic scenarios point towards a potential vaccine by September 2018, which could lead to a mass produced vaccine in the next year. That could significantly support Kinder Morgan’s shareholder returns.
Conclusion
Kinder Morgan’s impressive portfolio positions the company well for a market recovery. The company is one of the few midstream companies that’s covering its capital expenditures and its dividends from its cash flow. Over the past 5 years, the company has reduced its debt by $10 billion. Overall, the company is incredibly well positioned for the market collapse.
Unfortunately, COVID-19 has had a big impact on Kinder Morgan. However, despite that decline, the company’s moves to address the decline mean that it can now more than handle the decline. It does have some continued potential sensitivity, but even then, the company’s financial potential is more than strong enough to handle the decline. Utilizing options can allow investors to get an even better return.
Overall, Kinder Morgan is a solid investment at this time.
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This article was written by
The Value Portfolio specializes in building retirement portfolios and utilizes a fact-based research strategy to identify investments. This includes extensive readings of 10Ks, analyst commentary, market reports, and investor presentations. He invests real money in the stocks he recommends.
He is the leader of the investing group The Retirement Forum with features including: model portfolios, macro overviews, in-depth company analysis and retirement planning information. Learn more.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.
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 (27)
Natural gas is the important bridge between today and the green energy of tomorrow. One could write either that the efficiency of solar cells is now 22% or the efficiency of solar cells is only 22%, but it is an advance from 12% say a decade ago. Economical storage is the goal of many researchers. (Little Sweden may become a power house in the future due to the amount of research in all facets of green energy.) Thevpoint is that in the interim natural gas will be in high demand, particularly abroad. For this reason there is more competition as other nations are are exporting LNG. However, what many do not realize is that some believe the real debate is not competition, but will we run out of natural gas, or not! Maybe, as existing supply decreased advanced more expensive exploration and extraction techniques may allow continued supplies but at a higher cost. As one blogger wrote at some point the higher cost of natural gas versus the lowered cost of renewables will “flip” the markets for everyday uses.
Your concise article clearly gives many reasons why I expect to hold KIM for, say, five years or so, but not being blind to the trends outlined above, I expect to consider to start selling energy stocks about that time, unless my estate sells everything before then.
If renewable energy push is disclosed as the fraud it is
If Trump is re-elected they win--if not---doubtful much will help
If China is forced to purchase US LNG to help reduce the massive trade deficits
If economic activity increases into 4th quarter, Trump wins, and kmi can raise the remainder of 25% dividend planned.Lots of if's---but seems, many PE firms are buying midstream assets----that's good because they buy many politicians who can help the nat gas cause.
