Kinder Morgan (KMI) is in a class of its own among midstream energy firms. But despite being one of the largest firms dedicated to moving crude oil, natural gas and other energy commodities, KMI stock has been taken to the woodshed this past year, down over 20% in the last 12 months.
So what gives? Is KMI stock misunderstood, or is there something sinister going on?
It appears like the former. For investors, this is a case of the market throwing out the bath with the bath water. Kinder Morgan could be one of the biggest values in the midstream sector, and the time to buy KMI stock is now.
KMI Stock – Still Growing
There’s no denying Kinder Morgan’s status an energy sector juggernaut. Under its massive umbrella –and newly simplified corporate structure — it controls 84,000 miles worth of pipelines and gathering systems and operates over 165 terminals, distributing everything from gasoline and jet fuel to coal and steel.
Within the confines of that giant framework, KMI stock has managed to produce steadily increasing cash flows as the bulk of these ventures operate under fee-driven cost structures predominantly supported by take-or-pay contracts. Hardly any of them deal directly with commodity price, with Kinder Morgan simply playing middle man.
Kinder Morgan’s latest quarterly earnings report is a testament to this.
KMI managed to report $1.827 billion in segment earnings-which was an increase of 2% over the previous year’s quarter. The kicker to that earnings increase is that distributable cash flows (DCF) clocked in at 50 cents per share for the second quarter. That’s a substantial increase from the 32 cents per share it earned in the year-ago quarter.
What’s also impressive is that this DCF number is about $20 million more than it paid out in dividends. For the first six months of the year, KMI brought in $226 million more than it has been paying out to shareholders.
And Kinder Morgan is building on that DCF win.
The midstream giant’s project backlog now sits at whopping $22 billion worth of new pipelines, processing capabilities and additional terminal projects. As these get completed and move into service, KMI should continue to see rising cash flows.
Also adding to those cash flows are recent strategic acquisitions. At the beginning of the year, it bought privately held Hiland Partners from Continental Resources (CLR) CEO & founder Harold Hamm. That gave it crude oil gathering/pipeline exposure in the prolific Bakken Shale — one of the areas of the nation where production volumes are still rising.
More recently, KMI inked a deal with Philly Tankers for the construction of four new 50,000 deadweight-ton tanker ships for $568 million. These tankers are Jones Act compliant. The quirky maritime law enacted in the 1920’s basically states that all vessels shipping cargo between two locations in the U.S. be built here in America as well as be majority owned by U.S. citizens or companies.
For producers and refiners hoping to avoid infrastructure bottlenecks, shipping crude via barge and tanker has become a necessity. And the Jones Act requires that these barges be of U.S. origin. Naturally, there’s a shortage of barges and tanker ships as a result, and KMI is filling that role. The additionally capacity that Kinder Morgan is bringing on is already been booked at relatively high day rates as a result.
Buy Kinder Morgan Here
And yet, despite all these wins for Kinder Morgan, KMI stock is being sold pretty indiscriminately. Since hitting an all-time high back in April, Kinder Morgan’s shares have fallen by about 25%. Part of that drop could be attributed to the decline in oil prices, the part could be attributed to the potential of the Fed to raise rates.
Yet neither is a good enough reason for the drop.
As we said before, the vast bulk of Kinder’s businesses aren’t directly effect by commodity pricing. KMI is still more than covering its dividends at today’s depressed oil price. Sure, you could argue that lower oil prices will cause some producers to stop shipping product on KMI’s system. But that’s where the “take-or-pay” part of its fee structure comes in. Use my terminal or not, you’re still going owe me a check.
As for the Fed, Kinder is promising 10% annual dividend growth through 2020. That rate will certainly outpace anything the Fed plans to do and helps underscore the fallacy that all high yield securities do poorly when the Fed raises rates. The truth is- after an initial shock of stupidity- most dividend stocks, REITs and midstream firms will do quite well in the year after a raise. KMI will be no exception to the rule.
Given its strong history of rising cash flows and growth, KMI stock’s recent sell-off makes it a compelling buy for investors. Shares can currently be had for price-to-DCF metric- which is better way to gauge midstream and MLP shares- of 16. That makes it a pretty strong buy vs. the overall stock market. Especially, when you consider it’s yielding a hefty 6%.
Kinder Morgan is still one of the best midstream firms on the planet, and the recent drop in KMI stock has made a great value for investors.
Disclosure: Aaron Levitt personally holds a long position in KMI stock.