It has been an absolute bloodletting in the midstream oil and gas major limited partner space. As the bear market in oil prices has taken another leg down, everything even tangentially related to energy has gotten crushed.
Even the blue chips with minimal exposure to prices have been left for dead. Kinder Morgan (KMI) and Enterprise Products Partners (EPD) are down 26% and 20%, respectively, since late April. And Teekay Corp (TK) is down by about a third during the same period.
That level of utter destruction always gets my attention.
A stock is not always a bargain because it has fallen in value. Sometimes a cheap stock is cheap for a reason. Just as often as not, however, the market tends to overreact and presents us with a good buying opportunity.
Let’s take a look at Kinder Morgan and see if we have one of those opportunities today.
The selloff in Kinder Morgan and other MLPs this summer has been peculiar, because KMI stock mostly avoided the pain that hit the rest of the energy sector a year ago when the price of crude oil first began falling.
The massive declines are happening now, months after the oil supply glut should have been old news. Some of this is due to belated fears that U.S. domestic production — which has been slowing in recent weeks — will crimp the volume growth that drives pipeline profits. That’s a legitimate concern. But hardly one that would justify this kind of move in the stock price.
Particularly when you consider Kinder Morgan’s most recent quarterly-earnings release: KMI increased its project backlog by $3.7 billion in the second quarter to $22 billion, meaning that KMI has no shortage of growth prospects in front of it.
Lower energy prices are a problem, to be sure. While KMI gets the vast majority of its revenues from fee-based contracts that are not sensitive to energy prices, the company is not completely immune. KMI estimates that every $1 change in the price of crude oil lowers distributable cash flow by $10 million. That sounds like a lot of money, but remember that Kinder Morgan produces over $16 billion per year in revenues.
Even at today’s depressed price, KMI generated enough distributable cash flow in the first half of the year to cover its dividend and still have more than $220 million to spare.
And speaking of, last month Kinder Morgan raised its dividend by 14%. KMI management reaffirmed that it intended to raise dividends by at least 10% per year from 2016 to 2020. Does that seem like something a company that was concerned about its future would do?
At today’s prices, KMI’s $1.96 per share dividend works out to a yield of 6%. If KMI is able to follow through on its promise of 10% annual dividend growth, by 2020 its annual dividend will be a cool $3.16. That works out to a yield on today’s price of 9.7%.
Between the current dividend and the expected growth rate, you should be looking at minimum annual returns of about 16% per year over the next five years. That’s enough to double your money.
And don’t take my word for it. Watch what the company insiders are doing.
Richard Kinder, the founder and chairman of Kinder Morgan, bought over $11 million in KMI stock in June and July. And since December 2013, Richard Kinder has spent $56 million of his own money buying shares.
And he’s not the only one. Board member Fayez Sarofim dropped more than $17 million last month buying shares, and since December 2013, various Kinder Morgan insiders have plowed nearly $90 million into company stock.
It’s worth noting that Richard Kinder takes no salary for his work as chairman. His only compensation is via the dividend on his vast holdings of KMI stock. So it’s in his best interests, as well as ours, to keep the dividend checks growing.
After the recent rout, KMI stock is a steal. Use this lull as a buying opportunity.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long EPD, KMI and TK. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.