Pipeline giant Kinder Morgan Inc (KMI) releases its first-quarter earnings results after the closing bell on Wednesday, and a lot of investors — including heavyweights like David Tepper and Warren Buffett — will be watching this release very closely.
Buffett’s Berkshire Hathaway (BRK.A, BRK.B) and Tepper’s Appaloosa Management both took major positions in KMI at the end of last year. This is only the second earnings release since Kinder Morgan slashed its dividend by 75% in December
And while virtually no one expects KMI to hike its dividend this quarter, Executive Chairman Richard Kinder has made it clear that paying down debt and funding new growth projects are the top priorities at the moment.
Running a Fine-Tooth Comb Through Kinder Morgan
Investors will run a fine-tooth comb through Kinder Morgan’s report for comments about distributable cash flow, the metric KMI uses when determining what it can afford to pay in dividends. They’ll also look for any nuggets on the state of the backlog, which was viewed by many bulls as a guarantee of continued profitability.
But as Kinder Morgan has reconciled itself to a period of indefinitely depressed oil and gas prices, it’s essentially scratched less profitable projects out of the backlog. That potentially means higher margins for the next few years, but could also mean lower growth further down the road. Investors will search for clues here.
And finally, investors will be looking for any insight from management about the state of the capital markets.
Junk bonds, along with most other risk assets, have rallied since mid-February. Rising junk bond prices (and thus falling yields) point to a normalizing of the credit markets. It was the upheaval in the credit markets that led to Kinder Morgan having to issue prohibitively expensive preferred stock last year, paying 9.75%. It was also the reason KMI reached the conclusion that “self funding” through dividend slashing would be cheaper than going to the equity or bond markets.
Let’s dig into the numbers: Zacks’ consensus earning per share forecast for the first quarter is 18 cents. That’s down six cents (or 25%) from the same quarter last year. Analysts expect revenues of $3.65 billion, which is actually a slight increase over last quarter’s number. Last quarter, KMI’s results were pretty disappointing, and with modest expectations this time around, don’t be at all surprised if KMI beats. Estimize, a crowdsourced earnings estimator, sees earnings coming in slightly higher at 19 cents and revenues slightly lower at $3.61 billion.
Bottom Line on KMI Stock
Also, it’s worth noting that share dilution won’t be a problem for a while. While KMI is not a master limited partnership, it operates like one, regularly issuing new shares to fund growth projects.
That’s not a problem when the share price is high and the profit potential on the growth projects makes it worthwhile. But it’s massively dilutive when the share price is down and the growth projects are somewhat marginal. This, along with credit market turmoil, is what drove Kinder Morgan to slash its dividend last year.
Depending on how KMI delivers on distributable cash flow, I wouldn’t be surprised if management announces a stepped-up stock buyback, something that is extremely rare in MLP land. I would see this as being more likely than a dividend hike. Share buybacks can be done with short-term cash surpluses and can be quietly stopped without creating much of a ruckus. And importantly, they don’t create an ongoing obligation the way that quarterly dividends do.
Chairman Richard Kinder doesn’t want to be in the humiliating position he was in last year, so I’d expect him to favor a buyback over a dividend hike at this juncture.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, Sizemore was long KMI.
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