Investors who hoped Kinder Morgan Inc (KMI) would provide shelter from the storm of the oil bust have been disappointed.
After restructuring its limited partnerships into a single corporate structure in November, 2014, the stock collapsed in 2015 by more than half, falling to below $13 in January.
The company was forced to take action to save the balance sheet during this period, slashing the dividend from 51 cents per share down to 12.5 cents, a current yield of 2.4%. Yet since January, the stock has been on the rise, and recently flirted with $22/share.
It’s a gas story.
The Natural Gas Story
Since bottoming out below $1.60/mcf in March, the price of natural gas at the industry’s Henry Hub terminal has skyrocketed, and now stands at nearly $2.80/mcf. Futures are pointing to prices topping $3/mcf by the winter. The opening of the Cheniere Energy, Inc. (LNG) liquification plant on the Texas-Louisiana border in April has had the desired impact of putting a bid under the price.
The market improvement let KMI sell half its interest in gas lines serving the southeastern states to Southern Co. (SO), the area’s electric utility. KMI plans to use the $1.47 billion to retire debt. For Southern, this means more stable production prices as it continues moving from coal to natural gas as its main fuel source.
Kinder Morgan’s long-term debt after the deal falls to its lowest level since 2013, and Moody’s rating on the debt is now Baa3 but stable.
The balance sheet still shows almost 50 cents of debt for each dollar of assets, but that is now below the level of pipeline rivals like Enbridge Inc (USA) (ENB) and Enterprise Products Partners L.P. (EPD).
KMI’s structure as a C-corporation also means it no longer has to push exclusively for short-term profit, the way limited partnerships like EPD are pressed to do.
Bottom Line for Kinder Morgan
Importantly for KMI bulls, the remaining network is leveraged toward exports rather than the saturated domestic market. The big gains in natural gas are probably over, but there are slightly higher prices coming, and Kinder Morgan is positioned to benefit. Analysts are now moving their price targets to $25, a good profit from current levels.
This is no longer a go-go stock, for either growth or yield investors. I made a mistake buying it in 2014, but I am now willing to hold it for another year or two in hopes of recovering some of that lost ground.
If you’re buying today, however, those gains are pure profit.
Dana Blankenhorn (http://www.danablankenhorn) is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time (https://www.amazon.com/Reluctant-Detective-Travels-Time-ebook/dp/B01FECREKW/ref=nosimacluecom ) Write him at email@example.com or follow him on Twitter at @danablankenhorn. At the time of writing he owned shares in KMI.