Don’t look now but Kinder Morgan Inc (NYSE:KMI) is a hot stock again. KMI stock is up 47% on the year, and 22% in just the last three months, on a return to normal operations and profit margins.
During the June quarter, KMI earned 15 cents per share on revenues of $3.144 billion. Its balance sheet has leveled off at $1 in debt for every $2 in assets, in line with industry averages. And it is leveraged to higher oil prices, which improve the margins of its “midstream” operations, including pre-treatment of crude to remove volatile Natural Gas Liquids, or NGLs, that can be sold at a profit.
KMI stock’s price-to-earnings multiple, listed at 597, is misleading, because it includes an extraordinary loss of $711 million during last year’s fourth quarter, caused by a $1.15 billion write-down of assets resulting from the oil crash. Gross profits during that quarter actually hit a record of nearly $2.2 billion.
KMI Stock: After the Fire, the Fire Still Burns
The year 2015 was the fire for Kinder Morgan. That year, KMI transformed itself from three companies dedicated to distributing profits, into one company dedicated to increasing assets. Instead of acting as master limited partners, KMI became a single-stock company, a move meant to conserve capital as oil prices fell.
But conserving capital also meant handing out less money to shareholders, and the company was punished severely. KMI stock fell 65% during the year, from the low-40s to below $15, as the dividend fell from its high of 51 cents per share to its present level of 12.5 cents per share — a yield of 2.33% at current prices. The recovery in the stock price this year, while impressive, still leaves it almost 50% below its early 2015 highs.
Thanks to its previous fall, some analysts have been pointing investors toward rival Enbridge Inc (USA) (NYSE:ENB). The appeal of ENB is that it is less heavily leveraged to oil prices, based in Canada where tax rates are lower and recently announced the purchase of Spectra Energy Corp. (NYSE:SE), a Houston-based company that has an immense backlog of construction work Enbridge cash flow is supposed to finance.
However, the problem for me is just that; the fact that Enbridge doesn’t benefit from rising energy prices, with oil now up nearly 50% from the lows of below $30 per barrel, and natural gas up similarly at about $2.82 per million BTUs.
The opening of the Cheniere Energy Inc. (NYSEMKT:LNG) gas export terminal on the Texas-Louisiana border, and the re-opening of oil exports means producers, and midstream companies, can now get the world price for their product, and for moving it.
KMI Has Momentum and Leadership
KMI executive chairman Richard Kinder is still just 71, only a year older than Donald Trump, and his CEO, Steven Kean, is 54 and has served beside his boss for over a decade. KMI generated $3.44 billion in operating cash flow in the last quarter alone and it’s expected to match last quarter’s numbers when it reports earnings Oct. 19.
Now is probably not the time to dump KMI stock. If you’re looking to get back into energy, it’s still one of the safer places to play. You could easily have a $25 stock by the end of the year, and if not, you’ll still have a yield better than a 10-year bond.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in KMI.