Kinder Morgan Inc (KMI) Whiffs on Earnings. So What?

Kinder Morgan Inc (NYSE:KMI) may have technically booked a loss of 10 cents per share for its recently ended third quarter, but its distributable cash flow of 48 cents per share of KMI stock on $3.33 billion worth of revenue was more than enough to pay for the 12.5 cent quarterly dividend the company intends to pay shareholders in early November. The difference will continue to support the ongoing improvement of the company’s financial situation.

Kinder Morgan Inc (KMI) Whiffs on Earnings. So What?

Analysts were collectively calling for earnings of 16 cents per share on revenue of $3.47 billion. Both numbers were lower than the year-ago distributable income of 19 cents per share of KMI stock and sales of $3.71 billion. The midstream pipeline (mostly natural gas) operator earned 15 cents per share in its second fiscal quarter of the year.

President and CEO Steve Kean commented:

“We had a good third quarter and once again, we demonstrated the resiliency of our cash flows, generated by a large, diversified portfolio of predominantly fee-based assets. We generated a loss per common share for the quarter of $0.10, primarily as a result of non-cash charges discussed below. That said, we produced distributable cash flow of $0.48 per share relative to our $0.125 per share dividend, resulting in $801 million of excess distributable cash flow above our dividend.”

KMI Stock: Putting a Lid on Costs

The company has been, and continues to be, diligent about containing costs, only focusing on projects that offer strong ROIs.

Kean said after the release of Q2’s results that the company’s backlog stands at $13.5 billion worth of projects. That figure has since been whittled down to $13 billion as the company completed some work during the quarter.

But it’s still finding plenty of good ones. In the statement delivered with last quarter’s numbers, the company expects its current backlog to generate an average capital-to-Ebitda multiple of approximately 6.5.

RBC Capital Market recently noted its backlog of projects should lead to revenue growth, funding the firm’s expectations of $1 worth of dividends per share of KMI stock in 2018. The current annualized dividend payout is 50 cents per share. RBC expects the natural gas company to continue raising its dividend, considerably, through 2020 when it could reach $2 per share.

It’s easier for Kinder Morgan to complete lucrative projects than its smaller peers, as it’s able to leverage its size and build new pipelines more cost effectively.

Capitalization Progress

In early October, Stifel downgraded KMI stock from a “buy” to a “hold” after a runup had pushed the value of KMI stock up 50% for the year. Analyst Selman Akyol explained “While Kinder Morgan’s natural gas dominated asset base and improving balance sheet remain attractive, we believe the current valuation largely reflects the positive attributes of the KMI story. As a result, we are downgrading shares of KMI to Hold.”

That balance sheet improved in the meantime, with long-term debt pulling back to $36.7 billion versus $40.6 billion a year earlier and $38 billion a quarter ago.

Debt levels remain uncomfortably high, however, while the company continues to decrease its debt leverage. At the end of the second quarter Kinder Morgan’s net-debt-to-Ebitda pulled back to 8.8 — the first decrease for the prior seven quarters. Last quarter marks the second quarter of net-debt reduction, and there’s another $750 million already earmarked to lower debt levels for the quarter currently underway.

Moody’s recently projected that Kinder Morgan would continue to whittle down the debt-Ebitda ratio down to 5.4 by the end of next year, restoring creditworthiness and access to new funding sources … if needed.

Its plans, though, broadly steer the company away from taking on more debt. Chairman Richard Kinder plainly stated “We do not expect to need to access the capital markets to fund our growth projects for the foreseeable future beyond 2016.” Kinder added, “We are ahead of our plan for 2016 year-end leverage and we’re pleased with the progress toward reaching our targeted leverage level of around 5.0 times net debt-to-Adjusted Ebitda.” It should be at 5.3 by the end of the year.

Natural Gas Volume

Natural gas prices fell from $3.10 per MMBtu to $2.90 per MMBtu during the company’s fiscal third quarter.

Usage of natural gas — which has a greater impact on Kinder Morgan’s revenue than price — fell during the quarter, while supply remained relatively steady. The volume of natural gas Kinder Morgan handled last quarter fell to a small degree, on a sequential as well as a year-over-year basis. Natural gas transport volumes ebbed to 28,144 BBTu per day, versus 28,438 BBtu per day in the same quarter a year earlier.

Looking Ahead for KMI Stock

Looking ahead, Kinder Morgan anticipates full-year distributable cash flow of just under $4.7 billion and adjusted Ebitda of just below $7.5 billion.

Analysts are looking for the company to earn 19 cents per share on $3.55 billion worth of sales for the fourth quarter. That bottom line would be an improvement on the year-ago number, though the top line would be a bit lower on a year-over-year basis.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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