Not all turnarounds work. But when they do, it can be a thing of beauty. Former pipeline superstar Kinder Morgan (NYSE:KMI) certainly fits into the latter camp. After getting hit hard during the oil meltdown, KMI has battled back and its latest quarter shows just how far it has come. And it continues to get better each day.
Just take a look at its newest one-two punch of removing debt and selling a troubled asset. By ridding itself of two major issues, the turnaround at KMI is only getting stronger.
For investors, Kinder Morgan continues to execute and is finally on the path of returning to former glory days. Some hefty dividend growth could be on the horizon.
A Better Quarter at Kinder Morgan
It’s no secret that the energy slump back in 2015-16 hit Kinder Morgan particularly hard. Lower prices for crude oil and natural gas hit KMI right in the cash flows. At the same time, the cost of capital to fund its needed massive-sized expansion projects become even more expensive. And it’s no secret that Kinder Morgan had to cut its good-as-gold dividend and swallow its master limited partnership (MLP) subsidiaries to make ends meet.
But that was then and this is now. KMI is once again on the path to better overall operational results.
Improving grades have already helped Kinder increase its dividend by a whopping 80% at the end of the first quarter. The end of the second quarter saw a variety of additional improvements to its financial picture.
Kinder continues to hit it out of the park when it comes to natural gas shipping. Volumes in natural gas-focused lines continued to be strong and saw some big double-digit gains over the last three months. The shift over the last three years to focus more on fee-based revenue has continued to pay off for KMI. However, it has been getting a helping hand on its commodity-sensitive assets. Both its carbon dioxide segment and natural gas processing units have hit better as higher prices have helped their bottom lines.
All in all, the improving results have translated into better cashflows. Kinder Morgan managed to record distributable cash flows of $1.1 billion — a 9% year-over-year jump and about $700 million over what it needed to fund its dividend payout during the quarter.
KMI’s Great De-risking Move
As you can see, Kinder Morgan’s turnaround is working. Its focus on reducing debt/costs and improving cash flows is starting to bare real fruit. We’ve already gotten a major dividend increase and the potential to see more in our future. The best part is that KMI isn’t resting on its laurels.
Kinder Morgan’s Trans Mountain pipeline in Canada has been a thorn in the firm’s side for quite a while. The pipeline — which carries oil sands-based crude — has been a huge source of protest in recent years. That’s especially true in the wake of the woes facing rival TransCanada (NYSE:TRP) and its Keystone XL pipeline. An expansion plan for the Trans Mountain has been stuck in the planning stages since about 2013.
All in all, the pipeline was turning into a major headache for KMI. So, with its new focus on slimming down and keeping it simple, the midstream firm sold the strategic pipeline to the Canadian government. For its efforts, KMI’s publicly traded Canadian subsidiary, Kinder Morgan Canada Limited will receive $3.4 billion in cash. Of which, KMI is entitled to about $2 billion through a special dividend.
Aside from removing a major headache and potential drag on it shares, Kinder Morgan plans on using the cash to reduce its debt even further. That will thereby increase its overall cash flows. After all, less cash going towards debt means more cash for its shareholders. A full sale of KMI Canada is also on the table as well. Again, any proceeds here would be further debt reduction.
In the end, the deal underscores Kinder Morgan’s turnaround plans and why it’s ultimately great for shareholders.
Time to Buy KMI Stock
It’s certainly a different world for Kinder Morgan. Three years ago, when oil was crashing, Kinder was cutting its dividend and KMI stock was tanking, it looked like that the firm was going to be a relic of the energy sector. Today, KMI is not only getting better, it is perhaps stronger than before.
And thanks to its moves in Canada, KMI will be better tomorrow as well.
The continued cash flow generation above its dividend and debt reductions now make KMI stock a big time buy. And with a forward price-to-earnings ratio of around 20 and a 4.52% yield, Kinder Morgan seems priced for investors to take advantage of the turnaround.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
