Pipelines are supposed to smooth flowing. But, for industry stalwart Kinder Morgan (NYSE:KMI), it’s pipelines have been full of kinks lately. Once a dividend kingpin, KMI was forced to cut its distribution to save cash, reduce debt and live below its means. And the fruits of that labor have been working in resulting years. That is until recently. Like much of the energy sector and market in general, KMI stock has sunk.
Since its peak back in October, Kinder Morgan shares have plunged about 20% or so. While some of that could be attributed to the recent overall market decline, a lot has to do with the recent plunge in oil prices.
The question for investors is whether or not, the dip represents a great buying opportunity to load up on one of the biggest and best names in the midstream sector.
The answer could be a resounding yes.
The Big Cut & Turnaround at KMI
Back in 2015/2016, investors in Kinder Morgan were blindsided to say the least. KMI was long one of the biggest and brightest firms in the midstream sector and that leadership position translated into a steady diet of dividend growth across its various entities.
But as oil prices crashed and Kinder Morgan decided to eat its various master limited partnerships (MLPs), the company was hit with declining cash flows. With the inability to raise funds via its MLPs or tap the debt markets cheaply, KMI did the unthinkable.
It cut its dividend by a whopping 75%.
Shares of the stock plunged as just weeks before, management promised hefty dividend growth. But the move turned out to be the right one for KMI stock. Kinder has continued to see decent cash flow generation from its vast array of pipelines, storage, and other energy logistics assets.
At the same time, net debt has dropped and the firm has expanded the amount of cash on its balance sheet. All in all, the cut was to done to help align itself and live within its means. The firm’s underlying businesses aren’t too stressed or performing badly.
The proof is in KMI’s continued earnings improvements. Last quarter alone, Kinder Morgan saw a huge 107% increase in its profits and a 4% jump to its distributable cash flows.
Because of this, KMI has once again returned to dividend growth-boosting its payout by 60% year-over-year.
Moreover, it bought back around $500 million in its own stock during the last two quarters.
Better Times Ahead for KMI Stock
Perhaps the best part is that things are still getting better for KMI stock. Thanks to its previous dividend cut and the ability to reduce debt/live within its budget, KMI has been in expansion mode.
Overall, the midstream player has more than $6.5 billion worth of new pipelines and projects on its docket including new pipelines in the prolific Permian Basin. Many of these projects are heading to completion in 2020.
This only strengthens Kinder Morgan’s cash flow picture even more. According to a recent statement by Kinder Morgan CEO Steve Kean, KMI is projected to generate $5 billion of distributable cash flows this year. That’s about a 10% increase over it produced in 2018 and is above its earlier estimates for the new year.
Looking at its historical norms, Kinder Morgan should pay out about 45%- or $2.3 billion- of those cash flows as dividends. That should result in a 25% boost to its payout over 2019.
The rest of those cash flows will be added to its backlog and be plowed into additional projects. That should only help strengthen cash flows and dividends further down the road.
Buying the Dip in KMI Stock
The problem and wrench in system looks awfully familiar to 2015, and that’s the drop-in oil prices.
While KMI does generate a ton of its revenues from “take or pay” and toll-road like contracts, it’s not a pure-player. NGL/natural gas processing facilities and its CO2 injection assets are technically tied to oil prices. And as we’ve seen previously, crashing oil prices means plenty of energy producer bankruptcies and contract negations.
When you add in the general market meltdown, investor’s do have a right to be spooked.
But perhaps, investors are a bit too scared when it comes to Kinder Morgan. With the nearly 20% drop to its share price, KMI now trades for a forward P/E of just 15 and 7.8 forward price-to-cash-flow ratio. Data from S&P Global Market Intelligence shows that Kinder Morgan over the last three-years has sold for an average of 25.1 times forward earnings. Investors are getting a 40% discount on shares today.
And yet, KMI is a much better company today than it was three years prior. That’s on almost every metric from debt to cash flows.
Given the huge discount, continued improvement on cash flows and overall better position, investors are being provided a huge opportunity to grab the stock for dirt cheap. With its continued dividend improvement, KMI can once again regain its income stalwart title and investors don’t have to pony up too much cash for the ride.
All in all, Kinder Morgan could be one of the biggest bargains in the entire energy sector.
As of the time of writing, Aaron Levitt did not have a position in any stock mentioned.
