Kinder Morgan, Inc. KMI is well poised to grow on the back of midstream infrastructure strength. However, its levered balance sheet remains a concern for now.
The Houston, TX-based midstream energy infrastructure company — with a market cap of more than $48 billion — has an expected earnings growth rate of 7% for the next five years. For second-quarter 2019, its earnings per share are projected at 23 cents, indicating a 9.5% rise from the year-ago reported figure. The stock has witnessed two positive estimate revisions in the past 30 days.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
A Look at the Positives
Kinder Morgan has the largest network of natural gas pipelines, which spread across almost 84,000 miles, in North America. Most importantly, the company’s midstream properties are linked to all prospective plays, which are rich in natural gas, in the United States. These extensive networks of natural gas pipelines, for which the company has invested more than $32 billion to date, provide it with stable fee-based revenues. In fact, Kinder Morgan generated significant cash flow from fees charged for using its midstream properties.
Kinder Morgan’s proposed Permian Highway Pipeline Project comes at an opportune time when there is a dearth of pipeline capacity for transporting natural gas and oil to Gulf Coast export facilities from the Permian. The project — with all of its capacity fully subscribed under long-term agreements — will likely come online by late 2020. This project is anticipated to deploy additional capacity for consistent transportation of natural gas to the U.S. Gulf Coast. Also, it will help the company to set appropriate tariff and eradicate Permian bottlenecks.
Since inception, Kinder Morgan has spent more than $50 billion on natural gas pipelines, products pipelines and terminals. Majority of the spending has so long been allocated for natural gas pipelines. This is likely to help the company capitalize on clean energy demand. Moreover, it has $5.7 billion worth of commercially secured capital projects underway.
Clearly, investors are noticing the company’s true potential. This is evident from Kinder Morgan’s rally of 38.1% year to date compared with 18.1% and 17.1% growth of the industry and the S&P 500 Index, respectively.
What’s Deterring the Stock?
There are a few factors that are holding back the stock from reaching its true potential.
As of Mar 31, 2019, total debt — both short and long term — was almost $35 billion. The debt capital is marginally higher than the total equity capital of $34.5 billion, which reflects the company’s significant exposure to debt. Kinder Morgan’s debt-to-capitalization ratio currently stands at 50.3%, signifying that the midstream energy player’s balance sheet is more levered than the industry it belongs to.
The company’s current backlog stands at $6.1 billion, significantly lower than the $22-billion high attained in 2015. Kinder Morgan has lost significant backlog with the divestment of Trans Mountain Pipeline and associated properties. This will likely dent the company’s future cash flows.
Although it announced strong first-quarter earnings and dividend hikes, investors were disappointed with the midstream energy firm’s projection for below-budget 2019 EBITDA. This is likely to increase the company’s debt-to-EBITDA ratio, thereby weakening the balance sheet. Even though Kinder Morgan has a target of achieving dividend growth in 2019 and 2020, its dividend yield history is far from being impressive. This is because the midstream energy player has been paying lower dividend yields than the industry, mostly since 2016.
To Sum Up
Despite riding on significant growth prospects, levered balance sheet and declining backlog are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space are TOTAL S.A. TOT, Murphy USA Inc. MUSA and Par Pacific Holdings, Inc. PARR, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
TOTAL’s 2019 earnings per share are expected to rise 7.3% year over year.
Murphy USA beat earnings estimates thrice in the trailing four quarters, with a positive surprise of 21.7%.
Par Pacific’s 2019 earnings per share are expected to rise 46.2% year over year.
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