As is the case every three months, Kinder Morgan (KMI) kicked off earnings reporting season for the US energy midstream sector. The most noteworthy takeaway: No real surprises, asserts Roger Conrad, utility and energy sector expert and editor of Conrad's Utility Investor.
The $2 billion Elba Island liquefied natural gas export facility did not open before June 30. That arguably held back the bottom line, as distributable cash flow inched up just 1 percent.
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But distribution coverage was still 2-to-1 after the 25 percent payout increase in April, with debt-to-EBITDA on budget at 4.6 times. That keeps the company squarely on target for next year’s planned 25 percent dividend boost.
Natural gas pipelines contributed 58 percent of Kinder’s second quarter earnings before depreciation and amortization, or EBDA. They’re also 80 percent of the company’s $5.7 billion targeted capital projects.
Second quarter division EBDA increased by 7 percent and growth will accelerate in the second half of the year, as Elba Island and the ahead of schedule Gulf Coast Express Pipeline Project enter service.
By October 2020, Kinder will open a second major natural gas pipeline out of west Texas, the Permian Highway Pipeline. The company is also building out substantial new gas transport capacity in the Bakken that will enter service in November.
Kinder’s results confirm the recovery strategy in place since late 2015 is still very much on track. Selling the CO2 division and/or the remaining Canada assets at good prices could speed progress in reducing debt, and tilt the revenue mix further towards natural gas. But even without these moves, the company is in great shape to grow its 40 percent market share of US gas transmission.
Kinder’s second quarter results at its Products Pipelines and Terminals while solid also indicate general softness in this area of midstream. Of particular concern is the effect on the storage sector of backwardation and regional supply interruptions, such as Venezuela’s impact on Caribbean facilities.
Bottom line is wise selection has rarely been more important in discerning midstream values. But if you’re willing to look for the growing number of companies that have adapted to the high demand/low price environment, the future is bright and the stocks are cheap.
We expect Kinder to deliver sustainable annual dividend growth of mid-to-upper single digits starting in 2021. That adds up to an exceptionally solid value proposition, especially since management’s plans are largely internally financed. The shares are a buy whenever they trade under $22.
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