Kinder Morgan (NYSE: KMI) can't seem to catch a break these days. Despite its completing what management dubbed a "momentous" quarter, shares of the natural gas pipeline giant barely budged this week. It was a head-scratching outcome considering that its financial results came in well above its guidance, which the market seems to have completely missed.
Drilling down into the numbers
At its investor day in January, Kinder Morgan published a detailed outlook of its financial expectations for 2018. The company anticipated that it would generate about $7.5 billion of adjusted EBITDA for the full year, which would be 4% higher than last year's result. Meanwhile, it thought that distributable cash flow (DCF) would come in at $4.6 billion, or $2.05 per share, which would be about 3% higher on a per-share basis.
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The company anticipated that 24% of its adjusted EBITDA and 22% of its DCF would come in the third quarter, which is a seasonally lower one for the pipeline giant. That forecast implied that the company should have reported about $1.8 billion of adjusted EBITDA and $1 billion, or $0.45 per share, of DCF in the recently completed quarter. However, it ended up posting $1.86 billion of adjusted EBITDA and $1.1 billion, or $0.49 per share, of DCF. That was the third straight time its 2018 financial results came in ahead of its guidance.
What was remarkable about Kinder Morgan's ability to beat its forecast is that it came even though the company sold its Trans Mountain Pipeline in Canada, which caused earnings in its Canadian segment to plummet 36% versus the year-ago period. The company was more than able to offset that loss with much-stronger-than-expected results in its natural gas pipelines and carbon dioxide segments. Earnings in the gas pipelines segment surged 9% year over year, due to an improvement in midstream activities thanks to higher oil prices. Meanwhile, carbon dioxide earnings rose 7% thanks to higher realized prices for natural gas liquids (NGLs) and carbon dioxide.
Overlooking all the progress
Kinder Morgan's stronger-than-expected financial results through the third quarter put the company on track to exceed its full-year forecast for both adjusted EBITDA and DCF. That more optimistic outlook comes even after it sold the Trans Mountain Pipeline (which will continue weighing on earnings in the fourth quarter), it faced a delay in completing its Elba liquefied natural gas (LNG) project, and a customer terminated a contract in its Gulf LNG joint venture -- none of which it assumed in its budget.
On top of the stronger financial performance, the company's balance sheet is improving faster than expected. Kinder Morgan initially planned to end the year with a debt-to-EBITDA ratio of 5.1. However, with its stronger earnings and the sale of the Trans Mountain Pipeline, it now expects that number to be 4.6 by year-end. As a result, the company has lowered its long-term leverage target to a ratio of 4.5, and is in line for a credit-rating upgrade next year. That upgrade would allow Kinder Morgan to borrow money at cheaper rates and have greater access to the capital markets to fund growth and refinance debt.
As if that wasn't enough, the company has also improved its growth prospects in the past quarter. While Kinder Morgan did part ways with the associated Trans Mountain expansion project, that turned out to be a wise decision since the project recently experienced another setback, which could delay construction for many more years. In place of that controversial project, the company has added two new long-haul gas pipelines out of the Permian Basin in the past few months, which should boost earnings as they come online in the coming years.
On top of that, the company's improving financial profile will enable it to capture even more expansions in the future; it aims to secure $2 billion to $3 billion of projects each year, up from its recent rate of roughly $1.5 billion of new projects annually.
Kinder Morgan continues getting more attractive
Investors seemed to have completely overlooked the fact that Kinder Morgan has delivered much-stronger-than-expected financial results not only in the third quarter, but throughout the year. It's on pace to grow faster than expected this year even though it sold a key pipeline, and it now has a stronger balance sheet and increased clarity on its growth prospects. Those factors make the stock look like an even more attractive buy right now, especially considering how cheap it is versus rivals.
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