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What's in the Cards for Kinder Morgan (KMI) in Q4 Earnings?

Zacks Equity Research
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Kinder Morgan Inc KMI is expected to post fourth-quarter 2018 results on Jan 16.

In the last reported quarter, the company delivered positive earnings surprise of 5%. Moreover, the company pulled off average positive earnings surprise of 9.2% in the last four quarters. Let’s see how things are shaping up prior to the announcement.

Which Way are Estimates Treading?

Let’s look at the estimate revisions to get a clear picture of what analysts are thinking about the company before its earnings release.

Estimates for fourth-quarter earnings have witnessed two upward movement and a downward one in the past 30 days. The Zacks Consensus Estimate of 25 cents reflects an improvement of about 19.1% from the year-ago quarter figure.

Further, the Zacks Consensus Estimate for revenues is pegged at $3,913 million for the impending quarter, reflecting an increase of 7.7% year over year.

Factors to Consider

Kinder Morgan has the largest network of natural gas pipelines in North America, spread across about 84,000 miles. Notably, the company’s midstream properties are linked to all the prospective players in the United States that are rich in natural gas.

The extensive networks of natural gas pipelines, where the company has invested heavily, provide stable fee-based revenues. In fact, Kinder Morgan expects significant part of cash flow generation to come from fees charged for midstream properties in the upcoming quarters. The revenues from midstream properties will be reflected in the quarterly results.

With a dearth of pipeline capacity for transporting oil to Gulf Coast export facilities from the Permian, Kinder Morgan’s proposed Permian Highway Pipeline (PHP) Project comes at an appropriate time. It is anticipated to offer additional capacity for consistent transportation of natural gas to the U.S. Gulf Coast. This will also help the company set appropriate tariff and eradicate the Permian bottlenecks.

However, a weak balance sheet is a concern. As of third-quarter 2018, total debt — short and long term — is pegged at $37 billion. The company’s debt capitalization ratio of 50.4% is higher than the industry ratio of 48.7%, which depicts its exposure to debt. The company may face liquidity issues, if its debt continues to rise.

Earnings Whispers

Our proven model does not show that Kinder Morgan is likely to beat the Zacks Consensus Estimate in the to-be-reported quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Earnings ESP: Kinder Morgan has an ESP of -0.97% as the Most Accurate Estimate is 24 cents, while the Zacks Consensus Estimate is pegged at 25 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Currently, Kinder Morgan carries a Zacks Rank #3.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few companies, which per our model, have the right combination of elements to post an earnings beat in the quarter to be reported.

Ensco plc ESV is a leading supplier of offshore contract drilling services to the oil and gas industry. The company has an Earnings ESP of +2.9% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Southwestern Energy Company SWN, based in Houston, TX, engages in the exploration, development and production of natural gas and crude oil in the United States. The company has an Earnings ESP of +24.1% and holds a Zacks Rank #3.

Fort Worth, TX-based Range ResourcesCorp RRC is an independent oil and gas exploration and production company. The company has an Earnings ESP of +24.3% and a Zacks Rank #3.

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