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Why Credit Suisse Remains So Positive on Kinder Morgan

Paul Ausick

When midstream energy giant Kinder Morgan Inc. (KMI) reported fourth-quarter and full-year results after markets closed Wednesday, investors sliced nearly 3% off the share price. The company posted a small profit for the quarter, though the profit was smaller than expected, and missed on revenue estimates both for the quarter and for the year.

Just about every metric Kinder Morgan reported was down, but the downturn was not a surprise. Distributable cash flow fell 4% year over year and EBITDA was down 3%, but both had long been included in the company's projections.

The best news from the earnings report was the drop in leverage to a 5.3× debt-to-EBITDA ratio, 0.2× better than the company had planned. Analyst John Edwards at Credit Suisse titled his note on Kinder Morgan, "2016 Objectives Met on Slight 4Q Beat; TMX [Trans Mountain Express pipeline] and Elba [Island LNG liquefaction plant] Sell Downs Next Catalysts." In other words, 2016 may not have looked great, but Kinder Morgan did better than expected and prospects are good for 2017.

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The "sell downs" Edwards refers to are include the sale of a 50% interest in the Trans Mountain Express pipeline expansion project and a sale of some percentage of the company's Elba Island liquefied natural gas (LNG) plant. Edwards writes:

Assuming 50% sell down of TMX sometime in 2017 with proceeds realized in 2018 limited to development costs, off-balance sheet financing in 2018 and 2019, we forecast B/S leverage of 5.1x in 2018 and 4.9x in 2019. Any kind of promote from low 6x EBITDA multiple and further proceeds would further enhance the balance sheet as would a sell down of Elba.

That could translate into a boost to the company's $0.50 annual distribution. Edwards is bullish enough on the company that Credit Suisse is maintaining its estimate for a dividend hike in the second half of 2018 to $1 a share annualized.

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In a comment on Credit Suisse's outlook, Edwards wrote:

Management remained confident on the future, esp. on natural gas infrastructure even with permitting having gotten more challenging. But the TMX permits are a big positive as was starting construction on Elba Island Liquefaction.

Credit Suisse estimates 2017 EBITDA at $7.23 billion and distributable cash flow at $4.5 billion. For 2018, EBITDA is forecast at $7.6 billion and distributable cash flow at $4.7 billion.

Kinder Morgan shares traded down about 0.3% Thursday morning, at $22.33 in a 52-week range of $12.47 to $23.36. The 12-month consensus price target on the stock is $25.28.

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