Kinder Morgan (KMI) – Adding A Pipeline To Your Portfolio?

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Brian Cantoni, https://www.flickr.com/photos/cantoni/

Overview

Kinder Morgan is the largest energy infrastructure company in America. The company specializes in transferring oil and natural gas by owning and controlling the pipelines and terminals. They own or operates roughly 84,000 miles of pipelines and own about 180 terminals. The pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and more. They also store or handle a variety of products and materials at their terminals such as gasoline, jet fuel, ethanol, coal, petroleum coke and steel.

Plans

Kinder Morgan has significant growth prospect with around 11.7 billion in backlog, which includes the Trans Mountain pipeline project in Canada, the Gulf Coast Express pipeline in the Permian Basin, and some other smaller projects.

The Gulf Coast Express pipeline would move natural gas from the Permian Basin to the Gulf Coast in Texas, where it could feed into growing liquefied natural gas (LNG) market in Mexico and others in the region. And while the Permian Basin is known more for the oil production, the region is actually the 2nd largest gas producing region in the US at 7 billion cubic feet per day. The company hopes to have the pipeline in service by the second half of 2019, but it needs to secure shippers that will agree to the proposed capacity of 1.7 million dekatherms per day. Kinder Morgan found that partner with DCP Midstream. DCP agreed to become a shipper and also as a developmental partner. DCP is an ideal partner because it is the largest natural gas processor in America. They processes around 1.3 billion cubic feet of gas per day in the Permian Basin which makes the partnership ideal for both party. That’s not to say all the gas will use the pipeline, but it will provide Kinder Morgan with a good start to the project. Kinder Morgan will still need to secure more shippers for the project for it to be a sure thing.

The Trans Mountain pipeline which is expected to nearly tripled Kinder Morgan’s capacity in Alberta has hit a few road blocks. The New Democratic Party (NDP) and Green Party have reached an agreement to put the NDP in charge for the next 4 years. They are both against the Trans Mountain pipeline expansion even though the project has already been approved by the national government. However, Justin Trudeau continue his support for the project saying it would benefit the entire country greatly which is why the central government approved it. The political uncertainty has caused some concern and lower the share price at the risk of the project being delayed. The project is also being opposed by a coalition which has urges banks to not give fund to support the project. However, Kinder Morgan plans to continue with the project timeline and has recently successfully raised 1.3 billion through an IPO of the Canada assets.

Financials

Kinder Morgan shares have taken a big hit since its glory days in 2015. Due to the nature of this industry, companies will have accumulate debt over time to fund their growth projects. Moody’s changed Kinder Morgan debt outlook to “negative” which threaten Kinder Morgan with a debt downgrade. Kinder Morgan had to cut its dividend payout in ordered to commit to keeping its debt investment rating (think our credits score). That has caused the share price to tumble. By the middle of 2016, Kinder Morgan proved to the world that it can operate without abusing debt market and Moody’s has reiterated the debt outlook to “stable”. Kinder Morgan generated over 4.6 billion in operating cash flow in 2016. It used the cash to shore up its balance sheet which restored Moody’s outlook from negative to stable. Since the lower dividend, Kinder Morgan has use that cash flow to cover a lot of its expansion plans. For this year, 2017, Kinder Morgan kept the same dividend payout from 2016 which will allow it to use more of its cash flow on expansion plans and more debt reduction. The company is expected to generate around 4.5 billion in distributable cash flow. Based on how things go, Kinder Morgan have mentioned that they may increase the dividend payout for 2018 which will bring confidence back to the stock. The decision will not come until later on in the year.

DISCLAIMER: I do not own any position in KMI currently. I believe this could be a good long play (very long). I will be keeping a close eye on KMI and may open a small position in the near future. Please do your own research before making any decisions. Do not invest based solely on the information provided here.