Kinder Morgan Misses EPS, Hikes Div

Kinder Morgan Inc. (KMI - Analyst Report) reported fourth quarter 2012 earnings of 32 cents a share from continuing operations, failing to meet the Zacks Consensus Estimate of 34 cents a share. However, the quarterly earnings increased from the year-earlier profit level of 19 cents on the back of higher volumes in most of its businesses.

For full-year 2012, Kinder Morgan posted earnings of 61 cents a share from continuing operations compared with 64 cents recorded in 2011. The earnings also failed to meet the Zacks Consensus Estimate of 90 cents.

Total revenue for the quarter increased 59.0% year over year to $3,079.0 million. The reported figure surpassed our expectation of $2,978.0 million. In 2012, total revenue increased to $9,973 million from $7,943 million reported in 2011 and beat the Zacks Consensus Estimate of $9,813 million.

Dividend

Kinder Morgan boosted its quarterly dividend to 37 cents a share ($1.48 per share annualized), up 19.4% from 31 cents ($1.24 per share annualized) paid in the fourth quarter of 2011.

Management set a dividend target of $1.57 a share for 2013, up 16% from the 2012 budget target of $1.35 per share and 12% from the 2012 declared dividend of $1.40 per share.

The company’s growth curve will be driven by its ownership of the general partners of both Kinder Morgan Energy Partners, L.P. (KMP - Analyst Report) and El Paso Pipeline Partners, L.P. (EPB - Snapshot Report). The natural gas assets acquired by Kinder Morgan through the El Paso Corporation will further augment dividend growth.

Operational Highlights

Total expenses in the quarter were $2,114.0 million, representing a 41.3% increase from $1,496.0 million spent in the fourth quarter of 2011.

Operating income came in at $965.0 million in the quarter, representing a substantial 118.8% growth from the comparable quarter a year ago. Operating margin was 31.3% compared with 22.8% in the year-ago quarter.

Financials

Cash available for dividend payments was $439.0 million in the fourth quarter of 2012, an increase of 81% from $243.0 million in the comparable quarter last year. For 2012, Kinder Morgan reported $1,411 billion cash available to pay dividends, up 62% from $866 million in 2011 and ahead of the company’s published annual budget of $985 million, mainly due to the El Paso Corporation acquisition.

Our Take

We believe Kinder Morgan will be able to seize attractive investment opportunities in the near term, particularly in the Eagle Ford and Haynesville shale plays. The company intends to invest about $3 billion in expansion and acquisitions in 2013. The completion of the El Paso acquisition has enabled Kinder Morgan to leverage the extensive natural gas pipeline network and has given it access to major markets. The gradual dropdown of El Paso’s assets to its partnerships will further add value.

Again, increased exploration and production volumes along with continuous expansion of the Transmountain oil pipeline, terminal volume growth and upcoming new projects would further enhance shareholder value.

However, the El Paso acquisition, which enabled Kinder Morgan to shift toward natural gas, has also raised concerns amid a sluggish natural gas price environment. Again, the company incurred a debt to fund the cash portion of the El Paso acquisition, thus keeping leverage metrics high. Though Kinder Morgan is expected to de-lever over time, we believe it may perhaps take several years to reach investment-grade credit metrics.

Kinder Morgan holds a Zacks Rank #2 (short-term Buy rating). For the longer term, we maintain our Neutral recommendation.