Kinder Morgan, Inc. (KMI - Free Report) is well poised to grow on the back of massive network of natural gas pipelines in North America and LNG export capacity. However, balance sheet weakness is a persistent concern.
Headquartered in Houston, TX, Kinder Morgan is a leading midstream energy infrastructure provider in North America. The company operates pipelines that are spread across 83,000 miles to transport natural gas, crude oil, condensate, refined petroleum products, CO2 and other products. Kinder Morgan also owns 147 terminals that are utilized for storing liquid commodities comprising ethanol & chemicals, and petroleum products.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Favoring the Stock?
Kinder Morgan has the largest network of natural gas pipelines in North America that spreads across almost 70,000 miles. Most importantly, the company’s midstream properties are linked to all the prospective plays in the United States that are rich in natural gas. These extensive networks of natural gas pipelines, in which the company has invested more than $32 billion to date, provide it with stable fee-based revenues. In fact, Kinder Morgan generates significant cash flow from fees charged for using its midstream properties.
Kinder Morgan’s proposed Permian Highway Pipeline (PHP) project is viewed as a game changer. The project — whose entire capacity is fully subscribed under long-term agreements — is anticipated to offer additional transportation capacity of natural gas to the U.S. Gulf Coast. The $2-billion pipeline project, which will likely come online by early-2021, will transport daily natural gas volumes of roughly 2.1 billion cubic feet, and fetch the company stable and additional fees-based revenues.
With its diverse midstream infrastructure, Kinder Morgan is well positioned to capitalize on growing natural gas demand and rising liquified natural gas (LNG) export volumes on the back of strong clean energy demand. Moreover, it has brought the Movable Modular Liquefaction Unit 7 online under the Elba Liquefaction project. With this latest move, full commercial operations at the $2-billion Elba facility have kickstarted.
Despite coronavirus-induced depressed energy demand scenario, the company continues to rely on its strong business model to raise annualized dividend payments to $1.25 per share for 2020. The midstream energy player will, however, consider the overall economic scenario while returning cash to stockholders and maintaining a strong balance sheet. It has a $2-billion share repurchase program, under which it has bought back $575 million worth of shares since December 2017.
However, there are a few factors that are impeding the growth of the stock lately.
As of Jun 30, 2020, the midstream company had only $526 million in cash and cash equivalents, and a significantly high long-term debt of $29,976 million. Notably, its cash balance is not sufficient to pay off short-term debt of $3,006 million. Also, total debt-to-capitalization at second quarter-end was 50.7%, reflecting significant debt exposure.
The company’s current backlog was $2.9 billion as of the June quarter of 2020, significantly lower than the high of $22 billion in 2015. Kinder Morgan has lost significant backlog with the divestment of the Trans Mountain Pipeline and associated properties. This will likely dent the company’s future cash flows.
Owing to the drop in global energy demand due to coronavirus pandemic, Kinder Morgan has lowered its 2020 expansion capital budget by 30%. Resultantly, lower capital will be invested in growth projects, which will likely hurt the company’s incremental fee-based revenues. Moreover, in response to the virus outbreak, the midstream energy player has reduced the projection for 2020 DCF by a little more than 10% from the initial guidance of $5.1 billion. The virus outbreak also compelled the company to decrease adjusted EBITDA expectation for 2020 by a little more than 8% from the initial guidance of $7.6 billion.
To Sum Up
Despite significant growth opportunities, Kinder Morgan’s balance sheet weakness and lower estimate of DCF are concerning. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Which Way are Estimates Headed?
The Zacks Consensus Estimate for third-quarter 2020 earnings per share has increased from 14 cents to 21 cents in the past 60 days. During this time period, it has witnessed six upward estimate revisions and one in the opposite direction. The company met earnings estimates thrice and missed once in the trailing four quarters.
Stocks to Consider
Some better-ranked players in the energy space include Holly Energy Partners, L.P. (HEP - Free Report) , World Fuel Services Corporation (INT - Free Report) and Royal Dutch Shell plc (RDS.A - Free Report) , each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Holly Energy’s bottom line for 2021 is expected to rise 4.8% year over year.
World Fuel Services’ bottom line for 2021 is expected to rise 61.3% year over year.
Shell’s bottom line for 2021 is expected to jump 81.1% year over year.
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