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Kinder Morgan's Growth Strategy Impresses, High Debt a Drag


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We issued an updated research report on Kinder Morgan, Inc. (KMI - Analyst Report) on Oct 12, 2016. The company’s investments in a number of projects should help drive growth in the coming years. We also appreciate the company’s focus on stable, fee-based, well-diversified assets.

Kinder Morgan has the largest network of natural gas pipelines in North America. In the continent, the company’s pipeline networks cover more than 69,000 miles and are connected to the major natural gas plays in the U.S, including Eagle Ford, Marcellus, Utica, Permian, Bakken and Haynesville. Kinder Morgan is also the leading transporter of petroleum products and CO2 in the continent. Additionally, the company is the largest operator of terminals in North America.

It is to be noted that natural gas – the cleanest fossil fuel – is a huge contributor to Kinder Morgan's bottom-line growth. In fact, natural gas produces significantly less CO2 – a major pollutant – when burned to produce heat or power. With the commodity's demand set to grow annually in the future, we expect Kinder Morgan to generate stable fee-based income from its large scale natural gas pipeline networks.

Though Kinder Morgan’s decision to trim dividend payout might have shocked income investors, it has provided the much-needed stability to the company’s balance sheet. This means that rather than paying out more for dividend, the company will be now able to invest substantially in growth opportunities and hence, will not be dependent too much on debt and equity markets for generating capital for growth projects. In fact, the company’s current backlog of growth projects is worth $13.5 billion, which is likely to provide stable fee-based returns in the future.

However, Kinder Morgan is currently the largest natural gas pipeline operator in North America and thus, its results are exposed to gas price volatility. This apart, we remain concerned about Kinder Morgan's high debt level, which makes the company vulnerable to an extended downturn. As of Jun 30, 2016, Kinder Morgan had total debt of around $38.1 billion, representing a debt-to-capitalization ratio of 52.4%.

Based on the aforesaid factors, Kinder Morgan currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Stocks to Consider

The stocks in the energy sector that warrant a look include Bill Barrett Corp. (BBG - Snapshot Report) , Evolution Petroleum Corp. (EPM - Snapshot Report) and Ultra Petroleum Corp. (UPLMQ - Analyst Report) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bill Barrett posted an average positive earnings surprise of 71.46% for the last four quarters.

In the current year, Evolution Petroleum is expected to post year-over-year earnings growth of 218.2%.

In the current year, Ultra Petroleum is expected to post year-over-year earnings growth of 148.4%.

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