Kinder Morgan (KMI Quick QuoteKMI - Free Report) is currently undervalued, with a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 13.90x. This is below the broader industry average of 14.76x and lags key midstream players like Enbridge Inc. (ENB Quick QuoteENB - Free Report) and The Williams Companies Inc. (WMB Quick QuoteWMB - Free Report) , trading at 16.74x and 17.87x EV/EBITDA, respectively. This lower valuation may indicate market skepticism about KMI’s prospects or potential mispricing of the midstream company’s intrinsic value.

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The pressing question for investors is how to approach KMI in light of this valuation. To make an informed decision, it is essential to first examine the fundamental strengths and weaknesses of this major energy infrastructure company.

Securing Stability: The Value of KMI’s Take-or-Pay Contracts

Kinder Morgan operates an extensive network of pipelines spanning 79,000 miles, transporting natural gas, gasoline, crude oil and carbon dioxide. In addition, the company owns 139 terminals that store a variety of products, including renewable fuels, petroleum products, chemicals and vegetable oils.

As a leading midstream service provider, Kinder Morgan’s pipeline and storage assets are secured under long-term take-or-pay contracts. These contracts ensure that shippers pay for the capacity reserved, whether they utilize it or not, which provides a steady stream of revenue. This structure allows Kinder Morgan to generate stable earnings, primarily insulated from fluctuations in the volume of natural gas transported, offering significant stability to its bottom line.

How Growing Natural Gas Demand Fortifies KMI's Future

The demand for natural gas in the United States is anticipated to grow rapidly, backed by several important factors. As the nation shifts toward cleaner energy, natural gas is being increasingly utilized as a transitional fuel, given its cleaner-burning properties compared to coal and oil, which result in lower carbon emissions. Moreover, the rise in industrial activity and the growing demand for electricity, particularly from gas-powered plants, are fueling this increased demand. Additionally, the expansion of natural gas exports, mainly as liquefied natural gas, to satisfy global energy needs further boosts domestic demand.

As a leading transporter of natural gas, Kinder Morgan is well-positioned to benefit from the growing demand for natural gas, which aids its earnings.

KMI’s High Utilization Rates for Assets & Robust Backlog

Kinder Morgan’s impressive asset utilization reflects its operational effectiveness and consistent revenue generation. With nearly all of its liquid terminal capacity (95%) leased and full utilization (100%) of its Jones Act tankers through 2024, the company is optimizing the profitability of its infrastructure. These strong performance indicators underscore KMI's resilience and the robust demand for its services, positioning the company as a compelling option for investors looking for reliable income and sustained growth in the energy infrastructure space. 

Additionally, KMI benefits from a robust project backlog. The company’s backlog grew substantially from $3.8 billion in third-quarter 2023 to $5.1 billion in third-quarter 2024, signaling a healthy pipeline of upcoming projects that are expected to drive top-line growth.

What Should Investors Do With KMI Stock?

The positive progress is evident in the stock's price chart. Over the past year, KMI has climbed 63.2%, outperforming the industry’s composite stocks, which gained 42.4%.

One-Year Price Chart

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However, investors should be cautious about rushing to buy the stock at this moment, as several uncertainties surround the midstream company. Regulatory and legal challenges, like the court stay on the Cumberland project, highlight potential risks in project execution and the reliability of timelines. Also, the slow start-up of RNG (Renewable Natural Gas) facilities suggests challenges in diversifying and scaling newer energy initiatives.

Furthermore, KMI, carrying a Zacks Rank #3 (Hold), has generally offered a lower dividend yield than the industry over the past year, disappointing investors looking for consistent, attractive dividend income. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Therefore, although the stock is undervalued, investors should wait for the uncertainties to resolve and look for a more favorable entry point.