Kinder Morgan, Inc. (KMI - Free Report) is well poised to grow on the back of midstream infrastructure strength. However, its levered balance sheet is a concern as of now.
The Houston, TX-based midstream energy infrastructure company — with a market cap of more than $46.7 billion — has an expected earnings growth rate of 5% for the next five years. For third-quarter 2019, its earnings per share are projected at 22 cents, indicating a 4.8% rise from the year-ago reported figure. The stock has witnessed one positive and one negative estimate revision in the past 60 days.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
A Look at the Positives
Kinder Morgan has the largest network of natural gas pipeline in North America that spreads over almost 84,000 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, for which the company has invested more than $32 billion to date, provide it with stable fee-based revenues. In fact, Kinder Morgan generated significant cash flow from fees charged for using its midstream properties.
Kinder Morgan’s proposed Permian Highway Pipeline Project comes at an opportune time when there is a dearth of pipeline capacity for transporting natural gas and oil to Gulf Coast export facilities from the Permian. The project — with all of its capacity fully subscribed under long-term agreements — will likely come online by late 2020. This project is anticipated to deploy additional capacity for consistent transportation of natural gas to the U.S. Gulf Coast. Also, the project will help the company to set appropriate tariff and eradicate Permian bottlenecks.
Moreover, Kinder Morgan’s Gulf Coast Express (“GCX”) Pipeline Project came online at the end of this September, ahead of schedule. The 2-billion cubic feet per day (Bcf/d) pipeline will collect natural gas from the Waha region in West Texas and deliver it to Agua Dulce near Texas Gulf Coast. The commencement of the 448-mile pipeline will help upstream companies operating in the prolific Permian to reduce flaring of natural gas that is produced as a by-product of crude oil.
Since inception, Kinder Morgan has spent more than $50 billion on natural gas pipelines, products pipelines and terminals. Majority of the spending has so long been allocated for natural gas pipelines, which are likely to help the company to capitalize on clean energy demand. Markedly, the company has $5.7 billion worth of commercially secured capital projects underway.
Clearly, investors are noticing its true potential. This is evident from Kinder Morgan’s rally of 34% year to date compared with 9.5% and 17.4% growth of the industry and S&P 500 Index, respectively.
What’s Deterring the Stock?
There are a few factors that are holding back the stock from reaching its true potential.
As of Jun 30, 2019, total debt — both short and long term — was almost $35 billion. The debt capital was marginally higher than the total equity capital of $34.5 billion, which reflects the company’s significant exposure to debt. Kinder Morgan’s debt-to-capitalization ratio currently stands at 50.3%, signifying that the midstream energy player’s balance sheet is more levered than the industry it belongs to.
The company’s backlog stands at $5.7 billion, significantly lower than the high of $22 billion in 2015. Kinder Morgan has lost significant backlog with the divestment of Trans Mountain Pipeline and associated properties. This will likely dent the company’s future cash flows.
Investors are disappointed with the midstream energy firm’s projection for below-budget 2019 EBITDA. This is likely to increase the company’s debt-to-EBITDA ratio, thereby weakening the balance sheet. Although Kinder Morgan has a plan of achieving dividend growth in 2019 and 2020, its dividend yield history is far from being impressive. This is because the midstream energy player has been paying lower dividend yields than the industry, roughly since 2016.
To Sum Up
Despite significant prospects, levered balance sheet and declining backlog are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space are Dril-Quip, Inc. (DRQ - Free Report) , Holly Energy Partners, L.P. (HEP - Free Report) and Pembina Pipeline Corp. (PBA - Free Report) . All the companies hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Dril-Quip’s 2019 earnings per share are expected to rise 133.3% year over year.
Holly Energy Partners’ 2019 earnings per share are expected to rise 8.8% year over year.
Pembina’s 2019 earnings per share are expected to rise 21.5% year over year.
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