Kinder Morgan: A Potential Bargain with Improving Financials and Growth Prospects

Kinder Morgan: Still A Great Bargain At 7x Price-To-Cash Flow (NYSE:KMI)

Looking for a portfolio of ideas like this one? Members of iREIT®+HOYA Capital get exclusive access to our subscriber-only portfolios. Learn More " Many dividend stocks remain a great place to be despite recent uncertainty around the pace of rate cuts. That can especially be true for those companies that have inflation-protected revenue streams, durable contracts, and strong balance sheets. This brings me to Kinder Morgan (NYSE:KMI), which checks those aforementioned boxes and more, all while paying a decent yield above 5%. I last covered KMI in April, highlighting its attractive valuation and forward growth opportunities. I should probably have bought more at the time, as the stock has given investors a 17% total return since my last piece, beating the 7% rise in the S&P 500 (SPY) over the same timeframe. In this article, I revisit KMI to discuss its recent business performance and why KMI remains a 'buy right hold tight' stock at the present valuation for income and growth, so let's get started! Kinder Morgan remains one of my top picks in the midstream energy space for a number of reasons. This includes its moat-worthy presence of 66K miles of natural gas pipelines that traverse the U.S., moving ~40% of the country's natural gas production. Other factors include the following: KMI's business mix has evolved over the past 10 years to include more natural gas, which is cleaner burning than other fossil fuels and is a more reliable energy source than intermittent sources of renewable energy like sun and wind. As shown below, natural gas now makes up 64% of KMI's EBDA, up from 54% 10 years ago. Moreover, KMI enjoys mostly steady earnings as it only has 5% exposure to commodity prices with the remaining 95% being take-or-pay/hedged or fee-based. Plus, over half of EBDA in the products and terminals segment have inflation or fixed price escalators, as shown below. Meanwhile, KMI continues to execute well, with distributable cash flow per share growing by 2% YoY to $0.49 during Q2 2024. Adjusted EBITDA also grew by 4%, driven by growth in the natural gas segment and two refined products segments. Natural gas gathering volumes were up 10% YoY during Q2, driven by Haynesville and Eagle Ford volumes, and KMI is seeing strong demand coming from utilities and the data center segment. Management is guiding for a robust 8% increase in both Adjusted EBITDA and DCF per share this year. Longer term KMI sees significant project opportunities across its gas pipeline network to expand transportation capacity and storage capacity. As shown below, demand for natural gas is projected to grow through the end of this decade with a 19% increase in total U.S. demand and 92% increase in LNG and Mexican exports between 2023 and the end of this decade. As a result of increased demand on the horizon, KMI's project backlog grew by $1.9 billion during the second quarter alone to $5.2 billion total. This includes the South System 4 Expansion project that's designed to increase gas capacity by 1.2 Bcf per day. Management expects for this project, upon completion, to meet the growing power demand in the Southeastern markets. Moreover, data centers are expected to be another underlying growth driver for the company, as noted during the recent conference call: In Texas, the largest power market in the US, ERCOT now predicts the state will need 152 gigawatts of power generation by 2030. That's a 78% increase from 2023's peak power demand of about 85 gigawatts. This new estimate is up from last year's estimate of 111 gigawatts for 2030. Other anecdotal evidence also supports a vigorous growth scenario. For example, one report indicates that Amazon alone is expected to add over 200 data centers in the next several years, consistent with the large expansions being undertaken by other tech companies chasing the need to service AI demand. Meanwhile, KMI sports a BBB investment grade credit rating from S&P and management expects to achieve a net debt to adjusted EBITDA ratio of 3.9x by the end of this year, down from 4.2x at the end of 2023. At the same time, KMI expects to return $2.6 billion in capital through dividends this year, up from $2.5 billion last year. The stock currently yields a respectable 5.5%. The dividend is well-covered by a 59% payout ratio, based on the aforementioned $0.49 DCF per share generated in Q2. Risks to KMI include commodity price volatility. While most of KMI's cash flows are fee-based, low prices may not make it viable for some producers to utilize KMI's services. In addition, economic uncertainty may reduce demand from end markets and a faster than expected ramp-up in renewable energy could result in displacement of traditional fossil fuel sources. Lastly, while KMI is no longer cheap at the current price of $21.00, it's not expensive, either, at a Price-to-Cash Flow of 7.2x. As shown below, this sits in the lower half of KMI's trading range of 6-10x over the past 5 years. KMI also compares favorably to peers Enterprise Products Partners (EPD), MPLX LP (MPLX), Williams Companies (WMB) and Oneok (OKE), which carry P/CF ratios in the 7.7 to 11.5x range. KMI is more expensive than only Energy Transfer's (ET) 5.6x P/CF. With a 5.5% dividend yield and my expectations for it to be able to achieve mid to high single digit distributable cash flow per share, KMI could deliver market-beating returns from here. These forward growth expectations are more or less in line with the aforementioned management guidance for this year and analyst estimates. Kinder Morgan remains a great potential wealth compounder for those seeking both income and growth in the midstream energy space. With a robust infrastructure portfolio, KMI is well-positioned to benefit from increasing natural gas demand and the expansion of its project backlog. The company's predominantly fee-based revenue model, inflation-protected contracts, and investment-grade credit rating further enhance its appeal. Although KMI's stock is not as cheap as it was earlier this year, its reasonable valuation, combined with a well-covered 5.5% dividend yield and expected growth in distributable cash flow, suggests potential for market-beating returns, making it a buy-and-hold stock for long-term investors.

Kinder Morgan Stock Heating Up, And I Believe It May Go Further Higher (NYSE:KMI)

KMI has improved its financial position since 2015, with the potential for continued growth and dividend increases. Shares of Kinder Morgan (NYSE:KMI) have broken out and are in a bull market after appreciating 21.74% over the past year. While I have seen fewer comments about getting Kindred recently, some investors still refuse to either get back in or evaluate KMI for the company it is today, rather than the company it used to be. I previously indicated that I wouldn't be surprised if KMI establishes a trend above $20 in the 2nd half of 2024, and it looks like shares are breaking out. KMI is a premier natural gas transporter, and I believe the stars are aligning as more information about the future of computing comes out. Many are waiting for Nvidia Corporation (NVDA) to report earnings next week. NVDA's earnings will allow us to see how much of the CapEx spending actually went to chips in Q2, get updated guidance, and try to determine what the runway for hardware looks like. KMI is an indirect beneficiary of the AI trend, as natural gas will play a critical role for all the new electricity needed for data centers in the future. KMI has put itself in a much better financial position since 2015 while continuing to establish an attractive dividend. Shares of KMI are nowhere near their lows, but there is an argument to be made that from a business perspective, KMI will be an indirect beneficiary of the growing infrastructure demand for years to come. I think there is still a lot of room in the investment case, and shares of KMI can continue to increase while the dividend continues to increase. I previously wrote an article about KMI in June, in which I discussed why I felt they would be one of the indirect winners during the AI boom (can be read here). A lot of attention is going to companies such as Meta Platforms (META), Nvidia, Palantir (PLTR), and Amazon (AMZN), and while these are great companies in which I am invested in, I believe investors are looking over the investment opportunity on the infrastructure side. KMI is up 21.74% over the past year, and since my last article, shares of KMI have appreciated by 6.06% compared to the S&P 500 increasing by 1.78%. After the dividend is accounted for, KMI's total return has been 7.48%. I have been long KMI since 2019 (see full history here). While the pandemic was a setback in the investment thesis, and shares have only appreciated by 5.63% since my first article on KMI, the total return has been 48.8% after the dividends are accounted for. Investors have been getting paid to wait, and I think long-term shareholders are going to be rewarded over the next several years. Now that we have more economic data and a clearer picture on CapEx spend, I am more convinced than ever that KMI is in an incredible position to prosper over the next several years. Just because KMI is a critical part of America's energy infrastructure, there are still risks to my investment thesis. We're heading into an election, and while KMI didn't get as impacted as some thought as we changed administrations, there could be new political headwinds ahead depending on the outcome. Oil and gas were unpopular, then the discussion settled down a bit, but there is always a chance that those discussions could be pushed to the top of the agenda as new people take over decision-making roles. KMI must abide by federal and local policies, and there is a real chance that new legislation will be approved that will put restrictions on their operations. There are also technological risks from innovations in renewable resources. If breakthroughs in efficiency can be made, then it could drive the price per kilowatt-hour down, and renewable sources of energy could impact the profitability model for traditional energy companies. While I am bullish on KMI, there are still risks to consider before investing in KMI. I don't have a crystal ball, and shares of KMI could retrace, or enter a correction just as easily as the current trend could continue. In 2024, KMI has been on an upward trajectory, making higher lows and higher highs. After retracing to $15.89 in February, shares of KMI have established higher lows, with the most important aspect of the YTD chart occurring at the beginning of August in my opinion. When the carry trade caused short-term hysteria, KMI established a higher low that remained above $20. Shares of KMI have remained over the $20 threshold since the beginning of July. It's too early to tell, but the recent activity in KMI's chart suggests that it's trying to establish a new resistance level around the $20 mark. It will be interesting to see what happens as the next several months progress, but the fact is that KMI is now trading at its pre-pandemic levels. I believe we will see KMI establish a sideways pattern, then breakout to the upside again before the year is over. As the Fed cuts rates, I think it's entirely possible that shares of KMI can get past $23 and approach $25 before the year is over if the current trend continues. For KMI to continue on an upward trajectory, they need a strong catalyst, and I think the growing demand for AI will provide the spark to keep the rally going. If you follow big tech, then spending on Capex won't be surprising. META raised the low end of their CapEx spend in 2024 to $37 billion, and Mr. Zuckerberg discussed how their next Llama 4 model will require around 10x the compute power that it took to train the Llama 3 version. AMZN is increasing its CapEx spend for the 2nd half of 2024 and is forecasting that it will exceed the $30.5 billion they spent in the first half of the year. Big tech is in a race to develop and harness AI, and they're not stopping. This is very beneficial to KMI because the amount of power needed to bring the new hardware the AI boom requires will continue to increase, and eventually, a new annualized utilization rate will be established. While everyone is dissecting big tech earnings calls to figure out where to allocate capital, including myself, I am also looking through the utilities to see just how big the opportunity in AI will be. On The Southern Company (SO) Q2 conference call they indicated that they have roughly 200 projects in the pipeline over the next decade that will add over 30 gigawatts of potential electric load. The most compelling part was that they said 40% of the projects and 80% of the potential electric load are data centers. KMI is forecasting that the additional power needed to meet future demand will exceed the numbers provided by the North American Gas Strategic Planning Outlook. The demand for natural gas in the U.S. grew over 30 Bcfd since 2015 and is expected to grow by 20 bcfd by the end of the decade. This would be a 19% increase in total demand domestically. Even if KMI is incorrect and the expansion is only 20 Bcfd, it certainly supports my investment thesis about energy. Big tech is spending with an open checkbook on chips, and they need data centers to house these server farms. SO has validated that 40% of their new projects are data centers, and SO is only 1 of the main utility companies in the U.S. As infrastructure is built, and data centers come online, the demand for energy will increase, and KMI is in a prime position to benefit as they have over 66,000 miles of natural gas pipelines that move 40% of the natural gas throughout the country. As throughput volume increases, KMI should see its Adjusted EBITDA, and distributable cash flow (DCF) increase, which is bullish for investors. KMI doesn't get enough credit for fixing their balance sheet. While some investors exited the position because of the dividend reduction, it proved to be the correct decision. KMI has eliminated -$11.07 billion (25.76%) in net debt since the close of 2015 while maintaining stable EBITDA. In 2015, KMI had a net debt-to-EBITDA ratio of 6.22x, which declined to 4.94x at the close of Q2 2024. KMI now has $31.9 billion in net debt on the balance sheet rather than $42.96 billion and is producing $6.46 billion in EBITDA. Financial discipline has allowed KMI to operate through the inflationary environment without eroding the fundamentals further. KMI still has $28.86 billion in long-term debt on the balance sheet, but something is about to work in their favor that many investors aren't discussing. The Fed is about to cut rates, and it will be interesting to see what Fed Chair Powell says in his speech from Jackson Hole. We're less than 30 days away from the September Fed meeting and CME Group has a 26.5% chance a 50 bps rate cut is coming, while there is a 73.5% chance we get a reduction by 25 bps. The forecast now calls for a 100% chance of 75 bps in cuts by the close of 2024, with a 67.6% chance that we get 100 bps or more in rate cuts. This is great news for KMI because they have $6.2 billion in floating-rate debt on the balance sheet. As the Fed cuts rates, KMI's floating rate debt should decline, and over the next year, we could see significant benefits for shareholders because the savings are accreditive to the bottom line. The excess savings can be utilized to reinvest in the company, increase the dividend, buy back shares, or repay other debt obligations early. We're entering a period where KMI will likely increase their transport volumes and decrease their debt payment obligations, which should be positive for the bull thesis. Investors don't have to wait for rates to decline or transport volumes to increase for KMI to flex its muscles. KMI generated $0.49 in Q2 of DCF, which was an increase of 2% YoY. KMI was once again able to fund its capital projects through their $1.7 billion in cash from operations and $1.1 billion of free cash flow (FCF) generated in Q2. KMI grew its project backlog due to the future demand for traditional energy sources. KMI's backlog grew to $5.2 billion from $3.3 billion as they allocated 80% toward lower carbon energy investments such as natural gas. While many things are overlooked, KMI has an incredible contract structure that insulates them through commodity price cycles. KMI has 68% of its cash flow protected by take or pay contracts, which means that no matter if 100% or 50% of the contracted volume is used, the client has to pay 100% of their contracted volume. Another 27% of their contracts are fee-based, where KMI has fixed pricing, so even if commodity prices decline, their cash flow is projected. Only 5% of their contracts are correlated to commodity pricing, so no matter what happens, KMI is in a strong position to generate billions in FCF on an annual basis. KMI connects all of the major basins in the U.S. and many of the markets where data center growth is expected. In 2023, the U.S. produced 104 bcfd of natural gas; by 2030, we are expected to produce 18 bcfd of additional capacity. When I look at KMI's infrastructure, it's impossible to recreate its footprint. The Permian is expected to increase its natrual gas production by 8 bcfd, and Haynesville will account for 7 bcfd of the U.S. additional production through 20230. KMI provides primary takeaway capacity from these basins and connects their upstream clients to the major markets across the U.S. There is a chance that the 8% increase to KMI's $8.2 billion adjusted EBITDA and $2.26 DCF per share YoY is just the beginning. As demand for energy increases, we could see KMI continue to increase profitability and pay more to shareholders in the form of dividends. I think a lot of investors are going to look for investment opportunities where companies own and operate hard assets as rates decline. Energy infrastructure and real estate are 2 areas I think will do well in a lower rate environment as investors look for companies that can replicate the yields they became accustomed to. KMI is paying a dividend that yields 5.48% and has 6 years of growth behind it. I think that there is still a lot of upside left in KMI as a lower rate environment will shave points off their floating rate debt and make the savings accreditive to the bottom line. KMI should also be a large beneficiary of the growing demand for data centers as the amount of energy required will expand. KMI is in an uptrend, and while energy infrastructure isn't grabbing headlines, the underlying investment thesis still looks very bullish. I think the trend will continue, and KMI will continue to increase as we get closer to the holiday season.