Kinder Morgan’s (KMI) strong Q3 performance bodes well for its ongoing growth trajectory. Let’s take a look at some of the top factors that make the stock attractive. We’ll begin with its fundamental factors.
Natural gas production
The US EIA (Energy Information Administration) expects that US dry natural gas production could average 91.6 billion cubic feet per day in 2019—1% growth from the 2018 average. Prior to that, the US natural gas production had reached a record high in 2018.
Gas production grew 11% over 2017—the largest annual increase ever. Kinder Morgan noted in a recent investor presentation that US natural gas production is expected to grow by 40% by 2030.
The increased production has contributed to the growth in Kinder Morgan’s natural gas pipeline volumes. The company’s natural gas transportation volumes rose 13% year-over-year in Q3. This was the seventh consecutive quarter in which Kinder Morgan’s natural gas transportation volumes rose by 10% or more year-over-year.
Higher transportation volumes contributed to the segment’s earnings growth in the quarter. Rising gas production should continue to contribute to Kinder Morgan’s volumes growth over the next several years.
LNG (liquefied natural gas) exports are the biggest driver of natural gas demand growth. According to EIA, natural gas feedstock deliveries to LNG export facilities were the fastest growing among all US natural gas consumption sectors in the first seven months of 2019.
Kinder Morgan placed the first 10 units of its Elba liquefaction project into service in October. Previously, the Elba facility was only an LNG import terminal. However, it is currently able to produce LNG for export purposes.
The company expects to bring the remaining nine units of the project into service in the first half of 2020. This key project could add substantially to the company’s earnings over the coming years.
Kinder Morgan’s Permian Basin projects
Kinder Morgan has two key projects in the prolific Permian Basin. The company placed its Gulf Coast Express Pipeline project in service in September, ahead of schedule. The 450-mile pipeline provides much-needed takeaway capacity from the Permian Basin.
Kinder Morgan is also working on a 430-mile Permian Highway pipeline that’s expected to be operational in October 2020. These key projects not only provide the company an opportunity to leverage its existing footprint to reach major markets, but they also open attractive future expansion opportunities.
Now, let’s look at some of the positive financial factors related to Kinder Morgan and its stock.
Kinder Morgan’s improved leverage
Kinder Morgan expects to end 2019 with a net-debt-to-adjusted-EBITDA ratio of 4.6x. Although the company’s debt-to-EBITDA ratio rose marginally in Q3, it remains committed to maintaining a strong balance sheet.
In response to a question during the third-quarter earnings call, Rich Kinder, KMI’s executive chairman, noted, “And we would certainly — that’s a fundamental part of our philosophy is to maintain a strong balance sheet.”
Kinder added, “And we can speculate all you want about what might happen in M&A, but let me just say that the Board is very committed to maintaining a strong balance sheet and that will certainly be a really big factor in any decision we make.”
The company plans to use the proceeds from the sale of Cochin Pipeline and Kinder Morgan Canada stake to Pembina (PBA) in reducing its leverage.
Kinder Morgan currently trades at an attractive yield of approximately 5%. It expects to raise its dividends by 25% in 2020. Among its peers, Williams Companies (WMB) is trading at a yield of around 6.5%. In comparison, ONEOK (OKE) is trading at a yield of 5.0%. Plus, Enterprise Products Partners (EPD) is trading at a yield of 6.4%. Kinder Morgan’s yield is more than double the median yield of the S&P 500 stocks.
Kinder Morgan stock has risen around 32% so far in 2019. In comparison, ONEOK has risen 30%, Enterprise Products Partners is up 12%, and Williams Companies is up 5% over the same timeframe. The S&P 500 Index has risen around 20% year-to-date. So far in 2019, Kinder Morgan stock has outperformed its peers as well as the broader market.
In our view, Kinder Morgan’s primarily fee-based earnings, combined with the factors we discussed above, make it an interesting energy sector opportunity.