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Kinder Morgan’s 2020 Outlook Is Attractive

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Kinder Morgan stock is up 25% so far in 2019. That’s in line with the performance of the S&P 500 Index during this period. After Kinder Morgan’s (KMI) steep fall in 2015, the stock is largely trading sideways. It’s broadly trading in a range of $15–$23, with an average price of $18.90 for the last three years.

The stock’s restricted performance can partially be attributed to the absence of a near-term catalyst. However, its longer-term prospects look promising.

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Kinder Morgan’s leverage

Kinder Morgan has made substantial progress in improving its leverage since the end of 2014. The above chart shows the company’s five-year net-debt-to-adjusted EBITDA ratio. The company expects to improve this ratio to 4.3x by the end of 2020.

The company targets a debt-to-EBITDA ratio of 4.5x in the long term. The company’s 2020 ratio estimate assumes that it would use its Canada assets sales proceeds for repaying debt.

Kinder Morgan has the flexibility to borrow funds, as its expected 2020 debt-to-EBITDA ratio is below its long-term target. It intends to repurchase shares or invest in capital projects using this financial flexibility.

Kinder Morgan’s average outstanding shares rose in 2019. That trend resulted from the automatic conversion of KMI’s certain preferred shares into approximately 58 million common shares in October 2018.

Kinder Morgan’s 2020 dividends

Even in the absence of a substantial rise in the stock price in the near term, Kinder Morgan offers an attractive yield. It’s trading at a yield of approximately 5.1%.

Kinder Morgan expects to raise its dividends to $0.31 per share in Q1 2020. Based on the stock’s current price, that implies a yield of 6.3%. So, the stock’s yield returns look attractive. The company expects to use internally generated cash flow to fund its 2020 dividends.

KMI’s 2020 financial guidance

Kinder Morgan expects to increase its DCF (distributable cash flow) for 2020 by 3% over 2019. It expects to generate distributable cash flow of $5.1 billion in 2020. New projects starting operations and improved tariff rates may drive KMI’s DCF growth. Additionally, lower interest expenses and improved realized prices in its CO2 business are expected to contribute to this growth.

Some of KMI’s assets are expected to have higher tariff rates due to built-in contract and tariff escalators. On the other hand, some of its Natural Gas Pipeline segment’s assets and crude and condensate assets are expected to have lower recontracting rates.

Kinder Morgan plans to invest $2.4 billion in expansion projects in 2020. That’s lower than the company’s planned spending of $2.8 billion for 2019.

KMI’s financial guidance assumes an average WTI crude oil price of $55 per barrel in 2020. This guidance assumes an average Henry Hub natural gas price of $2.50 per MMBtu (million British thermal units).

The company estimates that every $1 per barrel change in the average WTI crude oil price could impact its 2020 DCF by approximately $7 million. Similarly, each $0.10 per MMBtu change in the price of natural gas could impact KMI’s DCF by approximately $1 million.

In our view, with its steadily growing cash flows, improving leverage, and attractive yield, Kinder Morgan makes an attractive investment proposition.

Also, please read Kinder Morgan: Can the Stock End 2019 on a High Note? and 2019 Oil and Gas Bankruptcies Paint Bleak Outlook.

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