On Feb 24, 2015, we issued an updated research report on Kinder Morgan Inc. KMI, one of the largest energy infrastructure companies in North America.
The recent reorganization of Kinder Morgan companies into one has created the largest midstream company in North America. This will facilitate access to additional projects and lead to improved growth. We believe that the company’s size advantage provides it with opportunities to build smaller adjacent pipelines at lower cost than peers. Further, increased demand for power generation and exports is expected to drive continued infrastructure build-out for the company.
During the fourth quarter, Kinder Morgan reported improved revenues on an annual basis, buoyed by higher volumes in most of its businesses. The company also increased its fourth-quarter dividend by 10% to $0.45 per share from $0.41 paid during the fourth quarter of 2013. Per the company’s projections for 2015 it is expected to declare dividends of $2.00 per share, up about 16% over the dividend of $1.72 per share declared in 2014.
Kinder Morgan has identified growth opportunities of $17.6 billion over the next five years of which $2.6 billion is expected in 2015. The company continues to prove that it is capable of utilizing its extensive presence to boost domestic production, price differentials and shifting demand. With four of its five segments scheduled to receive over $500 million in capital, the company is poised for growth in near future.
Although the Kinder Morgan-El Paso deal is believed to be one of the largest energy transactions in recent years, the company’s shift toward natural gas via this acquisition raises concern amid a sluggish natural gas price environment. With this transaction and the subsequent sale of El Paso’s exploration and production business, Kinder Morgan made a big strategic shift into natural gas and is currently the largest natural gas pipeline operator in North America. The company’s results are, therefore, vulnerable to the weak gas price scenario.
Moreover, we believe gas infrastructure opportunities are limited in the near to medium term, given low basis differentials and reduced dry gas drilling. The only positive we see for natural gas infrastructure is the Marcellus Shale development.
Kinder Morgan took additional debt to finance the cash portion of the El Paso acquisition, keeping leverage metrics high. Though the company is expected to de-lever over time, we believe it may take several years of asset dropdowns and debt reduction before reaching investment-grade credit metrics.
Other risks include rising interest rates, lower commodity prices leading to reduced customer activity, operational risks like pipeline leaks and terrorism, reduced access to capital markets and regulatory risks.
Stocks to Consider
Better-ranked stocks in the same industry include Valero Energy Partners L.P. VLP, Sunoco LP SUN and Hallador Energy Co. HNRG. All of these stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment