Midstream energy assets operator, Kinder Morgan, Inc. KMI is expected to report first-quarter 2015 earnings on Apr 15, after the closing bell.
In the last quarter, the company’s earnings of 27 cents per share missed the Zacks Consensus Estimate of 36 cents and decreased 18.2% from the year-ago earnings of 33 cents. Let’s see how things are shaping up prior to the announcement.
Factors Likely to Affect Earnings
The recent reorganization of Kinder Morgan companies into a single entity has created the largest midstream company in North America. This will facilitate access to additional projects and lead to improved growth. We believe the size advantage provides the company with opportunities to build smaller adjacent pipelines at a lower cost than its peers. Further, increased demand for power generation and exports are expected to drive continued infrastructure build-out for the company in the coming quarters.
During the fourth quarter, Kinder Morgan improved its 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 45 cents per share from 41 cents 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 2014 budgeted dividend of $1.72.
Kinder Morgan is undergoing numerous large scale projects that could face delays or opposition and in turn cause delay in cash flow realizations. In this respect, it is worth mentioning about the Trans Mountain pipeline expansion in Canada, which has already been deferred by nine months due to local opposition and the Canadian regulations. The project is expected to cost approximately $5.4 billion, signifying about 30% of Kinder Morgan’s project backlog. Any further delay in the project will adversely impact the company’s earnings as well as long-term growth.
Further, 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.
Earnings Whispers
Our proven model does not conclusively show that Kinder Morgan is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. This is not the case here, as you will see below.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +8.7%. This is a meaningful and leading indicator of a likely positive earnings surprise for this company.
Zacks Rank: Kinder Morgan carries a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. We caution against Sell-rated stocks (Zacks Rank #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some other companies from the energy sector that, according to our model, have the right combination of elements to post an earnings beat this quarter:
Valero Energy Corporation VLO has an Earnings ESP of +5.23% and a Zacks Rank #2 (Buy).
Spectra Energy Partners LP SEP has an Earnings ESP of +1.28% and a Zacks Rank #3 (Hold).
Phillips 66 PSX has an Earnings ESP of +0.65% and a Zacks Rank #3.
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