Kinder Morgan (NYSE: NYSE:KMI) is one of the largest midstream companies in the world with a market capitalization of more than $30 billion and a dividend yield of more than 7%. The company has focused on developing its assets and turning that into strong cash flow. As we'll see throughout this article, the company's impressive asset base and its focus on developing them makes it a strong investment at this time.
Kinder Morgan - Reform Austin
Kinder Morgan Asset Base
Supporting Kinder Morgan, on the base, is the company's impressive asset base. That asset base allows the company to operate as a toll operator extracting tolls for the movement of oil and natural gas around the world.
Kinder Morgan Asset Base - Kinder Morgan Investor Presentation
Kinder Morgan has the largest natural gas transmission network with 70 thousand miles of natural gas pipelines and 659 billion cubic feet of storage capacity. The company's assets spread across the entire United States moving an astounding ~40% of U.S. natural gas consumption and exports. Additionally, the company has 1200 miles of natural gas pipelines.
The company's impressive portfolio of assets are essential to the standard of living of modern Americans. The company, regardless of prices, generates a toll. It's also worth noting the company has significant storage assets for the downturn. The company has 147 terminals and 16 Jones Act vessels, which are more valuable because of the COVID-19 demand drop.
As a side note, the company is effectively the largest and only transporter of CO2. The company transports 1.2 billion cubic feet per day of CO2 and, along with the company's other businesses, earns a toll as its moves this.
Kinder Morgan 2020 Financial Strength
Kinder Morgan has incredibly strong financials that support the company's returns for shareholders, based on its asset base.
Kinder Morgan 2020 Financials - Kinder Morgan Investor Presentation
Kinder Morgan's original pre-COVID-19 budget involved $7.6 billion in adjusted EBITDA and $5.1 billion in DCF. The company now expects those to decline by 8% and 10% respectively, although, its more than 25% reduction in its discretionary capital budget will make up for that. As a result, the company is still paying a respectable $1.05 annual dividend.
The company's net debt / adjusted EBITDA has increased from 4.3x to 4.7x, however, it's worth noting the increase in debt is fairly negligible, and that this increase is from the drop in adjusted EBITDA. The company's dividend of almost 7.5% for the year is a great yield at a difficult time, and fully covered by DCF.
The company is considering, based on its earlier guidance, dividends of $1.25 / share. Even if the company does not achieve that this year, if it starts that next year, that means dividend of almost 9% annualized. That would all be covered by DCF, highlighting the company's financial strength.
Kinder Morgan Volumes
Kinder Morgan, as we've said time and time again, is fundamentally a pipeline operator. That means that the company's future success is based on its volumes and its ability to extract tolls from those volumes. 2Q 2020 was an incredibly difficult time, however, volumes are expected to recover dramatically.
Kinder Morgan Natural Gas and Refined Volumes - Kinder Morgan Investor Presentation
Kinder Morgan expects refined product volumes to recover back to where they were at the start of the year. Natural gas volumes aren't expected to change much, however, it's worth noting that natural gas volumes also took a much smaller impact from COVID-19. More so, due to the company's strong business, natural gas volumes are much higher than where they were during the last collapse.
In the long run, despite the short-term blip, U.S. natural gas production is expected to continue growing. That's incredibly important as it remains one of the cleanest scalable energy sources. Overall, the key takeaway here is that the recovery in volumes is expected to be on the order of quarters instead of years. That recovery means much strong revenue for Kinder Morgan.
Kinder Morgan Capital Projects
Additional evidence of the strength of Kinder Morgan's cash flow comes from the company's continued investments in capital projects and growth.
Kinder Morgan Capital Projects - Kinder Morgan Investor Presentation
Kinder Morgan's backlog of capital is $2.9 billion. The company's market capitalization is just over $32 billion meaning the company's backlog is almost 10% of its market capitalization. The company has 71% of these projects at a 5.8x EBITDA multiple meaning hundreds of millions of new EBITDA. That represents mid-single digit EBITDA growth for the company.
The impressive aspect of Kinder Morgan's cash flow is that the company has switched to a model where not only is its capital spending fully covered by DCF but so is its dividend. Or to put it another way, the company isn't borrowing money in order to grow, it's simply growing.
Kinder Morgan Potential Shareholder Returns
Putting this all together, Kinder Morgan has the potential for significant shareholder returns.
Kinder Morgan CFFO - Kinder Morgan Investor Presentation
The above graph shows the company's CFFO - Capital Expenditures - Dividends Paid. The company's annualized DCF is more than $5 billion, an incredibly high dividend yield for a company with a market capitalization of more than $30 billion.
The company can afford its dividend of more than 7%, it's more than $2 billion (mid single digits in annual capital spending) and still have several hundred million left over per year. That directly translates to net double-digit rewards to shareholders, highlighting how the company is an incredibly opportunity.
Kinder Morgan Risk
Kinder Morgan's risk, as a toll operator, is what we saw happened in the 2Q 2020, a dramatic decline in the company's volumes. A longer term dramatic decline in the volumes from a prolonged crash and the associated reduction in drilling is very possible. That could hurt Kinder Morgan's cash flow and its ability to reward shareholders.
Conclusion
Kinder Morgan has an impressive portfolio of assets which defines the ability to generate significant shareholder rewards. The company's DCF clearly enables double digital shareholder returns, which the company has turned into a more than 7% dividend yield along with billions invested annually into capital spending for the company.
Kinder Morgan has some risk from a potential collapse in capital spending hurting volumes. However, the company's volumes have remained incredibly strong. They're expected to recover going forward to support DCF. That DCF will result in double-digit shareholder rewards, something investors should pay close attention to.
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