Why Kinder Morgan (KMI) Is a Winner

Shares of energy infrastructure company, Kinder Morgan (KMI) have soared nearly 30% on the back of strong fourth-quarter results announced on January 20, 2016. Its shares are now up by over 5% for the year, and this trend in my opinion will continue due to its continued efforts of diversifying energy infrastructure platforms. These diversified platforms are enabling the company to drive profits during this not so impressive commodity price environment.

Improving bottom line performance

For instance, the company for the fourth-quarter 2015, generated earnings of $0.55 per share as compared to earnings of $0.27 per share in the fourth-quarter of 2014.
This strong show has come against the backdrop of a very negative environment for the entire energy sector. This growth in its bottom line can be attributed to a variety of factors such as reduction in interest expenses and other costs savings benefits such as lower CO2 volumes that contributed significantly to its earnings in the past quarter.

For instance, the company during the quarter minimized its interest expenses by over $450 million as compared to the same quarter last year. Moreover, the lower commodity prices led to lower crude oil volumes, lower CO2 volumes and lower capitalize overhead that delivered nearly $40 million in total costs savings.

Apart from this costs savings benefits, Kinder Morgan’s  gas, terminal and product businesses grew approximately 1%, 8% and 27% respectively year-on-year basis. The company saw a 5% increase in gas volumes, while its sales and gathering were up 4% each on a full year basis. Also, its product business witness a 3% increase in the products pipeline volumes due to growth in the refinery products and other liquids. These growing volumes clearly provide an indication for its future revenue.

Better times ahead

Looking ahead, the company expects significant growth for its gas and product businesses. This is because Kinder Morgan has entered into a new and pending firm transport capacity commitments totaling 8.5 Bcf a day. This also includes approximately 1.6 Bcf of unsold capacity stated earlier. In fact, it estimates about 38% natural gas consumption across the United States moved through its facility and pipes.

In addition, the company has made significant progress on KMI. It has during the last reported quarter completed the acquisition of KMP and EPB pipelines that should further support its gas business. KMI business remained pretty solid throughout 2015, despite the commodity market crash. So, the acquisition of these facilities will certainly improve its discounted cash flows going forward.

In fact, the company expects this 38% of its estimated natural gas moving to KMI pipelines at some point of times, which will further enhance its growth. Also, the combination of power demand, LNG exports, exports to Mexico and additional petchem and industrial demand on the Gulf Coast create a bright outlook for its gas transportation and the storage assets. In fact, the management expects the U.S. natural gas demand to grow approximately 27% through 2020.

So, overall its gas & storage as well as product pipeline businesses look pretty strong in 2016 that should drive its growth and create value for shareholders. This is because, the company has maximum of its business consist of fee-based that provides clear visibility of its cash flows in the future. In fact, the company has contracted nearly 90% of its fee-based projects with attractive returns and strong counterparties.

Meanwhile, its terminal business is benefiting from the strong performance of its liquid business. In fact, liquids now account for nearly 74% of its earnings before DD&A from this segment. However, its terminal segment was negatively impacted by lower coal and steel volumes. But the company seems to offset this decline as it has made investments in the Double H. Pipeline. This investment in a Hiland acquisition has helped the company to offset this decline by over $24 million during the quarter.

In fact, Kinder Morgan during the last reported quarter closed the acquisition of 15 terminals and infrastructure from BP Products North-America valued at $350 million. The management said, “The terminals are key distribution facilities for major refined products consuming markets and have approximately 9.5 million barrels of storage and associated infrastructure in the United States.”

Furthermore, both these companies have formed a joint venture limited liability company (JV) terminal business to own 14 of the acquired assets, which Kinder Morgan will operate and market on the JV’s behalf. The fifteenth terminal is however expected to be owned and operated solely by KMI.

In the long-run, the company sees tremendous growth for refined product demand and supply due to Gulf coast liquid exports. And it is right on the track to invest in this growth opportunity. It has project backlog of approximately $2.3 billion of liquefied growth projects such as Jones Act tanker builds, Edmonton merchant crude terminal, Houston Ship Channel network expansion, chemical terminal development over the next five years. These projects will drive growth for its terminal business in the future.


Kinder Morgan looks pretty strong despite the weak commodity market environment. It is making significant progress with respect to its business and consistently growing its volumes. Also, it is reducing its interest expenses and costs that should positively weigh on its earnings this year. The company is expected to generate approximately $7.5 billion in EBITDA in 2016 with discounted cash flow of $4.7 billion.
Published on Mar 31, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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