Is Kinder Morgan a Buy After Earnings?

Kinder Morgan (KMI) announced second quarter ended June 30, 2016 total revenue of $3.2 billion, down 8.5 percent year-over-year from $3.5 billion during the same period last year.

Kinder Morgan declared second quarter of 2016 net income of $375 million or $0.15 per diluted share, up 9.7 percent year-over-year from $342 million or $0.15 per diluted share in second quarter of 2015.

The North American energy infrastructure company reported continued year-over-year decline in its top line primarily due to the ongoing weaker drilling activities performed globally and driven by poor margins for energy mining companies, forcing them to minimize their core capital expenditures that includes drilling of new energy wells.

A closer look at the business  

Kinder Morgan has strategically secured 79% of total liquids revenue through take-or-pay agreements having a constant advanced lease expense for the month to use the company assets, Monthly Warehousing Charge (MWC) lease for tank capacity, smallest agreements based on throughput and key marine charters.
In addition, 38% of bulk revenue is allowed by Take-or-Pay agreements having lowest throughput commitments, 19% driven by requirements agreements related to either steel production or making of petroleum coke and nearly 43% fee-based revenue achieved through ancillary services and fees for volumetric per ton. Moreover, the company has attractive leverage metrics with controlled total debt level, impressive revolver credit facility and declining long-term debt maturities.

Kinder Morgan is believed to have a robust asset footprint and being a major North American energy infrastructure company with the largest network of natural gas pipelines across the country. The company is connected to all the key US natural gas resource plays that include Uinta, Bakken, Utica, Marcellus and Eagle Ford. In addition, Kinder is also the greatest independent carrier of petroleum produce across North America, transporting nearly 2.1 MMBbl/d and largest CO2 carrier in the country.

Importantly, Kinder Morgan has made a total of about $54 billion worth of key asset investments and acquisitions since its start that highlights the company’s major focus on acquiring fee-based stable assets at the core of energy infrastructure in North America. Further, the company is keen on sustaining a robust balance sheet through cutting on its dividend distribution policy and maintaining an investment-grade financial position with controlled costs and targeting impressive capital investment prospects, both through acquisition and expansion.

The attractive organic and inorganic growth efforts of Kinder Morgan through generating profits from its daily operations by leveraging a strong portfolio of well-diversified oil assets coupled with uniquely acquiring other smaller energy players is expected to support the company in emerging strongly from the ongoing global meltdown while making prospective long-term growth investments to solidify its market presence.

Making the right moves  

Going forward, Kinder Morgan has developed a strategic 5-year expansion capital expenditure program with approximately $14.1 billion of key fee-based projects including, 87% of planned backlog for strategic fee-based terminals, pipelines and related facilities which is expected to deliver about $1.8 billion of additional EBITDA and target almost 15% unutilized after-tax returns to uniquely enable attractive CO2 projects. Further, the company is keen on further upgrading these investment prospects to successfully counter the impact of ongoing tough capital market environment.

Natural gas storage and transportation comprises approximately 57% of the company’s annual 2016 budgeted consolidated segment EBDA which is believed to successfully cater to the expanding natural gas demand in the US that is estimated to grow nearly 35% as of 2025. Liquids storage, handling and transportation comprises of nearly 33% of the company’s annual 2016 budgeted consolidated segment EBDA which is expected to fully meet the growing global requirements of key liquids and thus, deliver consistent solid top line growth for Kinder Morgan.

The well-distributed capital expenditure program of Kinder Morgan is expected to drive a balanced growth across all the key energy resources of the company while strongly positioning it to deliver sustainable long-term growth and offer attractive shareholder returns.

Conclusion

Overall, the investors are advised to “Hold” their position in Kinder Morgan, Inc. considering the company’s significant long-term growth prospects but currently weaker financial position with poor total cash position of $180 million only but, huge total debt position of $43.62 billion, restricting the company to continue with its daily operations profitably. The PEG ratio of 3.68 indicate healthy company growth. The profit margin of 1.30% seems satisfactory.
Published on Jul 26, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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