Kinder Morgan: Big and Beautiful

08/17/2015 8:00 am EST

Focus: STOCKS

Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

This featured recommendation undertook a massive consolidation of its affiliates last year, which transformed it into the largest midstream company in the US, explains Ari Charney, editor of Utility Forecaster.

This move was a masterstroke for Kinder Morgan (KMI), which has allowed the firm to weather the collapse in energy prices better than its peers, while reestablishing KMI as a solid income investment.

Of course, the transition had painful tax consequences for longtime unit holders of Kinder Morgan’s MLP subsidiaries. But the silver lining is a firm that has greater economies of scale and highly diverse operations that improve the reliability of its earnings.

Under a single corporate umbrella, KMI operates approximately 84,000 miles of pipelines and 165 terminals. KMI’s pipelines transport natural gas, refined petroleum products, crude oil, and carbon dioxide.

The firm also stores or handles a variety of products and materials at its terminals, such as gasoline, jet fuel, ethanol, coal, petroleum coke, and steel.

While some midstream players have been forced to scale back due to the downturn in the energy sector, this new KMI juggernaut has shown no signs of slowing down in terms of developing new projects.

Indeed, even in this challenging environment, KMI still added another $3.7 billion of growth projects to its backlog, for a total backlog of $22 billion.

The market applauded KMI’s consolidation of its MLP empire late last year, and its shares continued their ascent, even as its peers were getting pummeled.

Since hitting an all time high in late April, however, KMI’s shares have fallen 21.4%, with most of that drop occurring after oil renewed its decline.

Nevertheless, KMI’s segment earnings grew 2% during the second quarter, to $1.8 billion, thanks to earnings from its petroleum products pipelines (up 37.1%, to $277 million) and storage terminals (up 19.7%, to $279 million).

Over the past year, KMI has boosted its quarterly dividend by 14%, to $0.49 per share or $1.96 per year. And management reaffirmed the payout is on track to reach $2.00 per share this year, with further increases of 10% per year through 2020.

KMI still boasts strongly bullish sentiment among Wall Street analysts, with 18 buys, three holds, and one sell. Bigger and more beautiful, Kinder Morgan is a buy below $47.

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