Kinder Morgan: A Pipeline to Profits

11/11/2019 5:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roughly 40 percent of US natural gas moves through pipelines owned by Kinder Morgan Inc (KMI), explains utility sector expert Roger Conrad, editor of Conrad's Utility Investor.

And the company has sizeable operations transporting crude oil and refined products, terminals that store 80 percent liquids and 20 percent bulk commodities, and a carbon dioxide manufacturing business that also produces oil and natural gas liquids. 

That breadth and scale of operations means quarterly results often highlight sector-wide trends. What we learn is not just key to investing in Kinder, but to the entire North American energy midstream sector. 

Kinder’s most important third quarter number was the 13 percent increase in natural gas transport volumes. That’s the seventh consecutive reporting period of at least 10 percent growth. And that trend will continue at least through next year, with the company’s Gulf Coast Express Pipeline and Elba Island liquefied natural gas export facility now operating. 

Gulf Coast Express is full to capacity with "associated gas," produced coincidently with Permian Basin oil. Delays winning some permits forced Kinder to postpone startup of a second Permian pipeline to early 2021.

But the asset is already fully contracted and will immediately add to EBITDA when operating. There’s also a third gas pipeline in the works, now expected for service in 2022. 

Increased associated gas volumes are very bullish for petrochemicals as well as LNG. The startup of Elba Island is Kinder’s initial foray into this business, with the first of ten liquefaction units just started up.

Despite areas of weakness, overall operating goals and financial guidance were on track. That highlights the scale, financial power and operational diversification in the North American midstream business that are the company’s key underlying strengths. And it contrasts sharply with the elevated risks of rivals that are heavily concentrated on a single business line, and/or a group of customers. 

Management is still guiding to an increase in the quarterly dividend from 25 to 30 cents per share next April. That’s a yield of nearly 6 percent for investors who buy Kinder below our recommended entry point of $22. 

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