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The Risks and Opportunities for Natural Gas Investing via Kinder Morgan, Inc. (NYSE:KMI)
Natural gas is part of the current market focus, as political shifts change the supply landscape. This puts companies like Kinder Morgan, Inc. (NYSE:KMI) in a beneficial position, as they can drive growth by leveraging and expanding their gas transportation infrastructure. In this article, we will review the growth prospects of Kinder Morgan, and see the risks and opportunities for investors.
KMI is one of the largest energy infrastructure companies in North America, with some 83k miles of pipeline and 143 terminals. The company mostly transports natural gas (62% of the business), but also deals in crude oil, gasoline, carbon dioxide etc.
Risks & Opportunities
For investors, KMI offers an annualized dividend per share of US$1.11, currently amounting to around a 6% dividend yield. Investors can drill down on our comprehensive dividend analysis if they are interested in KMI's dividend.
The company points out that it is 13% (12.3%) owned by management, which can be a positive factor because the success of management is tied to the success of the company. Our ownership analysis reveals that 60% of the stock is owned by institutional investors and 27.2% is owned by the general public. While there is an institutional presence, it seems that they don't have a very large stake in the business at the moment. Investors may notice that one insider sold a hefty stake in the company on the 1st of March 2022, however that may have been too early in the European shift towards energy independence in order to have impacted the decision.
Looking at the potential risks, investors should know that the company has a BBB debt rating, which increase the risks of financing in an interest-rising environment. While the company has been gradually reducing debt in the last five years, its debt to market value of equity is 79%, with a total debt balance of US$33.3b. Our health checks show that interest payments are not well covered by EBIT, which could put into question the long term feasibility of the dividend for investors, and put pressure on refinancing efforts.
Management also outlines infrastructure expansion opportunities, as well as an increased demand in European markets in the future, that will benefit the profitability of the company.
Earnings Review
For Q1, Kinder Morgan's highlights consist of:
- Sales of US$4.3b, down from US$5.2b in Q1 2021 - This is primarily because of the Texas deep freeze and reflects an unusual Q1.
- Net income was US$667m, compared to USD$1.4b a year ago. It seems that net income is highly variable across the years, however the cash flows are more stable.
- Distributable cash flow - what is left over after dividends and CapEx of US$1.455b, down from US$2.329b a year ago.
When earnings came out last week, the early response was not positive, with shares down 4.8% to US$18.61.
In order to form a better picture of the company, it is good to see financial performance in context with what analysts are expecting to see in the future. That way, we can see the potential amount of cash flows, which investors are buying.
We gathered the latest post-earnings forecasts to see what estimates suggest is in store for next year.
Check out our latest analysis for Kinder Morgan
Following last week's earnings report, Kinder Morgan's eleven analysts are forecasting 2022 revenues to be US$15.5b, approximately in line with the last 12 months. Statutory earnings per share are predicted to leap 44% to US$1.12. Free cash flows for 2022 are expected to reach US$3.21b, and keep being consistently above earnings.
Management has also released guidance, and expects that the company budgeted to generate US$2.5b in net income, primarily because of expected tailwinds in the natural gas segment.
We can see that the company is positioned to benefit from increasing gas demand in Europe, as their transportation infrastructure will need to be used to transport the gas to LNG ports in the U.S.
Key Takeaways
Kinder Morgan is a relatively unknown company to the general public that offers massive energy infrastructure and high dividend yields for income investors.
The company is set to benefit from a rise in natural gas demand and prices worldwide. Energy demand was forecasted to grow over the years, and the situation in Europe exacerbated the problem.
The company is continuously deleveraging, however the high debt to equity ratio puts pressure on the financial stability of the company.
With that said, the long-term trajectory of the company's earnings is a lot more important than next year. We have forecasts for Kinder Morgan going out to 2024, and you can see them free on our platform here.
And what about risks? Every company has them, and we've spotted 4 warning signs for Kinder Morgan (of which 1 shouldn't be ignored!) you should know about.
What are the risks and opportunities for Kinder Morgan?
Kinder Morgan, Inc. operates as an energy infrastructure company in North America.
Rewards
Earnings are forecast to grow 4.09% per year
Earnings have grown 28.6% per year over the past 5 years
Risks
Interest payments are not well covered by earnings
Significant insider selling over the past 3 months
Further research on
Kinder Morgan
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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Goran Damchevski
Goran is an Equity Analyst and Writer at Simply Wall St over 4 years of experience in financial analysis and company research. Personally, Goran has over 4 years of experience in financial analysis and company research, where he previously worked in a seed-stage startup as a capital markets research analyst and product lead and developed a financial data platform for equity investors.
About NYSE:KMI
Kinder Morgan
Kinder Morgan, Inc. operates as an energy infrastructure company in North America.
Proven track record second-rate dividend payer.
