Kinder Morgan Inc

KMI Details 

KMI to Reward Shareholders With 5% Dividend Hike: Kinder Morgan, Inc. (NYSE: KMI) is a midstream energy infrastructure provider in North America, which operates ~83,000 miles of pipelines to transport natural gas, crude oil, condensate, CO2, refined petroleum products and other products. On July 22, 2020, the company approved a cash dividend of $0.2625 per share for 2QFY20, representing a 5% increase over 2QFY19, payable on August 17, 2020.

A Look at KMI’s 2QFY20 Key Financial Highlights: During the quarter, the company reported adjusted earnings per share of 17 cents, as compared to 22 cents reported in the year-ago quarter. Total revenues for the quarter stood at $2,560 million, as compared to $3,214 million in the prior-year quarter. The results were impacted by lower contributions from the Tennessee gas pipeline and a fall in the demand for refined products. Total operations and maintenance expenses stood at $606 million, as compared to $646 million reported in the year-ago quarter. Total operating costs increased from $2,241 million reported in 1QFY19 to $2,842 million during the quarter. The company reported an operating loss of $282 million for Q2 FY20 as compared to the year-ago profit of $973 million. Net loss for the quarter came in at $624 million against the net income of $528 million reported in 1QFY19.

2QFY20 Key Highlight (Source: Company Reports)

Balance Sheet & Cash Flow Highlights: The company exited the quarter with a total cash balance of $526 million, and long-term debt amounted to $29,976 million. Total debt-to-capitalization ratio stood at 50.7% at the end of 2QFY20. KMI’s 2QFY20 distributable cash flow stood at $1,001 million, as compared to $1,128 million reported in the year-ago period.

Key Risks: The reduced commodity pricing situation, led by the coronavirus pandemic, could weigh on the company’s financial performance, going forward. Further, the company’s ability to return cash to shareholders and maintain a strong balance sheet will depend on the overall economic scenario. Also, KMI has significant debt exposure, which reflects a more levered balance sheet.

Outlook: The company remains on track to increase its annualized dividend payments to $1.25 per share on the back of its robust business model amid COVID-19 led low commodity pricing scenario.  The company expects FY20 distributable cash flow to marginally greater than 10% from the original guidance of $5.1 billion. This was on the back of reduced energy demand and low commodity prices due to the pandemic.  Further, the company also expects a decline in adjusted EBITDA for FY20 to be slightly more than 8% from the original guidance of $7.6 billion.  The company has reduced its sustaining capital expenditure by a total of $170 million for FY20. It also lowered its outlook for expansion capital spending by ~30% for the same period. 

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of KMI closed at $14.1 with a market capitalization of ~$31.9 billion. The stock made a 52-week low and high of $9.42 and $22.58, respectively, and is currently trading below the average of its 52-week trading range. The stock gave negative returns of ~7.42% and ~31.62% in the last three months and one year, respectively. KMI remains on track to benefit from the robust demand for clean energy. Considering the above factors, we have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Enterprise Products Partners LP (NYSE: EPD), ONEOK Inc (NYSE: OKE), Magellan Midstream Partners LP (NYSE: MMP), to name a few. Hence, we recommend a “Buy” rating on the stock at the closing price of $14.1, down 1.54% on 31 July 2020.

KMI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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