Kinder Morgan (KMI) released disappointing earnings last night that sent the stock lower after hours. But the stock is rallying hard today, as there seems to be a light at the end of the tunnel. Here are some highlights.
From Richard Kinder:
We are pleased with KMI’s business performance for the year especially in light of a tremendously challenging commodity environment, and we are glad to have generated the greatest amount of annual distributable cash flow in the company’s history along with a 7 percent increase in our DCF per share year-over-year,” said Richard D. Kinder, executive chairman. “However, we were disappointed by KMI’s stock performance, which declined 65 percent during 2015.
Disappointed? You and me both, Richard!
As Kinder continuesL
“The decision to reduce our dividend was very difficult and was a direct result of the rapid and significant disconnect between the performance of our business and the performance of our stock. We believe this bold move is in the best interest of the company and our shareholders. We expect the reduced dividend has completely eliminated our need to access the capital markets to fund growth projects in 2016. This insulates us from challenging capital markets and significantly enhances our credit profile. Moreover, by reducing the dividend and high-grading our backlog, we do not expect to need to access the capital markets to fund our growth projects for the foreseeable future beyond 2016.
“Additionally, as our future cash flow exceeds our investment needs, we are in an improved position to return value to shareholders. While the markets appear to have begun 2016 on the same sour note on which they left 2015, we are confident that we are one of the best positioned companies to withstand these headwinds.”
While 2015 was a miserable year for shareholders, I agree that management did the right thing in slashing the dividend. It’s in the long-term best interest of the shareholders. I have no idea when the credit markets will return to “normal,” and neither does Kinder’s management team. This takes that question out of the equation.
I also found this interesting:
“As a result of the current challenging capital markets, we are focused on high-grading our backlog to allocate capital to the highest return opportunities, including efforts to reduce spend, improve returns and selectively joint venture projects where appropriate. We have reduced our expected 2016 spend by approximately $900 million, reduced our backlog by $3.1 billion from the third quarter of 2015 and expect further reductions in the coming months as we continue to high-grade our capital investments.
KMI is prioritizing by choosing the best capital projects and leaving the less profitable ones undone. That shows a new discipline we didn’t see in the era of cheap, abundant capital.
The company’s outlook for the next year seems reasonable:
On Dec. 8, 2015, KMI issued its preliminary financial projections for 2016. Since providing this guidance, the company has updated its 2016 budget to reflect current commodity price and foreign exchange rate expectations as well as its high-graded investment plan. As a result, for 2016, KMI expects to declare dividends of $0.50 per share, generate approximately $4.9 billion of distributable cash flow available to equity holders and approximately $4.7 billion of distributable cash flow available to common shareholders (i.e., after payment of preferred dividends) and generate approximately $3.6 billion of cash flow in excess of its dividend. KMI’s revised growth capital budget for 2016 is approximately $3.3 billion which is a reduction of approximately $900 million from the preliminary 2016 guidance. These expectations assume an average 2016 West Texas Intermediate (WTI) crude oil price of $38 per barrel, an average 2016 Henry Hub natural gas price of $2.50 per MMBtu and interest rates consistent with the current forward curve.
The overwhelming majority of cash generated by KMI is fee-based and therefore is not directly exposed to commodity prices. The primary area where KMI has commodity price sensitivity is in its CO2 segment, where KMI hedges the majority of its next 12 months of oil production to minimize this sensitivity. For 2016, the company estimates that every $1 per barrel change in the average WTI crude oil price impacts distributable cash flow by approximately $7 million and each $0.10 per MMBtu change in the price of natural gas impacts distributable cash flow by approximately $1.2 million.
At current prices, I don’t see a lot of risk in KMI stock. It will probably be a few years before we see new highs. But starting at today’s prices, and given the unattractive valuation of the market in general, KMI would seem like a safe bet for outperformance.
Charles Sizemore is the principal of Sizemore Capital. As of this writing, he was long KMI.