The 2 Biggest Concerns With Kinder Morgan

While some investors are unhappy with Kinder Morgan, the company's steady growth continues. So far this year, Kinder Morgan is well on track to reach its annual goals.

Jul 28, 2014 at 10:06AM

Pipeline Panama Gunvorgroup

A pipeline in Panama. Source: Gunvorgroup.

For retail investors, Kinder Morgan is perhaps the best-known midstream pipeline partnership. Despite this, the Kinder Morgan family trades at a substantial discount to other midstream partnership names. The two biggest concerns about Kinder Morgan are that its ownership structure is a bit complicated, with four ticker symbols in all, and also that growth will be difficult for a business that is already so big. 

While it is true that Kinder Morgan may not be growing be growing as fast as many smaller midstream partnerships, such as Williams Partners or Spectra Energy, it is still chugging along and on course to grow distributable cash flow, or DCF, at a mid single-digit clip. 

In a good spot
While the natural gas renaissance rightfully gets the lion's share of attention these days, Kinder Morgan's very strong CO2-injection oilfields operations were actually the brightest of all Kinder Morgan's business segments last quarter: Oil volumes from Kinder Morgan's fields, all of which are in West Texas, grew 7% year over year, with the SACROC field leading the way. 

When considering all three of the Kinder Morgan businesses, which are Kinder Morgan Energy Partners, Kinder Morgan Inc, and El Paso Pipeline Partners, the company's net project backlog increased by $600 million in the second quarter, despite putting $700 million into service. In all, Kinder Morgan added an impressive $1.3 billion to its project backlog. 

Of the $700 million of projects put into service, $500 million was in natural gas, so we can expect DCF from natural gas to pick up the pace in the coming few quarters. One other operational anecdote I believe is worth highlighting is that most new storage and transportation agreements that were signed during this quarter were for existing systems, meaning Kinder Morgan will not have to build out much new capacity for these deals. 

G 

A pipeline in Cortez, NM. Source: Kinder Morgan.

How it affects the bottom line
Financially, the first and most important item Richard Kinder mentioned in the most recent conference call is that all businesses are on target to meet and exceed DCF guidance for 2014. Kinder Morgan Inc should grow DCF by 8%, and Kinder Morgan Energy Partners should grow DCF by between 5%-6%.

At a more granular level, per share DCF for Kinder Morgan Energy Partners was up only 1% versus the same quarter of last year, but the partnership usually performs better in the third and fourth quarters. Kinder Morgan Energy Partners' balance sheet remains solid: The debt to earnings before taxes, interest, depreciation, and amortization ratio, or debt to EBITDA, was actually down from 3.8 times at the same time last year to 3.7 times today. 

For Kinder Morgan Inc, cash to pay dividends increased by an impressive 13% versus the same quarter last year. Much like KMP, KMI saw debt levels tick down, in this case, from 5 times EBITDA to 4.9 times. 

Pipeline

Trans Alaska Pipeline. Source: Wikipedia.

Looking at all options 
One theme on the mind of analysts is a simplification of Kinder Morgan's ownership structure. Because Kinder Morgan is more cheaply valued than most other large midstream names, Kinder Morgan cannot access equity markets as well as most other large midstream partnerships can. As a result, Kinder Morgan is at a disadvantage when it comes to acquisitions. While Richard Kinder did not commit to anything specifically, one gets the impression that management is seriously considering reorganization. 

Foolish takeaway
While Kinder Morgan trades at a discount to many other large midstream MLPs, it is doing so in part because of a lower growth rate. However, KMP's 5% growth rate with a yield of 6.8% is certainly not bad. If management does indeed reorganize its ownership structure and is successful at bringing Kinder Morgan up to the valuation of other midstream MLPs, there will be substantial capital gains to be had. Even without a simplification of ownership strucuture, however, both KMP and KMI should deliver solid growth in 2014.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Casey Hoerth owns shares of Kinder Morgan Energy Partners LP. The Motley Fool recommends El Paso Pipeline Partners and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers