Kinder Morgan Inc (NYSE:KMI) has had a poor year to date, but the company is well placed to benefit from long-term trends. Indeed, according to Wall Street, Kinder is well placed to take advantage of long-term trends in the natural gas infrastructure market as the sector enters a period of growth.
Construction of natural gas infrastructure projects has slowed significantly during the past few years. During the four years preceding 2011, a combination of low interest rates and relatively high natural gas as well as rising production volumes of natural gas around the United States sparked a natural gas infrastructure construction boom within the U.S.
However, due to falling natural gas prices, construction has slowed since 2011. Now, according to some Wall Street analysts, the midstream industry is about to enter a new wave of long-haul natural gas infrastructure investment. This investment will be driven by rising production of natural gas as well as a rise in the number of gas-fired power stations in operation and increasing liquefied natural gas export volume. Kinder Morgan is set to thrive off this growth. The company has already identified $15 billion worth of potential natural gas projects, giving plenty of space for growth and a solid road map with which to chase the growth.
It seems as if Kinder Morgan is one of the few companies that will be able to drive this growth. The construction of these projects will require plenty of capital, and recent comments from credit ratings agency Moody's confirm that the company has plenty of borrowing headroom to facilitate heavy capital spending.
Kinder Morgan's debt to earnings before interest, taxes, depreciation, and amortization ratio is expected to come in at or below 4 times for 2014. Furthermore, the company has funded recent large acquisitions in what Moody's calls a "credit-neutral" manner; in other words, the company and its subsidiaries have issued new stock to fund growth.
A "credit neutral" expansion has kept Kinder's debt ratio low, especially when compared to the ratios of the company's similar-sized peers. For example, Williams Companies (NYSE:WMB) and TransCanada (NYSE:TRP) have debt-to- EBITDA ratios of 4.5 times and 5 times, respectively. But despite a lower level of leverage, Kinder is actually achieving a lower rate of return on its assets than its peers.
Based on 2013 numbers, Kinder achieved a return on invested capital of 2.4% for the period compared to Williams' 4.7% and TransCanada's 6.1%. So, even though Kinder is borrowing less, it would appear that the company is not using the capital effectively . However, it seems as if a low return on invested capital is currently factored into Kinder's valuation. You see, at present the company trades at a discount to its wider sector on several metrics.
Specifically, Kinder currently trades at a P/E ratio of 29.1 compared to the industry average of 40 and a P/B ratio of 2.7 compared to the industry average of 2.9. That said, the company does trade at similar price/cash flow and price/sales metrics as its peers.
Overall, it would appear that Kinder is well placed to drive expansion during the next few years. The company has multiple factors working for it, including rising demand for natural gas, a need to transport this gas, and a relatively clean balance sheet. On the other hand, the company's return on capital is not as impressive as that of its peers, although this seems to be factored into the current valuation.
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Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends 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.