Kinder Morgan (NYSE:KMI) enjoyed a bounce-back year in 2016. Driving that success was its ability to complete several important strategic initiatives that strengthened its balance sheet, enabling its portfolio of stable assets to generate solid results. That said, while last year was a good one for the company, most of its key financial metrics fell well short of the prior peaks. Unfortunately, as things currently stand, 2017 isn't likely to be a record-setting year for the energy infrastructure company, either. Here's how the company's expectations line up with the previous records.
The financial expectations
In early December, Kinder Morgan announced that it expected to produce $4.46 billion of distributable cash flow in 2017. That is down slightly from the $4.511 billion it pulled in last year, which was below the $4.699 billion it collected in 2015. Adjusted EBITDA, likewise, is expected to continue its decline this year, falling from $7.4 billion in 2015 to around $7.2 billion this year. Driving the decline is a combination of factors, including the impact of lower oil prices on the carbon dioxide segment, as well as the recent sale of a 50% stake in the Southern Natural Gas system.
Several other factors could cause results to fall short of these expectations, and thus even farther away from its all-time high, including lower-than-expected oil prices, additional asset sales, or lower volumes. That said, the company could also outperform expectations should oil prices run well above expectations, or it completes an accretive acquisition. However, outside of a large transaction, it is highly unlikely that Kinder Morgan will report its best year ever for cash flow.
The balance sheet forecast
Another important metric for Kinder Morgan is its leverage ratio. For 2017, the company expects debt-to-adjusted EBITDA to be 5.4 times. While that is a major improvement from late 2015 when this number crept up to nearly 5.9 times, it is quite a ways away from the company's 2011 ratio of 4.5 times. Furthermore, 2017's projection is above last year's average of 5.3 times and the company's 5.0 times target.
Suffice it to say, Kinder Morgan's leverage ratio is not where it needs to be just yet. However, the company has several strategic initiatives underway to push this number down toward its target level including seeking a joint venture or IPO of its Trans Mountain Pipeline expansion project. The company believes it can extract value from this process, which could result in a further reduction in leverage.
For example, last year pipeline companies Energy Transfer Partners (NYSE:ETP) and Sunoco Logistics Partners (NYSE:SXL) signed an agreement to sell a minority stake in the Bakken Pipeline project. Energy Transfer and Sunoco Logistics agreed to sell a 36.75% interest in the project for $2 billion, which represented a roughly 5% premium to the project's $4.8 billion cost. A similar transaction by Kinder Morgan could enable it to capture the additional value created by the project, which it could use to reduce debt. However, even with this and other potential transactions, it is unlikely that the company will set a new leverage record this year.
The dividend projection
A third important metric for investors is Kinder Morgan's dividend. For 2017, the company said that it expects to pay $0.125 per share in quarterly dividends, which is the same rate it paid last year. That rate is well below the prior peak of $0.51 per share on a quarterly basis that the company paid at the end of 2015.
As things stand right now, Kinder Morgan does not anticipate increasing its dividend until 2018, which is when it expects to hit its leverage target. However, even if Kinder Morgan was able to complete enough strategic transactions to deliver a dividend increase in 2017, it is highly unlikely that it would reset the level anywhere close to its prior peak. That is because the company no longer plans to issue equity to fund growth capex, instead choosing to finance expansion capital with internally generated cash flow. Because of that, at best the company would only have enough excess cash left over to double its current quarterly rate, which would still be about 50% below its prior peak. While it could eventually grow the payout back above that level, it likely will be several years until that happens.
Kinder Morgan currently sees 2017 matching what it did last year when results declined from 2015's peak. Because of that, this year does not look like it will be the company's best yet. That is, of course, unless it completes a game-changing acquisition, which is always possible but hard to predict. Outside of that, it will probably take the company several years to deliver enough organic growth needed to set new financial records.
Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.