Kinder Morgan (NYSE:KMI) gave its investors a pleasant surprise when it reported second-quarter results after the closing bell on Wednesday. Not only were its financial results slightly ahead of guidance thanks to the continued stability of its operations, but the company finally unveiled what it intends to do with the substantial excess cash flow it expects to generate starting next year: significantly increase its dividend and buy back shares.
Kinder Morgan Inc. results: The raw numbers
What happened with Kinder Morgan this quarter?
Results continue to come in just ahead of expectations:
- Earnings in Kinder Morgan's natural gas pipeline segment were $905 million, which was 6% lower than in the second quarter of 2016, mainly as a result of the recent sale of a 50% stake in the company's Southern Natural Gas system to Southern Company (NYSE:SO). It offset some of that impact with the completion of expansion projects on the Tennessee Gas Pipeline and Elba Express pipeline. It has also benefited from a 3% increase in natural gas volumes.
- Carbon dioxide segment earnings fell 4% to $220 million because of lower oil prices and a 4% reduction in volumes stemming from the decision to continue allocating capital toward higher-return projects with longer lead times.
- Terminals segment earnings edged up 1% to $299 million, thanks to the strong performance in its liquids terminals business as a result of placing two new-build Jones Act tankers into service during the quarter.
- Product pipeline earnings slipped 2% to $290 million because of higher expenses, which offset higher volumes across the board.
- Kinder Morgan Canada's profits dipped 7% to $43 million as a result of the timing of operating expense charges and a 21% decrease in oil volumes flowing to Washington state.
- Overall, segment earnings slipped 4% year over year to $1.76 billion, while distributable cash flow was down 3% to $1.02 billion. That said, both numbers came in slightly ahead of the company's guidance for the quarter, keeping it on pace to hit its full-year targets.
What management had to say
CEO Steve Kean commented on the results, saying that: "Our operational performance was once again resilient, putting us slightly ahead of guidance for the quarter. We generated earnings per common share for the quarter of $0.15 and distributable cash flow of $0.46 per common share, resulting in $743 million of excess distributable cash flow above our dividend."
As Kean notes, Kinder Morgan's operations continue to deliver steady results, even though oil prices weakened during the quarter. That shouldn't come as a surprise, though, since fee-based assets and commodity price hedges underpin 97% of this year's expected cash flow.
That said, the announcement of what the company plans to do with its cash flow starting next year overshadowed those results. After finishing its balance sheet-strengthening objectives during the quarter by completing an IPO of Kinder Morgan Canada Limited (TSX:KML) to finance the construction of its Trans Mountain Pipeline expansion, the company expects to generate significantly more cash flow than it will need going forward. Because of that, it plans to increase the dividend 60% starting next year, with the intention of growing it by a 25% annual rate through 2020. Furthermore, the company plans on repurchasing $2 billion worth of stock, which represents 5% of its outstanding shares.
The decision to repurchase shares instead of giving investors an even larger dividend increase in the near term stems from management's belief "that the company's shares are an attractive investment opportunity," according to Kean. Given the stock's embarrassingly cheap valuation these days, that decision makes sense.
One thing Kinder Morgan made clear is that its decision to return more cash to investors isn't the result of dimmer growth prospects. Quite the opposite in fact, since the company's backlog increased from $11.7 billion to $12.2 billion after adding new projects in both its natural gas and carbon dioxide segments during the quarter, which more than offset the impact of placing the two Jones Act tankers into service. This growing backlog helps underpin the company's plan to increase its dividend at a rapid rate in the coming years.
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.