Natural gas pipeline giant Kinder Morgan (NYSE:KMI) surprised the market when it unveiled its new way forward along with reporting second-quarter results after the market closed on Wednesday. Given the stock's 5% pop by midday Thursday, it's clear that investors were thrilled to see that the company intends on increasing the dividend 60% next year and by another 25% annually in 2019 and 2020. They also loved the fact that the company plans to buy back $2 billion of its shares, which amounts to as much as 5% of its outstanding stock given how embarrassingly cheap it is these days even after the post-earnings pop. That said, because all the focus was on the future increase in cash heading back to shareholders, it's likely that you missed some important things in that report. Here are three that you won't want to overlook.

Its underlying operations remain rock-solid

One of the reasons Kinder Morgan can start sending more cash to investors next year is due to the overall stability of the cash flow its assets generate. That operational strength was on full display during the second quarter. CEO Steve Kean noted this in the company's earnings release by saying that "Our operational performance was once again resilient, putting us slightly ahead of guidance for the quarter." That's a repeat performance from the first three months when the company also came in slightly ahead of its budget. It is worth noting that the pipeline giant still expects to end the year right on budget due to the timing of some sustaining capital expenses, which positively impacted results during the first half of the year but will have the opposite effect on the back half of the year.

Oil pipelines isolated on blue sky.

Image source: Getty Images.

Volumes are improving for the most part

One of the contributors to the company's solid quarter was an improvement in volumes across most of its segments. For example, transportation volumes in its natural gas pipeline segment were up 3% year over year thanks in part to an 8% spike in export volumes heading to Mexico. That's worth noting since the company sees Mexico as being an important growth driver in the future given that the country's imports from the U.S. are expected to rise 55% by 2021, according to a forecast from Wood Mackenzie, a respected industry research firm. Kinder Morgan also benefited from 2.2% increase in refined product volumes, 14% higher NGL volumes, and a slight rise in crude oil volumes.

The only real weak spot was a 12% decline in natural gas volumes gathered directly from the well head. While the company noted that volumes in the Bakken rose, those in the Haynesville and Eagle Ford fell. However, Kinder Morgan's management noted on the accompanying conference call that they saw volumes flattening out to slightly recovering in the key production basins as drillers ramp up activities in response to higher commodity prices this year. Those growing volumes are noteworthy for two reasons: It fills up the capacity on the company's existing system and should eventually lead to more expansion opportunities.

A pipeline under construction.

Image source: Getty Images.

The backlog grew, and there's more on the way

That's just what happened during the quarter. Kinder Morgan noted that its capital project backlog expanded from $11.7 billion at the end of the first quarter to $12.2 billion at the end of the second, even after factoring in new assets recently placed into service. The additional projects came from both its natural gas pipeline and carbon dioxide segments. One of the drivers of the natural gas pipeline expansions stems from the company's ability to secure 280 billion cubic feet per day (Bcf/d) of additional long-term firm transportation agreements during the quarter, bringing its year-to-date total to 680 Bcf/d. While some of these commitments represent previously unsold capacity, others created new expansion opportunities for Kinder Morgan to expand its existing network as evidenced by the new projects.

The backlog could grow even larger later this year if the company moves forward with its 1.8 Bcf/d Gulf Coast Express project, which it's developing in partnership with DCP Midstream (NYSE:DCP). Kinder Morgan noted that while it's not putting the project in the backlog just yet, it's making real progress in turning shipper interest into firm commitments. Given the rumored price tag of more than $1 billion for the project, it could be a needle-mover for Kinder Morgan and DCP Midstream should it enter service in 2019 as hoped.

Meanwhile, Kinder Morgan also noted that it's receiving strong interest for a potential capacity expansion of its EPNG system, which it could expand by as much as 920 Bcf/d due in part to rising supplies from the Permian Basin and increasing natural gas demand from Mexico. This project has the potential to generate excellent returns since it's an expansion of an existing system instead of a new development like Gulf Coast Express.

Getting back to business as usual

While the focus of investors this quarter will likely be on the increase in cash heading their way starting next year, they shouldn't miss the reason Kinder Morgan is opening up the floodgates. Fueling the decision is the rock-solid stability of the company's underlying asset base, which continues to crank out more than $1 billion dollars in cash flow each quarter. Furthermore, thanks to an improvement in market conditions, volumes flowing through its systems are on the upswing, which should push that cash flow higher in future quarters, especially as it captures more expansion opportunities.

In other words, after nearly two years of fretting about the future, this quarter shows that Kinder Morgan is finally getting back to the steady growth company it used to be. That growth, along with the buyback and rising dividend, could be just the catalysts to push the stock's valuation closer to where its peers trade. 

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