1 Insanely Cheap Energy Stock to Buy Before December Ends

Several catalysts position this pipeline stock to potentially be a big winner for investors in the coming year.

Matthew DiLallo
Matthew DiLallo
Dec 23, 2017 at 3:19PM
Energy, Materials, and Utilities

Natural gas pipeline giant Kinder Morgan (NYSE:KMI) has disappointed investors this year, falling more than 14% through late December. That slump came even though the company completed its turnaround strategy and its cash flow remained steady as a rock. Now, with its plan complete, Kinder Morgan expects to start growing again next year.

That return to growth mode makes Kinder Morgan look like an irresistible bargain right now. For starters, with cash flow on pace to head higher next year, the company trades at less than 8.7 times expected 2018 cash flow, which, for perspective, is well below the 14.9 times average cash flow multiple of most rivals. That rock-bottom price, however, might not last much longer, because Kinder Morgan has several catalysts on the horizon that could fuel a fierce rebound in its stock in 2018.

A chart showing a bar graph with an arrow showing a bounce back.

2018 could finally bring the long-awaited bounce in Kinder Morgan's stock. Image source: Getty Images.

A high-yield stock in hiding

While Kinder Morgan pays an above-average dividend that currently yields 2.8%, this level might not be enough to entice income-seekers. However, that should change in 2018 since the company plans to increase its payout by 60%, which would push its yield to a much more appealing 4.5%. That higher yield alone should start drawing the attention of dividend seekers and might help narrow the valuation gap between Kinder Morgan and its peers.

But 2018's massive dividend increase is only the beginning for investors since the company also plans to boost its payout 25% in both 2019 and 2020. To put that into perspective, investors who buy today could lock in a 7% yield for 2020. Further, even at that higher level, Kinder Morgan would only pay out about 50% of its cash flow in dividends, which is a very conservative rate for a pipeline stock.

A big bet on itself

Kinder Morgan currently expects to generate enough cash flow next year to pay its higher dividend rate and invest $2.2 billion in expansion projects, with about $500 million to spare. The company said it could use that excess cash to invest in additional high-return growth projects or repurchase its cheap stock. However, I wouldn't be surprised to see Kinder Morgan spend the entire amount on share repurchases next year to take advantage of the fact that shares currently sell for the lowest valuation in its peer group. Those buybacks would provide an incremental lift to cash flow per share, which should nudge the stock higher and help narrow the valuation gap.

An oil pipeline cutting across a rugged mountain.

Image source: Getty Images.

The catalyst that could lift a mountainous weight

One of the things that seem to be holding down Kinder Morgan's valuation is the uncertainty surrounding its Trans Mountain Pipeline expansion project in Canada. The company initially hoped to begin construction of that project this year and complete it by the end of 2019. However, it has run into delays obtaining the necessary permits. As a result, the in-service date could get pushed back nine months, while it's also possible that the company could still scrap the project. Either outcome would be bad news for investors because, at the cost of $5.7 billion, it represents nearly half of Kinder Morgan's five-year project backlog, which means it would move the needle for the company once complete.

However, there's reason to be optimistic that the company could move forward soon since it recently won a key ruling from Canada's energy regulator that could offset some of the construction delays. If the company finally starts construction on the project next year, it would lift a big weight that has been holding down the stock's valuation.

This sale could be ending soon

Kinder Morgan's stock currently trades at an unjustifiably low valuation heading into a year where it has several catalysts that could spark a massive rally. That's why investors should consider picking up shares of this crazy cheap stock before this sale ends.