Kinder Morgan (NYSE:KMI) expects to unveil its third-quarter results after the market closes on Wednesday. If the pipeline giant reports strong numbers and a bullish outlook, that could give its stock a much-needed bump. Here are three things investors should keep an eye out for in that report that might give the stock a jump-start.
1. Changes to its outlook
Kinder Morgan's initial forecast was that it would generate $4.57 billion, or $2.05 per share, of distributable cash flow this year, which would be 4% higher than 2017's total. It was well on its way to achieving that after its posted better-than-expected results in the first half of 2018. Meanwhile, with oil prices well above the levels it had budgeted for, the company had plenty of tailwinds during the third quarter, which suggests those results should be strong too.
However, the company's Canadian subsidiary, Kinder Morgan Canada Ltd. (TSX:KML), closed the sale of its Trans Mountain Pipeline to the Canadian government during the quarter, which will have some impact on companywide results. While Kinder Morgan stated at the time that even with the sale it "still expect[ed] to meet or exceed our 2018 distributable cash flow (DCF) per share target," management also said they would "provide additional financial guidance after the transaction closes."
They haven't done that yet, so it's likely that they'll provide an updated outlook along with the third quarter report. If the guidance is optimistic, that naturally would be a positive catalyst for the stock.
2. Adjustments to its capital allocation strategy
Kinder Morgan has already laid out plans for allocating cash flow across several initiatives this year. The initial plan was to invest $2.2 billion into growth projects (fully funding its expansions for the year), and pay roughly $1.9 billion in dividends (60% higher than last year's level). That would have left it about $500 million with which to buy back stock, if it chose to do so. The company spent half of that on share repurchases earlier this year, and earmarked another $200 million toward expansion projects in the second quarter.
However, after a busy third quarter, the company could make some changes to that plan. For starters, Kinder Morgan recently gave another growth project the green light, so it will definitely invest even more capital into expansions this year. On top of that, it will soon receive a large cash infusion from Kinder Morgan Canada from the aforementioned sale of the Trans Mountain Pipeline. Because of that transaction, the company's balance sheet is in its best shape in years, which could enable it to make a notable shift in how it allocates capital.
One thing Kinder Morgan now has the flexibility to do is borrow money to finance as much as half of its expansion projects, which would free up more of its cash flow to return to shareholders. A more defined share-repurchase strategy would show the market that the company plans to do more to address the current deep discount in its stock price.
3. An update on its plans in Canada
Kinder Morgan originally created Kinder Morgan Canada as a vehicle to finance the construction of the Trans Mountain Pipeline expansion project. However, now that the whole pipeline has been unloaded, it's unclear what the future holds for that entity. Kinder Morgan is currently considering its options, and has hired bankers to explore the sale of its remaining assets in Canada. It could also choose to take it private, or use it as a vehicle to drive growth in Canada by other means.
Clarity about its plans on that front would give investors a better idea of what to expect from the company more broadly. A sale, for example, would provide Kinder Morgan with cash it could use to buy back stock or fund additional expansions. As such, an announcement that the company found a buyer (and has a clear plan for the proceeds) could give Kinder Morgan stock a nice shot in the arm.
Waiting around for one more catalyst
Kinder Morgan has transformed itself dramatically over the past couple of years, and improved its financial profile and growth prospects in the process. However, the market has yet to give it any credit for its accomplishments; its stock has fallen about 8% in the past year. However, it may be just a catalyst or two away from finally getting a respect boost from investors, and those catalysts could come this week when it reports its Q3 results.