Kinder Morgan (NYSE:KMI) recently reported solid first-quarter results. The midstream giant's cash flow came in slightly ahead of budget thanks to strong execution. That keeps it on pace to achieve its full-year forecast.
The company takes great care in how it allocates this cash. That was a key theme on the accompanying conference call when CEO Steve Kean walked investors through the company's four guiding principles.
1. We're committed to having a strong balance sheet
Kean spent most of his time on the call discussing how well the company performed in following its principles. He started by stating that "we have a strong balance sheet, having met our approximately 4.5 times target of debt-to-EBITDA." Kinder Morgan has worked hard to improve its financial profile in recent years. It capped things off last year by selling the Trans Mountain Pipeline in Canada and using most of that cash to pay down debt.
Founder and executive chairman Rich Kinder went through a bit more detail on the company's progress during the call. He stated that "we had used that cash (free cash flow and asset sale proceeds) to get our balance sheet in shape, having paid off over $8 billion of debt and received credit upgrade from both S&P and Moody's, and we intend to maintain our improved credit metrics." By strengthening its balance sheet, Kinder Morgan has lowered its borrowing costs and improved its access to credit. That gives it significantly more financial flexibility.
2. We're maintaining discipline by focusing on investment returns
Kean followed up his balance sheet comments by noting that "we're maintaining our capital discipline through our return criteria, a good track record of execution, and by self-funding our investments." He went on to say:
We're very careful with your capital. We don't swing at every pitch. We definitely have our hits and misses, but we have shown that in aggregate we do well. We get there by having elevated return criteria well above our cost of capital. We focused on projects that we understand and primarily focus on expansions off of our existing footprint. All of this helps us invest for returns that are well above our cost of capital and helps overcome the inevitable curveballs that come up during project execution.
The company demonstrated this discipline recently by walking away from a proposed joint venture with Enbridge (NYSE:ENB). Kinder Morgan initially agreed to partner with Enbridge and Oiltanking to build Texas COLT, which would have exported oil from an offshore terminal. However, that project didn't fully align with Kinder Morgan's strategic priorities. As a result, it sold its share to Enbridge.
3. We're committed to returning value to shareholders
With a much-improved balance sheet and a firm commitment to only invest in its highest return projects, Kinder Morgan can return more of its cash flow to investors. Kean pointed this out on the call by saying that "we are returning value to shareholders with the 25% dividend increase announced today." That lines up with the company's promised increase.
Meanwhile, the company still expects to boost its payout by another 25% in 2020. It also has a $2 billion stock buyback program underway and had already repurchased $525 million in shares since late 2017. While Kinder Morgan didn't buy back any more stock during the first quarter, Rich Kinder stated on the call that the company intends "to repurchase stock when appropriate."
4. We continue to find attractive expansion projects
While Kinder Morgan has a high return hurdle for new expansion projects, that hasn't hurt its ability to find compelling investment opportunities. Kean noted on the call that "we continue to find attractive growth opportunities, with a net add of $400 million to our backlog during the quarter." Overall, the company sanctioned $600 million of new projects during the quarter, which increased its backlog to $6.1 billion after adjusting for $200 million of completed projects.
The company continues to believe it can secure between $2 billion and $3 billion of high return expansions per year. It has several projects under development, including an oil pipeline joint venture in the Rockies, oil pipeline expansions in North Dakota and Texas, a third natural gas pipeline out of the Permian Basin, and an LNG export facility in Mississippi. Kinder Morgan's ability to continue securing high-return expansions will give it the fuel to grow cash flow and cash returns to shareholders.
Conservatively stewarding shareholder capital
Kinder Morgan is a much stronger company than it was a few years ago. It has become more conservative in managing its balance sheet and shareholder capital. That will put the pipeline giant in a better position to navigate through the ups and downs of the energy market. It also sets the company up to steadily grow cash flow so that it can return more money to shareholders. Those dual fuels should help Kinder Morgan generate market-beating total returns over the long term.