Kinder Morgan's Beautifully Boring First-Quarter Results

Kinder Morgan (KMI 0.27%) is off to a solid start in 2019 after posting first-quarter results that came in slightly above expectations. That keeps the pipeline company on target to achieve its full-year forecast. In this segment from Industry Focus: Energy, host Nick Sciple and Fool.com contributor Matt DiLallo discuss:

• Initial reactions to Kinder Morgan's first-quarter results.
• The company's increasing cash returns to shareholders.
• What will happen with Kinder Morgan Canada.
• Potential upcoming expansion projects.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 18, 2019.

Nick Sciple: Matt, let's move on to talk a little bit about Kinder Morgan. They reported earnings yesterday. Before we dive into those, on our 2019 preview podcast, Matt, you named Kinder Morgan your favorite stock idea for 2019. Is it still your favorite stock idea after we got yesterday's earnings reports news in?

Matt DiLallo: I can't complain about them. Kinder Morgan's one of those really steady companies. The reason I picked them as my top one is because they were so undervalued at the time. They're still undervalued, even though they're up 25% this year. It's really a value play there. They're about to make more money this year than they did in the peak in 2015 and yet their stock's still down like 50%. I really like that one.

Sciple: Awesome! Let's go through their earnings report. I'm going to go step by step. You posted an article on fool.com earlier this week, "Four Things to Watch When Kinder Morgan Reports Its Q1 Results." We're just going to go through those things that you told us to watch on fool.com. We'll see what our earnings gave us there.

The first thing that you called out for us to watch is, you want to see if the results match the budget. In 2019 guidance, Kinder Morgan had anticipated they would generate $5 billion in cash flow. They expected to generate 27% of that in the first quarter. The numbers that we got out yesterday, how is Kinder Morgan doing there when it comes to meeting their guidance?

DiLallo: They were right on track with that. Their budget was $1.35 [billion] and $0.59 a share. They came out at $1.37 [billion] and $0.60 a share. So it was 10% overall, up from last year's first quarter. Seven percent on a per-share basis due to some dilution. That keeps them right on track with their full-year budget, even though there's been some headwinds here and there. They did a settlement with some customers on some rates for some pipelines. That was a headwind. But then they had some positive, some oil prices. So net-net, they're basically right on track for the full year.

Sciple: You like to see that from a company like Kinder Morgan. Another thing a lot of investors are looking for out of Kinder Morgan is the dividend and returning cash to shareholders. The company repeatedly promised to increase its dividend 25% in 2019. They've been buying shares back. They had a $2 billion stock buyback program that they initiated previously. From what we saw in Q1, what have we seen when it comes to the dividend boost? Anything from the buyback point of view from Kinder Morgan?

DiLallo: They did fulfill that promise, 25% increase. Nice to be a shareholder and get that extra boost this year. They also reiterated the plans for another 25% increase next year. They did not buy back any stock during the quarter. However, on the conference call, founder Richard Kinder said they'll do that when it makes sense. They've got some other things going on with a lot of expansion projects. I'm not totally surprised that they didn't buy back shares. But that is something to keep in track.

Sciple: Yeah. A lot of expansion projects coming down the line. We'll talk about that in a second. The third thing you said to look out for their earnings this quarter was what's going on with Kinder Morgan Canada. Back in 2017, they IPO-ed Kinder Morgan Canada to fund the Trans Mountain Pipeline. However, they've since sold that pipeline back to Canada. What, if anything, have we heard about what Kinder Morgan is going to do with that Kinder Morgan Canada entity and what its future is for the business?

DiLallo: They're currently exploring strategic alternatives for that. From what they've said, their alternatives are, they could sell it outright to another company for cash, they could merge it with another company and do a share-and-cash merger type of deal. They could just leave it alone and let it just be a separate entity. Or they could take it private. They're still analyzing all their options. They thought that they would have a decision by the first-quarter call. But it's just taking longer to analyze the options. It's a pretty complex thing. They do expect it to wrap up in the next couple of weeks. I would expect an announcement soon. My gut feeling is that they're going to sell it because it just seems like that's the direction that...they're not hinting that way, but it just makes sense to get rid of that now, one way or the other. It just doesn't have the growth that they're looking for elsewhere.

Sciple: Yeah, it seems it was really a tough break with the company. It seemed to be they had huge opportunities with this Trans Mountain Pipeline, and just politically, it didn't work out for them, they had to sell it back to the government. Still working through those issues. We'll have to watch and see how things happen.

The last thing we wanted to look for in this Q1 earnings, and probably the thing a lot of investors want to look for is, how is Kinder Morgan going to continue to expand its business? What did we see? I know they laid out a new Permian pipeline. What are we seeing from Kinder Morgan when it comes to new expansion deals and how they're going to grow the business moving forward?

DiLallo: They secured another $600 million in projects during the quarter. They had completed $200 million. That was a net add of $400 million. That's a good starting point. Their goal is to get between $2 billion and $3 billion a year in high-return expansion projects. They're well on their way to that. As you mentioned, there's a lot of different things in the pipeline, so to speak. One of the highlights of the conference call was that they're working on a third gas pipeline in the Permian. There's a lot of interest behind that. What's interesting about that is, there's so many other companies trying to build a Permian gas pipeline. You've got Targa, NextEra Energy, they've proposed the Whistler pipeline. They basically proposed that right around the same time Kinder Morgan came out with the Permian Highway Pipeline. Kinder Morgan beat them to the punch with that one. It'll be interesting to see if they can stay ahead of rivals and get that third pipe out there.

Sciple: A lot of opportunities there in the Permian. An exploding region. For a company like Kinder Morgan, great opportunity to service those folks, bring that oil and natural gas off of the shale plays. LNG seems to be moving forward. A lot of opportunities there for Kinder Morgan.