Kinder Morgan's (NYSE:KMI) third-quarter report was a bit of a mixed bag. While the energy company's natural gas pipeline segment continued to deliver strong results, its overall earnings came in slightly below its budget. The culprits were delays in completing one of its major projects, and some issues with its oil business. The company therefore expects its full-year results to come in a little bit below expectations.

Drilling down into Kinder Morgan's third-quarter earnings

Metric

Q3 2019

Q3 2018

Year-Over-Year Change

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA)

$1.834 billion

$1.857 billion

-1.2%

Distributable cash flow (DCF)

$1.14 billion

$1.093 billion

4.3%

DCF per share

$0.50

$0.49

2%

Data source: Kinder Morgan.

Kinder Morgan's third-quarter results came in just under its budget projections that it would produce $1.15 billion, or $0.51 per share, of DCF, and $1.88 billion of adjusted EBITDA. Overall, however, the company delivered solid results, especially in its key natural gas pipeline segment:

Kinder Morgan's earnings by segment in the third quarter of 2019 and 2018.

Data source: Kinder Morgan. Chart by author.

Earnings in the natural gas pipeline segment jumped 8% year over year, fueled in large part by a 13% increase in natural gas transportation volumes. That marked the seventh straight quarter of double-digit volume growth for that segment. Among the factors driving that growth was the start-up of the Gulf Coast Express pipeline (GCX) toward the end of the quarter. That helped offset the delayed start-up of the company's Elba LNG project, which finally began coming online in late September.

The company's products pipeline segment also delivered solid results, as earnings rose 7% year over year. That's due in part to a 4% uptick in oil volumes in places like the Bakken Shale, as oil companies drilled more wells in that region.

Those two bright spots helped offset weakness elsewhere. Earnings in the terminals segment slipped 1%. That's mainly due to an increase in tank lease costs following the sale of the Trans Mountain pipeline, which also affected the company's former Canada segment. Finally, the carbon dioxide segment's earnings were under pressure because of the continued challenges in the oil market. Lower oil prices not only affected earnings but also caused the company to invest less capital on oil projects, leading to a 7% decline in its oil output.

A group of wells connected by a pipeline.

Image source: Getty Images.

What management had to say about its third-quarter results

While Kinder Morgan's third-quarter results came in slightly below its budget, the company was pleased with its progress during the quarter. CEO Steve Kean stated in the earnings press release that "the third quarter was a momentous one for Kinder Morgan, as we placed two major projects into service." The GCX pipeline started up slightly ahead of schedule, while the first of 10 liquefaction units at Elba finally came online.

Meanwhile, the company continued to generate strong cash flow, including producing $571 million in free cash after paying its dividend, which was 25% above the year-ago level. That led Kean to point out that "we also continued to maintain fiscal discipline by funding growth capital through operating cash flows without accessing capital markets, as we have been doing since the first quarter of 2016."

One concern that emerged during the quarter

With the start-up of GCX and Elba during the quarter, Kinder Morgan has removed them from its backlog. As a result, its backlog now stands at $4.1 billion. That's $1.6 billion less than it was at the end of the second quarter. While the company did add about $200 million of new projects during the quarter, that only brought its year-to-date total of secured expansions to $1.2 billion. That has the company on track to fall well short of its target to add $2 billion to $3 billion of new projects per year. That means the company's growth engine could stall out in the future.

Adding to its growth concerns are the issues it's having with the Permian Highway Pipeline. While the company started construction of that natural gas pipeline during the quarter, regulatory approval has been slower than it anticipated. The company has therefore pushed back the projected in-service date from October of next year to early 2021.

Kinder Morgan also recently agreed to sell its interests in Kinder Morgan Canada and a related pipeline in the U.S. to Pembina Pipeline. While that transaction will help bolster the company's balance sheet, it's giving up the associated earnings, which will be a drag on growth next year.

If the company doesn't begin refilling its backlog soon, its earnings could start heading in reverse again. That's a concern for a company that's no longer on track to grow as fast as it initially expected this year. Because of its issues with Elba and oil prices, 2019's adjusted EBITDA is pace to finish 3% below its budget, or only about 1% above last year's level. Though on a more positive note, cash flow is still on track to rise by around 6% thanks to lower interest rates.

Kinder Morgan's growth engine is starting to sputter

On one hand, Kinder Morgan reported a pretty solid third quarter. While its results came in slightly below budget, the company did finish two large-scale expansion projects, which will supply some incremental cash flow over the next year. However, the delays to both Elba and Permian Highway, when combined with its declining backlog, are increasing concerns about the company's ability to grow in the future. That lack of clarity could weigh on the company's stock in the near term.