Kinder Morgan (NYSE:KMI) delivered solid growth last year -- its cash flow rose 6% overall and 5% on a per-share basis. That pace will moderate considerably this year to slightly above 2%. While that's largely because the company closed the sale of its stake in Kinder Morgan Canada and the U.S. portion of the Cochin Pipeline to Pembina Pipeline in December, concerns about its growth profile have emerged over the past few quarters. Driving those worries is the shortage of new project announcements from the company.
Its management team, however, made it clear on the fourth-quarter conference call that they're not concerned. They believe the energy company can keep finding high-return investment opportunities. Though, even if they can't, Kinder Morgan still has plenty of ways to deliver value to shareholders.
We won't force things
One of the main ways Kinder Morgan grows its value is by expanding its midstream footprint. Historically, it has invested between $2 billion and $3 billion a year on expansion projects, and it routinely secures new ones in the same range each year. In 2019, however, the company only approved about $1.2 billion of new projects. As a result, it ended the year with a project backlog of $3.6 billion -- down from the $5.7 billion with which it started the year -- implying only that it only has about a year and a half of growth left ahead.
Its failure to keep the backlog robust wasn't for lack of trying. The company, for example, walked away from a proposed joint venture with Canadian pipeline giant Enbridge (NYSE:ENB) to build an offshore oil export terminal in Texas. In hindsight, that proved to be a wise move since Enbridge put that project on hold when it joined Enterprise Products Partners (NYSE:EPD) to help develop its facility. Meanwhile, it was working on a joint project with Tallgrass Energy (NYSE:TGE) to increase oil transportation capacity in the Rockies, but couldn't get enough shippers to sign up due to all the competition in that region to move those barrels. Finally, the development of a third gas pipeline out of the Permian Basin hit a snag when customers didn't sign on as quickly as expected.
While this lack of progress is disappointing, it's all part of being disciplined. That's a theme Kinder Morgan's management reiterated on the call. CEO Steve Kean, for example, said that "if we don't find that much in new opportunities [$2 billion to $3 billion per year], we are not going to force it."
Founder Richard Kinder said something similar: "Looking forward, I assure you that we will not be chasing acquisitions or expansion projects that do not meet our strict criteria for delivering solid and transparent returns."
Lots of other options to grow shareholder value
The reason Kinder Morgan won't chase growth is that "we have other opportunities to deliver value to our shareholders," said Kean. Both he and Kinder laid those opportunities out more than once on the call:
- Maintaining a strong balance sheet.
- Returning cash to shareholders through dividends and share buybacks.
- Investing in growth opportunities when they meet its strict returns criteria.
The company already has a strong balance sheet thanks to the Pembina transactions, which pushed its debt-to-EBITDA ratio down to 4.3, below management's target of 4.5. That gives the company an estimated $1.2 billion of additional financial flexibility this year that it could use to invest in new growth initiatives.
If good options don't materialize, the company could retain its flexibility for the future or return additional cash to investors via its share repurchase program or even a special dividend. Those actions would deliver more value to its investors than a low-return project or high-priced acquisition. The key is that Kinder Morgan plans to remain disciplined in allocating its excess capital.
Growing value doesn't always mean increasing in size
Kinder Morgan would love to find more expansion projects that meet its strict criteria since those have the potential of producing the highest returns for investors compared to other options. However, it won't lower its standards simply so that it can maintain its prior pace of expansion.