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Is Kinder Morgan's Growth Sustainable?

By Rekha Khandelwal – Feb 11, 2020 at 9:15AM

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Kinder Morgan has progressed on the recovery path, but is the growth sustainable?

Kinder Morgan's (KMI -0.71%) stock has outperformed energy sector peers in the last couple of years. The company's strong operational performance combined with its financial discipline has brought investors back to the stock. Kinder Morgan's latest results reinforce investor's faith in the company. However, more importantly, several factors indicate that the company is firmly set for future growth.

Global natural gas demand

Natural gas operations account for roughly 60% of Kinder Morgan's earnings. And that's one of its key segments where the company has seen consistent growth. Kinder Morgan's natural gas pipeline volumes grew 14% in Q4 2019 -- the eighth consecutive quarter of more than 10% year over year rise. The rise in volumes reflected in natural gas pipelines segment's earnings, which grew 10% in full-year 2019 over 2018. 

natural gas drilling rig

Image Source: Getty Images

More importantly, this growth in volumes isn't just one time or short-term. Kinder Morgan expects US natural gas demand to rise by around 30% in the next ten years, driven by LNG exports, demand from the petrochemical and power sectors, and exports to Mexico.  Kinder Morgan, which transports about 40% of the US natural gas, should benefit from the higher demand. Globally, huge energy demand from developing economies is expected to absorb the US surplus supply. Kinder Morgan's long-term growth here looks sustainable.

Products, terminals, and CO2

It's not only the natural gas operations that provide the midstream operator with impressive growth prospects. While Kinder Morgan's gas operations are expected to significantly drive the company's earnings growth, its products pipelines business is expected to show consistent growth driven by modest demand growth in the US markets. In 2019, the segment's earnings grew by 3%.  

At the same time, increased crude oil, refined products, and liquids exports should drive Kinder Morgan's terminals earnings. Like other segments, take-or-pay and other fee-based contracts underlie terminals segment's earnings. The company is enhancing its renewables storage and blending capabilities at key hubs in response to market demand.

Kinder Morgan's CO2 operations add to the company's earnings without much additional investments. As the segment's operations are exposed to commodity prices, Kinder Morgan keeps a higher return threshold compared to other segments while evaluating projects for the CO2 segment. Secondly, the company hedges a bulk of segment's volumes, limiting the downside risk. This strategy should allow the company to capture higher profits when commodity prices are supportive. As an example, improved Midland-Cushing differential hedged price is expected to contribute to the segment's 2020 earnings growth.  

Projects backlog

A key factor concerning investors off-late relating to Kinder Morgan's growth is its dwindling projects backlog. Notably, Kinder Morgan placed two big projects -- the Gulf Coast Express pipeline and the Elba Liquefaction project -- into service in 2019 that contributed to the fall in backlog. Kinder Morgan's current backlog accounts for roughly one-and-a-half years of growth based on its historical investment of $2 billion-$3 billion per year in growth projects.

Kinder Morgan has adopted a cautious stance while selecting newer projects. While this may admittedly slow down earnings growth temporarily, the company should not have trouble finding growth projects as the near-term headwinds go away and the demand remains robust. A temporary period of slower growth is better than doing projects just to grow, but which do not contribute positively to returns. Kinder Morgan's approach is, in fact, far more supportive to its sustained longer-term growth.

Disciplined growth

Kinder Morgan has a projects backlog of $3.6 billion, which should continue to fuel its earnings growth. The company reduced its net debt by $1.1 billion in 2019 and has reduced net debt by more than $9 billion since 2015.  With leverage under control, the company is better positioned than ever to benefit from the rising natural gas demand. Moreover, the company is committed to maintain its financial flexibility. It's progressing well with its key projects including the Permian Highway Pipeline project. Overall, Kinder Morgan seems to be pushing all the right levers for sustained growth while delivering an attractive yield.

Rekha Khandelwal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

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