In volatile times, a steady regular dividend income is a big relief. It's also the time when you get stocks at bargain prices. Yields of two such energy stocks -- Kinder Morgan (KMI 0.40%) and ONEOK (OKE 0.01%) -- have become more attractive after their recent fall. The gas-focused players are getting crushed due to the novel coronavirus and lower oil prices, though these should not get impacted as much.
Stronger than before
Kinder Morgan has learned how to survive in lower commodity prices the hard way. After it was forced to slash dividends at the end of 2015, the company has taken significant steps to reduce its leverage and commodity price exposure. Kinder Morgan has reduced its net debt by around $10 billion in the past five years. A significant portion of the company's cash flows are now backed by long-term take-or-pay contracts. At the same time, it is growing earnings steadily, driven by higher natural gas transport volumes.
Still, Kinder Morgan's earnings are not immune to a sustained fall in commodity prices or weakness in demand due to COVID-19. These factors may ultimately reduce U.S. drilling activity, impacting the company's transport volumes. Notably, reduced drilling for oil impacts natural gas production as well, as the two commodities are produced together from most wells. Having said that, the company is not as directly prone to the impacts of lower prices as pure-play upstream players are. It also has the financial strength to sail through periods of volatility while keeping dividends intact. The company expects $2.2 billion in excess distributable cash flow for 2020. That's after paying dividends, which are expected to rise by 25% for the year.
Crude oil prices, and ONEOK stock, fell steeply after the OPEC+ failed to reach a deal to cut output. There are a couple of reasons why ONEOK fell more steeply than its midstream peers. One, the company's natural gas gathering and processing segment exposes it to commodity prices, although to a limited extent. Around 15% of the segment's earnings are based on commodity prices. Secondly, the segment's fee-based earnings may be directly impacted if production declines due to lower commodity prices. Lower production may also impact ONEOK's liquids and gas transport volumes, though the contracts here have volume commitments. However, if the producer customer goes bankrupt or is unable to pay, ONEOK's earnings will take a hit.
Lower commodity prices will also impact ONEOK's growth plans. It has already announced a $500 million cut in its 2020 planned capital expenditure. While this may impact the company's earnings growth, the extent of the stock's fall looks like an overreaction. ONEOK still plans to spend $2 billion on growth projects in 2020.
ONEOK has not yet lowered its earnings guidance for 2020. Several factors support the company's expected earnings growth. More than 550 million cubic feet per day of natural gas gets flared in North Dakota currently, highlighting the need of takeaway capacity. Similarly, low-cost production in Permian Basin looks more insulated from a drop in commodity prices. ONEOK's Permian volumes are fully contracted.
ONEOK's strong distributable cash flow of 1.4 times its dividends for 2019 provides it with the flexibility to weather the challenging price environment. Its strong balance sheet further adds to its flexibility. Having said that, if commodity prices remain suppressed for long, producer bankruptcies are sure to rise. Midstream players like ONEOK will surely face some heat then. Overall, while the earnings may grow at a slower rate, dividends don't seem to be at risk yet.