Please ensure Javascript is enabled for purposes of website accessibility

3 Questions Kinder Morgan Investors Want Answered This Week

By Matthew DiLallo – Apr 20, 2020 at 9:11AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The gas pipeline giant expects to report its results after the market closes on Wednesday.

Shares of Kinder Morgan (KMI -2.66%) have been battered and bruised this year. Overall, its stock is down about 30%, though it fell more than 50% from the high at one point. The main factor weighing on the stock is the impact the COVID-19 outbreak is having on demand for the energy products it transports and stores.

That uncertainty-fueled sell-off has investors questioning what's ahead for Kinder Morgan. The company will hopefully have some answers to a few key questions this week when it reports its first-quarter results. 

A group of wells connected by a pipeline.

Image source: Getty Images.

1. How much will COVID-19 affect volumes?

Heading into this year, Kinder Morgan anticipated that it would generate $5.1 billion, or $2.24 per share, of free cash flow. Both numbers would be about 2% above 2019's level as the benefit from expansion projects, and lower interest rates would more than offset the sale of its Canadian subsidiary and the U.S. portion of the Cochin Pipeline to Pembina Pipeline (PBA -3.01%).

That outlook, however, assumed certain things, including prices for oil and gas, as well as certain volume levels. The company, for example, based its budget on oil averaging $55 a barrel and volume growth of 2% and 10%, respectively, for refined products and crude oil. Oil has since crashed below $20 a barrel. Meanwhile, demand has cratered because of the impact the COVID-19 outbreak has had on travel.

Consumption has fallen so dramatically that oil and refined products are piling up in storage. At the current rate, the country will run out of room by mid-May, according to an estimate by oil pipeline giant Plains All American Pipelines (PAA -4.41%). That's leading oil producers to start shutting in wells. Kinder Morgan's volumes are therefore likely to be less than anticipated, which will have some impact on earnings. The big question is how much it will affect the company's 2020 results, which the pipeline giant will hopefully answer this week by providing an updated outlook.   

2. What's the deal with the dividend?

Kinder Morgan entered 2020 in its strongest financial position in years. The company's leverage ratio was on track to average 4.3 this year thanks to its transaction with Pembina Pipeline, which would be comfortably below its 4.5 target. This improvement increased its confidence in its plan to boost its dividend by another 25% this year.

However, given the likely impact of the COVID-19 outbreak on its cash flows, it's unclear what the future holds for the dividend. Several of its peers have opted to reduce their payouts during this time to strengthen their balance sheets, including Plains All American. Kinder Morgan will hopefully provide investors with some clarity on the future of the dividend this week.

3. Is it deferring any expansion projects?

Kinder Morgan entered the year with $3.6 billion of expansion projects under construction, roughly $2.4 billion of which it expected to fund this year. However, with oil prices and demand cratering, several of the company's peers have cut capital spending by deferring projects. Plains All American, for example, reduced its 2020-2021 capital spending program by $750 million, or about 33%, in part because of project cancellations and deferrals.

Kinder Morgan could also announce a capital spending reduction. The most likely area would be within its carbon dioxide business because of low oil prices and demand. However, the company could delay other projects because customers won't need the capacity as early as initially expected. While a spending cut would affect future earnings growth, it would help preserve its near-term financial flexibility.

Lots of questions

The COVID-19 outbreak plunged the energy industry into a period of intense uncertainty. It's unclear how much demand for oil, gas, and refined products will decline or how long it will take for consumption to bounce back.

While Kinder Morgan won't have all the answers this week, it will hopefully provide investors with some important ones. That could help determine whether Kinder Morgan's sell-off is a buying opportunity or if shares might have further to fall.

Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$16.09 (-2.66%) $0.44
Plains All American Pipeline, L.P. Stock Quote
Plains All American Pipeline, L.P.
PAA
$10.18 (-4.41%) $0.47
Pembina Pipeline Corporation Stock Quote
Pembina Pipeline Corporation
PBA
$30.33 (-3.01%) $0.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.