The global oil industry is in crisis as demand for refined products has plummeted under stay-at-home orders. Those same orders, enacted by governments to slow the spread of COVID-19, have also affected commercial and industrial activity, reducing the demand for electricity and other utility services.
As a result of concerns over the depth of the oil and gas market collapse, investors have run from Kinder Morgan (NYSE:KMI), sending shares of the oil and gas logistics giant down 34% from their high this year.
At the same time, global infrastructure giant Brookfield Infrastructure (NYSE:BIP)(NYSE:BIPC) units are down 23%, joining many other utility-like businesses that have seen investors sell from fears that demand for their services would fall.
While I understand why many investors have sold these two -- particularly Kinder Morgan, with its exposure to oil demand -- they both look like compelling buys at recent prices. Kinder Morgan's business is much more diverse than just shipping and storing refined products, while Brookfield Infrastructure's assets are key pieces of the economy in the areas in which they operate, even under social lockdowns.
However, which one is the better buy: Kinder Morgan and its massive natural gas logistics business (that's less-impacted by the oil crash than investors may realize), or the diversified Brookfield Infrastructure (which doesn't represent nearly the discounted opportunity)?
Let's compare them and see which one comes out ahead.
The case for Kinder Morgan
The clear risk for Kinder Morgan is the reality that it's in the oil business. Gasoline consumption in the U.S. fell to Vietnam-War-era levels in April, and even after a recent rebound, it's still down 40% over the past four weeks. The company counts on shipping and storing oil and refined products as part of its business, and the longer demand stays down, the less oil and refined products it will be able to move through its system and charge customers for.
Yet even with these risks, Kinder Morgan is probably much safer than many investors may realize. There are three big reasons why:
- 90% of its cash flow is from take-or-pay and fixed-fee contracts.
- 76% of its customers have investment-grade credit ratings; 70% are end-users of product.
- Natural gas provides the vast majority of its cash flow.
The last bullet above, especially, is really important. Yes, reduced commercial and industrial activity has cut U.S. electricity consumption, reducing the amount of natural gas Kinder Morgan will move though its pipelines to utility customers, but it's still holding up far better than oil.
Moreover, it's also something that will benefit Kinder Morgan almost immediately as economic activity recovers, while it may take a bit longer for its crude and refined products segments to see a boost.
This is why, when the company reported first-quarter results in late April, the board of directors was still comfortable raising the dividend 5%, and management still expects to generate $4.6 billion in distributable cash flow this year. That's down about 10% from the initial forecast, but it's still far better than many other oil companies that are going to lose billions this year. The company was able to answer a lot of questions investors had this quarter.
Paying a 34% discount from recent highs for a modest dip in this year's results makes Kinder Morgan a pretty solid value. Add a strong dividend that yields over 7% after the recent increase, and the company's a real bargain.
What about Brookfield Infrastructure?
Brookfield Infrastructure also has some exposure to energy. The company, which is structured as both a limited partnership with the "BIP" shares and as a corporation via the "BIPC" stock ticker, has made energy assets a bigger part of its portfolio in recent years. More than half of the company's cash flow came from energy in 2019, with natural gas distribution and pipelines prominent parts of its portfolio.
However, unlike Kinder Morgan, the company doesn't count crude oil assets in the mix at all. As a result, its downside risk from the current energy turmoil is less than even Kinder Morgan's.
At the same time, it's also far more diversified, both in the assets it owns and geographically. Kinder Morgan is essentially a bet on one of the biggest logistics providers to the North American oil and natural gas industries, while Brookfield also owns water, telecommunications, freight, and human transportation infrastructure assets on four continents.
Moreover, many of those businesses are regulated monopolies or offer services under firm long-term contracts, and all with significant financial barriers to competitive entry. Its contracts are also structured to adjust for inflation and to hedge against monetary exchange rate fluctuation.
Add it all together, and Brookfield Infrastructure may not be as cheap as Kinder Morgan, but it is a more diversified business across multiple asset types, and with far better long-term prospects than a company built around fossil fuels.
Why Brookfield Infrastructure comes out ahead
As much as Kinder Morgan is an excellent value today, and its 7%-plus dividend is a lot more generous than Brookfield Infrastructure's 5.3% payout, the nature of their two businesses sets Brookfield Infrastructure apart -- and ahead.
In short, Kinder Morgan is a pure play on oil and gas demand in North America. And while I'm not one to call for a quick demise for fossil fuels, at some point, the company will have to completely reinvent itself to have a future. Alternative and renewable fuels are already taking market share from fossil fuels, both in power generation and transportation, and I expect that disruption to accelerate in the coming years.
That's not a problem for Brookfield; to the contrary, between the two, it's far better-positioned to profit from the trends that are driving the future. The company's management is always on the hunt for the right assets to acquire, including water, telecommunications, and transportation infrastructure. Over the next decade-plus, these kinds of assets will be in higher demand as the global middle class expands. Over that same decade, I think it's not a stretch that Kinder Morgan could see demand for refined products in North America peak and start to decline, and potentially see a similar fate with natural gas not long after.
So sure, investors who buy Kinder Morgan could make good money over the next few years, or even the next decade. It's a good company with solid assets and a strong balance sheet, trading for a meaningful discount today.
But Brookfield Infrastructure is a business built to last for generations. Water, telecommunications, and transportation aren't facing the same sort of disruption fossil fuels are. Instead of buying a good business at a great price, it's time to buy a wonderful business -- Brookfield Infrastructure -- at a very, very good price.