Kinder Morgan's Earnings Slump as Coronavirus Upends Demand

The COVID-19 outbreak had a significant impact on energy demand during the second quarter when many states issued stay-at-home orders to help slow the spread. That affected Kinder Morgan's (KMI -1.56%) second-quarter results since it has some exposure to fluctuations in both volumes and prices, which were under pressure during the quarter.

On a more positive note, the company is starting to see some green shoots in many of its businesses, which gives it increasing confidence in achieving its revised guidance and eventually delivering its promised dividend increase to $1.25 per share. 

Drilling down into Kinder Morgan's earnings

Data source: Kinder Morgan.

Kinder Morgan's earnings and cash flow fell by more than 10% due to headwinds across all its business segments:

Data source: Kinder Morgan. Chart by the author.

Earnings from natural gas pipelines declined by 5% year over year. That's primarily due to lower volumes across many of its gathering and processing assets because its producing customers had to shut-in wells due to weak prices. That more than offset a 3% increase in transportation volumes, thanks to the recent completion of the GCX pipeline.

Carbon dioxide segment earnings tumbled 15% due to lower oil and carbon dioxide volumes and NGL prices. On a positive note, the company's realized oil price per barrel sold increased 1% year over year despite plunging crude prices thanks to its hedging contracts.

Products pipelines earnings plunged 26% in the quarter due to a "severe decline in refined product demand," the company said, and lower oil volumes. Overall, refined product volumes cratered 31% because of stay-at-home orders, which impacted gasoline demand.

Finally, earnings in the terminals segment slumped 21%. That's mostly because it sold its interest in Kinder Morgan Canada last year. The company offset some of this impact thanks to historically high utilization at its liquids storage terminals.

Image source: Getty Images.

What's ahead for Kinder Morgan

Kinder Morgan initially anticipated that it would generate $7.6 billion of adjusted EBITDA and $5.1 billion, or $2.24 per share, of distributable cash flow (DCF) in 2020. But it revised those numbers lower when it reported its first-quarter results in May. That outlook has adjusted EBITDA and DCF coming in slightly more than 8% and 10% below budget. It reaffirmed that guidance this quarter, though it noted that market conditions remain uncertain, implying that its final numbers could come in above or below that revised outlook, depending on how quickly demand rebounds.

Kinder Morgan has also reduced its capital spending plan by $660 million from its initial $2.4 billion budget. That will result in a net $100 million improvement in free cash flow, enabling it to cover both capital spending and the dividend with DCF. By living within its means, Kinder Morgan will keep its balance sheet in tip-top shape.

Kinder Morgan plans to revisit its dividend next January. The company initially promised to boost it by 25% this year to an annual rate of $1.25 per share. But it only ended up increasing it by 5% because of the impact of COVID-19. As long as market conditions improve, the company will fulfill its promised dividend level, which it could announce following its next board meeting in January.

Reasonably resilient amid the storm

Kinder Morgan's second-quarter results show the overall durability of its business model. While its earnings and cash flow did decline by double digits, that's relatively minor compared to how lousy market conditions were in the period, since its contract profile helped cushion much of the blow. Because of its resilience and strong balance sheet, the company should make it through this downturn relatively unscathed, which would allow it to deliver on its promised dividend boost early next year.