With energy demand having cratered this year because of the COVID-19 outbreak, oil and gas companies are producing lower volume, which is affecting the flow of hydrocarbons through energy midstream networks -- such as those operated by Kinder Morgan (NYSE:KMI). On a more positive note, the company's contract structure has helped cushion much of this blow, which eased the impact on its earnings and cash flow during the third quarter. 

Drilling down into Kinder Morgan's third-quarter earnings

Metric

Q3 2020

Q3 2019

Year-Over-Year Change

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDTA)

$1.709 billion

$1.834 billion

(6.8%)

Distributable cash flow (DCF)

$1.085 billion

$1.140 billion

(4.8%)

DCF per share

$0.48

$0.50

(4%)

Data source: Kinder Morgan.  

Overall, Kinder Morgan's earnings dipped by a mid-single-digit rate from the year-ago period. That was due to weakness in two of its four business segments:

Kinder Morgan's earnings in the third quarter of 2020 and 2019.

Data source: Kinder Morgan. Chart by the author.

As that chart showed, earnings from the company's products pipelines and terminals slumped during the quarter, declining 20% and 17%, respectively. The main issues weighing on products pipelines were low refined product demand and weaker oil volumes. Overall, oil and refined product volumes were down 17% and 16%, respectively, from the prior year. Though on a positive note, they did improve from the second quarter as demand started to recover. Meanwhile, the two factors weighing on the terminals segment was last year's sale of Kinder Morgan Canada and pandemic-driven demand destruction, which caused refined product volumes to slump 22% during the period.

The company's natural gas pipeline operations held up relatively well as, earnings declined by about 1%. That's primarily due to lower gas gathering and processing volumes because of weaker oil prices and the Cochin Pipeline sale last year. The company offset most of this impact thanks to strong results elsewhere and the boost from the recently completed Elba Liquefaction and Gulf Coast Express projects.  

Finally, the carbon dioxide segment delivered somewhat surprising results as earnings rose by 3%. The company benefited from its oil hedging program, which enabled it to realize higher oil prices during the quarter. When combined with lower operating expenses, these factors more than offset weaker carbon dioxide and oil volumes.

Sunset through the twists of a pipeline system.

Image source: Getty Images.

A look at what's ahead for Kinder Morgan

Because of the dislocation in the energy sector this year, Kinder Morgan sees its results coming in below its initial expectations. The company currently expects its DCF to be slightly more than 10% below its initial $5.1 billion budget. Meanwhile, it sees adjusted EBITDA coming in a bit more than 8% below its $7.6 billion plan. That's unchanged from the revised outlook it provided last quarter. 

The company expects to invest roughly $2.4 billion into expansion projects, which is about $680 million below its initial budget. Because of that decline, the company's projected free cash flow will improve by about $135 million over its initial forecast. As a result, it expects to generate enough cash to cover its dividend and capital spending with room to spare, which will enable it to maintain a strong balance sheet.

Kinder Morgan is nearing the completion of its largest expansion project, which should start up early next year. Because of that and limited remaining spending on other projects, the company's capital budget should decline further in 2021, which will free up additional cash that it intends to return to shareholders via dividend increases or share repurchases. As soon as it has finished its 2021 budget, the company expects to determine its fourth-quarter dividend and 2021 policy.

Stability amid the storm

While the deep dive in energy demand has affected Kinder Morgan, its diversification and strong contract profile have helped cushion the blow. It's generating lots of cash, which is giving it more than enough money to fund its growth projects and 8.4%-yielding dividend. Meanwhile, with spending on track to decline next year, it should have more money to return to shareholders, probably through an even higher dividend.