Kinder Morgan (NYSE:KMI) closed 2020 on a down note as its earnings and cash flow declined. Several factors weighed on its results, including asset sales, lower volumes, and weaker commodity prices. Unfortunately, the company expects that downward trend to continue in 2021 even though it recently completed a needle-moving project, and energy market conditions are on the upswing. 

Here's a closer look at its fourth-quarter results as well as what the energy infrastructure giant sees ahead in 2021.  

Drilling down into Kinder Morgan's first-quarter results

Metric

Q4 2020

Q4 2019

Year-Over-Year Change (Decline)

EBITDA*

$1.837billion

$2.020 billion

(9.1%)

Distributable cash flow (DCF)

$1.250 billion

$1.354 billion

(7.7%)

DCF per share

$0.55

$0.59

(6.8%)

Data source: Kinder Morgan. * Adjusted earnings before interest, taxes, depreciation, and amortization.

Kinder Morgan's earnings and cash flow declined in the fourth quarter due to weaker results across all four of its operating segments:

Kinder Morgan's earnings by segment in the fourth quarter of 2020 and 2019.

Data source: Kinder Morgan. 

Earnings from the company's natural gas pipeline operations fell about 5% year over year in the fourth quarter, pushing its full-year results down by 3%. Weighing on this business were lower contributions from several natural gas gathering and processing assets due to lower natural gas production tied to weaker oil and gas prices. The sale of the U.S. section of the Cochin Pipeline also impacted these results.

Earnings from products pipelines tumbled more than 20% in the fourth quarter and by 18% for the full year. The primary issue was low demand for refined products because of the COVID-19 outbreak, which also affected oil volumes. Crude oil volumes were down 26% year over year during the fourth quarter, while refined products volumes slumped 13%, mainly because of a 47% slump in jet fuel volumes.

Earnings from the company's terminals declined by 11% during the fourth quarter and 16% for the full year. The primary issue was the sale of the company's interest in Kinder Morgan Canada in late 2019. Without that sale, earnings from its terminals would have been about flat with 2019's level in the fourth quarter.

Finally, earnings from Kinder Morgan's carbon dioxide business was 10% lower in the fourth quarter and down 8% for the year. The main issues were lower carbon dioxide sales and oil production volumes. On a more positive note, the company sold its oil for an 11% higher price on average due to its hedging contracts.

A gas field covered in snow at sunset.

Image source: Getty Images.

What's ahead for Kinder Morgan

Last year was a tough one due to the market disruption caused by the pandemic. While the company generated nearly $4.6 billion in cash, that tally was about 8% below 2019's total. Furthermore, even though it increased its dividend by 5% for the year, that was much less than the 25% boost it initially promised. Though on a positive note, the company generated enough cash to cover that payment and its $1.72 billion expansion program with room to spare. Meanwhile, Kinder Morgan completed its largest growth project, the $2 billion Permian Highway pipeline, despite permitting and legal challenges.

However, with the oil market still reeling from the pandemic, Kinder Morgan expects its results to continue declining in 2021. Overall, it sees its cash flow coming in at about $4.4 billion, which would be about 4% below last year's level due to the impact of lower oil prices on its carbon dioxide business, lower volumes, and lower rates on recently renewed contracts.

That's still enough cash to cover its dividend (which it intends on increasing by another 3%) and its $800 million capital spending program, with about $1.2 billion to spare. The company expects to use those remaining funds to repay debt and repurchase up to $450 million in stock.

While it's still early, it doesn't appear as if Kinder Morgan will return to growth anytime soon since it expects capital spending to fall by nearly $1 billion this year. That's in addition to the $680 million it lopped off of last year's initial $2.4 billion expansion program. With fewer expansion projects, the company has less fuel to offset the headwinds facing its business, which could put additional pressure on its cash flow in the coming years. However, the company should continue to generate significant free cash flow, which it can use to fund its 6.7%-yielding dividend, repay additional debt, and buy back more stock.

Durable income with questionable upside

On the one hand, Kinder Morgan struggled in 2020 as the oil market's downturn impacted its operations. But the company delivered relatively steady results amid that storm as its cash flow didn't decline as deeply as others in the sector. That enabled it to continue increasing its dividend, which it expects to do again this year. While it could continue increasing its payout in the future, since it's spending less cash to expand, it needs to figure out another way to grow its earnings to help jump-start its stock.