Pipeline giant Kinder Morgan (KMI +0.26%) is spending a lot less money than it used to. Burned by the oil and gas crash of 2014, the company has shifted from a high-debt, high-growth, boom-and-bust strategy to sustaining low growth over the long term.
The company reported Q3 2021 earnings on Oct. 20, and signaled that it plans to keep a tight lid on spending. At first glance, a lack of worthwhile investments may indicate that there are limited opportunities in oil and gas. But dig deeper and you'll find that Kinder Morgan has plenty of ways to invest in new natural gas projects, as well as alternative energy. Here's why its strategy is great news for investors interested in collecting and counting on Kinder Morgan's 6% dividend yield.
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Lean operations
Like most companies, Kinder Morgan's capital expenditures (capex) is made up of maintenance capex and growth capex. In Kinder Morgan's case, maintenance capex can go toward improving existing terminals and pipelines, whereas growth capex would be building a new terminal or pipeline. In years past, Kinder Morgan would spend about $2 billion to $3 billion per year in total capex. Now its goal is to spend around $1 billion to $2 billion in annual capex. However, the company has spent only around $800 million so far this year, and less than $1 billion over the last 12 months.
KMI Capital Expenditures (TTM) data by YCharts
One reason Kinder Morgan's spending has declined is due to its project development timeline. Over the last two years, it has rolled out a handful of major pipelines that transport natural gas from the Permian Basin in West Texas to liquefied natural gas (LNG) export terminals along the Gulf Cast. The Gulf Coast Express pipeline entered into service in September 2019, followed by the Permian Highway Pipeline in January of this year. The company's conversion of the Elba LNG import terminal into a liquefaction facility that can also produce LNG for export was completed and ready for commercial service in August 2020.
Cooling off from years of high spending to develop these projects, Kinder Morgan has made it clear that its intention is to only deploy capital toward investments that can achieve attractive returns. "We're going to be very disciplined in this approach to spending capital, make certain that these are satisfactory returns... we have a lot of uses for our capital, and we're going to be very judicious about how we use it," said Executive Chair Rich Kinder during the company's Q3 earnings call.
Management also said that mega projects were becoming increasingly hard to permit and build. The bulk of Kinder Morgan's long-term growth is associated with supporting LNG and liquids infrastructure near the Gulf Coast. Originally estimating the Permian may need an additional pipeline in 2025, Kinder Morgan said it was in early talks with producers that may want to push the in-service date to 2024, but those conversations are still in the early stages.
Alternative energy spending
During its Q2 earnings call, Kinder Morgan discussed its acquisitions of Stagecoach Gas Services and Kinetrex Energy. In short, Stagecoach pairs well with Kinder Morgan's existing assets in the Northeast, while Kinetrex is an investment in renewable natural gas (RNG).
The two acquisitions blend Kinder Morgan's legacy business with its goal to grow alternative energy spending. Given its capital spending plans, there's reason to believe we could see similar investments from Kinder Morgan going forward.
In its Q3 earnings call, Kinder Morgan said that 69% of its existing backlog supports low-carbon infrastructure (including natural gas), but also renewable diesel and RNG projects. "Importantly, too, that 69% is projected to come in at a weighted average 3.6 times earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple of the expansion capital spend. So, we're getting attractive returns on these investments," said CEO Steve Kean.
Achieving attractive returns from smaller projects and merger and acquisition (M&A) activity fits perfectly with Kinder Morgan's long-term strategy. In addition to LNG, Kinetrex is in the business of constructing RNG plants that are able to convert landfill gas that would otherwise be emitted into the atmosphere into useful RNG. Kinder Morgan called out the attractive returns of these projects on its conference call, saying an installation can require just $25 million to $40 million in capital.
A strategy fit for income investors
Acquisitions and smaller projects give Kinder Morgan the chance to grow its business without the large capital commitments required of mega projects. They also help the company diversify its revenue streams toward projects that support environmental, social, and governance (ESG) criteria. To fund its growing dividend, Kinder Morgan depends on generating returns without overly relying on debt. The company's decision to keep a lid on spending and make strategic acquisitions bodes well for dividend investors that care more about reliable income than fast growth.
