Last year, Kinder Morgan (KMI -0.32%) delivered an earnings gusher in the first quarter by taking advantage of opportunities that arose when winter storms hit Texas. Because of that, the natural-gas pipeline giant went up against a tough comparable quarter this year. As such, the headline numbers might seem awful at first glance, but they're much stronger than they appear after adjusting for that one-time event. Here's a closer look at the quarter and what's ahead for Kinder Morgan.
Drilling down into the numbers
Kinder Morgan generated $1.455 billion of distributable cash flow during the first quarter, down 38% year over year. That's due to weakness in its natural gas and carbon dioxide segments.
Data source: Kinder Morgan. Chart by the author.
While the natural gas segment's earnings were down 38% from the year-ago period, that's due entirely to nonrecurring earnings from last year's storms. Excluding that impact, its financial performance improved year over year due to higher contributions from several systems and the acquisition of Stagecoach Gas Services. Natural gas transportation volumes were 2% higher, while natural gas gathering volumes rose 12%. The driver was increased production in the U.S., thanks to higher oil and gas prices.
Contributions from the company's products pipeline segment surged 14%. Total volumes for refined products jumped 7%, primarily led by a strong rebound in jet fuel demand, which rose 38% year over year.
Earnings for the terminals segment improved by 5%. The company saw strong liquids volumes due to higher refinery utilization rates and the continued recovery in energy demand.
Lastly, earnings from its carbon dioxide segment slumped 29%. However, that's also mainly due to a storm benefit in the year-ago period. Kinder Morgan returned power to the grid by curtailing oil production, providing it with an economic boost. Adjusting for that positive impact, the company delivered strong underlying performance. While oil production was flat with the prior-year period, its realized crude pricing was 31% above last year's level. Meanwhile, volumes of natural gas liquids rose 7%, while prices soared 117%.
After excluding the impact of last year's winter weather, Kinder Morgan's distributable cash flow was up 16% year over year, enabling the company to exceed its budget by $62 million, or 4%. That helped it generate $822 million in excess cash after paying its dividend.
What's ahead for Kinder Morgan
Thanks to its strong showing in the first quarter, Kinder Morgan expects its full-year results to exceed its 2022 distributable cash flow budget of $4.7 billion. The company also anticipates that its leverage ratio will meet or exceed its target of 4.3 times debt to earnings before interest, taxes, depreciation, and amortization (EBITDA).
Given its strong cash flow, the company followed through on its pledge to increase its dividend by 3%. That marked its fifth straight year of increasing its payout. It continues to estimate that it can generate enough cash to cover that higher dividend and its capital expenses with room to spare. That will give it the funds to strengthen its already solid balance sheet, return additional capital to investors via its share repurchase program, and pursue new growth-related investments.
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CEO Steve Kean stated in the earnings press release, "We are seeing great opportunities, both in our traditional segments and in our growing participation in the low-carbon energy evolution." He pointed out that higher commodity prices are driving more-favorable renewals from customers and the potential for incremental growth opportunities.
One potential project is adding compression to the Permian Highway and Gulf Coast Express pipelines. It's exploring the prospect of adding more than 1 billion cubic feet per day of natural gas pipeline capacity as early as the fourth quarter of next year.
The company also continued to make progress on a renewable diesel hub project in Southern California. And Kean said, "Our investment in renewable natural gas is presenting good additional growth opportunities." Its success in securing these and other opportunities could help drive growth in the coming years.
Plenty of fuel to keep growing the dividend
Kinder Morgan exceeded its expectations in the first quarter as higher commodity prices are driving producers to ramp up their drilling activities. Those strong market conditions have the company on pace to beat its budget for the year and are starting to supply it with more investment opportunities. Because of that, Kinder Morgan should generate a rising stream of cash to continue growing its 5.5%-yielding dividend in the coming years.
