Kinder Morgan (KMI -0.05%) ended 2022 on a strong note. Its distributable cash flow was up by a double-digit percentage, fueled partly by improving energy market conditions. As a result, its full-year earnings were also up by a double-digit percentage after adjusting for the positive impact of winter storms in 2021.
Here's a closer look at the dividend-paying pipeline giant's fourth-quarter results and what lies ahead for it.
Drilling down into Kinder Morgan's earnings
In the fourth quarter, Kinder Morgan generated distributable cash flow of $1.217 billion, or $0.54 per share. That was up 11% on an absolute basis and up 13% per share after accounting for the impact of the company's share repurchase program. The company benefited from the strength of its natural gas pipeline operations and carbon dioxide business.
Data source: Kinder Morgan. Chart by the author.
Natural gas pipeline earnings soared by 11% compared to the prior-year period. The company benefited from higher contributions by several pipeline systems, increased volumes on one of its gathering systems, and more favorable pricing on another system. Driving the higher volumes were colder winter weather, the retirement of coal-fired power plants, increased deliveries to liquid natural gas (LNG) customers, and improving market conditions that led producers to boost their output.
The other highlight of the quarter was the company's carbon dioxide segment. Its earnings soared by 23%, fueled by higher oil, natural gas liquids, and carbon dioxide prices, which were all up by double-digit percentages compared to the prior-year period. Kinder Morgan also benefited from higher carbon dioxide sales as oil companies used more of the gas to boost crude output from their legacy fields.
Those growth drivers helped offset flat results at its terminals and a 10% earnings decline from its product pipelines. The company faced various headwinds in both segments, including higher operating expenses and lower volumes for some products.
For the full year, Kinder Morgan produced distributable cash flow of $4.97 billion, or $2.19 per share. While that was down 9% from 2021, that was due entirely to non-recurring revenue earned during the extreme winter weather in February 2021. Without that impact, Kinder Morgan's cash flow would have risen 14% in 2022.
A look at what's ahead for Kinder Morgan
Kinder Morgan expects to generate about $4.8 billion, or $2.13 per share, of distributable cash flow in 2023. That implies earnings will decline by about 3%. This forecast slump is entirely due to the impact of higher interest rates on its floating rate debt, which will cut distributable cash flow by about $0.15 per share this year. Without that impact, it would be expected to increase by about 5%.
That's still enough cash to cover the company's dividend (which it intends to increase by another 2% in 2023) and $2.1 billion of capital projects with room to spare. The company is investing money to build additional natural gas pipeline capacity and renewable natural gas production facilities. With it on track to produce excess cash, Kinder Morgan expects to end the year with a net leverage ratio of 4.0, well below its long-term target of 4.5. That gives it the flexibility to make opportunistic investments and share repurchases.
The company increased its ability to repurchase shares by boosting its authorization by $1 billion, pushing its total authorization to $3 billion. The company had already repurchased $943 million worth of shares at an average price of $17.40. Future repurchases could help boost its distributable cash flow per share this year.
Meanwhile, it continues to seek out new investment opportunities. As CEO Steve Kean stated in the earnings release:
Our own and independent analysts project that demand from LNG facilities is expected to double in the coming years, and we are moving forward with projects to provide additional transport capacity for that growing market. With a large portion of our existing network in Texas and Louisiana -- where nearly all of that LNG demand growth is expected to occur -- we expect to largely serve that growth with highly capital-efficient expansions on our existing network.
Because of that, the CEO believes that "KMI's future is bright."
Steady as it goes
Kinder Morgan has a simple business model. It operates an extensive portfolio of energy infrastructure assets that generate lots of cash. It uses that money to pay an attractive and growing dividend (that currently yields 6%), invest in expansion opportunities, maintain a strong balance sheet, and opportunistically repurchase shares. Those characteristics make it an ideal buy for investors seeking a rock-solid and steadily rising income stream.
