Kinder Morgan (KMI -0.11%) is off to a solid start in 2023. Despite some notable headwinds, the energy infrastructure giant produced results that were within its expectations. That gave the company the confidence to increase its dividend, which already yields more than 6%, by another 2%.
The company should have ample energy to continue increasing its dividend in the future. Here's a look at Kinder Morgan's first-quarter numbers and what's ahead for the pipeline giant.
Drilling down into Kinder Morgan's first-quarter results
Kinder Morgan produced steady results during the first quarter as it battled some headwinds:
|
Metric |
Q1 2023 |
Q1 2022 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$1.996 billion |
$1.967 billion |
1.5% |
|
Distributable cash flow (DCF) |
$1.374 billion |
$1.455 billion |
-5.6% |
|
DCF per share |
$0.61 |
$0.64 |
-4.7% |
Data source: Kinder Morgan.
Kinder Morgan's adjusted EBITDA edged up slightly during the period, primarily driven by the strength of its natural gas pipeline operations. That helped offset weakness in its product pipeline and carbon dioxide operations from lower-than-expected oil and gas prices. Meanwhile, cash flow went down, mainly due to the impact of higher interest rates on the company's floating-rate debt. The company offset some of that impact by repurchasing shares, causing a smaller decline in DCF per share.
Here's a snapshot of the company's performance by segment:
Data source: Kinder Morgan. Chart by author.
Natural gas pipeline earnings grew by more than 10%. The company benefited from higher contributions from several interstate natural gas pipeline systems and most of its gas-gathering systems. Kinder Morgan transported 3% more gas on its long-haul pipelines, while volumes jumped 18% on its gas-gathering systems.
Its Terminals segment earnings rose about 7%. The company benefited from higher rates at its bulk terminals. It also got a boost from recently completed expansion projects and higher utilization at its liquids-handling facilities.
Earnings from product pipelines slumped 16%. That's mainly because commodity prices were higher in the year-ago period.
Lower commodity prices this year also hit earnings in the carbon dioxide segment, which fell 17%. While oil prices were flat, natural gas liquid prices tumbled 22%, and carbon dioxide was down 19%. Meanwhile, oil production declined by 2% due to an extended outage at its SACROC field.
A look at what's ahead for Kinder Morgan
Kinder Morgan is maintaining its 2023 budget outlook. The company continues to expect that it will generate about $4.8 billion, or $2.13 per share, of distributable cash flow. That's down slightly from the $2.19 per share it produced last year.
The main factor weighing down DCF is higher interest rates (Kinder Morgan expected a $0.15 per share impact on DCF this year). However, the company has recently been able to refinance maturing debt and lock in some floating-rate debt at rates below its budget. While that's a net positive for the budget, oil and gas prices are lower than the company expected. As a result, it sees those factors and the strong underlying performance of its business offsetting each other.
Despite those interest-rate and commodity-price headwinds, Kinder Morgan increased its dividend by 2%. That marks the company's sixth straight year of dividend increases.
That steady growth should continue. Kinder Morgan has a conservative dividend payout ratio (53% of its 2023 DCF at the recently increased dividend rate). That's enabling it to retain significant cash. It's using that money to fund expansion projects, repurchase shares, and maintain a strong balance sheet. Kinder Morgan expects leverage to end this year around 4.0 times debt-to-EBITDA, well below its 4.5 times target. That gives it significant financial flexibility to fund new investment opportunities.
The company continues to secure high-return expansion projects. It ended the quarter with $3.7 billion of organic growth projects in its backlog, roughly $400 million more than the end of last year. The natural gas pipeline segment led the way, adding $324 million of projects. A notable one is expanding its Tennessee Gas Pipeline system to allow a customer to retire a coal-fired power plant by supplying it with cleaner-burning natural gas. These high-return expansion projects should enable Kinder Morgan to grow its cash flow in the future. That should allow the company to continue modestly increasing its already sizable dividend.
Plenty of fuel to grow in the future
Kinder Morgan is battling some growth headwinds this year. However, the company expects to eventually overcome them as it continues expanding its infrastructure portfolio. That should allow the company to continue paying and growing its sizable dividend. Because of that, it remains a low-risk way to generate passive income.
