There are a lot of questions about the future of fossil fuels. That uncertainty has weighed on the value of traditional energy companies like Kinder Morgan (KMI 3.46%). Investors aren't sure if the company can sustain its massive cash flows in the coming decades, which are crucial to supporting its big-time dividend.
The company firmly believes those fears are overblown. It's not alone in that belief, which co-founder Richard Kinder highlighted on the company's first-quarter conference call. It drives the view that Kinder Morgan could continue delivering value to shareholders for decades.
A gas-powered future
Richard Kinder discussed the future of fossil fuels on the call. He stated:
Fossil fuels will supply the great majority of the planet's energy needs for decades. For example, the recent IEA World Energy Outlook predicts that fossil fuels will supply 62% of the world's energy demand in 2050. And just this week, our Assistant Secretary of Energy stated that given the current state of events, and I quote, "the world absolutely needs new gas investment."
Many believe that the demand for fossil fuels will go extinct over the next few decades. However, that's not the consensus view among energy industry experts. Most expect them to supply a substantial portion of the world's growing energy needs in the coming decades.
Kinder further stated:
While we expect that renewables will experience rapid growth over the coming years, the demand for energy as a whole will also increase substantially. Thus driving the continued use of fossil fuels, with natural gas playing an especially important role in the coming energy transition. In my judgment, this outlook deflates the argument of those investors who avoid our segment because they do not believe our assets will produce long-term value.
Because of that, the infrastructure Kinder Morgan owns and operates to transport, process, store, and export fossil fuels will remain vital. Furthermore, the company and its peers will likely need to build more infrastructure to support growing demand, especially for cleaner-burning natural gas. That's getting harder to do. These factors drive the company's view that its assets will grow more valuable as it gets harder to build new infrastructure while demand keeps expanding.
Slowly making the transition to lower-carbon energy
While Kinder Morgan believes demand for fossil fuels will remain strong in the future, it's not naive. It knows that the global economy desires to switch to lower carbon and more sustainable energy sources. That's leading Kinder Morgan to begin investing in infrastructure-supporting lower-carbon energy.
Richard Kinder stated on the call, "Through our investments in renewable natural gas (RNG), renewable diesel, and carbon capture and sequestration facilities, we are participating in the transition to cleaner energy." The company recently completed its renewable diesel hubs in California. Meanwhile, it's in the final stages of commissioning its Twin Bridges landfill RNG facility in Indiana.
The company has two more landfill RNG projects in Indiana under construction that it expects to complete over the next few months. It's also working on converting its recently acquired Autumn Hills facility from using biogas to generate electricity to produce renewable natural gas. Meanwhile, Kinder Morgan and a partner approved a project to capture carbon dioxide at two natural gas-treating facilities. The captured gas will move via a pipeline it operates to the Permian Basin for enhanced oil recovery.
Kinder Morgan will continue to evaluate new opportunities to further support the transition to lower-carbon energy. Future projects could include repurposing existing assets to handle alternative energy and building new infrastructure. For example, there's vast potential to repurpose underutilized pipelines and construct new ones to transport carbon dioxide and hydrogen.
The fuel to sustain and grow the dividend
Kinder Morgan generates nearly $5 billion of cash each year, a little more than half of which it pays investors via its dividend. The payout currently yields over 6%, putting it in the top 10 among S&P 500 members. That high yield is due largely to its extremely low valuation, driven by concerns that the company won't be able to sustain it over the long term.
The company believes that's a flawed view, given the expectations that fossil fuels won't go extinct anytime soon. Furthermore, it's already starting to transition to lower-carbon energy. That should give the company plenty of power to sustain its payout over the long term. Because of that, investors can buy shares of Kinder Morgan to potentially generate a lifetime of dividend income.
