Kinder Morgan's (KMI -0.19%) management team believes it offers investors a compelling investment proposition. On its recent first-quarter conference call, several senior leaders laid out the case of investing in the company. CEO Steve Kean summed them up into a few main points. Here are the many reasons why they believe the company makes a great investment.
We have a strong and flexible balance sheet
Kean began his overview by stating, "Our balance sheet is strong...We built our budget for this year with balance sheet capacity available to enable opportunistic share repurchases and incremental investment opportunities at attractive returns, and we have done both."
Kinder Morgan entered 2023 with tremendous financial flexibility. It ended the first quarter with a net debt-to-adjusted EBITDA ratio of 4.1 times, well below its 4.5 times target. The company estimates that it has $770 million of investment capacity for every 0.1 times it's below its target, implying it currently has over $3 billion of spare capacity. That's giving it the flexibility to opportunistically repurchase shares (it bought back 6.8 million for $113 million in the first quarter) and sanction additional high-return expansion projects (it added about $400 million to its backlog in the period).
Our backlog of attractive projects is growing
Next, Kean drilled down into its expansion project backlog, which has been on the rise. The CEO noted, "Our current backlog is $3.7 billion, up $400 million quarter-to-quarter, and had an aggregate EBITDA multiple of 3.5 times." That increase shows the company has continued to find new opportunities with very attractive investment returns.
Contract renewal rates are improving
Weaker market conditions in recent years have impacted the rates Kinder Morgan could get on renewals as legacy contracts expired, causing an earnings headwind for the company. However, Kean noted on the call that renewals "are showing more increases." That's helping drive stronger results in its base business. Earnings in its natural gas pipeline business were up 10% in the first quarter, partly helped by an improving base business.
Our assets will remain essential for a long time
Another issue that has weighed on Kinder Morgan's stock in recent years is the view that it owns stranded assets that will eventually become worthless as the world switches to lower carbon energy. However, Kean stated: "Hydrocarbon infrastructure is going to be needed for a very long time to come in its current use. The world needs reliable and affordable energy to advance human development, and it needs natural gas transportation and storage assets to backstop renewables."
According to the International Energy Agency, fossil fuels will still supply a majority of the world's energy needs in 2050. That means Kinder Morgan's pipelines, processing plants, storage terminals, and export facilities still have long and useful lives.
We're well-positioned for the future
The CEO then ran through several factors driving the company's view that "our assets are also well positioned for the energy forms of the future." He said, "You can see that with the renewable liquid fuels and renewable feedstocks projects in our products and terminals businesses." Kinder Morgan recently completed work on two renewable diesel hubs in California, positioning it to support the growth of that alternative fuel. It's also building several renewable natural gas production facilities and approved its first carbon capture and storage project.
The CEO also pointed out: "Our existing natural gas transportation and storage network is growing more valuable as the grid tightens with increasing demand over time, and increasing volatility. Compounding this effect is the difficulty of siting new infrastructure in many parts of the country. "
Growing demand for natural gas is driving the need for more infrastructure. However, building new fossil fuel infrastructure is getting more challenging because of opposition and permitting issues. As a result, existing infrastructure should grow more valuable since it will be the only way to move hydrocarbons in some places in the future.
Meanwhile, Kean noted, "our network is well positioned for expansion in those parts of the country where it is possible to build new infrastructure, the Gulf Coast primarily." While it's hard to build new pipes in most places, Kinder Morgan owns significant infrastructure in a region where expanding is easier. That positions it to continue securing new investments to grow its cash flow.
Strongly positioned to grow shareholder value
Kinder Morgan's management believes the company has excellent investment characteristics. It has a strong balance sheet, a growing backlog of high-return expansion projects, an improving base business, essential infrastructure, and a strong future position. Add in its high dividend yield and bargain basement price, and Kinder Morgan looks like a screaming buy.
