Kinder Morgan's (KMI -0.64%) vast energy infrastructure network continues to produce prodigious amounts of cash. The company recently reported its second-quarter results, noting that it generated roughly $1.1 billion in distributable cash during the period. That gave it the money to cover its 6.5%-yielding dividend (one of the top 10 highest payouts in the S&P 500) with ample room to spare. The company continues using that excess cash to further enhance value for investors so it can sustain and grow its high-yielding payout.
Here's a look at the company's most recent quarterly results and what's ahead for the pipeline giant.
Another solid quarter
Kinder Morgan has relatively low earning variability because 67% of its earnings come from take-or-pay agreements (meaning it gets paid regardless of usage) or hedging contracts that lock in pricing. Meanwhile, most of its remaining earnings (26%) come from fixed fees as volumes flow through its systems.
The overall stability of the company's earnings was on full display during the second quarter. Despite significantly lower oil and gas prices, distributable cash flow (DCF) was only down $100 million from last year's second quarter. That put DCF ahead of the company's budget for the period, even though it faced additional headwinds from higher interest costs and sustaining capital expenses. Strong operational performance in its natural gas pipeline and terminals segments helped offset some of that impact:
Data source: Kinder Morgan. Chart by the author.
Natural gas pipeline earnings increased by about 6%, fueled by higher volumes. Growing production and demand boosted volumes in the period. Meanwhile, earnings in the company's terminals segment rose 3%, driven by higher contributions from its tanker fleets as charter rates increased.
The strength of those two business units helped mute most of the impact of headwinds facing its product pipelines and carbon dioxide segments. Product pipeline earnings slipped 4%, driven mainly by falling commodity prices. That headwind also impacted carbon dioxide earnings, which declined by 17% due to decreases in the prices of oil (2%), natural gas liquids (25%), and carbon dioxide (35%). That offset strong oil production growth of 7%, which was above its budget.
Wisely allocating its excess cash
Kinder Morgan generated about $1.6 billion in cash from operations in the quarter. It paid out $637 million in dividends (2% higher on a per-share basis) and incurred $535 million of capital expenses (including spending on growth capital projects). That enabled it to generate $378 million in excess free cash flow.
Kinder Morgan used about $200 million of that cash to opportunistically repurchase shares during the second quarter at an average price of $16.57. It has now spent nearly $330 million buying back its stock this year, paying an average of $16.61 per share. It has about $1.7 billion remaining on its current repurchase authorization.
Kinder Morgan ended the quarter with a strong balance sheet, even with those unbudgeted repurchases. Its leverage ratio was 4.1 times, well below its 4.5 times target. Leverage is on track to fall to around 4.0 times by year-end.
That strong balance sheet gives Kinder Morgan tremendous financial flexibility, allowing it to capitalize on attractive growth opportunities as they arise. It recently announced the expansion of its Eagle Ford natural gas transportation system. It will spend $251 million on a project that should enter service and generate incremental cash flow by the fourth quarter.
The company also spent $15 million to buy an oil field adjacent to its existing SACROC field. The company expects to start an enhanced oil recovery project to inject carbon dioxide into that field next year to boost its production and cash flow.
Those new projects helped refill the company's backlog, keeping it at $3.7 billion as new additions offset project completions. These high-return projects will help grow the company's cash flow, giving it more money to enhance shareholder value by paying dividends, opportunistically repurchasing shares, and securing additional high-return investments.
Steady as it goes
Kinder Morgan continues to produce very stable cash flow. That's giving it more than enough money to pay its dividend, fund growth capital expenses, and opportunistically repurchase shares. Meanwhile, its steady backlog of high-return capital projects should help grow its cash flow over the long term, which should enable it to continue increasing its already high-yielding dividend. That attractive, secure, and rising payout makes Kinder Morgan a top option for those seeking steady passive income.
