Kinder Morgan (KMI -0.64%) is one of the largest energy infrastructure companies in North America, with a natural gas pipeline network spanning nearly 70,000 miles and moving as much as 40% of the total natural gas production in the U.S.
Kinder Morgan is also the largest independent transporter of refined products in the U.S. Its foothold in the midstream oil and gas industry, coupled with steady and growing dividends, has made the company a popular stock among oil investors over the years.
Yet given how Kinder Morgan stock has underperformed the overall market in recent years, some investors are at odds with the company's prospects. So is Kinder Morgan stock worth buying or avoiding? Here's the bull and bear arguments to help you decide.
The bull case: A stronger, leaner company committed to dividend growth
Neha Chamaria: Investor sentiment in Kinder Morgan soured after the pipeline giant slashed its dividend in late 2015. What investors haven't realized, though, is how the move has helped Kinder Morgan emerge as a much stronger and leaner company since.
Kinder Morgan saved up the money to shore up its balance sheet, which was imperative at that point. So far, the company has paid down more than $11 billion in debt since early 2015 and has been able to self-fund its capital expenditures and dividends for the past seven years. That speaks volumes about the financial discipline Kinder Morgan has maintained since the oil price plunge of 2014-2016.
In fact, Kinder Morgan resumed dividend increases in 2018, and its annual dividend payout has more than doubled since. Generating the bulk of its cash flows under take-or-pay and fee-based contracts helped, of course, but Kinder Morgan has also been conservative about debt over the years and has prioritized liquidity and financial flexibility. For example, the company made several acquisitions in recent years without burdening its balance sheet.
To keep up with the changing dynamics of the energy sector, Kinder Morgan is also investing in low-carbon projects. Examples include renewable natural gas and carbon capture equipment at its natural gas treating facilities.
I believe Kinder Morgan is in a great place right now, generating steady cash flows and paying regular and growing dividends that should be able to support the stock's high yield of 6.9%.
The bear case: Investors need to consider the long term too
Lee Samaha: There's a strong case for buying stock in Kinder Morgan, not least from using natural gas and LNG as transition fuel as the economy shifts from fossil fuels to renewable energy sources. In addition, the intermittent nature of renewable energy and the cost of storage implies a need for natural gas and LNG to support renewable energy.
That much is clear, and investment in LNG, in particular, continues to soar. That's fine for now, and Kinder Morgan is a great way to generate some strong dividend yields and invest in U.S. energy infrastructure.
Still, the longer-term picture is more open to question. The International Energy Agency's "stated policies" case calls for a fall in North American gas demand from 2030-2050, and there's no guarantee that the export market will be there to fill the gap if it occurs.
Given Kinder Morgan's 83,000 miles of pipelines, 140 terminals, and ample natural gas storage facilities across the U.S., there would be nowhere to hide for the business if natural gas volumes were to decline.
Moreover, while Kinder Morgan's long-term fixed contracts provide medium-term security, they are not a panacea for a long-term demand contraction. As management notes in SEC filings, the remaining weighted average of its natural gas transportation is "approximately six years" and its "LNG regasification and liquefaction" contracts "are subscribed under long-term agreements with a weighted average remaining contract life of approximately 12 years."
While a lot could change in the coming years, and "stated policies" assumptions could easily change with a new administration, it still makes sense to factor in the potential downside for the stock if gas transportation volumes decline.
