Kinder Morgan (KMI -0.64%) has two growth engines: acquisitions and expansion projects. Both will play starring roles in 2024.
The company completed a $1.8 billion acquisition late last year while putting $965 million of capital projects into service in the year's final quarter alone. Those catalysts drive the company's outlook for distributable cash flow to rise by 8% per share this year.
After finishing several expansion projects last year, Kinder Morgan has a growth-capital backlog that is much lighter. Despite that, the company remains confident it will have no problem finding more ways to boost its organic growth. Because of that, it should continue increasing its 6.5%-yielding dividend.
Confidence in its growth potential
Management discussed the factors driving its growth on its recent fourth-quarter conference call. CEO Kim Dang talked about the current state of its expansion-project backlog, saying, "During the fourth quarter, we put $965 million of projects in service and added $344 million to the backlog, which currently stands at approximately $3 billion."
The company recently completed several notable projects, including expanding its Permian Highway Pipeline, upgrading the Tennessee Gas Pipeline's East 300 line, and finishing the Freer-to-Sinton project on its Texas Intrastate system.
It added $344 million in new projects in the quarter to help offset some of those completions and keep its backlog above $3 billion. Kinder Morgan expects to fund $2.1 billion of those projects this year, which is above the high end of its $1 billion to $2 billion annual range of investment targets. That means the company has less than $1 billion of investments lined up beyond this year.
Management isn't worried about the current state of its backlog. Dang said on the call, "Despite the decline versus last quarter, we're still confident in our ability to spend at the high end of the $1 billion to $2 billion per year discretionary [capital expenditure] range for the next few years." That suggests the company won't run low on spending to grow its cash flow and dividend.
What's driving this optimism?
Dang then explained why the company isn't apprehensive about the recent decline in its expansion-project backlog:
Our confidence is supported by the roughly 20% expected growth in the natural gas market between now and 2030 driven by LNG [liquid natural gas] exports, exports to Mexico, and industrial demand. We're looking at multiple expansion projects, some of them significant in size, to supply LNG exports from the Texas coast, the Louisiana coast, and the West Coast, to supply Mexico through exports from both Texas and Arizona to bring incremental supply to the southeast markets for Permian egress, as well as expansions of storage and for incremental power and industrial demand.
As Dang points out, the main factor behind her confidence in Kinder Morgan's expansion potential is the expected growth for the natural gas market:
Image source: Kinder Morgan.
As that slide shows, U.S. gas production is on track to grow 22% by 2030. The company is in an excellent position to capture this supply growth, thanks to its existing infrastructure in key supply basins and demand centers like the Gulf Coast, where LNG demand is on track to more than double.
Kinder Morgan is evaluating several potential projects, including expanding its Gulf Coast Express (GCX) pipeline and building a new large-scale pipeline in the Permian. Company president Tom Martin discussed the potential of developing new gas pipeline capacity out of the Permian on the conference call:
What we're hearing from our customers is probably late '26, early '27 ... something probably needs to be actioned here in the next couple of quarters to be able to meet that timeline. And the question is really is it just one pipe or two when you think about the incremental demand that's coming on?
A future pipeline would have a trickle-down impact. Dang pointed out on the call: "If we participated in the newbuild or the GCX expansion, there also could be further downstream expansions of our existing system. And so, that's something that we're also looking at as part of this."
That's just one example of its growth potential. Kinder Morgan is also exploring opportunities for natural gas pipeline expansion in other regions. And it's evaluating lower-carbon opportunities, like more renewable natural gas facilities, renewable fuel hubs, and carbon capture and storage projects.
Lots of fuel to keep growing
Kinder Morgan remains confident it can invest around $2 billion annually on high-return growth projects. Given the expected growth in the natural gas market, it should have plenty of opportunities to expand.
Because of that, the company should also have the wherewithal to continue increasing its big-time dividend. That makes it a compelling option for those seeking a steadily rising income stream.
