Kinder Morgan (KMI +0.74%) started the year showing only modest growth in its first quarter, although that was largely attributable to a turnaround at its condensate processing facility, which is required only once every 10 years. Nonetheless, with this maintenance work comes lost profits from the plant being shut down.
Yet the pipeline giant continues to expect solid growth this year, noting that its business model is largely insulated against periods of economic instability. At the same time, the company remains bullish on natural gas demand and continues to add new projects in this area to its pipeline.
The strength of its business model stems largely from its contract mix. Approximately 64% of its cash flows come from take-or-pay contracts. With these contracts, the company gets paid regardless of whether its customers use its pipelines or services. Another 26% of its cash flows come from volumetric fee-based contracts, where it is paid based on the volumes that run through its systems. The remaining 10% of its contracts have spread or commodity exposure, of which it hedges half of this exposure. Overall, only about 5% of its cash flows are exposed to commodity price fluctuations.
In its first-quarter presentation, the company also highlighted the strength and creditworthiness of its customers. During the last big energy downturn, some midstream companies felt pressure when their customers went bankrupt and contracts had to be reworked.
NYSE: KMI
Key Data Points
A natural gas giant
While Kinder operates a diversified midstream system, natural gas gathering, processing, storing, and transmission is its bread and butter. It transports around 40% of U.S. natural gas production through its 66,000 miles of natural gas pipelines. Natural gas accounts for approximately 65% of its business mix.
The company remains very bullish on the future of natural gas demand and volumes. It noted that over the past 20 years, natural gas demand in the U.S. has risen 80% from 60 billion cubic feet (Bcf) a day in 2005 to 109 Bcf a day in 2024.
Future growth drivers for natural gas include power demand stemming from artificial intelligence (AI) and data centers, exports to Mexico, and increased residential demand. Kinder noted that many of its recent projects have been backed by long-term contracts with southeastern U.S. utilities, showing this growing electricity demand.
That said, it sees the biggest driver of future natural gas demand coming from increased LNG (liquified natural gas) exports. It estimates that LNG will add an additional 16 Bcf a day in demand by 2030, with most of that coming from facilities that are currently being built or where companies have made a final investment decision (FID) and are backed by long-term commitments. With all of the talk of tariffs and trade imbalances, it sees the European Union and Asia looking to boost U.S. LNG imports to reduce trade imbalances as part of their negotiations. It said that South Korea and Indonesia are already discussing this strategy. It also noted how it would benefit the E.U. to wean itself off Russian natural gas.
Image source: Getty Images.
Given the strong outlook for natural gas demand, Kinder added $900 million to its growth project backlog, taking it to $8.8 billion, after adjusting for the projects placed in service. It said more than 70% of these newly added projects are related to serving power demand. The largest of these new projects is a $430 million extension of its Elba Express pipeline that will serve increased power demand in South Carolina. The project is backed by a 30-year contract.
As for the impact of tariffs on its projects, Kinder estimates that it would only increase the cost of its largest projects, representing two-thirds of its backlog, by about 1%. It said it proactively preordered certain equipment, negotiated caps on tariff impact, and secured domestic steel and mill capacity. It also locked in the cost of finished steel pipe so that less than 10% is now exposed to tariffs. As of now, it sees tariffs having no material impact on project economics.
As for the quarter itself, adjusted net income attributable to the company rose by 1% to $766 million, while its adjusted earnings per share (EPS) were flat at $0.34. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) edged up 1% to $2.16 billion.
Kinder Morgan forecast that its full-year net income attributable to the company will grow 8% to $2.8 billion and that adjusted EPS will climb 10% to $1.27. It is looking for a 4% increase in adjusted EBITDA to $8.3 billion.
Is the stock a buy?
Given its contract makeup and increasing demand for natural gas, Kinder Morgan continues to find itself in a strong position. Importantly, the company sees tariffs having little impact on its current growth projects. Rising project costs were one of the biggest risks pipeline companies faced, especially as many have picked up their growth spending.
Trading at an enterprise value-to-EBITDA ratio of just over 11 times based on 2025 analyst estimates, the stock remains attractively valued given the growth opportunities in front of it. The stock also carries a solid 4.2% forward dividend yield.
As such, I would be a buyer of the stock given its valuation and growing natural gas opportunities.
