Oil prices have crashed for seven straight weeks to their lowest price in six years, and the result has been catastrophic for the likes of high-yielding oil producing MLPs like Breitburn Energy Partners (NASDAQOTH:BBEPQ), Linn Energy (NASDAQOTH:LINEQ), and its non-MLP equivalent LinnCo (UNKNOWN:LNCO.DL).
Breitburn has responded with a 47% and 52% slashing of its 2015 capital expenditure budget and distribution, respectively. Meanwhile Linn Energy has announced even more drastic cuts, of 53% and 56% cuts to its capital expenditure budget and distribution, respectively.
While these may be very painful cuts in the short term, they are necessary long-term moves given the fact that no one knows whether oil will rebound to its recent $100 per barrel highs or crash to as low as $20 per barrel over the next 12 to 18 months.
Income investors wishing to participate from a potential rebound in oil prices may be interested to know that there is an high-yielding oil company that has a far more secure payout than these other investments and likely to survive 2015 without cutting its dividend. In fact this company actually plans to increase its dividend by 10% in 2015.
Kinder Morgan: a diversified oil producer whose payout is highly secure
Most investors know Kinder Morgan Inc (NYSE:KMI), as America's largest natural gas pipeline operator and indeed this high-yielding energy blue chip derived 82% of its 2014 EBITDA, or earnings before interest, taxes, depreciation, and amortization, from long-term, fixed-fee contracts associated with pipelines.
As this chart illustrates Kinder Morgan has only 20% of its EBITDA exposed to oil prices, 30% of which involves pipelines that transport CO2 to Enhanced Oil Recovery, or EOR projects in the Permian basin. However most people don't realize that Kinder Morgan is also an oil producer with 57,000 barrels per day of production of which they own an average working interest of 71% that resulted in $1.12 billion in EBITDA last year.
|Oil Field||Working Interest||Oil Production Barrels/day (first 9 months of 2014)||Oil Production growth (over first 9 months of 2013)|
This production is courtesy of four oil fields, whose production has either been growing impressively or been relatively stable thanks to Kinder Morgan's use of CO2 injection, which slows decline rates and which can triple the amount of ultimately recoverable shale oil from each oil well.
Four reasons Kinder Morgan's dividend is likely safe in 2015
The safety of Kinder Morgan's dividend is courtesy of four factors. The first is its long-term, fixed-fee contracts on its pipeline business, which provides stable and guaranteed distributable cash flow, or DCF, from which to pay the dividend. Last year 82% of cash flows were derived from this dependable source.
Second is Kinder's aggressive use of hedging in regards to its oil production, which currently stands at 22.3 million barrels of production, representing 18 months worth of the company's net production.
Third is the enormous tax benefits derived from its recent merger with its MLPs, which founder and CEO Richard Kinder claims will be worth $55 billion, or nearly $4 billion per year, over the next 14 years.
Finally, Kinder Morgan currently has $500 million in excess DCF to weather the current oil price crash and protect its dividend. In fact, according to the company as long as West Texas Intermediate, or WTI, oil remains above an average of $55 per barrel for the year, its dividend is not in danger of being cut.
If oil were to recover and average above this level then Kinder may be able to achieve its previous guidance of a 10% dividend increase for 2015, while maintaining a safe long-term DCF distribution coverage ratio of 1.1.
Risks you should know about
Of course, if oil were to average below $55 per barrel then Kinder Morgan's dividend may need to be cut. This is because several of its major investment projects, such as the $1 billion Lobos CO2 project, which would support CO2 injection for oil producers in the Permian basin, might be cut if US oil producers are forced to scale back their drilling since the average break even price for Permian drilling is between $53 and $81 per barrel.
CO2 injected enhanced oil recovery projects break even prices are higher still thanks to the added expense of the gas injection, storage, and transportation infrastructure.
Already crashing oil prices have forced competitor Enterprise Products Partners (NYSE:EPD), to cancel its planned 1,200 mile oil pipeline that would have transported 340,000 to 700,000 barrels per day of Bakken oil to the terminal in Cushing, Oklahoma. Enterprise made the decision because of a lack of long-term commitments from oil producers, that are vastly scaling back their oil production plans thanks to the worst oil price crash since the financial crisis.
Kinder also has several major oil projects that might face the threat of cancellation, including its $5.4 billion Trans Mountain pipeline expansion that has faced years of political and environmental controversy and delay. The project is designed to triple the capacity of the existing pipeline, from 300,000 barrels per day of Canadian oil sand crude to 890,000 barrels per day and has already received commitments from 13 major producers in the region. If crashing oil prices cause these producers to pull out of their commitments, then a project representing 15.4% of Kinder Morgan's entire current and potential $35 billion backlog could evaporate and limit the company's dividend growth prospects in the years to come
Bottom line: Kinder Morgan is a safer high-yield way to invest in oil's eventual recovery
While no one can predict oil prices with any accuracy in the short-medium term, Kinder Morgan's expanding oil business makes it a unique diversified way for long-term income investors to participate in oil's eventual recovery from these unsustainably low levels. Its enormous $7.7 billion in distributable cash flow, protected by long-term, fixed-fee, inflation-protected pipeline contracts offers the company cash flow predictability that other oil producers can only dream of. In addition its large current DCF surplus and massive tax savings from its recent merger, means that off all the high-yielding oil producers I cover, Kinder's dividend seems the least likely to be cut in 2015 and even has the chance to grow if oil prices recover.