Kinder Morgan Inc. (NYSE:KMI) just dropped a bomb shell on Wall Street with its latest earnings release, including the announcement of the $3 billion acquisition of Hiland Partners and the retirement of its founder and CEO, Richard Kinder. The news saw shares drop 2% in after-hours trading.
What does it mean for you as a long-term investor, and how is the company weathering the oilpocolypse? Let's take a look.
Kinder misses expectations, reports dip in backlog growth, and raises dividend
For the fourth quarter, Kinder reported $3.95 billion in revenue and earnings of $0.08 per share, or $0.27 per share when adjusted for asset impairments. Wall Street was expecting $4.3 billion in revenue and $0.34 per share in earnings, meaning Kinder missed sales and net income expectations by 20% and 8%, respectively.
What matters most to investors, however, isn't a quarterly earnings miss but how the company's backlog is doing. For the quarter, the company put $730 million worth of projects into service, removed $785 million in projects, mostly in CO2 projects that have been delayed because of low oil prices, and added $1.24 billion in new projects.
All told, Kinder's project backlog now stands at a healthy $17.6 billion, although this represents a 1.7% decrease from the $17.9 billion backlog reported in the third quarter. With 4% of the backlog removed this quarter, the company showed signs that it isn't impervious to depressed oil prices.
When it comes to the dividend, the company did report good news, with a 10% dividend increase to $0.45 a share. More importantly, however, is that Kinder reported a dividend coverage ratio of 1.33 this quarter, thanks to $0.60 per share in distributable cash flow, or DCF, after excluding certain one-time items. That represents 30% growth in DCF per share over last year's fourth quarter.
For the full year, DCF per share was up 21% from $1.65 to $2.00, and Kinder's dividend coverage ratio was a solid 1.15, which is above the company's long-term target of 1.1.
Hiland Partners acquisition: Kinder grows its oil empire
Hiland Partners is a midstream operator in North Dakota's and Montana's Bakken shale formation, as well as the Woodford Shale of Oklahoma. Its largest customers include some of America's largest independent oil producers, such as Continental Resources, Oasis Petroleum, XTO Energy, and Whiting Petroleum.
It owns 1,225 miles and about 2,500 miles of crude oil and natural gas gathering pipelines, respectively. In addition, it's currently constructing the 485 mile Double H pipeline, which will connect the partnership's oil terminal in North Dakota with Guernsey, Wyoming. Once there, it will connect with Tallgrass Energy's Pony Express pipeline for transport to Cushing, Oklahoma, where West Texas Intermediate oil is priced.
The Double H will have an initial capacity of 84,000 barrels per day and will be expanded to 108,000 barrels by 2016. Thus far, Hiland has secured firm take-or-pay contracts for 60,000 barrels of capacity and has extended its open season to Jan. 23 to allow oil producers to secure additional contracts.
Hiland Partners is also working to expand its gas processing plant in the Bakken to 240 million cubic feet of gas per day and 30,000 barrels of natural gas liquid fractionation per day capacity.
Founder and CEO retires, but successor is primed for the job
Richard Kinder, the founder and CEO of Kinder Morgan, will be stepping down as CEO and will become executive chairman of Kinder's board as of June 1. His replacement, Steve Kean, is currently Kinder's president and chief operating officer. Kean has been with Kinder since 2002 and has 29 years of experience in the energy industry.
Kean has been the major driver behind Kinder's recent investment and capital allocation decisions, and his ascendancy to the top spot at the company should ensure continued success for many years to come.
Things to watch going forward: stalling oil projects and backlog concerns
Two concerns immediately jumped out at me as I read Kinder's results and news releases.
First, several of Kinder's oil projects seem to be showing signs of distress caused by plunging oil prices. For example, the Double H pipeline's capacity is only 71% secured thus far, and the project is almost complete. The extension of the open season period, which has occurred a total of seven times, potentially indicates that demand for oil transportation from the Bakken shale may be waning.
Similarly, Kinder's removal of $785 million in mostly CO2-related projects because of long-term delays makes me worry that more of these projects may be cancelled entirely if oil doesn't recover in 2015.
Bottom line: Kinder's dividend is safe, but possible problems may be appearing
Today's major news at Kinder Morgan may have Wall Street somewhat upset, but in my opinion, long-term investors can remain confident in Kinder's ability to safely cover its generous dividend for now. The Hiland Partners acquisition represents a significant step for Kinder Morgan in asserting its midstream presence in the Bakken and should serve it well in the years to come as it strives to become America's leader in fossil fuel transportation. Similarly, the retirement of Richard Kinder as CEO and his replacement with the company's COO is a smart and logical step to ensure the continued prosperity and growth of one of America's best income stocks. However, current and future investors should be aware that as Kinder diversifies away from gas and into heavier oil involvement, its susceptibility to the recent plunge in crude prices will increase -- an effect that is already possibly being felt.