The problem most investors have with energy stocks is that they're just so volatile. That's because the price of oil has a crazy history of spiking and collapsing and taking energy stocks with it. This roller coaster ride can be more than some investors can stomach. However, that doesn't mean all energy stocks should be avoided as there's one really great energy stock that has the best of what the industry has to offer, including dividends and growth, without its sometimes stomach churning volatility. That stock is energy infrastructure giant Kinder Morgan (NYSE:KMI).
The toll booth
What sets Kinder Morgan apart from most other energy stocks is its focus on owning critical energy infrastructure like natural gas pipelines and oil storage terminals. These toll-booth type assets mean the company gets paid a fee for the capacity that a customer has contracted for even if that capacity isn't being used. Even better, its pipelines and storage tanks couldn't care less what the price of the oil and gas being transported or stored is at any given moment. Because of this, Kinder Morgan's revenue stream is pretty much locked in thanks to its long-term fee-based contracts as we see on the slide below.
Overall, 94% of the company's earnings are either fee-based or hedged. That locks in the bulk of its cash flow and because of this the company has very limited commodity price exposure. Its only real exposure is in its carbon dioxide segment where it produces oil through enhanced oil recovery. Because of that, and a little bit exposure elsewhere, the company has about $10 million in commodity price exposure for every $1 change in the price of crude oil over one year. However, on $8.2 billion in segment earnings, that's really pocket change for the company.
Not only is most of Kinder Morgan's cash flow locked in, but most of its growth is locked too. The company has a five year contracted project backlog that at the moment stands at $17.6 billion. These projects provide the company with very visible growth over the next few years as we see on the following slide.
As that slide notes, 90% of the backlog is backed by fee-based projects like pipelines and terminals, meaning that much of the company's growth comes with cash flow that is locked in by contracts.
On top of the company's visible growth it has upside to new project opportunities that could arise over the next couple of years. For example, the company is working on a major project to bring more natural gas to keep New England warm in the winter. The Northeast Energy Direct project could lead to $4.4 billion in investments on the demand side along with another $2.1 billion in supply driven spending. Meanwhile, should oil prices improve, the company does have several oil-related projects that it recently removed from its backlog that could be added back. Finally, the company also has upside to acquisitions, such as its recent $3 billion deal for Hiland Partners that added both incremental cash flow this year with upside in the years ahead.
The combination of the company's strong portfolio of fee-based assets along with its transparent growth enables Kinder Morgan to pay a very generous dividend. Not only is that payout rock-solid in the near-term, but it's expected to grow by 10% over the next five years. That compound growth will really add up over the long-term, which is what makes Kinder Morgan such a great energy stock to hold for the long-term.
The formula for a great energy stock is pretty simple: Fee-based cash flow + visible growth + a growing dividend = 1 great energy stock. It's the formula Kinder Morgan has been following for years, which is why the company has a history of outperformance, without the stomach churning volatility.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.