Few high-yield energy stocks have been as reliable when it comes to dividend growth as Kinder Morgan Inc (KMI 2.20%), whose strong, consistent payout growth has helped it beat the market in recent years.
KMI Dividend data by YCharts.
However, with oil prices experiencing the worst crash since the financial crisis, many investors are worried about the company's ability to make good on its guidance of 15% dividend growth in 2015 and 10% growth through 2020.
So, let's examine three key quotes from Kinder's most recent earnings conference call to see how its business is faring, and whether or not management will be able to achieve its dividend growth plan.
Lower energy prices are not threatening 2015's dividend
Our average realized oil price per barrel in our CO2 segment was $72.62 in the first quarter of 2015 versus $91.89 in the same quarter a year ago. And the average Henry Hub price for natural gas was $2.98 in the first quarter of 2015 versus $4.94 in the first quarter of 2014. -- Richard Kinder, Chairman and CEO
Source: Kinder Morgan investor presentation.
As this table shows, the average oil price Kinder was able to achieve during the first quarter was in line with its 2015 budgetary forecasts, but natural gas prices were much lower than expected. Energy prices as of April 22 are $56.40 per barrel of oil, and $2.60 per MMbtu for natural gas. Should energy prices remain at their current low levels, Kinder will still likely end the year with around $465 million in excess distributable cash flow, or DCF, indicating that its $2 projected dividend for 2015 is likely safe as long as energy prices don't fall further.
Kinder's overall business is doing just fine
...[W]e experienced good volume growth in most of our businesses. For example, our natural gas transportation volumes were up 6%, our refined products volumes were up 5.6%. Our condensate volumes more than tripled. Our net oil production and our CO2 segment was up 9%. And our liquids throughput in our Terminals group was up 23%. -- Richard Kinder
Here you can see the strength of Kinder's business model, which is mainly fixed-fee, long-term contract-based, which generally assures volume growth as projects come online each quarter. That's because the company usually won't start a project until it's secured firm commitments from customers that ensure it can make an attractive return on its investment.
For example, Kinder has yet to include two of its largest investments into its backlog: the Northeast Energy Direct, or NED, and Utica Marcellus Texas Pipeline, or UMTP, projects. Kinder is still gathering commitments for the NED -- which will transport up to 2.2 billion cubic feet per day of Marcellus natural gas to the Northeast and Eastern Canada and is expected to be complete in 2018 -- which is why it's holding off on adding it to the backlog for now.
The UMTP is a project to abandon and retro-fit Kinder's Tennessee Gas Pipeline to carry natural gas liquids from the Utica and Marcellus shales down to the Gulf coast -- which is a hot spot for the petrochemical industry -- where it can be processed into high-margin products like plastics or exported to Europe or Asia.
Source: Kinder Morgan.
Kinder is confident that there is sufficient demand for the project -- which is scheduled to be completed in Q4 2018 -- but it hasn't yet received any firm commitments from potential customers, so it's keeping the project off of its backlog for now.
Management is confident its dividend growth plan is sustainable
Our Board today voted to increase the dividend for the first quarter to $0.48 or $1.92 annualized. That's up 14% from the first quarter of 2014 [...] This is consistent with our announced intention of declaring $2 per share in dividends for 2015, the full year of 2015, which would be a 15% increase over full-year 2014 [...] We also continue to project growth in that dividend of 10% per year off of that $2 base out through 2020. -- Richard Kinder
For the first quarter, Kinder Morgan managed to generate $206 million in excess DCF -- 26% ahead of its earlier 2015 budgetary forecast -- in an environment of extremely weak energy prices. This shows the resiliency of Kinder's broadly diversified, long-term contract-based business model, and why management is so confident that Kinder will be able to live up to its recent dividend growth guidance -- especially if oil prices recover in the latter half of 2015 or 2016.
Investor takeaway
Long-term income investors shouldn't worry about the oil crash's effects on Kinder's dividend growth plans because management has proven that it's capable of growing Kinder's diversified empire despite low energy prices. More importantly, it's able to do so while generating gobs of excess DCF that should allow it to aggressively and consistently grow its dividend -- per its earlier plan -- even if energy prices remain weak over the next few quarters.
