North America's largest midstream energy company is expected to report its second-quarter results this Wednesday after markets close. Given that 94% of Kinder Morgan's (NYSE:KMI) gross margin is secured by fees or hedges this year, there's an expectation that the company will deliver another solid quarter despite the persistent weakness of oil and gas prices during the quarter. Here's a look at what to expect this week.
First, let's review
Last quarter, Kinder Morgan's earnings didn't miss a beat as the company's menagerie of pipeline and terminal assets produced $1.2 billion in cash flow. That fully covered its dividend with $206 million to spare, leading to a robust divided coverage ratio of 1.2 times. Driving those strong results were the company's products pipelines and terminals segments, which as the chart below shows, delivered strong year-over-year growth in segment earnings.
It's also worth pointing out on that chart that the company's segment earnings from its natural gas pipelines were relatively flat while both its carbon dioxide and Canada segment earnings were lower. Those results were to be expected as the natural gas pipeline segment is facing some headwinds from expiring contracts while the carbon dioxide segment was affected by weaker oil prices and Canada was pulled down by the weak Canadian dollar.
Expect a repeat
Investors can pretty much bank on a repeat of the first quarter as many of the same headwinds and tailwinds will impact results again this quarter. When the company provided its full-year budgeted income outlook at its analyst day this year, it forested the following segment earnings growth:
- Natural gas pipelines -- up $24 million, or 1%.
- Carbon dioxide -- down $115 million, or 8%.
- Products pipelines -- up $254 million, or 29%.
- Terminals -- up $195 million, or 20%.
- Canada -- up $2 million, or 1%.
Those estimates were revised after the company's first-quarter results with natural gas pipelines and product pipelines on track to exceed growth, terminals on track to meet growth, and carbon dioxide and Canada expected to be below projected growth. Even with those guidance changes, the company is still on pace to meet its 2015 budget forecast, and there is nothing to suggest that its expectations to at least meet its full-year guidance will change when it reports second-quarter results.
Getting into more specifics, investors should expect the company to again produce more cash flow than it paid in dividends. Last quarter, it generated $0.58 per share in distributable cash flow and declared $0.48 per share in dividends, which resulted in a total of $206 million in excess cash flow. Given where commodity prices have averaged in 2015, Kinder Morgan should generate between $430 million and $530 million in excess cash flow this year. Because of that, it's not unreasonable to assume that it should produce around $100 million in excess cash flow during the quarter to again fully cover its dividend with room to spare.
Expect another dividend increase
Given that expectation, Kinder Morgan remains on pace to hit its target to declare $2 per share in dividends in 2015. Last quarter, it raised its payout by 6.7% to $0.48 per share. That leave its with $1.52 left to declare this year, meaning it's safe to assume another dividend increase of at least a penny per share is in the cards when the company reports its second-quarter results. Moreover, it has reiterated several times that it also remains on pace to grow its dividend by a 10% annual rate through 2020, suggesting steady dividend increases for years to come.
Kinder Morgan owns and operates mainly fee-based assets, making its quarterly results very predictable. Because of that, investors shouldn't expect to see too much variation from its projections. This means we should see it continue to generate more than enough cash flow to support its dividend, which is on pace to grow again this quarter.
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.