Kinder Morgan Inc Pipeline View

Source: Kinder Morgan

Kinder Morgan (NYSE: KMI) recently reported decent second quarter results. While the quarter was negatively affected by several headwinds, the company doesn't expect those issues to derail its long-term plan. That theme was very evident by managements' comments on the company's second-quarter conference call. Here are five key takeaways from that call.

1. Dividend growth remains on track
While weak commodity prices are having some impact on Kinder Morgan's cash flow, it's nowhere near as deep an impact as it's having on other companies. This is due to the fact that 94% of the company's gross margin this year is secured via fee-based assets or commodity price hedges. As a result, the company's dividend remains rock-solid, which was a point hammered home by founder Rich Kinder who said,

We raised the dividend to $0.49 for the second quarter. We're on track to meet our target of delivering -- declaring $2 for full year '15 with substantial excess coverage even after adjusting for the current commodity prices, and we expect to grow our dividends by 10% each year from 2016 through 2020.

This is great news for investors as it reiterates the fact that the company's dividend growth plan isn't being affected by weak commodity prices.

2. Heads up! Dividend coverage could be weak next quarter
That being said, investors should be aware that there will be some bumps in the road. This past quarter the company only had $20 million in excess cash flow after paying its dividend, which was down from $206 million the quarter before. That was to be expected as CFO Kim Dang reminded investors on the conference call that, "We told you we thought in the second quarter we might have [a deficit]. You can see we ended up on the good side of that equation." Dang then said that, "the third quarter will be tight," however, she is not overly worried about that because coverage is much stronger in the first and fourth quarters as there's some cyclicality in Kinder Morgan's business.

3. See a bright future for natural gas demand
Another reason why Kinder Morgan is so confident in its future is because it sees natural gas being a key future fuel in America. Rich Kinder reminded investors of this by saying,

[...] We think we're looking at a bright future for natural gas demand. As an example of the increasing demand, the power generation throughput on our set of natural gas pipelines was up 16% from the second quarter compared with second quarter of '14. I might add anecdotally, that's pretty consistent. In Texas, the overall demand for gas as a source of power generation increased its share year-to-date to 48% from 37% in the first half of '14.

What Kinder is pointing out is a very important shift the company is seeing in the natural gas sector. Over the past several years Kinder Morgan built a myriad of pipelines to support producers to get natural gas out of production basins. These so-called producer push projects are what has really pushed so much natural gas onto the market. However, more recently the company has started to see a real meaningful increase in demand pull projects from end-users like utilities, which are expected to drive future growth for years to come.

4. Backlog is growing, with more to come
One big example of this shift is coming via the newest addition to the company's backlog. CEO Steve Keen discussed the backlog by noting that,

Since the April update, our project backlog increased by $3.7 billion from $18.3 billion to $22 billion. That's great progress and a sign of the strength of our network and the continuing need for additional midstream energy infrastructure...Now here are the main changes: We added $4.6 billion in new projects. And this is an important one, $3.3 billion of that is the addition of a market path portion of Northeast Energy Direct, a natural gas pipeline expansion to serve the New England market.

This particular project has both a producer push and a demand pull segment, however, the one going in the backlog first is the demand pull piece. It's a project that the company has the potential to expand over time as demand for natural gas increases in the Northeast. It is just one of many demand pull projects the company expects to build in the years ahead. 

5. Oil market outlook
While more than half of Kinder Morgan's business revolves around natural gas, oil is still important to it and its customers. Because of this an analyst on the call asked the management team for its updated outlook on the oil market. Here's what CEO Steve Keen had to say,

[...] There's a lot of near-term bearishness...particularly across the liquids parts of the commodity portfolio. But I think longer term, I think the future is brighter for those...as we see additional demand pickup. But look, it's so hard to call. Particularly, oil has all the geopolitical factors that you have to have a crystal ball to try to predict. But I think fundamentally, you would believe there to be long-term upside..., but maybe not this year.

What Keen is suggesting is that while he sees the potential for the near-term bearishness for oil continuing for at least the rest of this year, the longer-term story is more bullish for both demand and prices. The key to this bullishness is demand. As we've seen with natural gas, the low price is fueling incremental demand, which over time should push the price higher. It's why the company continues to remain bullish on the long-term future of both commodities.

Investor takeaway
The overriding theme of Kinder Morgan's conference call is that while times are tough for the industry, that's not having much impact on Kinder Morgan's plans. Aside from the fact the company's cash flow is largely fee-based, the other reason why Kinder Morgan isn't worried is because it sees long term demand for energy remaining robust. It's a future that suggests that Kinder Morgan's investors should do quite well in the years ahead.

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.