For the most part, companies try to ignore their stock price, at least publicly, and don't make much comment on its movements. Kinder Morgan Inc.'s (NYSE:KMI) management team, on the other hand, doesn't have a problem speaking up when its stock is being unjustly punished. That's largely due to the fact that insiders are large shareholders in the company, which is why the company's tag line is "run by shareholders, for shareholders."
Recently, CEO Steve Kean took the time to speak directly to his fellow shareholders on the company via a video. (To view the eight-minute video, click here.) For the highlights, here are two key points he addressed.
1. Indiscriminate selling = fresh opportunity
Kean started off by noting that "energy company stocks have been hit hard this year" and while Kinder Morgan is primarily a fee-based provider of transportation and storage services, it too has been hit hard. As the chart on the following slide notes, Kinder Morgan's stock price is down as much, if not more so, than the rest of the sector.
This is despite the fact that the company's actual cash flow has very little direct exposure to commodity prices. This is why Kean said that he's disappointed with the stock's performance, however, for investors he suggested that this "presents an opportunity to take a fresh look at Kinder Morgan." He notes that the stock is now yielding more than 6% and that the dividend is primarily backed by rock-solid fee-based contracts. Furthermore, the company remains on pace to grow the dividend by 10% per year through 2020, which Kean believes is a "compelling value proposition."
Also, he believes that the market has not "adequately distinguished between [Kinder Morgan] and other energy companies." That's why its stock price is down as far as the energy indexes despite the fact that Kinder Morgan has little direct exposure to commodity prices. As such, he thinks that "the market has sold out of the sector indiscriminately, which is the only way we can make sense of this performance." In other words, this is an opportunity for investors to consider bolstering their position in Kinder Morgan as the market is offering them a gift.
2. In the right place, at the right time
Kean then went on to reiterate the value proposition of the company pointing first to its unparalleled asset base. He noted that the company is the third largest energy company in North America, and that it owns and operates the largest natural gas network, it's the largest independent transporter of petroleum products, the largest transporter of carbon dioxide, and the largest independent terminal operator. The bulk of these assets are fee-based assets that generate cash flow no matter the commodity price. In fact, 96% of the company's segment earnings this year are either fee-based or hedged leaving it little exposed to prices.
On top of that first-class asset base, the company has a strong backlog of future growth. There are two important characteristics of this growth. First, it's primarily fee-based and, second, it's primarily demand-, not supply-driven. In other words, Kinder Morgan's growth projects are being driven by demand for cheap North American energy resources, not the growing supply of those resources, which are driven more by commodity prices. That means its projects are much less likely to be canceled and more likely to be further expanded upon in the current environment. For example, the company is uniquely positioned for the natural gas demand mega trend shown on the slide below.
As that slide notes, demand for gas is expected to surge as it's used for power generation and petrochemical manufacturing as well as sent elsewhere via exports. This demand is largely behind the $9.4 billion in natural gas projects in its backlog. This is what's backstopping the company's expectation that it will be able to grow its dividend by 10% per year through 2020.
Kinder Morgan's CEO believes that the sell-off in its stock price this year has been completely indiscriminate, which is creating a buying opportunity for investors. His company has very little exposure to commodity prices as its cash flow is locked up while its growth is actually primarily driven by demand for inexpensive natural gas. That's why he's completely confident that the company's current dividend is safe and so is the plan to grow the payout by 10% per year through 2020.
Matt DiLallo owns shares of Kinder Morgan and 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 owns and recommends 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.