Kinder Morgan (NYSE:KMI) reported its fourth-quarter and full-year results after the closing bell on Wednesday. In many ways, the results were a mixture of some strong highlights and a few concerning trouble spots, with the overarching theme being that the company, while largely insulated, isn't immune from the impact of continued weakness in the oil market.
A look at the numbers
Kinder Morgan reported $1.233 billion in distributable cash flow for the fourth quarter, which was a bit weaker than the prior year's result of $1.278 billion. For the full year, distributable cash flow was up 7% on a per-share basis, though that too was a bit under its budget. There were a number of factors that weighed on the company's results, including weaker oil and NGL prices, as well as weak coal exports and steel production. These issues noticeably weighed on the company's carbon dioxide and terminals segments, which delivered year-over-year declines in segment earnings.
The carbon dioxide segment is where the company feels the most direct impact from lower oil prices, because of some direct exposure to commodity prices. However, that segment's earnings were down only 22% for the year, which was much less than the decline in the price of oil because of the company's oil hedges. Meanwhile, the terminals segment was weak this quarter, with segment earnings falling 7% year over year after two of its coal customers declared bankruptcy during the quarter, resulting in a $45 million impact to earnings.
On a more positive note, the company's natural gas pipeline segment was strong, with segment earnings up 4%, in part because of a 5% increase in natural gas transport volumes. Further, new projects placed into service helped offset some of the weakness from its midstream gathering and processing assets, as well as a contract expiration. The company's product pipeline segment was also strong, delivering 28% growth in segment earnings, largely because of higher volumes on two of its key pipelines, as well as the start-up of a number of new projects.
A look at the outlook
While Kinder Morgan's fourth-quarter results were fairly solid, its outlook left a bit to be desired. Because of the continued weakness in the oil market over the past month, the company has reduced its full-year distributable cash flow outlook from the slightly over $5 billion it forecast last month to $4.9 billion.
Further, the company has chosen to high-grade its project backlog to focus only on its highest-return projects. As a result, it's removing $3.1 billion in projects from its backlog, including $900 million in projects that it was anticipating for 2016. In addition, it expects further reductions in the coming quarters, as it focuses only on its best investment opportunities.
With these changes, the company now anticipates investing $3.3 billion in 2016 on capital projects, which will be fully funded with internally generated cash flow. In fact, after paying dividends, the company expects to generate $3.6 billion in cash flow, assuming, of course, that commodity prices don't weaken materially from its current expectations. That's a potential concern, because its budget is based on $38 crude, which at the moment looks rather optimistic, with crude in the mid-$20s. However, given that every $1-per-barrel change in crude affects its cash flow by only $7 million over the course of a full year, it does have some wiggle room.
Even though most of Kinder Morgan's cash flow is either fee-based or hedged, it's not immune from the steep drop in commodity prices. Instead, that drop has forced the company to do some belt-tightening so that it's not only investing within its cash flow but will also now only pour money into its best projects.
Still, the key takeaway is that while the company is under pressure, its cash flow is still growing and will continue to grow as new projects come into service, which is something the market is clearly forgetting.