Kinder Morgan Continues To Beat Expectations On Robust Demand

-Kinder Morgan reported earnings of $635 million compared to $516 million in the second quarter of 2021.

-Distributable cash flow came in at $1,176 million, compared to $1025 million.

Kinder Morgan NYSE: KMI, is one of the largest energy infrastructure companies that specializes in owning and controlling oil and gas pipelines and terminals.

Kinder Morgan Business Overview

The natural gas pipeline segment’s financial performance was up in the second quarter as the company’s Stagecoach business and improved pricing in the Altamount and South Texas pipeline helped improve results for the quarter. Natural gas transport volumes were down 2% compared to the second quarter. Products and pipelines witnessed mixed results, as total volumes were down 2%, and crude and condensate products pipeline volumes were down 6%. Terminal segment earnings were up relative to the second quarter of 2021. Liquid business volumes were up across the business as well.  Higher fleet utilization and pressure from refined product facilities continued to help pricing, which drove revenue higher. The Co2 segment was up as well compared to the second quarter primarily on higher utilization rates. The weighted average price for crude was up 31% to $68, while the weighted average price for NGL was up 85%, and Co2 prices were up 72% for the quarter.

Kinder Morgan is continuously expanding its capacity by investing in its infrastructure, with a 550 mmcf expansion in capacity. Gulf Coast expansion, meanwhile, will add another 570 mmcf during the second half. Furthermore, additions to terminals and product pipelines over the next couple of quarters are also expected to help increase capacity and meet demand.

Outlook for crude and NGL

Both crude and NGL demand continue to remain high, and despite high prices (which have started to come down), demand for these products remains robust. Currently, demand continues to outstrip supply, but increased supply from OPEC and shale producers should help bring down energy prices. In turn, some of that increase in demand should translate into higher volumes for companies such as Kinder Morgan in the coming quarters.

The LNG market is also experiencing a tailwind from global demand, as the conflict in Ukraine continues to weigh on deliveries from Russia. This has translated into an 18% increase in LNG exports y-o-y from the U.S., meanwhile, overall volumes for the year are expected to be up around 7-8%. Both of these factors should help Kinder Morgan as we move into the second quarter. Furthermore, some of the volume declines that were witnessed during the recent quarter should turn around.

Valuation and balance sheet

Kinder Morgan, due to its high dividend yield of 7% might be considered slightly undervalued, this despite the fact that it currently trades at a P/E ratio of 38x. Operating margins were 23%, and profit margins were 6.64%. These margins could increase in the second quarter as certain segment volumes turn positive and utilization rates improve. Some of the cost pressures affecting operating margins such as labor and transportation costs should also reduce, thereby improving cash flow. Currently, the payout ratio stands at 240% and could improve as cash flow improves into the next couple of quarters.

 Furthermore, the company locked in rates on their debt, which will save them $70 million in 2022, and even more in 2023. Bringing down some debt and combining that will lower rates that should help the company with overall cash flow for the year. Cash and cash equivalents fell significantly from $1.1 billion during the same quarter in 2021, to $100 million during the current quarter. Despite this reduction in cash flow, the company should remain on a solid footing for the foreseeable future. The current ratio is lower than the company might want with excess short-term debt and current liabilities. Long-term debt also remains elevated at $28 billion, but management has outlined plans to reduce that debt going into 2023.

Kinder Morgan’s results should continue to improve as we move through the quarter. Economic risks remain in the background, but with the economy continuing to show robustness there isn’t a lot of overall risk to the stock in the short term.