Kinder Morgan Results Benefit From Geopolitical Tailwinds

Key Points

• Kinder Morgan reported a net income of $576 million, for the quarter.
• Earnings per share came in at 25 cents versus an estimated 29 cents by analysts.
• A favorable environment continues to drive revenue and is expected to remain robust for a while.

Kinder Morgan NYSE: KMI continued to witness improved growth as tailwinds from natural gas pricing continued to be strong, due to global, which continued to be a catalyst.

“Our Natural Gas Pipelines segment continues to see strong demand for the extensive firm transport and storage services we offer, as well as favorable contract renewals on multiple assets across our network.

Kinder Morgan continues to witness a favorable macroeconomic environment after struggling for a few years of struggling, and the company's results are coming in at record levels, as both the global natural gas market and the domestic demand from the United States continue to drive the business dynamics.  During the quarter Kinder Morgan made a number of acquisitions, including North American Natural Resources and its sister companies. The acquisition is expected to produce 8 megawatt hours of energy in 2023. The company also sold a 25% equity stake in Elba liquefaction for approximately $565 million, at around 13x EBITDA.

Kinder Morgan’s stock rallied slightly by 1.25% during market hours but fell by 3% after hours. The stock is mostly flat for the year, and unlike Chesapeake NYSE: CHK, which has focussed purely on natural gas is up 33%.

Kinder Morgan currently runs 71,000 miles of natural gas pipelines and currently accounts for over 40% of US natural gas production. The current natural gas price continues to trade around $6 and December natural gas futures continued to trade around a similar level. Prices are expected to remain steady as domestic US demand continues to be on a strong footing as well, as seasonal weather continues to affect demand.

US natural gas continues to increase production at a rapid pace, as Europe focuses on reducing reliance on Russia, as the war in Ukraine continues to weigh on geopolitical sentiment. US natural gas production is expected to increase by 20% to get to around 100 million tonnes, but terminals still remain an issue, and it could be a few years until terminals are finally up to speed. The latest figures for exports to Europe came in at 4.3 million tonnes, accounting for a significant increase from the previous years.

Meanwhile, the terminal business also continued to show strong results as earnings were up mainly as a result of the bulk business segment, which benefited from increasing global demand. Meanwhile, crude oil continues to be quite profitable as well, as realized crude oil prices were up 25% at $66 per barrel, while the realized price of natural gas was up 35%. Terminal utilization rates fell slightly from 94% to 91%. The crude oil segment largely benefited from hedges coming off during the recent quarters, which allows for higher price realization. Kinder Morgan’s current market share, for transportation, stands at 50%, and management reiterated during the call that they expect that maintain those levels, as new capacity continues to come on.

Financials continue to expand rapidly and net income is expected to come in at around $2.5 billion for the year, with dividends increasing by 3% YoY, the current dividend yield stands at around 2.3%. During the quarter, revenue came in at $5.1 billion compared to $3.8 billion, indicating an increase of 34% YoY. Meanwhile, earnings per share came in 14% higher, the fall in EPS growth is largely attributable increase in operating costs, such as transportation, labor, etc. On the other hand for the 9 months YoY, earnings per share came in at 66% higher.

Free cash flow also continues to see a significant increase during the year, increasing by 82%, but fell slightly, for the quarter, as increasing costs hampered free cash flow. Management has continued to focus on debt throughout the year, after years of poor debt management, and as a result, net debt fell by 18% up to the current fiscal quarter.

Both natural gas stocks and crude oil are witnessing an environment, where both inflation and excess demand continue to push up prices. But prices could fall due to oversupply, a slowing global economy, and decreasing liquidity. The federal reserve continues to push interest rates higher, and with inflation continuing to run hotter than expected, the interest could head 200-300 basis points higher before topping out. But the rest of the fiscal year for the company should remain on strong footing as demand for terminals, storage, and energy continues to forward.