2023-04-11 00:49:54 ET
Summary
- Kinder Morgan has done a nice job of improving its balance sheet over the years.
- KMI has some solid low-carbon projects to help growth in the coming years.
- That said, I find some of its midstream peers more attractive at this time.
Kinder Morgan ( KMI ) is a solid midstream operator. However, I like some its peers a bit more at this time.
Company Profile
KMI is a diversified midstream operator. The company has four segments.
The Natural Gas Pipeline segment accounts for about 62% of its business and includes interstate and intrastate pipelines, storage facilities, LNG liquefaction & terminal facilities, and NGL fractionation facilities. The segment has over ~70,000 miles of natural gas pipelines that move about 40% of U.S. natural gas production. It also owns interest in 700 Bcf of storage capacity that represents approximately 15% of U.S. natural gas storage.
KMI’s Products Pipelines segment accounts for 15% of its business and includes crude, refined product, and condensate pipelines, along with terminals, a condensate processing facility, and transmix processing facilities. The segment has about 10,000 miles of refined products and crude pipelines and transports ~1.7 Mmnn/d of refined products to East and West Coast demand-pull markets.
The Terminals segments represent 12% of KMI’s business mix and include refined petroleum product, chemical, renewable fuel, and other liquid terminal facilities. It also consists of its pet coke, metal, and ore facilities. The segment also has 16 Jones Act-qualified takers with 5.3 MMbls of capacity. Its CO2 segment, which accounts for 11% of its business, meanwhile, produces, transports, and markets CO 2 f or use in enhanced oil recovery projects. The segment also includes its oil & gas producing fields, as well as RNG, LNG, and landfill GTE facilities.
Opportunities & Risks
Similar to Williams ( WMB ), which I wrote about earlier this week , KMI handles a huge amount of the natural gas produced in the U.S. It also has very strong contracts with the majority coming from take-or-pay, meaning that KMI gets paid whether or not volumes flow through its pipes.
For 2023, approximately 61% of KMI’s EBITDA will come from take-or-pay contracts, while 26% will come from fee-based contracts that have volumetric exposure. Approximately 7% of its EBITDA will come from commodity-based pricing, and 6% from hedged production. Overall, that’s a very nice mix, that is both defensive in nature, while allowing for some additional upside in good energy environments.
The biggest risk to numbers would be refined product volumes followed by natural gas volumes. A 5% volume change in refined product volumes can have a $49 million impact to EBITDA and DCF, while a 5% change in natural gas volumes can have a $40 million impact.
Like many midstream companies, KMI has done a good job of reducing its debt and lowering its leverage over the past several years. It’s reduced its net debt by about -19% since 2016, while increasing its adjusted EBITDA by ~4%. Over the same period, it paid out over $16 billion in dividend and bought back nearly $1 billion in stock. KMI ended 2022 with 4.1x leverage and expects to end 2023 with leverage of 4.0x, which is below its 4.5x target.
The company has $3.33 billion in growth projects in its backlog, and it plans to spend around $2.1 billion on these projects this year. About 62% of its backlog will come into service this year and 22% next year.
It estimates that it will get an attractive 3.4x build multiple on its projects. KMI’s big focus is on low carbon investments, which represents about 82% of its project backlog. The bulk of its growth CapEx will be directed towards its natural gas segment. Given its projected build multiple and backlog, EBITDA estimates a few years out look low in my view. As such, I think 2025-26 EBITDA estimates should rise over time as these projects should be fully ramped by that time.
Discussing its project backlog at its Analyst Day in January, President Kimberly Dang said:
“The biggest project in our backlog is the TGP and SNG pipeline project to serve Venture Global. And so it's a 2 Bcf of capacity, moving on a combination of SNG and TGP. We've got 20-year contracts, and the project will come online in '24 and '25. The second biggest project is $283 million project. This is a debottlenecking project within our Texas Intrastates that will come in service late this year. KinderHawk, the Haynesville, as I'll show you in a minute, has tremendous production growth. Given all the demand for LNG exports, it was just born in the right place. And so we've got a lot of opportunity there on our gathering assets. The TGP East 300 expansion, that's a pipeline expansion to bring incremental gas into New York. It's a compression expansion. Compression expansions tend to be highly economic. We've got 20-year contracts there. That comes in November 1 as our projected date on that.
“So those are some of the natural gas projects on products. It's really the renewable diesel project. So $73 million of renewable diesel projects. We'll go through in a minute. In terminals, we have the feedstock, the renewable diesel feedstock hubs for REG/Chevron and for NESTE. And then we've got a conversion project, which lowers greenhouse gas emissions in Pasadena by 38% for $64 million. And then we've got the ETV projects of about $300 million, converting some of the gas coming off the landfills to be pipeline quality. And that gets you to about 84% of the backlog. So these are the biggest projects in the backlog.”
KMI should also benefit this year from built-in inflation escalators on some of its contracts on the terminal side and those with tariff-based contracts. It also had some contract roll-off headwinds in its natural gas segment last year that won’t repeat this year.
The company is also one of the biggest LNG exporters in the country with about a 50% market share. LNG exports remain a big growth opportunity, although there has been some increased competition in the space. Overall, though, this is a nice growth market to be attached to.
Valuation
Turning to valuation, KMI trades at 8.5x the 2023 EBITDA consensus of $7.68 billion. Based on the 2024 EBITDA consensus of $7.9 billion, it is valued at 8.3x.
KMI stock has an attractive free cash flow yield of about 9.8% based on my 2023 projections calling for $3.85 billion in FCF. The stock has a yield of about 6.3%. As such, the dividend is well covered and has plenty of room to grow.
KMI trades in the middle of where other large midstream operators are currently trading.
Conclusion
Overall, KMI is a solid midstream company that has done a nice job of fixing past issues. The balance sheet is in decent shape, and it's got a solid ballot of growth projects. Investors who don’t like dealing with K-1s may find it particularly attractive.
That said, I prefer the likes of other names in the space such as Energy Transfer ( ET ), Enterprise Products Partners ( EPD ), and WMB. ET is cheaper and has the best assets in the midstream space in my view, while EPD is the best-run midstream company in my view. WMB, meanwhile, has a better balance sheet, similar EV/EBITDA valuation, and a better FCF yield.
As such, I think KMI is solid “Hold,” with some nice additional upside. I just like some of its peers a bit more.
For further details see:
Kinder Morgan Is Solid Midstream Option