2023-03-10 03:59:17 ET
Summary
- Markets have become volatile, and with rates continuing to increase, they will continue to be volatile.
- Kinder Morgan is an important part of the energy ecosystem.
- The company is valued at an attractive valuation.
Kinder Morgan (KMI) is an energy transportation company and is likely to continue to benefit in an environment where energy demand continues to remain relatively robust. Combined with an increasing demand for LNG out of key markets such as Europe, the Middle East, and Asia, Kinder Morgan should benefit from a range of positive dynamics, which in turn should send KMI stock higher over the next few quarters.
LNG Demand Continues to be Robust
Kinder Morgan has played a key role in LNG transportation and is benefiting from what is already a tight supply level, especially as Europe continues to demand LNG from the US. According to IEA, demand is supposed to increase by a further 4.3% , and with increasing levels of US natural gas proven reserves, exports will continue to be on the upside for a while. The first month of 2023 saw LNG demand fall by 5%, mainly due to the weather being milder than was initially expected. Regardless, despite the temporary hiccups LNG still looks to be in good hands.
European demand has been strong for a few years due to the war in Russia, but Europe might not see as much of an increase in demand during 2023, as most of the Russian exports have already been replaced. On the hand, Asia continues to be a strong prospect, as a source of demand, and should help Kinder Morgan as it looks to continue with its strong run of form. China, and India, are going to be two significant sources of that demand in 2023, as both should push demand towards 405 million tonnes to 408 million tonnes. Kinder Morgan’s management believes that the demand is sustainable and the US can be a reliable trading partner to Europe and others as well due to its ability to provide natural gas at $8-9 MBTU , which is competitive.
Kinder Morgan’s operations are positioned to continue to take advantage of these trends, with increased investment and capacity, and new pipelines coming up, which should help meet some of the demand coming from across the sea. Strong capacity combined with a strong network, remains key to success for the company, and management has been continuously investing in upgrading its facilities to keep up with future business prospects.
Investor Presentation: Kinder Morgan Investor Presentation: Kinder Morgan
Slower Than Usual Revenue Temporary
The latest quarter’s slowdown should be temporary, it was primarily caused by temporary shutdowns in Freeport, which affected capacity, but management indicated that increasing coal energy is being replaced by other more sustainable forms of energy, and this is where demand replacement is helping push Kinder Morgans products forwards. Moving from winter to spring and summer there will be multiple factors that will help the transition including the Freeport issues resolving themselves. Furthermore, a colder-than-expected spring due to “La Nina” , should help improve revenue. This should help revenue come in potentially higher, by around 2-3%, year-on-year, as factors such as slowing spending, could negatively affect revenue, and as a result, revenue may not increase as much as it would if things were a bit more normal.
Margins Providing Tailwinds
Margins are also slowly expanding, as improving economies of scale continue to help push Kinder Morgan’s profitability higher, which currently stands at 15%. This combined with steady profitability growth of around 6-7%, could push the stock slightly higher in 2023. Currently, the valuation remains relatively moderate, with the current P/E trading at around 15x, and that puts the stock at a relatively low chance of downside. This steams from the fact that energy demand is not likely to head lower, and Kinder Morgan remains central to the energy industry, where it provides key services, which cannot be replaced.
Kinder Morgan’s management has predicted that the company might see a slight decline in per barrel profitability in 2023 on lower realized prices, but oil prices have steadied out and the actual realized price per barrel should actually be slightly higher. And while adjusted EBITDA has been predicted at around $242 million it is likely that the actual number is higher as demand remains robust. I expected EBITDA for the year to be higher than 2022, and forward P/E is therefore closer to 13/14, which means that the stock could head up slightly as we move forward.
Investor Presentation: Kinder Morgan
Kinder Morgan Compared to Competitors
Kinder Morgan’s valuation remains relatively in the middle of the pack compared to others in a similar position. Surprisingly despite strong execution from management, and continued tailwinds, Kinder Morgan is currently on a consensus of the hold by analysts. The stock is barely up this year, compared to competitors many of whom have seen their stock up significantly. This could be due to overreaction to the temporary headwinds, and the slightly higher valuation, except for Cheniere which is trading at a significantly higher valuation. Therefore, considering the valuation is not too high and the current temporary factors will likely resolve themselves eventually, this could mean that Kinder Morgan is being overlooked by the market. But considering the headwinds to the economy, yes there is a likelihood that Kinder Morgan’s stock does not head higher significantly. I personally project around 10% upside, with around 15%, potentially by the end of the year.
TipRanks
Kinder Morgan's own P/E ratio, of 15x, for a company that could witness revenue grow consistently over the next 4-5 years at 6-7%, means there remains some upside. The company currently has a return of investment of around 5%, and a gross margin of around 38%. Considering the economies of scale mentioned earlier the gross margin could head higher, along with the return on investment. Furthermore, the P/S remains relatively low as well at around 2. All these factors combined make the stock relatively well priced, with the potential for growth.
Kinder Morgan’s operations face a number of overall headwinds despite the positives, and a slowing economy, slowing trade, and the prospect of fewer people using transportation such as airlines, and automobiles could affect the stock to the downside because there is a chance of rising cost of living, and higher interest push down demand for LNG. LNG is not as sensitive to economic cycles, especially since it’s become such an important part of the global transition away from carbon fuels, with many governments recognizing natural gas’ importance in transitioning to a more sustainable energy future. This means that while risks are present to the company they are not something that should affect the company in a manner that would scare investors.
Kinder Morgan remains a relatively simple business model, that will continue to witness consistent cash flows. With a dividend of around 6%, which should continue for now, KMI could be brought by investors looking for a reasonably valued company, with a strong competitive advantage, with little expectation that there will be any reduction in those dividends.
For further details see:
Kinder Morgan Remains Resilient Despite A Turbulent Environment