This Energy Pick Solves A Critical Need (And Yields 7%)
Back in March, as oil prices were in the middle of a historic climb, I spent a good deal of time discussing one of the most important long-term energy challenges we face in this country.
Specifically, the lack of energy infrastructure.
While politicians and pundits were talking about the need to drill for more oil or supposedly “greedy” companies gouging the consumer, the reality is that there just isn’t enough takeaway capacity to support the incremental growth needed to meet demand.
As I said back then, a lack of available pipeline capacity has already created severe transportation bottlenecks at times. That happens when you bring 30 million barrels per week to the surface.
All of those oil wells in the Permian basin? One way or another, it needs to get to refineries along the Gulf Coast. The same goes for our abundant natural gas… those export terminals that could ship badly needed liquified natural gas to Europe (and thus reduce dependence on Russia) are no good if there’s no way to bring it in.
As I pointed out back then, it’s not just West Texas we’re talking about, either. The Bakken shale in North Dakota is rich in natural resources. But, unfortunately, billions of cubic feet of natural gas have been flared (just burned off) due to lack of infrastructure.
That’s where Kinder Morgan (NYSE: KMI) comes in.
Kinder Morgan plans to invest over $1.5 billion near-term in its massive network of pipelines and storage terminals. Most notably, it’s addressing the rising demand for natural gas takeaway in West Texas by pushing more volume through its Permian Highway. The conduit (which is jointly owned with Exxon Mobil and another partner) will soon have the capacity to deliver an additional 550 million cubic feet per day.
The expansion was officially green-lit on June 29. And the company won’t have to go out looking for shipping customers, considering every cubic foot of this increase has already been pre-booked in advance.
With expansions on both the Permian Highway and the nearby Gulf Coast Express (GCX), Kinder Morgan will soon be easing traffic jams and transporting an incremental 1 billion cubic feet of natural gas per day. Much of that critical fuel will be routed to liquefaction facilities and eventually exported as LNG to hungry markets overseas.
Problem, solution. Sounds like a good setup. So let’s take a deeper…
Kinder Morgan’s first-quarter report was filled with countless facts and figures, but one number, in particular, caught my attention.
That’s how much cash the company generated for the period above and beyond what was needed to meet its dividend. Distributable cash flow (DCF) of approximately $1.5 billion ($0.64 per share) covered the distribution of $630 million ($0.28 per share) more than two times over – leaving a surplus of $820+ million.
Not bad for just three months’ work.
Kinder Morgan has learned from its mistakes and now lives entirely within its cash flow means. The once profligate spender has become quite disciplined with its budget, always leaving a comfortable cushion. That has allowed management to return more cash to stockholders (dividends have risen for five straight years), while also eliminating $11 billion in debt off the books since 2015.
The leaner organization now boasts a healthy investment-grade balance sheet. But there is always a tradeoff. By corralling its spending, the company isn’t plowing as much as it once did into expansions and new growth projects. Still, there is plenty in the tank to keep DCF (and dividends) moving forward over the next few years.
In the meantime, management has just bumped the quarterly dividend again, to $0.2775 per share. And that beefy 6.8% yield is supported by $4.7 billion in projected DCF this year.
I view Kinder Morgan as a portfolio anchor for any income-minded investor. And if you’re looking for more quality high-yield picks like this, then you need to see my latest report…
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