Kinder Morgan (NYSE: KMI) is back.
Publicly, the energy pipeline master limited partnership (MLP) issued guidance calling for distributable cash flow (DCF) of $4.6 billion in 2018 or $2.05 per share. Quietly, it has been telling stockholders that the numbers were tracking ahead of expectations.
Well, the official count is now in. The company indeed beat the mark, generating $4.73 billion in DCF or $2.12 per share. That's within two cents of the record high of $2.14 set in 2015. So for all intents and purposes, it has made a full recovery. Yet back then, KMI shares commanded a price north of $40. Today, they are still well below $20. That's difficult to reconcile.
Clearly, many investors haven't forgiven Kinder Morgan for its forced dividend cut in late 2015 as the bottom fell out of the oil market and many midstream partnerships suffered a liquidity crunch. But those days are long gone -- distributions were hiked 60% last year, and management is aiming for a 25% encore both this year and next.
If you prefer to look at standard earnings rather than cash flow, Kinder Morgan reported net income of $1.481 billion ($0.66 per share) in 2018, versus $27 million ($0.01) in 2017. Even more impressive, it did that without any help from its Canadian operations (having sold the Trans Mountain Pipeline during the year).
Much of the credit belongs to the firm's workhorse natural gas pipelines and terminals. U.S. natural gas demand rose 11% last year to 90 billion cubic feet per day -- and 40% of all domestic gas consumed and exported passes through Kinder Morgan's hands.
Even after a 60% increase, Kinder Morgan is having no trouble meeting its dividends. The $4.7 billion in DCF was enough to cover the $1.8 billion in annual distributions with $2.9 billion to spare. The surplus was $821 million last quarter alone.
That has given management the luxury of meeting its ambitious capital spending plans without having to tap the capital markets. Kinder Morgan plans to invest another $3.1 billion in growth projects in 2019, 100% funded from internal cash generation.
For those who are unfamiliar, MLPs are publicly traded limited partnerships. Ownership is usually divided into units rather than shares. The vast majority of MLPs are in the midstream energy business -- they typically operate pipelines, storage tanks and other infrastructure used to transport and process petroleum, natural gas and refined products like gasoline around the United States.
Unlike a corporation, a master limited partnership is considered to be the aggregate of its partners rather than a separate entity. The most distinguishing characteristic of MLPs, however, is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock.
Although they're a special type of asset, you can buy and sell MLPs just like regular common stocks. Yet MLPs allow for "pass-through" income. This means that they're not subject to federal corporate income taxes.
The result is that more cash is available for distributions than would be available if the company had to first send a large cut off the top to Uncle Sam. That's why many have dividend yields three to four times higher than the payout of the average S&P 500 stock.
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With new expansions such as the Gulf Coast Express and Permian Highway Pipeline taking hold, Kinder Morgan expects distributable cash flow to surpass the 2015 peak this year -- climbing to $5 billion or $2.20 per share.
Even with dividends rising 25% to $1.00 per share, that's enough to cover the distribution more than two times over. Meanwhile, KMI offers a yield of 4.4% at current prices.
As for the balance sheet, proceeds from asset sales have gone toward debt reduction, lowering the debt/EBITDA ratio to 4.5 by year's end. That deleveraging has been rewarded with credit upgrades, which should help win back investor confidence.
KMI remains one of my top picks over at High-Yield Investing. My subscribers and I are sitting on double-digit gains since adding it to our portfolio back in October 2018. And with record cash flows, a healthier balance sheet and a recent credit upgrade, KMI should see smoother sailing over the next six to 12 months.