With Improved Financial Position, Energy Firm 'Creates a Compelling Opportunity'

Darren Horowitz, an analyst with Raymond James, provided a Q1/18 preview.


In an April 16 research report, Raymond James analyst Darren Horowitz noted that the effort made over the past 18 months or so to improve Kinder Morgan Inc. (KMI:NYSE) financial standing helped decrease leverage and better positioned the company for providing value to shareholders.

Recently, the Houston-based firm has guided to an approximately 35% dividend compound annual growth rate between 2017 and 2020 and outlined a roughly $2 billion share buyback program to occur between Q4/17 and 2020. "Recent capital allocation announcements have set Kinder Morgan to outperform over the next 12–18 months (especially as share repurchases provide downside support through overemphasized project development headwinds)," Horowitz indicated. "We see this trade-off as compelling."

The analyst shared what his firm expects in terms of Q1/18 production from Kinder Morgan. The natural gas pipelines segment should post strong volumes on the back of increased Bakken/Hiland numbers, progress at KinderHawk and severe winter weather. Moderate volume growth is expected in the CO2 segment, evened out by lower commodity prices and dampened volumes from its S&T assets. In the terminals segment, recent expansions should counteract divestitures, and in the products segment, the Utopia Pipeline should offset lower crude and condensate volumes.

The one unknown in the upcoming Q1/18 numbers, Horowitz pointed out, is financing costs within the Kinder Morgan Canada segment due to management having curtailed capital spending on the Trans Mountain expansion project (TMEP) in mid-quarter.

Regarding this "beleaguered" project, as described by Horowitz, Kinder Morgan intends to decide by May 31, 2018 whether or not to proceed with it. The management team will be addressing TMEP with various stakeholders over the ensuing weeks. Canadian government officials have voiced increasing support for TMEP, with one even broaching the idea of perhaps investing in it. Thus, a project green light by Kinder management can't be ruled out.

Kinder Morgan is trading at a discount to its peers, which "despite lower relative risk (base business operations), creates a compelling opportunity," Horowitz said. Raymond James has a Strong Buy and $22 per share target price on Kinder Morgan, whose stock is currently trading at around $16.61 per share.

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