Kinder Morgan Inc’s belt-tightening pays off as returns beat pipeline peers, putting dividend hike on radar
North America's largest pipeline operator has earned investors a 49 per cent return this year
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Kinder Morgan Inc.’s efforts to raise cash and shrink debt are already paying off as the pipeline owner outperforms most of its peers and gets closer to fattening its denuded dividend.
After seven months of belt-tightening, North America’s largest pipeline operator has earned investors a 49 per cent return this year, more than double the gains for Energy Transfer Partners LP or the Alerian MLP Index of 44 energy infrastructure companies. Kinder is ahead of schedule on a debt-reduction target that will free up enough cash to raise annual investor payouts by 50 per cent next year and another 67 per cent in 2018, said Barclays analyst Christine Cho.
Investors cheered Kinder’s US$1.5-billion sale of a 50 per cent stake in one of its marquee pipelines to Southern Co. as the deal, announced last week, will give the company more room to maneuver. With an improved balance sheet, Kinder executives may finally be able to abandon talk about obscure financial metrics and revert to the nuts-and-bolts of the pipeline business, said Kristina Kazarian of Deutsche Bank.
“We think this should move the focus back to the backlog/fundamentals and could help frame up what we see as a compelling long-term story,” Kazarian, a lead research analyst for Deutsche in New York, said in a note to clients.
Earnings Forecast
Kinder is forecast to post a 15-cent per-share profit, excluding one-time items, when it discloses second-quarter results after the close of U.S. stock trading Wednesday. That would be little changed from a year earlier. Sales probably declined by 1.5 per cent toUS $3.41 billion, based on the average of 11 analysts’ estimates in a Bloomberg survey.
Kinder lost as much as 24 per cent of its market value after gutting its annual dividend by 75 per cent on Dec. 8 to avoid a credit downgrade. Since touching a record low on Jan. 20, shares in the Houston-based creation of billionaire Rich Kinder have gained about 80 per cent as the company shored up its finances and tackled a debt burden that more than doubled in the past four years to top US$40 billion.
As a result of the Southern Co. transaction, the ratio of Kinder’s debt to earnings before interest, taxes, depreciation and amortization probably will fall to 5.3 by the end of this year, below Kinder’s previous target of 5.5, Chief Financial Officer Kimberly Dang said during a July 11 conference call with analysts and investors. The ratio reached almost 9 in the first quarter.
Dividend increases and perhaps stock buybacks would kick in when the ratio stabilizes at 5 or less, Dang said.
Other Deals
Kinder may hit that level as soon as the end of this year, especially if the company strikes joint-venture deals to unload some of the costs associated with its Texas oil-production business or the US$5.4 billion Trans Mountain pipeline expansion in Western Canada, Barclays’ Cho said.
When Rich Kinder, the company’s executive chairman and largest shareholder, and CEO Steve Kean address second-quarter results Wednesday, investors will be keen for an update on the backlog of planned new projects. That key list of future cash generators shrank 24 per cent during the past six months to US$14.2 billion as the contraction in gas, oil and coal markets reduced demand for shipping and storage space.
Kinder executives “will likely provide an update on capex and backlog, and could give color on possible non-core asset sales or joint ventures at new projects or selective operating assets as it searches for ways to generate cash and improve leverage,” said Michael Kay, a Bloomberg Intelligence analyst.
