Oil Prices Have Little To No Effect On This Company
By Martin Tillier - Apr 03, 2015, 3:41 PM CDT
Despite the frequency with which sensational claims of oil dropping further, maybe to $20 or even $15 appear in the financial media, I doubt there are any rational observers who honestly expect the price to stay down forever. At some point a recovery will come, and when it does the companies that have used the current discount pricing of assets to expand will reap their rewards. That is true in terms of E&P companies, but also infrastructure providers.
When Kinder Morgan combined Kinder Morgan Energy Partners and El Paso Energy Partners into KMI last year many heads were turned. The fact that such a large proponent of the MLP structure was consolidating led to some (prematurely) forecasting the death of Master Limited Partnerships. From a business point of view, though, combining operations made perfect sense for Kinder Morgan. The resulting company is now the largest energy infrastructure company in North America and the cost of capital reduction (Down from 9 percent to around 3.5 percent, according to Stifel’s recent research report) leaves it poised for significant growth.
That process has already begun, with KMI announcing their intent to build a new storage terminal in Edmonton in a 50/50 joint venture with the Canadian company Keyera Corp. That just adds to a project backlog of around $18 Billion, and suggests that, even from a position of dominance, KMI has a lot more growth ahead in the next couple of years.
Piling on debt to fund those projects…
Despite the frequency with which sensational claims of oil dropping further, maybe to $20 or even $15 appear in the financial media, I doubt there are any rational observers who honestly expect the price to stay down forever. At some point a recovery will come, and when it does the companies that have used the current discount pricing of assets to expand will reap their rewards. That is true in terms of E&P companies, but also infrastructure providers.
When Kinder Morgan combined Kinder Morgan Energy Partners and El Paso Energy Partners into KMI last year many heads were turned. The fact that such a large proponent of the MLP structure was consolidating led to some (prematurely) forecasting the death of Master Limited Partnerships. From a business point of view, though, combining operations made perfect sense for Kinder Morgan. The resulting company is now the largest energy infrastructure company in North America and the cost of capital reduction (Down from 9 percent to around 3.5 percent, according to Stifel’s recent research report) leaves it poised for significant growth.
That process has already begun, with KMI announcing their intent to build a new storage terminal in Edmonton in a 50/50 joint venture with the Canadian company Keyera Corp. That just adds to a project backlog of around $18 Billion, and suggests that, even from a position of dominance, KMI has a lot more growth ahead in the next couple of years.
Piling on debt to fund those projects may not make sense to some in the current environment, but credit is still cheap, as the company has an investment grade credit rating. In addition, the actual amount of debt needed for expansion should be manageable, as Kinder Morgan has suffered very little in the current, low oil price environment. Around 85 percent of their revenue comes from fee-based projects and almost all of the rest is hedged, meaning that the price of oil has little to no effect on them.
That continued cash flow is why KMI has been able to announce something else that makes the stock particularly attractive in the sector…continued dividend growth; management has projected an anticipated $2 dividend for 2015, a 15 percent increase on 2014, and an approximately 10 percent growth rate through 2020. Of course you cannot bank a dividend until it is actually paid, but the company has a history of increasing dividends, regardless of fluctuations in the oil market.
There are some risks, of course. If oil does continue to fall, and natural gas with it, then even those fee based revenues could be at risk as Kinder Morgan’s customers feel the effects. Also, while the debt level looks manageable given strong cash flow, it is higher than many others in the infrastructure sector. A sharp rise in interest rates would also hurt the stock as an income instrument, but, like sustained low oil prices, that looks unlikely at this stage.
On balance, though, the potential benefits outweigh the risks. KMI has the two things that energy investors became accustomed to for a while, but which are now in extremely short supply in the industry: good cash flow and growth prospects. As I advised a few weeks ago, reaching for attractive looking yields in the cash starved E&P space is probably a mistake. A fee based infrastructure company, however, is a completely different proposition. With that in mind, Kinder Morgan looks like one of the best ways to play the resumption of the U.S. domestic energy boom that most think is coming.
