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Kinder Morgan's Growth Engine Is About to Rev Up

Matthew DiLallo, The Motley Fool
Updated

Kinder Morgan (NYSE: KMI) finally restarted its growth engine last year. Overall, the pipeline giant generated $4.73 billion, or $2.12 per share, of cash in 2018, which was 6% above 2017's level and just shy of the record $2.14 per share in cash flow it produced in 2015.

Kinder Morgan expects to eclipse its previous peak this year given its forecast that cash flow will top $5 billion, or $2.20 per share, which would be about 7% above 2018's level. The pipeline company is already off to a strong start as its first-quarter results came in slightly ahead of plan as cash flow rose 7% year over year. The company's growth engine, though, should further accelerate in the second half, given that it has three needle-moving expansion projects on track to enter service.

A dollar bill folded into the shape of an arrow that pointing higher
A dollar bill folded into the shape of an arrow that pointing higher

Image source: Getty Images.

Adding some fuel from LNG

Kinder Morgan expects earnings in its key natural gas pipelines segment to grow 11% this year. One of the big drivers is its Elba Liquefaction project, which is a liquified natural gas (LNG) export terminal near Savanah, Georgia. Kinder Morgan is investing $1.2 billion for its share of the project. That's a significant investment as it represents 20% of the company's $6.1 billion expansion backlog.

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The company placed the first of the 10 liquefaction units into service this May and expects to finish the remaining nine at a rate of one per month. As these units come online, they'll enable Kinder Morgan to liquify 350 million cubic feet of natural gas per day. The company will earn fees as it manufactures this LNG, supported by 20-year fixed-rate contracts with Royal Dutch Shell. Those agreements will enable it to produce steady cash flow from this facility for years to come.

Gassing up on the Permian Basin

Another large-scale project Kinder Morgan currently has under construction is the Gulf Coast Express pipeline. The 450-mile system will transport 2 billion cubic feet of natural gas per day from the Permian Basin to Corpus Christi, Texas. Kinder Morgan is funding 35% of the cost for this $1.75 billion project, putting its investment at about $610 million, or roughly 10% of its current expansion backlog.

The company anticipates finishing up this pipeline by October. Once it enters service, it will supply the company with steady cash flow given that shippers signed 10-year fixed rate contracts for all of the system's capacity.

Gathering more of the Bakken's gas

The third near-term expansion project Kinder Morgan has under way is in the Bakken Shale region of North Dakota. The company is currently investing more than $500 million on building out new natural gas gathering and processing infrastructure so it can connect more wells to its system.

The company is constructing enough new pipeline and compression capacity to handle an incremental 275 million cubic feet of natural gas per day. On top of that, the company is also expanding its natural gas processing capacity in North Dakota. It is building a new facility that will be able to handle 150 million cubic feet of natural gas per day. The company expects to finish up this facility by the first of November. Like most of its expansions, the company signed long-term fee-based contracts with shippers that support these projects. As a result, Kinder Morgan will collect a steady supply of cash flow from these investments when they enter service later this year.

Getting ready to hit the accelerator

Kinder Morgan has struggled to grow its cash flow in recent years. Not only did it feel some of the effects of the volatility of oil prices, but it needed to sell some assets to help shore up its balance sheet so it could finance these high-return expansion projects. However, those efforts should begin paying big dividends in the second half of this year because the company expects to complete three large-scale growth projects. As that happens, the company's earnings growth rate should accelerate, which could give its stock reason to rise sharply.

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Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.