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I Can't Make You Love Me, Part 2 - Kinder Morgan's Short- and Long-Term Prospects

Over the last decade and a half, oil and gas companies have taken investors on a wild roller coaster ride as their ambitious growth strategies and stock prices have been boosted, then badly battered, by volatile demand and commodity prices. With sentiment toward the old-school energy industry turning negative, producers and midstreamers shifted course to emphasize value over volume, prioritizing solid cash flow generation and substantial shareholder returns. Midstream giant Kinder Morgan has found it especially difficult to win back investor confidence despite its largely successful efforts to stabilize its balance sheet, internally fund growth, and gradually restore its dividend. But will that be enough to improve the company’s prospects? In today’s RBN blog, we draw on more highlights from our recent Spotlight report on KMI’s portfolio, performance, and near-term growth potential, with an emphasis on the opportunities ahead.

We’ll begin with a quick recap of Part 1 of this series, where we reviewed the company’s history and outlined its new strategic initiatives. Since its founding in 1997, Kinder Morgan has employed a variety of industry-leading structures and strategies, including a master limited partnership (MLP), a leveraged buyout, an initial public offering, and a consolidation of its holdings into a C-Corp, to grow into a midstream colossus with a market cap that neared $100 billion in early 2015. However, in 2014-15, investors concerned about plunging oil prices began abandoning the sector. KMI’s stock price was hit particularly hard, plummeting 66% between the fall of 2014 and the fall of 2015 on concerns about its elevated debt load. Unable to fund future expansion as its stock price cratered and debt soared, the company slashed its dividend by 75% in late 2015 in order to preserve cash to fund its sizable project backlog, which triggered an ice-cold response from shareholders.

KMI’s management responded with a commitment to stabilize the company’s balance sheet, fund growth internally, and rebuild shareholder returns. Since 2016, KMI has slashed debt by 20%, reduced is leverage ratio below its 4.5x target, generated sufficient cash flow to internally fund expansion projects, and instituted a stock-buyback program. It has also increased its annual dividend from $0.50 per share to $1.08 per share, and has budgeted to increase the dividend to $1.11 per share in 2022. Despite all these moves, KMI’s stock price today is little changed from its price of $16.45 per share on January 1, 2016, and down about $25 per share from its April 2015 peak. Just as worrisome, its stock performance has lagged some major midstream competitors.

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