Two years ago, Kinder Morgan (NYSE: KMI) found itself in a tight spot. With oil still crashing, its stock price sinking, and a balance sheet loaded with debt, the pipeline giant couldn't get the money it needed to finance its backlog of expansion projects. That led it to slash its dividend and use that cash to get its financial situation on a firmer foundation.
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This strategy has worked as planned. So the company is now generating enough cash to finance its expansion projects with room to spare, which has positioned it to significantly increase the dividend over the next few years. Meanwhile, more growth is now coming down the pipeline after the company recently gave the green light to a new project, supplying it with some incremental cash flow that could push the dividend higher in the future.
All aboard the Gulf Coast Express
For the past several months, Kinder Morgan has been working on developing a pipeline project that would move natural gas from the fast-growing Permian Basin to high-demand markets along the Gulf Coast. The company quickly got DCP Midstream (NYSE: DCP) to climb on board by agreeing to supply the project with some of the natural gas it gathers from wells in the region. In the meantime, fellow Permian Basin gas gatherer Targa Resources (NYSE: TRGP) joined them a few months later, bringing with it the production of leading driller Pioneer Natural Resources (NYSE: PXD). Another major piece came together recently when Apache (NYSE: APA) agreed to commit a portion of its growing gas production from the region to the project. As a result, Kinder Morgan and its partners have now secured volumes to fill 85% of the pipeline's proposed 1.92 billion cubic feet per day of capacity, which is enough to justify moving forward.
Kinder Morgan hopes to begin construction in the first quarter of next year, which would put it on pace to finish in October 2019 if it can gain the necessary regulatory approvals. The company will hold a 50% stake in the project and therefore will finance half its projected $1.7 billion price tag, though Apache does have the option to purchase a 15% stake from Kinder Morgan so it could recoup some of that cost. DCP Midstream and Targa Resources will split the remaining half of the project.
Adding some more fuel to the tank
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Before locking down this project, Kinder Morgan had $10.2 billion of fee-based pipeline and terminal projects in its backlog, which should supply it with more than $1.5 billion of incremental earnings as they enter service in the coming years. When combined with the company's stronger balance sheet, that rising income stream gives the pipeline giant the boost to significantly grow its dividend, as it plans for a 60% increase next year and 25% raises in 2019 and 2020.
That said, by adding the Gulf Coast Express pipeline to the backlog, the company now has a bit more fuel to keep the dividend growing beyond 2020. While the projected completion date fits within the current three-year forecast, that timing is noteworthy. That's because one of the primary drivers of 2020's planned dividend increase is the upcoming Trans Mountain Pipeline expansion, which the company also hopes to place into service by the end of 2019. However, this date remains up in the air at the moment because of permitting delays that could push back the start date to September 2020.
That potential setback has investors worried that the company might need to scale back its planned 25% dividend increase in 2020 given the magnitude of this project, which at $5.7 billion represents a huge portion of its backlog and incremental cash flow. However, with the Gulf Coast Express slotting in that same time frame, it eases some of the pressure a delay in Trans Mountain might cause. Instead, it could use the cash flow from this project, along with its stronger balance sheet, to keep its 2020 dividend growth promise, while using Trans Mountain's cash flow to help support an increase in 2021.
About to hit the accelerator
Kinder Morgan disappointed dividend investors a few years ago when it slashed its payout. However, it hopes to win back their trust by significantly increasing the dividend over the next several years. That future growth is now more likely after securing the Gulf Coast Express project, which could be extended beyond the current time frame. That's what makes Kinder Morgan one company that dividend growth investors won't want to miss.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: long January 2018 $30 calls on Kinder Morgan and short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.