This year has been a frustrating one for Kinder Morgan (NYSE: KMI) investors, considering that shares are down more than 9% since January. That decline is a bit of a head-scratcher since the company's underlying operations have outperformed expectations, enabling it to remain slightly ahead of pace on its full-year guidance. Furthermore, the pipeline giant completed the repair work on its balance sheet, which positions it to ramp up cash distributions to shareholders starting next year. While shares initially moved higher after unveiling that plan, they've come back down and currently trade at a ridiculously cheap valuation.
Because of what it has already accomplished this year, investors don't expect the company to report anything needle-moving when it announces third-quarter results later this week. That said, for patient investors, this report could further confirm that the company is heading in the right direction, as long as it shows progress in the following three areas.
Cash flow stays on pace
Heading into 2017, Kinder Morgan thought it would produce $4.46 billion of distributable cash flow (DCF), or $1.99 per share. It has already generated $2.237 billion of DCF so far this year, which is about $50 million ahead of pace. Ideally, the company will continue to stay ahead by at least meeting its third-quarter guidance forecast, which calls for it to produce $1.024 billion in DCF, or $0.46 per share.
If there's one concern with hitting that number, it's the fact that oil was below $50 a barrel for most of the quarter, which is less than the $53 a barrel assumed in its budget for unhedged oil production. That said, the company could offset that lower price, as long as volume across its systems came in ahead of expectations, which is possible given the increase in drilling activities this year. What we don't want to see is the company missing the mark on DCF or pulling back guidance because that could give the market a reason to sell the stock off.
The balance sheet improvements stick
One of Kinder Morgan's primary goals over the past year and a half has been to shore up its balance sheet. The company is getting closer to accomplishing that aim after completing a slew of strategic initiatives that has reduced debt by $5.8 billion since the end of 2015, including completing an IPO of its Canadian business Kinder Morgan Canada Limited (TSX: KML). Because of that, the company expects to end the year with a 5.2 times net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization ratio, which is ahead of its plan, putting it within striking distance of hitting its 5.0 times leverage target.
Because of the importance of that level, investors should keep an eye on what management has to say about its balance sheet during the quarter. Ideally, the company will reiterate that it's still ahead of plan.
The backlog keeps getting bigger
Among the actions Kinder Morgan took to shore up its financial situation was partnering some of the biggest projects in its backlog, as well as jettisoning those with lower returns so it could self-finance growth. However, with its balance sheet back on solid ground and the oil industry beginning to heal, the company is starting to focus on capturing additional high-return expansion opportunities. That's becoming increasingly important since its largest project, the Trans Mountain Pipeline expansion developed by Kinder Morgan Canada, faces intense opposition and might not enter service in late 2019 as scheduled.
The company began to grow its backlog last quarter by adding a net $500 million in projects, bolstering it up to $12.2 billion. Ideally, we'd like to see that number head even higher this quarter. However, even if the number doesn't move, that's not a concern as long as the company has a positive update on its proposed Gulf Coast Express project.
Kinder Morgan recently took a huge leap forward on this proposed natural gas pipeline by signing a letter of intent to form a joint venture with DCP Midstream (NYSE: DCP) and Targa Resources (NYSE: TRGP) to develop the project. Initially, Kinder Morgan thought that this would be a $1 billion project, partially supported by volume from DCP Midstream. However, the project's scope increased when Targa Resources recently jumped aboard. The inclusion of DCP and Targa as strategic partners is crucial because they'll not only help fill up its capacity but will finance half its cost. Meanwhile, the proposed in-service date of late 2019 is also worth noting because it coincides with Trans Mountain's (and therefore could help offset a delay).
Don't expect much excitement this quarter
While Kinder Morgan has accomplished everything it set out to do this year, that hasn't proven to be the catalyst needed to get its stock moving higher. Furthermore, given the company's guidance and what it has already announced, it's unlikely that it will reveal anything this quarter that will change the market's view of the company in the near term. Because of that, it looks like investors will need to be patient and wait for some of its 2018 growth initiatives to kick in, which will hopefully finally provide the fuel to drive the stock higher.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.