Image source: Kinder Morgan.
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Pipeline giant Kinder Morgan recently reported fairly solid first-quarter results, all things considered. While the weak oil market is having some impact on Kinder Morgan's financial results and its future plans, the impact isn't as great as it has been for oil and gas producers. In fact, CEO Steve Kean addressed it on the company's first-quarter conference call, focusing on three areas:
- Capital projects and expected growth spending for 2016.
- Its outlook for the balance of 2016.
- Some thoughts on our counterparty credit risk.
Here's a closer look at what he had to say about each area.
Growth spending updateKean started off by diving into an update on the company's backlog:
Kean went on to note that Palmetto was removed because of problems with using eminent domain in Georgia, which made it virtually impossible to move forward on that project. Meanwhile, the larger NED project was removed because it simply didn't have enough customers signed up to make it economically compelling. Basically, the projects weren't worth pursuing because the economics weren't compelling given the issues the company was facing.
Kean then detailed how this would impact 2016 capex spending:
As a result of removing two major projects from its backlog, as well as other project deferrals, Kinder Morgan was able to cut its near-term capital needs by $400 million from its last update. That'll provide it with a bit more financial breathing room should the energy market worsen, as well as a bit more flexibility to improve its balance sheet.
2016 outlookKean then gave an update on the company's outlook for the balance of the year:
While Kinder Morgan's exposure to oil and gas prices is muted because of its focus on owning fee-based assets, it's not completely immune. As the chart on the slide below shows, the company's budget was based on $38 oil and $2.50 gas, which had proven to be a bit optimistic so far this year.
Source: Kinder Morgan Investor Presentation.
Given current projections for commodity prices, Kinder Morgan no longer expects to hit its budgeted targets for earnings, though it does expect to hit its leverage target because of its capital spending reduction. As a result of those spending reductions and the overall stability of its cash flow, Kinder Morgan still expects to be able to fund its current dividend and reduced capex budget while still generating excess cash flow.
Image source: Kinder Morgan.
Counterparty riskThe final area Kean addressed was the growing concern surrounding the credit of its customer base, especially given the impact the three coal customer bankruptcies have had on its Terminals segment. Kean noted:
Kean goes into great detail on the overall security of the company's customer base as well as what it's doing to try to mitigate its risks, such as asking for more collateral.
That being said, there is a portion of its revenue that's at high risk right now, with Kean noting that, "Our identified credit concern list amounts to about 5% of revenue, and about half of that is mitigated by credit support or underlying resale value of the capacity that the customers hold." Further, the other half of that total is reflected in one of the recent coal bankruptcies, so the company has very limited near-term risk due to potential customer bankruptcies.
For perspective, that's much lower than rivals like Williams Companies , which derives 20% of its gathering and processing revenue from Chesapeake Energy . That has been a huge concern for Williams Companies this year because of the increased worry that Chesapeake Energy could have to restructure in bankruptcy due to its massive debt level. Clearly, Kinder Morgan doesn't have the counterparty credit concerns of Williams Companies, but this is still an area investors need to keep an eye on, because it could cause future results to be weaker than expected if a rash of bankruptcies do hit the energy sector.
Investor takeawayKinder Morgan CEO Steve Kean wanted investors to know three things:
- It's paring back its backlog and only investing capital into its best projects.
- It now expects to run a little behind budget this year because of weaker oil and gas prices.
- It's monitoring the credit concerns of its customers closely.
Kean wants investors to know the company is making changes to its business plan to reflect the weaker market outlook in order to ensure Kinder Morgan's exposure stays relatively minor.
The article 3 Things Kinder Morgan Inc's CEO Wants You to Know originally appeared on Fool.com.
Matt DiLallo owns shares of Kinder Morgan andhas the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has the following options: short June 2016 $12 puts on Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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