Kinder Morgan (NYSE: KMI) recently unveiled its initial expectations for 2018. The pipeline giant said it expects distributable cash flow (DCF) per share to rise 3% versus this year, which would reverse a two-year decline that saw DCF slip about 7% from its peak in 2015. That dip in cash flow is one of the reasons Kinder Morgan's stock has lost more than half its value over that time frame. However, it also shows that despite the nasty sell-off, the company's underlying business has held up rather well amid one of the worst oil market downturns in decades.
Here's a look at what Kinder Morgan sees in the year ahead and what that means for investors.
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A glimpse at what lies ahead
Kinder Morgan anticipates that it will produce $4.57 billion in DCF next year, which works out to about $2.05 per share. That would be up about 3% from the $1.99 per share it expects to generate this year and puts the company within 4% of its 2015 peak. That's enough money to cover the company's planned 2018 dividend -- which will be 60% higher than 2017's -- as well as fund $2.2 billion in expansion projects with roughly $500 million left over to invest in additional growth projects or repurchase shares.
Further, it's worth noting that this plan includes funding the company's 50% share of the proposed Gulf Coast Express Pipeline project (GCX project). While the company and its partners DCP Midstream and Targa Resources haven't sanctioned GCX yet, its inclusion in the budget suggests they have high confidence that it'll move forward. The pipeline would ship natural gas from systems operated by Targa Resources and DCP Midstream from the Permian Basin to the Gulf Coast, including gas produced by Targa's partner Pioneer Natural Resources, which is one of the largest shale drillers in the region. If everything goes according to plan, the project would enter service in the second half of 2019 and start generating cash flow for Kinder Morgan, Targa, and DCP Midstream while helping producers like Pioneer move gas to Gulf Coast markets.
One thing that's not in Kinder Morgan's capital budget is its controversial Trans Mountain Expansion Project (TMEP). That's because the company's Canadian subsidiary Kinder Morgan Canada Limited is a self-funding entity, meaning that Kinder Morgan won't contribute any more cash to finance the project. That financing situation aside, there's still quite a bit of uncertainty surrounding TMEP, which the company hopes to clear up in 2018. As things stand right now, there could be as much as a nine-month delay in starting construction, which would push the in-service date to September 2020. That said, there is a chance Kinder Morgan Canada could either expedite the process and still finish on time or even choose not to proceed with the project. Either way, TMEP won't have any impact on Kinder Morgan's 2018 plans since it's running everything through Kinder Morgan Canada.
What this forecast means for investors
After spending the past two years shoring up its financial situation, including paying off $5.9 billion in debt, Kinder Morgan enters 2018 on a much firmer foundation. Because of that, the company's focus will be on growing shareholder value. One of the ways it will do that is by completing several expansion projects over the next year, which will finally turn around DCF. The company will get the most immediate boost from the Utopia Pipeline, which should enter service this month. The $540 million project, which it owns as part of a 50/50 joint venture with a private equity fund, should generate steady cash flow since long-term, fee-based contracts underpin the project. Another major expansion to keep an eye on is the $1.8 billion Elba Island liquefied natural gas export facility and associated pipeline, which should enter service in phases beginning in the middle of next year. Long-term, fee-based contracts also support this project, which it partially owns in a joint venture with a private equity fund.
Because cash flow will start growing again next year, the company is in the position to start sending more money back to investors. As noted earlier, it expects to boost the dividend 60% next year to $0.80 per share and could repurchase as much as $500 million of stock, which is part of the $2 billion authorization it announced earlier in the year. Those repurchases could give shares a lift since the full amount represents 5% of its outstanding stock at the current price.
Now could be the last great time to buy
Kinder Morgan's return to growth mode next year should hopefully restart the company's stalled stock price. That said, in the meantime, investors can buy shares of this pipeline giant for a fantastic value. For perspective, with the stock around $17.25 at the moment, it implies a valuation of just 8.4 times its DCF forecast for next year, which is dirt cheap for a pipeline stock. Further, the current price suggests investors can lock in a 4.6% dividend yield for 2018. That blend of growth and income for a value price is hard to come by in today's red-hot stock market, which is why it might not last that much longer.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: long January 2018 $30 calls on Kinder Morgan, short December 2017 $19 puts 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.