Why Kinder Morgan, Inc. Shareholders Have Nothing to Worry About

Kinder Morgan's (NYSE: KMI) stock price currently sits about 55% below its all-time high. The reason it lies so far below that level is that investors are worried about the company's financial situation and growth prospects. Those worries, however, appear to be completely unfounded when we take a closer look at what's going on at the company.

Cash flow: Steady as she goes

One of the fears that drove down Kinder Morgan's stock price in late 2015 was concern that the worsening oil market downturn would significantly shrink the company's cash flow. That'sbecause the company does generate some revenue from oil production and several of its assets rely on volumes and would, therefore, see lower earnings if customers let their volumes decline. That said, one look at the numbers shows that the company's actual cash flow has experienced a minimal impact from these factors (and certainly not enough to justify the 50% haircut to the stock price).

Image source: Getty Images.

In 2015, for example, Kinder Morgan generated a record $4.7 billion of distributable cash flow. Last year, however, that number only slipped 4% to $4.5 billion. That's despite significantly lower realized oil prices, weaker volumes, customer bankruptcies, and asset sales. Meanwhile, the company anticipates that cash flow will be roughly flat this year (at $4.46) billion as new projects entering service should more than offset the impact of asset sales and lower realized oil prices. That level should mark the low-water mark in Kinder Morgan's cash flow because it has several more growth projects expected to enter service over the next year that should boost earnings.

Leverage: Getting better every day

The dip in Kinder Morgan's earnings caused the market to fear that its credit situation could quickly deteriorate due to the amount of debt on its balance sheet. Stoking those fears was a warning by one of its credit rating agencies in late 2015 that the company was at risk of losing its coveted investment-grade credit rating because its debt-to-EBITDAratio crept up to 5.9, which was just too high to justify investment-grade credit.

Kinder Morgan, however, sprang into action to protect its credit by slashing its generous dividend and reallocating that cash flow toward cap ex and debt reduction. The company would also go on to sell some assets to pay down debt whilepartneringon some of its growth projects, which brought in cash and reduced future capex requirements. As a result of these actions, the company's leverage is down to a more comfortable 5.4 times and should hit its 5.0 target next year when current expansion projects start generating earnings.

Image source: Getty Images.

Growth prospects: The picture continues to get clearer

One of the other worries that investors had was the uncertainty of how Kinder Morgan would finance its massive capital backlog given its inability to access the debt market to fund a portion of these projects. However, the company has quashed those worries over the past couple of years by seeking out innovative solutions to finance a portion of its growth projects. These have included partnering with private equity funds that agreed to bankroll a share of construction costs for two projects as well as plans to undertake an IPO to raise cash for its Trans Mountain Pipeline expansion in Canada. It's also worth nothing that Kinder Morgan had no problems securing a 4 billion Canadian dollar ($2.9 billion) credit facility to help finance a significant portion of that project's CA$7.4 billion price tag ($5.4 billion).

Meanwhile, the company has started replenishing its backlog by unveiling new projects it has in development. Topping the list is the proposed Gulf Coast Express Pipeline, which would move natural gas from the Permian Basin to the Gulf Coast. Kinder Morganquickly signed leading Permian gas processing company DCP Midstream (NYSE: DCP) as both a shipper and partner for the project. Furthermore, market response to the project has been robust since demand for capacity has far outstripped the planned 1.7 billion cubic feet per day (Bcf/d) pipeline the companies had planned to build. Because of that, Kinder Morgan and DCP Midstream could build a much larger project than the $1 billion pipeline initially pitched to shippers. In addition to that, Kinder Morgan is also looking to expand its El Paso Natural Gas system. While the company has 150 Bcf/d of existing capacity available on the system, it could grow the network by another 900 Bcf/d if it gets enough takers to justify expanding the system.

Investor takeaway

Market worries about Kinder Morgan's cash flow, balance sheet, and growth prospects have the stock sitting more than 50% below its high. Those concerns, however, don't make sense when looking at the company's numbers and the progress it is making to get better. In fact, those improving metrics and prospects are why I believe investors don't have anything to worry about, because Kinder Morgan clearly is on solid financial footing and heading in the right direction.

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Matt DiLallo owns shares of Kinder Morgan and has 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 a disclosure policy.