Morningstar | Kinder Looks to Permian Basin and Natural Gas Demand for Growth
We are reaffirming our $19.50 per share fair value estimate after Kinder Morgan announced second-quarter distributable cash flow flat with DCF in the second quarter of 2018. We are reaffirming our no-moat and stable moat trend ratings.Kinder approved a $0.25 per share dividend, flat from the first quarter and in line with our expectation. The company remains on track to reach $1.25 per share annualized dividend rate by 2020. We expect the final dividend hike in management's three-year program to come in January 2020. A recent rally in the company's stock has dropped the dividend yield below 5%, which we think is a fair level.
Results are mostly on track to meet our full-year estimates. Management continues to forecast full-year EBITDA slightly below its $7.8 billion budget primarily due to regulatory settlements and a slight in-service delay at the Elba LNG facility. However, the cash flow outlook is on budget.
Kinder's $5.7 billion project backlog ensures it can meet its target $2 billion-$3 billion annual investment run rate for the next few years. Management announced it is exploring a third Permian pipeline project similar to the two that are nearing in-service dates. This could add $1 billion of growth investment beyond 2021.
However, Permian pipelines are competitive and returns might suffer as more pipelines enter the region. If projections for natural gas demand growth don't materialize, these pipelines could rely more on producer-push economics rather than demand-pull. We think producer-push pipelines have weak competitive advantages.
Management reported $2.5 billion, or $1.10 per share, distributable cash flow in the first half of 2019, up 6% from the first half of 2018 primarily due to natural gas segment growth. We think Kinder's DCF growth outlook provides plenty of cover for the dividend and its investment-grade credit rating even with its investment backlog.
Kinder Morgan is an energy infrastructure company. The company's segments are: Natural Gas Pipelines, which includes the ownership and operation of, among others, main interstate and intrastate natural gas pipeline and storage systems; Products Pipelines, which includes the refined petroleum products, crude oil and condensate pipelines; Terminals, which includes the ownership and/or operation of, among others, liquids and bulk terminal facilities; and carbon dioxide (CO2), which includes the production, transportation and marketing of CO2, ownership interests in and/or operation of oil fields and gasoline processing plants in West Texas.
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