Rich Kinder and I see eye to eye quite often. The riskiness of the master limited partnership (MLP) structure is not something to scoff at, especially in the face of declining crude oil prices. Kinder Morgan (KMI) will finalize the roll-up of its MLP subsidiaries come end of year, and we think holders of Kinder Morgan will literally reap dividends on the move.
Yesterday brought news that the firm expects to declare dividends of $2 per share in 2015 and post $500 million of excess dividend coverage. The concept of excess dividend coverage is nothing new at Valuentum, as the Dividend Cushion focuses intensively on this very idea. The increase would represent a 16% move over the 2014 budget of $1.72 per share and a nice 4.8% annualized dividend yield. The increase is slightly better than our expectations for a 10% jump in 2015, and we’re reiterating our 1+ Dividend Cushion ratio for the soon-to-be-consolidated entity. Kinder Morgan announced in August that it would purchase KMP, KMR and EPB, closing the transaction by the end of 2014.
One of the reasons why we’re huge fans of the midstream operators is that they own a diversified portfolio of stable and primarily fee-based assets that act more like toll roads, generating gobs of free cash flow, regardless of market conditions and commodity prices. This is unlike risky exploration and production entities that not only take on exploratory risk but also take on risk related to spot prices, if not today’s then eventually. Kinder Morgan is more tied to the demand for transportation and storage of natural gas, NGLs, crude oil and refined products than the price of energy.
Here’s the rest of Kinder Morgan’s 2015 outlook:
• Generate approximately $8.2 billion in business segment earnings before DD&A (adding back KMI’s share of joint venture DD&A).
• Declare over $4.4 billion in dividends to its shareholders.
• Generate additional cash of over $500 million in excess of its dividend.
• Invest approximately $4.4 billion in expansions (including contributions to joint ventures) and small acquisitions.
• Finish the year with a Debt to EBITDA ratio of 5.6 times.
We like Kinder Morgan a lot, and the firm remains a key component in the Dividend Growth portfolio. Very few other companies in the energy sector are more resilient in the face of declining crude oil prices than Kinder Morgan.