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Kinder Morgan's (KMI) Take-or-Pay Strategy: Buy Now or Hold?
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Kinder Morgan (KMI - Free Report) , North America's leading midstream energy company, boasts a stable business model, largely driven by take-or-pay contracts. Unlike upstream and downstream players, KMI's operations are minimally impacted by commodity price volatility, making it an appealing option for risk-averse investors.
The critical question now facing investors is how to position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of the large energy infrastructure firm.
Take-or-Pay Contracts
Kinder Morgan operates an extensive network of pipelines spanning 79,000 miles, transporting natural gas, gasoline, crude oil and carbon dioxide. In addition, the company owns 139 terminals that store a variety of products, including renewable fuels, petroleum products, chemicals and vegetable oils.
As a leading midstream service provider, Kinder Morgan’s pipeline and storage assets are secured under long-term take-or-pay contracts. These contracts ensure that shippers pay for the capacity reserved, whether they utilize it or not, which provides a steady stream of revenue. This structure allows Kinder Morgan to generate stable earnings, primarily insulated from fluctuations in the volume of natural gas transported, thereby offering significant stability to its bottom line.
Escalating Natural Gas Demand Supports KMI's Stability
The demand for natural gas in the United States is anticipated to continue to grow rapidly, backed by several important factors. As the nation shifts toward cleaner energy, natural gas is being increasingly utilized as a transitional fuel, given its cleaner-burning properties compared to coal and oil, which result in lower carbon emissions. Moreover, the rise in industrial activity and the growing demand for electricity, particularly from gas-powered plants, are fueling this increased demand. Additionally, the expansion of natural gas exports, mainly as liquefied natural gas, to satisfy global energy needs further boosts domestic demand.
As a leading transporter of natural gas, Kinder Morgan is well-positioned to benefit from the growing demand for natural gas, which in turn enhances the reliability of its earnings.
High Debt & Low Project Backlog
While the company has a manageable debt level, its debt-to-capitalization is 50.01%, which is quite high and could be a concern in a higher interest-rate environment.
Image Source: Zacks Investment Research
A low project backlog is also adding to the concern. From a peak of $22 billion of project backlog in mid-2015, the midstream service provider’s backlog reduced to $5.2 billion at the end of the June quarter of this year. Thus, it is now crucial for the company to actively seek new business opportunities to maintain revenue and earnings levels.
High Valuation
Before diving into the valuation, let's first examine the company's price performance. KMI's stock has soared 26.6% over the past year compared with the Oil-Energy sector’s rise of 4.3%. The company's strong stock performance has been driven by escalating demand for natural gas and the stability provided by its take-or-pay contracts. In comparison, other major midstream companies like Enterprise Products Partners (EPD - Free Report) and Enbridge Inc. (ENB - Free Report) have also seen solid gains of 15.3% and 15.6%, respectively, but KMI has outpaced them both.
One-Year Price Chart
Image Source: Zacks Investment Research
With the price increase, KMI is appearing relatively overvalued. The company's current trailing 12-month enterprise value/earnings before interest, tax, depreciation and amortization (EV/EBITDA) ratio is 11.84, which is trading at a premium compared to the oil-energy sector average of 3.12.
Image Source: Zacks Investment Research
Last Word
To sum up, it could be said that despite KMI banking on secured take-or-pay contracts, it would be prudent for investors to wait for a better entry point for the stock, which is currently relatively overvalued. Kinder Morgan currently carries a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Kinder Morgan's (KMI) Take-or-Pay Strategy: Buy Now or Hold?
Kinder Morgan (KMI - Free Report) , North America's leading midstream energy company, boasts a stable business model, largely driven by take-or-pay contracts. Unlike upstream and downstream players, KMI's operations are minimally impacted by commodity price volatility, making it an appealing option for risk-averse investors.
The critical question now facing investors is how to position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of the large energy infrastructure firm.
Take-or-Pay Contracts
Kinder Morgan operates an extensive network of pipelines spanning 79,000 miles, transporting natural gas, gasoline, crude oil and carbon dioxide. In addition, the company owns 139 terminals that store a variety of products, including renewable fuels, petroleum products, chemicals and vegetable oils.
As a leading midstream service provider, Kinder Morgan’s pipeline and storage assets are secured under long-term take-or-pay contracts. These contracts ensure that shippers pay for the capacity reserved, whether they utilize it or not, which provides a steady stream of revenue. This structure allows Kinder Morgan to generate stable earnings, primarily insulated from fluctuations in the volume of natural gas transported, thereby offering significant stability to its bottom line.
Escalating Natural Gas Demand Supports KMI's Stability
The demand for natural gas in the United States is anticipated to continue to grow rapidly, backed by several important factors. As the nation shifts toward cleaner energy, natural gas is being increasingly utilized as a transitional fuel, given its cleaner-burning properties compared to coal and oil, which result in lower carbon emissions. Moreover, the rise in industrial activity and the growing demand for electricity, particularly from gas-powered plants, are fueling this increased demand. Additionally, the expansion of natural gas exports, mainly as liquefied natural gas, to satisfy global energy needs further boosts domestic demand.
As a leading transporter of natural gas, Kinder Morgan is well-positioned to benefit from the growing demand for natural gas, which in turn enhances the reliability of its earnings.
High Debt & Low Project Backlog
While the company has a manageable debt level, its debt-to-capitalization is 50.01%, which is quite high and could be a concern in a higher interest-rate environment.
A low project backlog is also adding to the concern. From a peak of $22 billion of project backlog in mid-2015, the midstream service provider’s backlog reduced to $5.2 billion at the end of the June quarter of this year. Thus, it is now crucial for the company to actively seek new business opportunities to maintain revenue and earnings levels.
High Valuation
Before diving into the valuation, let's first examine the company's price performance. KMI's stock has soared 26.6% over the past year compared with the Oil-Energy sector’s rise of 4.3%. The company's strong stock performance has been driven by escalating demand for natural gas and the stability provided by its take-or-pay contracts. In comparison, other major midstream companies like Enterprise Products Partners (EPD - Free Report) and Enbridge Inc. (ENB - Free Report) have also seen solid gains of 15.3% and 15.6%, respectively, but KMI has outpaced them both.
One-Year Price Chart
With the price increase, KMI is appearing relatively overvalued. The company's current trailing 12-month enterprise value/earnings before interest, tax, depreciation and amortization (EV/EBITDA) ratio is 11.84, which is trading at a premium compared to the oil-energy sector average of 3.12.
Last Word
To sum up, it could be said that despite KMI banking on secured take-or-pay contracts, it would be prudent for investors to wait for a better entry point for the stock, which is currently relatively overvalued. Kinder Morgan currently carries a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.