Earnings reporting season is where the rubber meets the road in the stock market. The most important question is always whether the the names in your portfolio are still holding up as businesses. But the market also looks to industry bellwethers to identify trends or developments that could have broader implications.
Midstream heavyweight Kinder Morgan (NYSE: KMI) kicked off fourth-quarter earnings season for the energy sector last week.
The company is at a critical stage in its recovery from the massive dividend cut announced in late 2015 that helped to shore up its balance sheet and maintain its investment-grade credit rating. However, given the scope of its midstream operations, Kinder Morgan’s earnings also speak volumes about the state of the industry.
Let’s start with Kinder Morgan itself. Fourth-quarter results indicate that the company continue to make solid progress tackling its major challenges.
In the fourth quarter, Kinder Morgan’s distributable cash flow increased 4 percent from year-ago levels and covered its current payout by a 4.24-to-1 margin. Kinder Morgan plans to increase its quarterly dividend by 60 percent this year, to $0.20 per share; the company’s fourth-quarter results would have covered this higher payout by 265 percent.
The company’s leverage shrank to 5.1 times operating cash flow, an improvement over management’s initial guidance of 5.4 times.
This uptick in operating cash flow indicates that stepped-up drilling activity and contributions from recent project start-ups have helped Kinder Morgan to overcome weakness in some legacy assets and the partial monetization of interests in Southern Natural Gas and its Canadian operations.
What Kinder Morgan’s results say about the rest of the midstream industry is a mixed bag.
First, they demonstrate that shale oil and gas basins haven’t participated equally in the energy sector’s recent recovery. Whereas Kinder Morgan reported strong year-over-year throughput growth in the Bakken Shale, Haynesville Shale and the Permian Basin, volumes on its gathering systems in the Eagle Ford Shale haven’t recovered to the same extent.
During Kinder Morgan’s fourth-quarter earnings call, management noted that the Eagle Ford Shale remains a “challenged basin in terms of transport capacity overhang.” Management has sought to alleviate the problem through aggressive marketing to attract volumes—bad news for smaller rivals that lack Kinder Morgan’s scale and diversification.
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Elliott and Roger on Mar. 26, 2019
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