Kinder Morgan Before Earnings
01.21.2019 - NEWS

January 21, 2019 [Seeking Alpha] - Some considerations as Kinder Morgan gets ready to report its Q4 2018 earnings this upcoming Wednesday. Look out for commentary on the company's proposed VLCC-capable oil export terminal that would be developed through a joint venture.


Expect its Natural Gas Pipeline division to post a tremendous quarter, and look out for updates on the Elba Island LNG project.Share buybacks may be muted this year.

Midstream giant Kinder Morgan Inc. is getting ready to report its fourth-quarter earnings this upcoming Wednesday. This will let management set the tone for what to expect going forward on a deeper level, expanding on Kinder Morgan’s 2019 financial guidance that was released back in December.

Expect the firm’s Natural Gas Pipeline division to post a tremendous quarter as supply-demand dynamics remain very favorable and new projects come on-line. Readers should keep an eye out for where Kinder Morgan sees new growth opportunities arising and how share buybacks will fit in with its capital allocation strategies. Let’s dig in.

Joining the Oil Export Boom
America is facing major bottlenecks when it comes to oil exports, and that is the nation’s inability to fully load very large crude carriers (VLCCs) at all but one existing terminal off the coast of Louisiana (known as LOOP). Logistical constraints offer a major growth opportunity for midstream operators willing to take on the risk.

Building a new terminal capable of fully loading VLCCs, particularly an offshore terminal, is a bet on being one of the first to bring such a facility on-line. Interested readers can get more information on that in this article on how Enterprise Products Partners L.P. is also moving into this space.

In a partnership with Enbridge Inc. and German-based Oiltanking (whose parent company is Marquard & Bahls), Kinder Morgan is thinking of sanctioning the Texas Colt project. With an estimated price tag of $800 million, onshore facilities would be located at Freeport in Texas, with a 40-mile offshore pipeline and presumably mooring infrastructure enabling the facility to fully load a VLCC in just one day. The venture would likely construct storage capacity and onshore pipelines that interconnect with major networks along the Gulf Coast as part of the onshore side of this development.

During Kinder Morgan’s conference call, pay close attention to any commentary on this development. As the project has yet to be sanctioned, keep in mind that it may not come to fruition in light of the highly competitive nature in the race to bring the first few VLCC-capable export terminals along.

America only needs so much oil export capacity considering existing capacity and the sheer size of the proposed developments. This project is targeted to start up in late 2021 or early 2022, and in part will cater to rising supplies from the Permian Basin.

That being said, the proposed terminals have a big advantage over existing capacity that requires reverse lightering to load larger crude carriers, which may justify bringing several new export terminals on-line in light of the North American energy renaissance.

Keep in mind, there remains a lot of upside in the form of America exporting Canadian oil supplies, particularly heavy oil supplies that are in short supply these days. Rising crude-by-rail exports to the Gulf Coast supports this thesis, as do a select few pipeline projects that are likely to come on-line (such as Enbridge’s Line 3 Replacement Program) which will route larger Canadian oil volumes to the Midwest and, ultimately, the US Gulf Coast.

If Kinder Morgan seems highly optimistic on the conference call that this project will get the go-ahead, then keep an eye out for when construction could start, the expected oil export capacity (loading capacity) of the offshore terminal, what onshore infrastructure will be required, and how ownership of the project will play out. Also, see if the company added any more projects to its backlog of $6.5 billion at the end of September during the final quarter of 2018.

May Take a Break on Repurchases
Kinder Morgan is targeting free cash flow neutrality in 2019. Distributable cash flow is guided to be $5 billion this year, enough to cover $3.1 billion in growth-related capital expenditures and $1.9 billion in dividend payments.

Note that maintenance-related capex is subtracted from forecasted DCF generation. Based on management’s guidance, there is no way the company can “organically” cover potential buybacks this year. Any repurchases will apparently have to be funded from Kinder Morgan’s cash on hand or, potentially, its revolving credit line.

The US$2 billion in cash proceeds Kinder Morgan should have received from its Canadian spin-off in January (funded by the sale of its Trans Mountain oil pipeline and the related expansion project) is going towards debt reduction. Personally, I am very supportive of this decision and think it was absolutely the right call by management.

Lower interest expenses, less financial distress risk, and a better balance sheet are worth a lot. The federal Canadian government wants to sell that pipeline (in operation since the 1950s) and the project after getting some momentum going, but that process has gone nowhere so far.

Kinder Morgan had $3.5 billion in cash equivalents at the end of September 2018, leaving $1.5 billion that could be used to continue implementing its $2 billion repurchase program. Management will likely extend the firm’s partially drawn $5 billion revolving credit line that comes due on November 2019 in order to maintain ample access to liquidity for ordinary business purposes. In theory, that credit line could also be used to cover repurchases if the company opted to keep more cash on hand.

Management aims to reduce Kinder Morgan’s net debt-to-adjusted EBITDA ratio to 4.5x by the end of this year, down a tad from 4.6x at the end of Q3 2018. The company forecasts its adjusted EBITDA will grow by 4% this year to $7.8 billion, leaving a modest amount of room to both live up to its leverage reduction guidance and repurchase a token number of shares.

If it isn’t addressed directly in management’s prepared statements, analysts are likely to ask how much the firm may spend on buybacks this year to get at least a ballpark figure. At the very least, qualitative assessments can be used to ascertain how management sees buybacks in relation to company-wide capital allocation strategies. As things stand today, it appears Kinder Morgan favors investing in the business, paying off debt, and growing its dividend over buying back shares.

Final Thoughts
This earnings season will set the stage for the entire midstream space as the industry starts the year off on its strongest footing in years, which may just be enough to win over some love from Wall Street. Kinder Morgan is following through with its promise of maintaining a sustainable cash flow position in the face of capricious energy markets, and will continue to rewards shareholders with dividend increases and a keen eye for future growth endeavors.

On a final note, look out for commentary regarding the Elba Island LNG development, specifically if the project is still on track to start up this quarter. Readers that want to read more about the company before earnings should check out its Permian and Mexican gas export upside.

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