The collapse in crude oil prices has naturally put a dent in most energy stocks. That’s the nature of such events. Dramatically lower oil prices have hit the oil stocks hardest, but the power of the oil markets has affected energy stocks from natural gas producers to solar providers.
Falling oil prices, you might say, have been poured over the entire energy sector to give it a decidedly bearish sheen.
But within this bearish oil bath, as with most bearish events, there are some casualties that don’t deserve it. One energy stock that falls into that category is Kinder Morgan, Inc. (NYSE: KMI).
A Pipeline Powerhouse
Kinder Morgan is chiefly a midstream pipeline company, which transports mostly oil but also natural gas as well as other fossil fuel and petroleum products. The company operates a staggering 80,000 miles of pipeline, and has 180 storage terminal facilities.
Kinder Morgan describes itself as “the largest energy infrastructure company in North America,” and “the third-largest energy company.”
The strategic importance of its energy storage and transport business can’t be overstated.
While the exploration and refining of oil, mostly the work of the major oil companies such as ExxonMobil (NYSE: XOM), Conoco Philips (NYSE: COP), Chevron (NYSE: CVX), and BP Plc (NYSE: BP), draws most of the attention, the vast energy needs of the country are ultimately met by the vital work pipeline companies do. Pipelines deliver the oil where it needs to go.
And Kinder Morgan is the leading pipeline company.
Kinder Morgan and Oil Prices
If Kinder Morgan is so heavily involved in the oil business, the obvious question is, “Why won’t it be hurt by falling oil prices?” The nature of Kinder Morgan’s business is why.
As a transporter of energy, Kinder Morgan describes itself as a “giant toll road,” where it collects fee-based income for transporting oil. With roughly 82% of its business fee-based, Kinder Morgan is not subject to the wild swings in commodity prices.
Despite the falling oil prices and the fluctuations in supply and demand, the U.S. continues to consume an enormous amount of oil. According to the U.S. Energy Information Administration (EIA), America used 6.9 billion barrels of oil in 2013, an average of almost 19 million barrels per day. Kinder Morgan moves 2.3 million barrels of petroleum products daily. With such demand, even with Kinder Morgan’s vast pipeline network, there’s a need for more pipeline to transport oil.
Kinder’s Big Deal
Kinder Morgan recently completed a massive $76 billion transaction in which it consolidated its companies, Kinder Morgan Energy Partners, LP (NYSE: KMP), El Paso Pipeline Partners, LP (NYSE: EPD), and Kinder Morgan Management, LLC (NYSE: KMR). By folding these companies into Kinder Morgan, Inc., Kinder Morgan has simplified its structure and will have better access to capital.
The need to acquire and build more pipelines is capital intensive, as the company’s debt load of $34 billion shows. The unified, combined company will be better equipped to pursue ambitious growth opportunities and trim debt rapidly.
The consolidated Kinder Morgan, Inc., will have an enterprise value of $125 billion. As the parent company, KMI generated $16 billion in revenue in the last 12 months, along with nearly $5 billion in operating cash flow. The consolidated company should produce scaled-up revenues and cash.
Kinder Morgan Stock (KMI) vs. Oil & Gas, 1-Year
Kinder Morgan Stock
Kinder Morgan stock has traded between $30 and $42 in the past year. It recently retreated a bit to just under $38 as oil prices plummeted. Chairman and founder Richard Kinder has invested most of his personal fortune, estimated at $10 billion, into the company. He now owns nearly one quarter of all Kinder Morgan shares.
The stock currently yields 4.5%. Kinder is committed to raising the annual dividend of $1.76 per share to $2.00 per share for 2015. He further expects to grow the dividend 10% per year through 2020. The goal is for the company to eventually produce $2 billion in additional cash beyond the dividend payments.
Investors will want to snap up shares if there’s any further pullback in Kinder Morgan’s stock price. Yet even at its current price, given its current value, its dividend growth potential as well as the growth and expansion potential of the company itself, Kinder Morgan stock represents a play not only on the present but an exciting future as well.
KMI shares have weathered the oil-price death spiral. After its recent consolidation, now the stock is poised to make a major move in 2015.
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