Kinder Morgan has an impressive portfolio of difficult to replace assets spanning tens of thousands of miles.

The company had strong 4Q earnings, proving a unique ability to generate substantial DCF even without the market fluctuations earlier in the year.

The company is planning roughly 8% in direct shareholder rewards through dividends plus share repurchases.

Additionally, the company is spending 3% on growth, showing continued investments in its businesses.The company’s debt is manageable and below the company’s target ranges.

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Kinder Morgan (NYSE:KMI) is one of the largest energy infrastructure companies with a market capitalization of more than $40 billion. The company announced strong earnings to close out 2021, and, as we’ll see throughout this article, should perform well throughout 2022 generating strong shareholder returns for investors.

Kinder Morgan Overview

As oil and natural gas infrastructure gets harder to approve, Kinder Morgan’s asset portfolio gets harder to replace.

The company has spent decades building an unparalleled asset footprint. The company has ~70 thousand miles of natural gas pipelines and ~700 bcf of working storage capacity. The company has ~1200 miles of NGL pipelines and is the largest independent transporter of refined products with 1.7 million barrels and 6800 miles of pipelines.

The company is also the largest CO2 transporter and independent terminal operator. The company’s assets are incredibly well distributed and difficult to replace and essential to our modern standard of living.

Kinder Morgan 4Q 2021 Results

The company has turned this asset portfolio into strong 4Q 2021 results for shareholders.

The company earned $1.1 billion in DCF for the quarter, annualized at $4.4 billion. It was a weaker quarter YoY, however, overall, the company is near its 2022 forecast. Additionally, the company is still performing well even outside of its incredibly strong 1Q 2021 performance showing it can sustainability generate strong FCF.

The company’s strength is evidenced through its ability to continue investing in discretionary capital on top of maintenance capital. That’s on top of high single-digit direct shareholder rewards. The company’s results show the continued ability for reliable cash flow and performance from its assets.

Kinder Morgan 2022 Forecast

At the same time, the company has a strong forecast for 2022 which we expect it’ll be able to meet.

Kinder Morgan 2022 Forecast – Kinder Morgan Press Release

Kinder Morgan has a strong outlook for 2022 that we expect will support substantial shareholder returns. The company expects dividends of $1.11 / share (a roughly 6.4% yield) and 2022 DCF of $4.7 billion. The company expects to end with a net debt to EBITDA ratio of roughly $31 billion in long-term debt versus its $40 billion market capitalization.

The company’s expected 2022 DCF of $4.7 billion is a 12% DCF yield, where the company is paying out just over 50% to shareholders. That leaves shareholders with more than $2 billion that the company can use in a variety of ways. The company is spending $1.3 billion in discretionary capital which is a 3% growth spending ratio.

Combined that’s $0.7 left. That lines up with an expected $750 million in share buybacks, or an almost 2% share buyback yield. That means 8% direct shareholder returns and 3% in additional shareholder returns. The company is aiming to keep its debt constant since it’s already below the company’s ratio.

Kinder Morgan Shareholder Returns

Kinder Morgan is focused on strong shareholder returns for the long run.

The company is committed to its dividend which it’s been slowly growing at several % annualized. The company’s dividend for 2022 is expected to be roughly 6.5% showing a direct commitment to substantial cash returns to shareholders. It’s a dividend that the company can comfortably afford with its payout ratio at roughly 55%.

Additionally, the company is continuing to invest in buybacks. It’s planning to buy back $750 million in shares or almost 2%, that’ll save the company $45 million in annual dividends and enable continued overall high single-digit shareholder returns. This capital return strategy is enough to generate substantial shareholder rewards by itself at ~8-8.5%.

Lastly, the company is continuing to spend on growth. The company has $1.3 billion in planned 2022 growth spending, which should generate a double-digit return on capital, and we expect it to continue investing heavily in growth. That spending highlights how Kinder Morgan is a valuable investment for shareholders to pay attention to.

Kinder Morgan Risk

Kinder Morgan’s risk is a long-term decline in volumes. So far, there’s been no sign of that happening, and we see the company has been fairly isolated from that. However, as natural gas and oil are increasingly replaced by other sources of fuel, there’ll be less demand for the company’s assets which could hurt its ability to generate shareholder returns decades from now.

Conclusion

Kinder Morgan has a unique portfolio of assets supporting its $40 billion market capitalization and $70 billion enterprise value. The company had abnormally strong results in early-2021, as a result of Winter Storm Uri. However, through the rest of the year, the company proved an ability to generate strong results in a normal market.

The company is committing to a roughly 6.5% dividend yield and an almost 2% share buyback meaning direct shareholder returns in the high single digits. Additionally, the company is planning to spend several % on growth spending showing continued opportunities and a unique ability to continue generating shareholder rewards.

All of this makes Kinder Morgan a valuable investment.

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By SeekingAlpha, January 24, 2022