Can Kinder Morgan (KMI) extend rebound on the strength of natural gas assets?

The energy industry has been going through a tough phase for some time and the situation went from bad to worse after coronavirus-related travel restrictions impacted oil demand, pushing several companies to the brink of bankruptcy. However, the relaxation of curbs and vaccination drive have given rise to hope that demand conditions would improve this year.

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Read management/analysts’ comments on quarterly reports

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Justifying analysts’ positive outlook on the industry, energy infrastructure firm Kinder Morgan, Inc. (NYSE: KMI) entered fiscal 2021 on a high note, reporting first-quarter earnings and revenues that blew past the market’s expectations. The solid results catalyzed the stock’s recovery from COVID-induced slowdown, capturing investors’ attention to a greater extent than oil companies usually do.

Multiple Tailwinds

The pipeline giant, headquartered in Houston, has benefitted from rising oil prices and commissioning of its Permian Highway Pipeline, besides weather-related tailwinds. The current momentum will likely continue for the remainder of the year, but the underlying challenges might persist in the long term. That said, KMI is a good investment option for value investors and those looking for long-term engagement.

A key factor that contributed to the recent growth is the spike in prices during the Texas winter storm when the company — unlike most others — remained operational despite the unfavorable conditions. Adjusted earnings more than doubled to $0.60 per share in the first quarter, supported by a 68% jump in revenues to $5.2 billion. The numbers also exceeded experts’ predictions. At $2.3 billion, distributable cash flow reached a record high, with the lion’s share of that coming from fee-based contracts for pipeline/storage assets. It is estimated that cash flow would rise to around $6 billion this year.

Back on Track?

The management’s positive guidance, after the impressive show, indicates Kinder Morgan is finally shrugging off the downturn that weighed on its finances in recent years, which at one point led to dividend cuts and escalation of debt. The rebound is good news for shareholders as a major portion of the cash balance will likely be used for dividend payment. Also, the ongoing efforts to cut costs and streamline operations should enhance shareholder value, while also reducing debt. But, elevated capital expenditure would be a drag as far as deployment of cash is concerned.

From Kinder Morgan’s Q1 2021 earnings conference call:

“At Kinder Morgan, we remain guided by what we believe is a sound corporate philosophy, fund our capital needs internally, maintain a healthy balance sheet, and return excess cash to our shareholders through dividend increases and opportunistic share repurchases. We think this is a recipe for long-term financial success for KMI and its shareholders.“

In Expansion Mode

In a deal that is expected to be immediately accretive to shareholders, the company last month agreed to acquire gas pipeline and storage company Stagecoach Gas Services LLC for about $1.2 billion. The buyout will help Kinder Morgan further expand its pipeline network, which is touted as the largest in the world.

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Key highlights from Chevron’s Q1 2021 earnings results

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The company’s stock outperformed the market so far this year, mostly staying above its 52-week average. It has gained about 22% since last year. The shares opened Thursday’s session at $18.23 and traded slightly higher in the early hours.