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With the carnage rippling through the energy sector, stability is a very valuable trait that investors should seek out. The steep, swift collapse in oil prices in the past year has caused energy profits to decline significantly from year-ago levels. This is setting up a very worrisome earnings season.
Fortunately, there is still one asset class within the energy sector that isn’t seeing profits dry up because of lower oil and gas prices. This area is the midstream business. Midstream companies like Kinder Morgan (NYSE: KMI) operate oil and gas transportation and storage facilities, including pipelines and terminals across the United States.
The beautiful thing about the midstream business model is that it is not dependent on commodity prices. Whereas upstream exploration and production companies are very reliant on supportive oil and gas prices, midstream firms are relatively shielded.
Kinder Morgan collects fees based on volumes of materials transported and stored. Because of this, its business model is much closer to a toll road. This is the key takeaway for investors – even though most energy stocks are struggling, midstream companies are a haven for investors seeking relative safety. In fact, shares of Kinder Morgan are up 31% over the past year, which is far better performance than the energy sector as a whole.
This stability is extremely valuable for investors when oil prices fall. The recent Kinder Morgan earnings report is a prime example of this. Kinder Morgan generated distributable cash flow – a non-GAAP equivalent to earnings per share frequently utilized by master limited partnerships – of $0.58 per share last quarter. This represented 5% growth year-over-year.
Not surprisingly, Kinder Morgan’s best-performing segment was its pipeline business. It’s plausible that lower commodity prices actually helped improve volumes, since consumers tend to buy more oil and gas when it’s cheaper. Distributable cash flow in the pipeline business soared 20% last quarter, and management expects the business to produce 29% growth in 2015.
Kinder Morgan’s business strength is plain as day. The company has an impressive $18 billion backlog of future growth opportunities. This is evidence of the urgent need to upgrade energy infrastructure in the United States. Now that the U.S. is atop the world’s energy producers, all that oil and gas needs pipelines and terminals to reach its end users across the country.
This demand allows Kinder Morgan to generate consistent cash flow, which the company dutifully returns to its investors. It passes through the majority of its cash flow as a dividend, and the company increased its dividend by 14% year-over-year.
Kinder Morgan management expects to keep raising the dividend throughout the course of the year. Ultimately, the company intends to distribute $2 per share this year. That would equate to a juicy 4.3% dividend. Kinder Morgan can easily afford to continue increasing its payout, as the company generated more than $200 million in distributable cash flow in excess of its current dividend.
Management takes the dividend very seriously, and it’s easy to see why. According to Yahoo Finance, CEO Richard Kinder held more than 233 million shares of his company as of March 13. His personal stake will yield him approximately $467 million in dividends just this year, if Kinder Morgan hits the $2 distribution as planned.
It’s a great sign that management aligns its interests with those of its fellow investors. It should give investors great peace of mind to know the CEO has such a huge personal stake in the company.
The bottom line for investors is that when it comes to Kinder Morgan, it’s steady as she goes. Unlike most other energy companies, Kinder Morgan investors don’t have to worry about a sudden crash in oil and gas prices taking the company to the brink of insolvency.
Kinder Morgan’s toll road-style business model provides a great deal of reliability and stable distributions, which is perfect for risk-averse dividend investors.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder.
Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom.