Q4 2023 Earnings Summary
- KMI is well-positioned to capitalize on the growing demand for LNG and natural gas exports, with infrastructure expansions like the Bakken Express pipeline, Phase I already in service and flowing at 92,000 dekatherms per day, ensuring capacity to meet increased production without limitations.
- The recent South Texas (STX) acquisition is highly accretive, expected to achieve a 7 to 7.5x EBITDA multiple over multiple years without significant additional CapEx, indicating strong future earnings growth from these assets.
- KMI maintains a strong balance sheet, operating with leverage below their targeted 4.5x, providing financial flexibility for future opportunities and demonstrating confidence in their stable cash flows due to the size and scope of their assets.
- Potential financial impacts from an EPA rule: KMI acknowledged potential material financial effects from an EPA rule that is being legally challenged. The outcome remains uncertain, and only three states where the rule is not stayed currently impact KMI.
- High leverage target may raise concerns: KMI maintains a leverage target of 4.5x, and plans to keep it at this level even with potential acquisitions, which may be considered high and could raise concerns about debt levels.
- Competition and uncertainty in pipeline projects may limit growth: KMI faces a highly competitive environment for new pipeline projects, and there is uncertainty about securing contracts for projects like the Permian pipeline, which could impact future growth opportunities.
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Capital Allocation
Q: How will you balance share repurchases and M&A?
A: Kinder Morgan plans to maintain flexibility on their balance sheet, allowing for share repurchases and acquisitions. Last year, they executed $522 million in share repurchases and made a $1.8 billion acquisition, ending the year with leverage essentially unchanged. They will continue this disciplined approach, with a leverage target of 4.5x, providing capacity for attractive opportunities. -
Permian Pipeline Projects
Q: What's the outlook for Permian gas egress projects?
A: Kinder Morgan sees a need for additional Permian egress pipelines in the late 2026 to early 2027 timeframe. They are considering both expansion of existing pipelines like GCX and potential new builds, leveraging their successful track record. Customer contracts will drive these projects, and the company is disciplined in ensuring attractive returns. -
STX Acquisition Impact
Q: How does the STX acquisition affect 2024 guidance?
A: The increase in 2024 guidance to $8.16 billion from $8.0 billion is due to the EBITDA from the NextEra acquisition, consistent with expectations. Between 2023 and 2024, an expansion project came online, adding incremental EBITDA driven by customer contracts. Over the next few years, they expect the acquisition multiple to decrease from 8.6x to between 7x and 7.5x, with minimal additional CapEx. -
Leverage and Flexibility
Q: What's your stance on leverage targets?
A: Kinder Morgan is comfortable with a leverage target of 4.5x, appropriate for the stability of their assets and cash flows. They have operated around 4x leverage in recent years, providing capacity to pursue attractive opportunities without significant impact on debt metrics. -
EPA Methane Rule Impact
Q: How will EPA's methane rule affect you financially?
A: Kinder Morgan believes the EPA's methane rule is flawed and heavily challenged. The rule has been stayed in multiple circuit courts, and only impacts three states where they operate. Potential impacts disclosed are smaller, and the Supreme Court's agreement to hear the case is seen as a positive sign. -
Haynesville Production Growth
Q: What trends are you seeing in Haynesville volumes?
A: Haynesville volumes were up over 30% quarter-over-quarter. Kinder Morgan continues to see increased volumes, with acreage positioned in prime Tier 1 areas. Their largest customer is preparing for upcoming LNG demand, and they have nearly doubled volumes over the last couple of years. -
Renewable Natural Gas Performance
Q: How did RNG assets perform this quarter?
A: Contribution from RNG plants was relatively small. They have three plants in service but not running as consistently as desired. After recently taking over operations, they expect to improve performance over the next few months in 2024. -
California Renewable Diesel Expansion
Q: Are there opportunities to expand RD projects in California?
A: Kinder Morgan sees potential to double capacity at their Los Angeles Harbor facilities, both in storage and throughput. They have about 60,000 barrels per day of capacity across two hubs and could scale up based on market demand and customer needs. -
Bakken Gas Infrastructure
Q: Will gas infrastructure limit Bakken growth?
A: They do not expect gas infrastructure to limit growth. Kinder Morgan recently brought online the Bakken Express Phase I, adding 92,000 barrels per day of capacity. Phase II is planned, which will further support customers and meet demand. -
International M&A Consideration
Q: Will you consider assets outside the U.S.?
A: While Kinder Morgan evaluates opportunities, they doubt making acquisitions outside the U.S.. They find it challenging to achieve attractive risk-adjusted returns internationally due to tax issues and generally lower returns. -
Weather Impact on Earnings
Q: How did recent cold weather affect earnings?
A: Cold weather leads to incremental opportunities but not on the same magnitude as winter storm Yuri. They budget for some cold weather, and recent fronts have helped progress toward achieving those budget assumptions.
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