KMI: Gauge Analysis (updated February 16, 2021)

I have analyzed Kinder Morgan's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Kinder Morgan operates a sprawling 83,000-mile network of pipelines and associated terminals for transporting oil, natural gas, gasoline and other fules, carbon-dioxide, and other products.  Kinder Morgan became gigantic when it combined with El Paso, Corp., in 2012.  Shortly thereafter, Kinder Morgan executed a series of transactions, totaling $76 billion, that converted general and limited partnership interests of various Kinder Morgan and El Paso entities into one publicly traded company. About 40 percent of the natural gas consumed in the U.S. is now carried by Kinder Morgan pipelines.  In 2020, worldwide actions to slow the spread of COVID-19 substantially reduced demand for energy products; firms across the energy industry suffered falling profits and cash flows.  Upstream producers that depend on high prices were hurt the most, but midstream firms such as Kinder Morgan were not spared.  The company incurred impairment charges of $1.6 billion in 2020 because lower energy prices made its assets less valuable.

Kinder Morgan recorded profits of $119 million on revenue of $12 billion during the last year. In the quarter that ended on December 31, 2020, Kinder Morgan earned $0.27 per share (excluding certain items), which matched the $0.27 Wall Street consensus forecast. See Kinder Morgan's most recent quarterly report.

Shares of Kinder Morgan now trade for about $15 each, giving the company a market value of $34 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

Kinder Morgan's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $34 billion (large cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 0.6 (>2.0 is conservative)

    Long-term debt/Equity = 99% (<100% is conservative)

3. The Company Generates Stable Earnings: RED

    Fifteen positive quarterly earnings reports in last 5 years (worrisome)

    Earnings variability = 87% (very high)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 8% (modest)

    Owner Earnings growth rate (five-year average) = 17% (good)

    Free Cash Flow growth rate (trailing year) = 15% (good)

    Free Cash Flow growth rate (five-year average) = 15% (good)

5. The Company is Efficiently Profitable: YELLOW

    Cash Flow Return On Invested Capital = 7% (so-so)

    Operating Profit/Sales = 29.8% (excellent)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 23% (very good)

    Dividend = 83% of last year's FCF (sustainability is a significant concern)

7. The Company's Shares are Fairly Valued: YELLOW

    Price/Owner Earnings (last year) = 11.7 (appealing)

    Price/GAAP Earnings (five-year average) = 38.6 (expensive)

    Free Cash Flow/Market Value = 8.3% (appealing, more than the five-year average of 5.3%)

    Acquirer's Multiple = 19.8 (expensive)

    Price/Book Value = 1.0 (about the same as its five-year average)

    Price/Sales = 2.9 (less expensive than the five-year average of 3.0)

In summary, the analysis assigned Kinder Morgan, Inc., two GREEN, four YELLOW, and one RED grades.  The resulting Overall Score is 48 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Kinder Morgan does not satisfy the GCFR criteria for value-investment consideration at this time.

The share price would theoretically have to fall by 22.6%, from $15.04 to $11.65, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Kinder Morgan's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on Kinder Morgan's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #kindermorgan    #kmi    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

KMI: Earnings Report for the Quarter Ending December 31, 2020

Kinder Morgan, Inc., reported after the market closed on January 20, 2021 it earned $0.27 per diluted share in the quarter that ended on December 31, 2020, no change from earnings of $0.27 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted Earnings, a non-GAAP figure, did a little better, rising 4 percent to $0.27 per share from $0.26 one year earlier. 

This post compares the quarterly Income Statement published by KMI to the predictions I made in the “Look Ahead” post I shared earlier. 

First a little background about the company: Kinder Morgan owns and operates a sprawling network of pipelines and associated terminals for transporting oil, gas, carbon-dioxide, and other products.  Already a large owner of pipelines, Kinder Morgan became gigantic when it acquired El Paso, Corp., in 2012.  Shortly thereafter, Kinder Morgan executed a series of transactions, totalling $76 billion, that converted general and limited partnership interests of various Kinder Morgan and El Paso entities into one publicly traded company. About 40 percent of the natural gas consumed in the U.S. is now carried by Kinder Morgan pipelines.  More recently, Kinder Morgan (and most other other energy firms) experienced declining profits and cash flows when actions taken worldwide to combat the COVID-19 pandemic reduced overall demand for energy products.  Upstream producers that depend on high prices were hurt the most, but midstream firms such as Kinder Morgan also suffered.  The company incurred impairment charges totaling $1.6 billion in 2020 when it recognized formally that lower energy prices had lowered the value of its assets.

Revenue in the December 2020 quarter totaled $3.1 billion, 7 percent less than last year's $3.4 billion.  I had predicted Revenue of $3.2 billion, and the actual figure missed this by 3.2 percent.

The Gross Margin weakened from 56.6 percent of revenue to 55.3 percent, a sign that Kinder Morgan sold its output and services at less profitable prices relative to production costs. I had assumed the Gross Margin would be 57.0 percent, and the actual margin was less profitable.

Sales, General, and Administrative expenses rose from $236 million in the year-earlier quarter to $270 million.  These expenses increased from 7.0 percent to 8.7 percent of quarterly revenue, which shows the company spent more per dollar of sales on other operational costs, such as marketing.  I had expected SG&A to be 7.4 percent of revenue, a lower figure than the actual percentage.

Operating Income sank from $1.9 billion (boosted by a big gain on a divestiture) to $980 million.  My estimate of $937 million was in the right ballpark.

Interest and other non-operating items totaled a net expense of $180 million, much better that last year’s $850 million expense because of higher earnings on equity investments.  I had predicted a $230 million non-operating expense.

The effective income tax rate fell sharply from 42 percent to 22 percent, which had a positive, but expected, effect on Net Income.

Net Income attributable to KMI, at $607 million, was almost the same as in the year-earlier quarter.  It beat my estimate of $537 million by 13 percent.   EPS, as mentioned above, was steady at $0.27, and exceeded by estimate by $0.03.

In summary, Kinder Morgan’s revenue and operating margins decreased in the latest quarter, when compared to the year-ear period.  But, non-operating income increased sharply and the income tax rate was down.   Somehow, everything balanced out and the company’s earning per share was exactly the same as last year, and 13 percent more than I expected.

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #kindermorgan  #kmi  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

KMI: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Kinder Morgan's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 20, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Kinder Morgan.

Kinder Morgan owns and operates a sprawling network of pipelines and associated terminals for transporting oil, gas, carbon-dioxide, and other products. About 40 percent of the natural gas consumed in the U.S. is carried by Kinder Morgan pipelines.  In 2014, the company completed a series of acquisitions that converted general and limited partnership interests in various Kinder Morgan and El Paso entities into full ownership.  As was the case for nearly every company in the industry, Kinder Morgan's results in 2020 were hurt by the significant drop in worldwide demand for energy products as COVID-19 led to reduced economic activity.  The resulting decline in the price of oil and gas also impaired (i.e., reduced the carrying value of) the tangible and intangible assets on the company's balance sheet. 

Shares of Kinder Morgan, Inc., now trade for about $14 each.  These shares can be found in the Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Kinder Morgan recorded profits of $122 million on revenue of $12 billion during the last year. In the quarter that ended on 30 September 2020, Kinder Morgan earned $0.18 per share (excluding certain items), which missed the $0.20 Wall Street consensus forecast. See https://tinyurl.com/y2hps7cd for Kinder Morgan's most recent quarterly report.

Revenue in the September 2020 quarter totaled $2.9 billion, 9% less than last year's $3.2 billion. The Natural Gas Pipelines business was responsible for 62% of overall revenue, and this unit's revenue fell by 6.5% compared to the year-earlier result. The Products Pipelines business contributed 15% of revenue, and this unit's revenue fell by 8.7%. The Terminals and CO2 unit supplied 23% of revenue, and the amount fell by 16.3%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

The expectations Kinder Morgan's management communicated for the December 2020 quarter last October are shown below.  Unfortunately, for my purposes here, the guidance is for Distributable Cash Flow (DCF) and Adjusted Earnings Before Interest expense, income Taxes, Depreciation, depletion, amortization (DD&A), and Amortization of excess cost of equity investments and certain items (EBITDA).  The company does not provide guidance for GAAP net income, claiming it is impractical to make the necessary predictions.

For 2020, KMI’s original budget contemplated DCF of approximately $5.1 billion ($2.24 per common share) and Adjusted EBITDA of approximately $7.6 billion. Because of the pandemic-related reduced energy demand and the sharp decline in commodity prices, the company expects DCF to be below plan by slightly more than 10% and Adjusted EBITDA to be below plan by slightly more than 8%. As a result, KMI expects to end 2020 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.6 times.

Market conditions also negatively impacted a number of planned expansion projects such that they are not needed at this time or no longer meet our internal return thresholds. We therefore expect the budgeted $2.4 billion of expansion projects and contributions to joint ventures for 2020 to be lower by approximately $680 million. With this reduction, DCF less expansion capital expenditures is improved by approximately $135 million compared to budget, helping to keep our balance sheet strong.

The guidance indicates that Kinder Morgan expects DCF for the year to be less than 90 percent of $5.1 billion, or $4.59 billion.  DCF realized during the first nine months of 2020 was $3.35 billion, so the fourth-quarter estimate is $1.24. billion or a little less.  Similarly, the Adjusted EBITDA guidance for the year is 92 percent of $7.6 billion, or $7.0 billion.  For the fourth quarter, the estimate is $7.0 billion less the $5.13 billion of the first nine months of 2020, or $1.87 billion.

A prediction for GAAP net income can be derived from the DCF or Adjusted EBITDA estimates, but the calculation in each case requires approximations to account for the many items excluded from DCF and Adjusted EBITDA.

Consider Adjusted EBITDA:  During the first nine months of 2020, GAAP net income was about $5.6 billion less than Adjusted EBITDA.  However, $1.6 billion of this amount was a one-time impairment charge.  The difference between GAAP net income and Adjusted EBITDA was $4.0 billion, or $1.33 billion per quarter, excluding the impairment.  

Subtracting $1.33 billion from the $1.87 billion Adjusted EBITDA estimate yields $0.54 billion, or $540 million, as the GAAP net income estimate for the December 2020 quarter.

Coming up with an Income Statement prediction that would generate $540 million ($0.24 per share) in earnings is an even trickier proposition, and one most certainly prone to error.  But the following takes into consideration the information mentioned above and trends seen in the company's historical results. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #kindermorgan  #kmi  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis