Goldman's Michael Lapides on KMI
Goldman Report
Investment View
We initiate coverage on Kinder Morgan Inc. (KMI) with a Buy rating and add KMI to the Americas Conviction List, with a 12-month price target of $24/share, which combined with a dividend yield of 4.4%, implies 37.3% total return potential. KMI should benefit from increased financial flexibility given its improving balance sheet & cash flow profile, and KMI trades at a ~1.5-2x discount to large cap peers.
As a diversified midstream company, KMI should have operating leverage to rising natural gas, crude oil, and refined products production levels across broad portions of the US. KMI remains a leader in natural gas pipeline and gas/crude/refined product storage infrastructure, with a small but growing LNG presence. Crude oil prices are a small driver of earnings given KMI’s CO2 segment – which produces oil using CO2 for enhanced oil recovery (EOR) – but we note KMI remains largely hedged through 2019 and the CO2 segment represents less than ~12% of total reported EBDA.
Our forecasts for adjusted EBITDA come in roughly at $8,054mn/$8,295mn/$8,503mn for 2019/2020/2021 – which compares to FactSet consensus EBITDA of $7,595mn/$7,829mn/$8,134mn with the difference likely on returns for select new projects (LNG, gas pipeline infrastructure, terminals), volumes for its liquids segments and storage terminals, and oil prices received for the CO2 segment.
As our top pick, we view KMI as a top tier investment opportunity for income oriented and total return focused investors. We developed a screen of large-cap ($10bn+) S&P 500 constituents in yield or dividend focused sectors (REITs, Telecom, Consumer Staples, Utilities, Financials) and compared their current dividend yield with the 2-year dividend CAGR through 2020. As highlighted below, KMI screens as one of the better ideas on this metric among the larger cap US stocks given 25% dividend growth through 2020 and a current dividend yield of 4.4%. |
