How Analysts See Kinder Morgan After Earnings

Kinder Morgan Inc. (NYSE: KMI) reported second-quarter results last Wednesday that were essentially in line with consensus earnings estimates and below revenue estimates. By Friday the stock dropped about $1.00 per share from its Wednesday high, down 4.4%.

The energy infrastructure giant maintained its $0.125 quarterly dividend and said that it expects to continue payouts at that rate to yield $0.50 per share for the current fiscal year. Kinder Morgan also said that it would continue to work on its balance sheet and plans to reduce its debt-to-EBITDA ratio from its prior target level of 5.5 times to 5.3 times, with an ultimate goal of 5 times.

For investors that means that the modest dividend (down from $2 a share in 2015) may not get an increase until well into 2018. And even though (or because) the share price has risen 40% so far in 2016, that’s too far in the future for investors to wait for a larger payout. After all, if they got in at the right time they’ve made a tidy profit in the first half of this year.

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Analysts were more sanguine. Wells Fargo’s take pretty well reflects the overall reaction to the company’s second-quarter results:

We believe KMI trades at a discount to peers primarily due to the following: (1) high leverage, (2) a volatile CO2 business, and (3) a relatively low dividend payout. Management has announced a number of joint venture/asset sales in recent weeks aimed at reducing Kinder Morgan’s leverage…. Our valuation range is based on a blend of (1) our three-stage dividend discount model, which assumes a discount rate of 9.5% and a long-term growth rate of 1.0% and (2) an EV/EBITDA multiple of ~12.5x for the low end of our range. Risks to Kinder Morgan trading below our valuation range include execution risk on projects, ability to achieve target leverage metrics, and a decline in crude oil prices.

Wells Fargo has an Overweight rating on the stock and raised its valuation range from a prior $19 to $22 to a new range of $24 to $26.

Merrill Lynch maintained a Neutral rating on the stock and its $22 price objective:

KMI reported 2Q16 adjusted EBITDA of $1.76bn, in-line with the BofAML/consensus estimates of $1.77/1.74bn. Management seeks to lower KMI’s leverage to below 5.0x net debt/EBITDA before considering increasing capital returns. 2Q16 does not meaningfully change our view though we change our income rating to “7” from “8” due to balance sheet progress.

Other analysts also weighed in:

• Goldman Sachs raised its price target from $21 to $24.
• Stifel also upped its price target from $21 to $24.
• S&P Global maintained a Buy rating and $25 price target.
• SunTrust Robinson Humphrey rates the stock a Buy and raised its target from $20 to $25.

Kinder Morgan shares closed at $21.22 on Friday, up 1.3% for the day, in a 52-week range of $11.20 to $35.92. The consensus price target is $22.79 and may not include the latest revisions.

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