Companies live or die, thrive or struggle, based on the cash flow they generate over time. So whenever a management team of a firm comes out with detailed guidance as to what the near future holds, it is worth listening to. A great example of this in action is the recently announced financial performance for the fourth quarter of the 2021 fiscal year of pipeline and midstream giant Kinder Morgan (KMI). During that release, management provided not just an update as to the company’s performance for the entire fiscal year, they also provided expectations for what the 2022 fiscal year holds. And what data has been provided continues to support the view that the company is fundamentally undervalued and represents a steady, safe opportunity for long-term investors to consider.
The future looks bright
I have long been a fan of Kinder Morgan as an investment opportunity. In the last article I wrote about the company, I rated it a bullish prospect, indicating that it offers the prospect for attractive returns down the road. That was in November of 2021, and since then, shares have performed quite well. In all, investors in the company have generated a return of 8.3%. That compares to the 4.9% decrease experienced by the S&P 500 over the same window of time. The big development that transpired during that time was the release of the company’s fourth quarter results for its 2021 fiscal year.
Due to financial performance achieved during that quarter, the company went on to generate net income of $1.78 billion. That compares to the $119 million the company reported for the same quarter one year earlier. Although net income is nice to see, there are more important metrics to consider for the company. For instance, we should pay attention to DCF (distributable cash flow). For the full 2021 fiscal year, the company generated DCF of $5.46 billion. That compares to the roughly $4.60 billion achieved in 2020. On a per-share basis, this came out to $2.40. That compares to the $2.02 generated in 2020. To put this in perspective, the company paid out distributions for the year of just $1.08 per share and plans to increase that in 2022 to $1.11. Another important metric to consider is EBITDA. According to the company, this metric came in at $7.95 billion for the year. That compares to the $6.96 billion generated in 2020.
Kinder Morgan benefited some from increased volume passing through its network. Natural gas transportation volumes, for instance, grew by 0.6% for the year, while sales volumes of natural gas rose by 5.1%. Of course, not everything was great. Gathering volumes, for instance, declined by 9.5% year over year. But that is a fairly small portion of revenue compared to other parts of the enterprise. Undoubtedly the biggest contributor to the company’s increase, however, was the one-time impact associated with Winter Storm Uri. According to management, this helped the company’s EBITDA by about $1.1 billion. Without this, EBITDA would have been around $6.85 billion.
When it comes to profitability by operating unit, it’s worth noting that the biggest improvement came from the company’s natural gas pipelines. Segment EBITDA for the year jumped 22.3%, climbing from $4.47 billion to $5.46 billion. By comparison, products pipelines saw an increase of just 8.8% from $1.03 billion to $1.12 billion. And CO2 salt profits grow by 15.6% from $652 million to $754 million. The only big decrease came from the terminals portion of the enterprise. That’s all profitability declined by 4%, falling from $990 million to $950 million.
Now that 2022 is underway, management has provided detailed guidance for what investors should anticipate. For the full fiscal year, the company is currently guiding for net income of $2.5 billion. DCF should be about $4.7 billion, while EBITDA should total $7.2 billion. Management did not give any guidance regarding operating cash flow. And it is important to note that as of this writing, the company has not released enough of its financial statements to reveal operating cash flow for all of 2021. However, based on a rough calculation on my end, I figured that operating cash flow for 2022 should be around $5.7 billion. Another metric that I like to pay attention to is free cash flow. But my preference is to strip out capital expenditures associated with growth and focus only on those that are maintenance in nature. Management refers to these as sustaining capital expenditures. In 2021, this figure came in at $864 million. So if we assume a figure of about $900 million for 2022, true free cash flow for the company for this year should be around $4.8 billion.
|Metric||$ Value of Denominator for 2022||Trading Multiple|
|EBITDA||$7.2 billion||10.1 (EV / EBITDA)|
|DCF||$4.7 billion||8.8 (Price / DCF)|
|Operating Cash Flow||$5.7 billion||7.2 (Price / Operating Cash Flow)|
|True Free Cash Flow||$4.8 billion||8.6 (Price / True Free Cash Flow)|
Taking these figures, it becomes very simple to value the enterprise. For instance, on a price to operating cash flow basis, the company is trading at a multiple of 7.2. The price to DCF multiple is slightly higher at 8.8, while the price to free cash flow multiple, using my measure of free cash flow, is 8.6. And finally, the EV to EBITDA multiple of the company stands at 10.1. Though not shown in the table above, the trading multiples using the 2021 figures are even lower. But it is important to keep in mind that the inclement weather benefit needs to be factored in. In fact, if we strip out that extra cash flow from the company’s EBITDA for 2021, then that metric would imply growth for 2022 of 3.7%. So although the company is expected to experience a down year this year, on an adjusted basis, things continue to improve. I should also note that while these multiples look cheap on an absolute basis, the company isn’t cheap relative to all of its competitors. When I last wrote about Energy Transfer (ET), for instance, in an article published in November of last year, the company was trading at an EV to EBITDA multiple of 7.1. Its price to operating cash flow multiple was 3.2, and its price to free cash flow multiple of 3.3. Even so, for investors who like a structurally simple firm that’s trading at a low price, Kinder Morgan is still an interesting prospect.
On the whole, Kinder Morgan looks to be doing really well for itself. The company is guiding toward an attractive 2022 fiscal year. And this performance will help the company reduce its net leverage ratio to about 4.3, down from the 4.5 target they are planning long-term. The company is not factoring in up to $750 million in other deals, but those may or may not happen and would be accretive to cash flows either way. All things considered, the company is an attractive play that is capable of generating strong, consistent, and growing cash flows for the foreseeable future.