Kinder Morgan(NYSE: KMI) has struggled to grow in recent years. The natural gas pipeline giant's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were $7.5 billion last year, about the same level as it was in 2018. While the company's financial results were very stable during that period, its earnings didn't grow.
However, the pipeline company reached an inflection point this year (it expects to generate about $8.2 billion in EBITDA, an 8% increase from last year). Meanwhile, it recently added a lot more fuel to its growth engine, which should enable it to continue increasing its earnings (and 5.5%-yielding dividend) over the next several years. Improving its growth profile enhances its long-term investment appeal.
A growth spurt
Kinder Morgan entered 2024 with $3 billion of growth capital projects in its backlog. That was down from $3.8 billion in the third quarter of last year due to the completion of several large capital projects. It finished the Tennessee Gas Pipeline's East 300 line upgrade, the Permian Highway Pipeline expansion project, and the Freer to Sinton project on its Texas Intrastate system.
Those project completions (along with its $1.8 billion acquisition of STX Midstream late last year) gave the company lots of momentum heading into 2024. It highlighted higher contributions from its Texas Intrastate system (and additional contributions from STX Midstream) as key growth drivers for its natural gas pipelines business segment in the second quarter. They're among the catalysts driving the company's view that its earnings and cash flow will rise by about 8% this year.
Refilling its growth engine
With those growth projects in service, there were questions about the company's future growth heading into 2024. However, Kinder Morgan has quickly addressed those concerns by more than replenishing its growth engine. The pipeline company added a net $300 million of new projects in the first quarter. Meanwhile, it recently revealed an additional $1.9 billion of net new capital projects, boosting its backlog to $5.2 billion.
Kinder Morgan has been saying for years that it expects demand for natural gas to grow materially by the end of the decade, which would drive additional expansion opportunities. It captured a needle-mover in the second quarter after signing up enough new customers to move forward with its proposed South System Expansion 4 Project to increase the capacity of Southern Natural Gas (SNG) Pipeline's South Line.
The $3 billion project will add about 1.2 billion cubic feet per day of capacity to help meet growing gas demand for power generation and local distribution in the Southeast. The company expects this project to enter service by late 2028. SNG is a 50-50 joint venture between Kinder Morgan and utility Southern Company.
In addition to that project, Kinder Morgan also approved building the $263 million Altamont Green River Pipeline Project. This 43-mile pipeline will transport gas from the Uinta Basin to a processing plant. It expects it to be in service by the middle of next year.
Kinder Morgan also approved plans to convert its Double H Pipeline in the Williston Basin from crude oil to natural gas liquids service. The $150 million project should enter service in early 2026. These projects significantly enhance Kinder Morgan's long-term growth visibility.
They likely won't be the last new projects the company secures. Kinder Morgan sees natural gas export demand from liquified natural gas (LNG) facilities and Mexico doubling by 2030. Meanwhile, new growth drivers are starting to emerge.
"We are also anticipating significant new natural gas demand for electric generation associated with artificial intelligence operations, cryptocurrency mining, data centers, and industrial reshoring," noted CEO Kim Dang in the second-quarter earnings release. Those catalysts would be additive to the expected demand growth from export markets. As a leading natural gas infrastructure company, Kinder Morgan is in an excellent position to capture future expansion opportunities.
Accelerating growth could fuel higher total returns
For the past several years, Kinder Morgan's main draw has been its high-yielding dividend, which made up the bulk of its total return. However, with increasing growth visibility, Kinder Morgan could produce higher total returns in the future as its earnings expand. That could give it more fuel to increase its dividend. These catalysts make the company an enticing option for those seeking income and upside potential.
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Matt DiLallo has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
