Kinder Morgan(NYSE: KMI) recently reported its second-quarter results, with the pipeline giant showing relatively modest growth across various metrics. However, investors seemed satisfied with the report, pushing the stock higher in the days following the earnings release.
Let's take a closer look at Kinder Morgan's most recent results and why stronger growth could be in store for the company.
Modest Q2 growth
For its second quarter, Kinder Morgan posted generally modest growth. Its adjusted net income attributable to the company rose 1% to $548 million, while its adjusted earnings per share (EPS) rose $0.01 to $0.25.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and distributable cash flow (DCF), two common metrics used to evaluate midstream companies, also both rose modestly. Adjusted EBITDA rose 3% to $1.86 billion, while DCF rose 2% to $1.1 billion. DCF is similar to free cash flow except that instead of subtracting out total capital expenditures (capex), it only reduces the number by maintenance capex.
The company ended the quarter with a leverage ratio (net debt divided by trailing-12-month adjusted EBITDA) of 4.1. Kinder Morgan also declared a dividend of $0.2875 per share, which is up 2% compared to a year ago. That equates to a forward yield of about 5.5%.
Kinder Morgan forecast that its full-year net income attributable to the company will come in at $2.7 billion, or $1.22 per share, up 15% compared to a year ago. It is looking for adjusted EBITDA and DCF to rise 8% to $8.16 billion and $5 billion, respectively. The results should be buoyed by the company's recent acquisition of the assets of STX Midstream. It expects to end the year with leverage ratio of 3.9.
The company ended the quarter with a project backlog of $5.2 billion, which was up from $3.3 billion in the first quarter. It is particularly excited about its natural gas pipeline business, despite current low natural gas prices. The midstream operator said it sees natural gas volumes growing substantially by 2030 led by liquid natural gas (LNG) exports, a 50% increase in exports to Mexico, and energy demand stemming for artificial intelligence (AI), data center buildouts, and cryptocurrency mining.
On the company's conference call, management cited a study from S&P Global Insights that U.S. utilities plan to add 133 new gas plants over the next several years as a reason for its bullishness on natural gas demand moving forward.
As part of its plan to help address this growing need, the company has one large growth project underway. Its $3 billion South System 4 expansion project will add 1.2 billion cubic feet (Bcf) a day of natural gas capacity by late 2028. The project will be backed by 20-year take-or-pay contracts. This type of contract assures Kinder Morgan that it will get paid whether its customers use its pipeline or not, and thus provides great visibility.
The company also talked up the conversion of its Double H Pipeline, which will be reconfigured to transport NGL instead of crude. The project is expected to go online by the first quarter of 2026 and is designed to meet to growing NGL in key markets.
Kinder Morgan also said that it is currently in active discussion with an additional 5 Bcf or more a day of natural gas opportunities related to power demand. This includes 1.6 Bcf a day related to data center buildouts, as well as for other activities such as coal replacement and backing up renewables.
Image source: Getty Images.
Is now a good time to buy the stock?
While Kinder Morgan's results were nothing to write home about in the second quarter, the company certainly looks like it has a growing opportunity to kick-start growth going forward.
Natural gas demand looks poised to expand significantly in the coming years to help support data center and AI application growth. AI uses a tremendous amount of power, and natural gas appears to be the most reliable and cheapest option to help fuel the demand for this power at the moment.
Given its large integrated midstream system and ties to the Texas utility market, Kinder Morgan is well-positioned to be one of the big beneficiaries of this trend in the pipeline space.
KMI EV to EBITDA (Forward) data by YCharts
With an enterprise value-to-EBITDA ratio of less than 10, the stock trades below the typical multiple of more than 12 that it has often fetched over the past several years. Given its valuation and the growth opportunities in front of it, the stock looks attractive at current levels. And while growth was lackluster in Q2, I would expect it to pick up nicely in the future.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
