Kinder Morgan, Inc. (NYSE:KMI) Q4 2023 Earnings Call Transcript

Kinder Morgan, Inc. (NYSE:KMI) Q4 2023 Earnings Call Transcript January 17, 2024

Kinder Morgan, Inc. misses on earnings expectations. Reported EPS is $0.28 EPS, expectations were $0.31. KMI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode until the question-and-answer session of today’s conference. [Operator Instructions] I would like to inform all parties that today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Thank you. You may begin.

Rich Kinder: Thank you, Sheila. Before we begin, as usual, I’d like to remind you that KMI’s earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the Securities and Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC, for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements.

As we look at our financial outlook for 2024, we are projecting very healthy growth in EBITDA, EPS, and DCF per share. While there are always headwinds and tailwinds for a company as sizable as Kinder Morgan, it appears that our strategy of expanding our assets through expansion CapEx and acquisitions, primarily in our Natural Gas segment, is delivering real benefits to the bottom-line. Kim and the management team will be taking you through our ’24 budget in great detail at the Investment Conference next week. In my remarks on these calls over the last few quarters, I’ve tried to outline the tremendous growth that we and most energy experts expect in natural gas production and demand over the coming years, driven primarily by LNG exports and exports to Mexico.

To the obvious relief of all of you on this call, I won’t be repeating the details supporting our outlook, but that growth is leading to extensive opportunities to grow our system, which already delivers about 40% of the nation’s natural gas throughput. Through selective expansion and extension of our enormous system, we can benefit from this expansion. Thankfully, most of these opportunities are concentrated along the Gulf Coast, where permitting and construction usually moves more quickly than elsewhere. Let me conclude with a bit of humor. Someone has recently said in comparing our growth to that of high-tech companies, that we were like the tortoise in Aesop’s Fable compared to the hare represented by high-tech. And that’s probably true.

But I like to think that looking at 2024, the tortoise is moving a little faster and then I would remind you of who won that race in the end. And with that, I’ll turn it over to Kim.

Kim Dang: Thanks, Rich. I’ll make a few overall points and then turn it over to Tom and David to give you the details. We ended 2023 slightly below budget, with about 1% on DCF per share and about 2% on EBITDA. There are several different moving pieces, but more than all of it can be attributed to lower commodity prices. Just before year-end, we closed the roughly $1.8 billion NextEra South Texas acquisition. This asset — these assets fit nicely into our existing Texas system serving the Gulf Coast and Mexico demand markets. We were excited to be able to get that transaction done a little more quickly than we expected. Looking forward to 2024, as Rich said, we expect really nice growth over ’23, with every business unit expected to contribute incremental earnings.

We’ve updated the preliminary budget guidance we released in early December of last year to incorporate the South Texas acquisition. As a result, our final 2024 budget now projects 15% growth in earnings per share versus 2023, and 8% growth in DCF per share. Our commodity assumptions in the final budget are unchanged versus the preliminary budget. We assumed WTI of $82 a barrel and $3.50 for Henry Hub natural gas, which was consistent with the forward curve during our annual budget process. While current prices are lower, we did not update prices in our final guidance given their potential to change over the year. However, based on our commodity sensitivities, even at current prices, we would still expect strong growth over 2023, given our relatively modest commodity exposure.

For example, at a WTI price of $72 per barrel and Henry Hub of $2.80, earnings per share would grow at 12% versus ’23, and DCF per share would grow at 6%. During the fourth quarter, we put $965 million of projects in service and added $344 million to the backlog, which currently stands at approximately $3 billion. Despite the decline versus last quarter, we’re still confident in our ability to spend at the high end of the $1 billion to $2 billion per year discretionary CapEx range for the next few years. Our confidence is supported by the roughly 20% expected growth in the natural gas market between now and 2030, driven by LNG exports, exports to Mexico, and industrial demand. We’re looking at multiple expansion projects, some of them significant in size, to supply LNG exports from the Texas Coast, the Louisiana Coast, and the West Coast, to supply Mexico through exports from both Texas and Arizona, to bring incremental supply to the Southeast markets for Permian egress, as well as expansion of the storage, and for incremental power and industrial demand.

We’re in a strong position as we exit 2023 and move into 2024. Our balance sheet is the strongest it has been in about a decade. We’re projecting nice growth for 2024. And the natural gas business, which is greater than 60% of KMI’s EBDA, is underpinned by 20% growth in that market, leading to nice expansion opportunities. We will continue to return significant capital to our investors through dividends and opportunistic share repurchase. Next week, at our annual Investor Conference, we will review in much more detail our ’24 budget, industry fundamentals, and our future opportunity set and answer all your questions. And with that, I’ll turn it over to Tom to give you details on the performance for the quarter.

Tom Martin: Thanks, Kim. Starting with the natural gas business unit, transport volumes increased by 5% or 1.9 million dekatherms per day for the quarter versus the fourth quarter of 2022, driven primarily from EPNG’s Line 2000 return to service and the Texas intrastate increased LNG feedgas demand and increased power demand. These increases were partially offset by decreased deliveries to local distribution companies. Our natural gas gathering volumes were up 27% in the quarter compared to the fourth quarter of ’22, driven by Haynesville volumes which were up 59%, Bakken volumes which were up 14%, and Eagle Ford volumes up 18%. Gathering volumes grew 14% compared to Q3 2023. For the full year, gathering volumes were up nicely at 19% over 2022 and just slightly below our 2023 plan.

We continue to see high demand for and utilization of our natural gas assets, which is driving in many instances, longer-term contracts, higher rates, and increased project opportunities in a growing US market. In our Products Pipeline segment, refined product volumes were up slightly about 1% for the quarter versus the fourth quarter of 2022, driven by an increase in jet fuel, partially offset by a slight reduction in diesel volumes. Gasoline volumes were flat for the comparable quarter of last year. We continue to see a considerable ramp in renewable diesel volumes flowing in our pipelines serving California. The pipeline volumes from the RD hub projects we placed into service earlier this year have grown from 700 a day in Q1 to 27,000 a day in Q4, and we’re currently expecting well above 30,000 a day in January.

As we stated previously, these RD hub projects are largely underpinned with take or pay contracts associated with our terminals facilities, so we get paid most of our revenue even if those volumes do not flow. However, when RD volumes actually flow on our pipelines, we collect the additional tariff on those barrels as well. Crude and condensate volumes were up 7% in the quarter versus fourth quarter of 2022, driven by higher Hiland wellhead volumes and favorable Double H transportation fundamentals from the Bakken. In our Terminals business segment, our liquids lease capacity remains high at 93%. Excluding tanks out-of-service for required inspections, approximately 97% of our capacity is leased. Utilization at our key hubs in the Houston Ship Channel and New York Harbor strengthened in the quarter versus fourth quarter of 2022.

We continue to see nice rate increases in those markets and leasing remains near all-time record levels. Our Jones Act tankers are 100% leased through 2024, assuming likely options are exercised. On the bulk side, overall volumes were up 3% from the fourth quarter of 2022, primarily from metals, pet coke, and soda ash tonnage, partially offset by decrease — decreases in grain and aggregate volumes. Grain volumes are minimum — have minimal impact on our financial results. Excluding grain, bulk volumes were up 5%. The CO2 segment experienced lower overall volumes on NGLs, CO2, and oil production, and lower prices on NGLs and CO2 versus the fourth quarter 2022. Overall, oil production decreased by 7% from the fourth quarter last year, but was above our plan for this quarter.

For the year, net oil volumes slightly exceeded our plan, largely due to better-than-expected performance from projects at Yates and SACROC, as well as strong base volumes post the February outage at SACROC. These favorable volumes relative to the 2023 plan, helped to offset some of the price weakness that we have experienced. With that, I will turn it over to David Michels.

David Michels: Thank you, Tom. So, for the fourth quarter of 2023, we’re declaring a dividend of $0.2825 per share or $1.13 per share annualized, which is 2% up from the 2022 dividend. We continued with our opportunistic share repurchase program in the fourth quarter, bringing our total year-to-date repurchases to over 31 million shares at an average price of $16.56 per share, creating a good value for our shareholders. We ended 2023 with net debt to adjusted EBITDA of 4.2 times, and that includes $522 million of repurchased shares and the $1.8 billion closing of our acquisition of the South Texas Midstream assets before year-end. Our leverage would have been 4.1 times if we had included a full year adjusted EBITDA contribution from those acquired assets.

We ended 2023 just slightly below budget for the full year. And more than all of that underperformance can be explained by lower-than-budgeted commodity prices. We saw better than budgeted performance in both our natural gas and terminals businesses. And for the quarterly performance, we generated revenues of $4 billion, which was down $541 million from the fourth quarter of 2022. Cost of sales were down a bit more than that, at a reduction of $614 million. Both of those declines were due to a decline in commodity price year-over-year. As you’ll recall, we enter offsetting purchase and sales positions in our Texas Intrastate business, which is primarily why our revenue and cost of sales are exposed to price fluctuations, but our margin is generally not impacted by price.

Interest expense was higher versus 2022 as expected, driven by short-term interest rates impacting our floating rate interest swaps. We generated net income attributable to KMI of $594 million, down 11% from the fourth quarter of 2022. Our EPS was $0.27, down $0.03 from 2022. Our average share count reduced by 27 million shares or 1% due to the repurchased shares. For our business segment performance, Terminals and Products segments were up, Natural Gas and CO2 segments were down versus the fourth quarter of 2022. The Natural Gas segment was down mostly due to mild winter weather in 2023 versus 2022. The Product Pipeline segment was up due to higher rates on existing assets as well as contributions from new expansion projects, including our renewable diesel assets.

Terminals was up due to improved rates on our Jones Act business, contractual rate escalations across multiple assets, and improved tank lease rates in the Northeast region. Our CO2 segment was down due to lower oil and CO2 volumes. Our DCF per share was $0.52, down $0.02 from last year. Excluding interest expense, we were favorable to last year. For the balance sheet, we ended the year with $31.8 billion of net debt, which was an increase from year-end of $901 million — year-end 2022 that is. So, a high-level of reconciliation for the year-to-date or the full-year 2023 change in net debt is as follows. We generated $6.5 billion of cash flow from operations. We spent $2.5 billion in dividends. We spent $2.5 billion of total CapEx. That includes our growth, sustaining, and contributions to JVs. We repurchased $500 million of stock and we spent $1.8 billion on the South Texas Midstream acquisition, which gets you close to the $901 million increase in net debt for the year.

As Kim mentioned, we updated our 2024 budget for the South Texas acquisition from the December guidance that we released. As you can see, the acquisition was quite accretive on both EPS and DCF per share. We’re very pleased with the resulting growth projected for 2024 with EPS growth of 15%, DCF per share and EBITDA growth of 8%, and a nice improvement in our leverage ratio to 3.9 times by year-end 2024. And as Rich said, we’ll be providing all the details behind those at our annual Investor Day meeting one week from today. With that, back to Kim.

Kim Dang: Okay. Sheila, we’d like now to open it up for questions. We would request that those asking questions, if you’d please limit it to one question and one follow-up. And if you have additional questions, please get back in the queue, and we will stay here until we get to everyone.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Jeremy Tonet with JPMorgan. Your line is open.

Jeremy Tonet: Hi. Good afternoon.

Kim Dang: Good afternoon, Jeremy.

Jeremy Tonet: Maybe just starting off here, wanted to start off with the recent weather. It’s been a cold snap that we’ve seen across a lot of the country, in Texas as well. And last time we saw a cold snap with Uri, it led to notable opportunities for the Midstream and KMI, and granted, it’s probably not the same order of magnitude here by any means, but just wondering if you could shed any color on if you are seeing kind of increased opportunities in this environment or how we should think about that in general.

Kim Dang: Sure, Jeremy. Yeah, I mean, the cold weather, you’re right, does lead to incremental opportunities for us. You’re also right that this is not the same order of magnitude as a Uri. When we do our budget, we do budget for some cold weather and I think coming into the year, we are a little bit nervous about that given the — a warmer than expected weather. With this cold front I think we have made good progress on achieving — on our way to achieving some of those cold weather budget assumptions. So, very happy with the progress to date.

Jeremy Tonet: Got it. That’s helpful there, thanks. And then, just wanted to come back to capital allocation, as maybe you talked about in the past and we’ve seen Kinder execute on repurchases this year and also some sizable M&A, and just wondering on a go-forward basis here, if you could walk us through, I guess, how those two specific opportunities could stack up in your mind? Clearly, there is still room on the Kinder balance sheet given leverage targets and where leverage sits today, and just wondering, how those two stack up? And as it relates to buybacks, is there a certain kind of cap and pace or any other thoughts that we should think about there?

Kim Dang: No. I mean, I think we like the flexibility that we have on our balance sheet. We’ve been around 4-ish times for the last three years. I think in end of ’21, we were at 3.9. Last year, we were at 4.1. And right now, we’re at 4.2. But if you adjusted for the EBITDA on the acquisition, you would be at 4.1. And so that gives us flexibility to do acquisitions. That gives us flexibility to do share repurchases. And so, last year we were able to do share repurchase, we did $522 million, as you heard David say. We made a $1.8 billion acquisition and our balance sheet ended essentially in the same place that we started the year. So, when — especially when we’re doing attractive acquisitions, it’s not that dilutive to our debt metric and so we acquired the NextEra acquisition at about 8.6 times.

And so, relative to our debt metrics, even though we are 100% debt-funded, it wasn’t that dilutive. So, I think where our balance sheet is, it gives us lots of flexibility and we were able to execute on multiple opportunistic transactions during 2023. And that’s quite frankly what we would look to do going forward as well.

Jeremy Tonet: Got it. Makes sense. See you at the Analyst Day. Thank you.

Operator: Thank you. Next, we will hear from Brian Reynolds with UBS. You may proceed.

Kim Dang: Hey, Brian.

Brian Reynolds: Hi. Good afternoon, everyone. Maybe to start off on just the quarterly performance and the ’24 guidance, kind of as it relates specifically to the Natural Gas segment. Jeremy touched on it a little bit, but we saw the year-over-year decline in Nat Gas segment driven by some winter storms in 4Q ’22, but I’d be great if you could just refresh us on maybe some of the marketing exposure in the business. Previously, we kind of view it as mostly contracted at this point, but just given the year-over-year earnings decline and maybe looking forward, just given significant amount of Nat Gas price volatility expected ahead and Kinder’s strategic positioning in natural gas storage, just kind of curious how we should think about maybe the marketing side of this business on a go-forward basis versus kind of Kinder over the last five years? Thanks.

Kim Dang: Well, let’s start on the interstate transmission side. And so, when you have a winter storm, people are going to need more balancing services, they’re going to need more storage services, you’re going to have more usage because you have more molecules flowing. And so what happens around a lot of times in these winter storms is, we are providing ancillary services to our customers that they need and they want in order to serve their customers. So — and so you see some incremental business on the interstate side in and around those services. On the intrastate side, there we actually — we do hold some storage in our own name and then our customers have storage as well. So, we make money from time to time on the small amount of storage that we do hold in our name.

We also have a little bit of transport capacity that we hold in our own name. It’s not significant overall, but we can make money on that where we haven’t already hedged it. And then some of the same types of services that the interstate customers need, the intrastate customers also need. So, they will over-pull on our system above their rights, and those services come at premium rates. And so, those are the types of things that you see when we have winter weather that leads to some incremental margins — on the margins.