Stifel: High-Yielding Kinder Morgan Is Now A Buy

On April 1, Stifel published a research report initiating coverage on North American pipeline giant, $90 billion cap Kinder Morgan Inc. KMI, with a Buy rating. Stifel had previously covered Kinder Morgan Energy Partners LP and El Paso Energy Partners LP prior to the November 2014 combination of these entities into Kinder Morgan Inc. Tale Of The Tape - Past Year VS S&P 500 The SPDR S&P 500 ETF SPY is a good approximation for the broader market. Kinder Morgan - Overview Kinder Morgan has a total enterprise value of ~$130 billion and operates ~80,000 miles of oil and gas pipelines, as well as 180 terminals; which transport about one-third of the natural gas in the U.S. on any given day. KMI reports five segments, including Natural Gas Pipelines, CO2, Products Pipelines, Terminals and Kinder Morgan Canada. Notably, the vast majority of Kinder Morgan earnings are based upon firm "take or pay" contracts with counterparties, or are hedged, helping to reduce risks from commodity price moves. Stifel - Kinder Morgan: Buy, $47 PT Stifel's $47.00 target price is derived by applying a targeted yield of 4.5% to our annualized 4Q15 dividend estimate of $0.53," and represents ~16 percent upside, including KMI's 4.3 percent dividend yield. Stifel - KMI Earnings: Deeper Dive  In January 2015, Kinder provided initial 2015 guidance of ~$8.2 billion in earnings before depreciation, depletion and amortization (EBDA).  Stifel pointed out that KMI's earnings are "approximately 85% fee-based and approximately 94% either fee-based or hedged."  Stifel noted that KMI's January guidance assumed average 2015 prices of $70 for WTI and $3.80 for Henry Hub natural gas, as shown in the table below.  Stifel has used $50 for WTI and $2.80 for HH natural gas in its 2015 model, which if accurate, would reduce KMI EBDA by $230 million in 2015, from company guidance.  In addition, KMI guidance was provided prior to its Hiland Partners acquisition.  Hiland Partners' is involved in the transportation of Bakken crude oil, and operates crude oil gathering assets, natural gas gathering and processing assets, in addition to the Double H pipeline.  In 2015 ~86 percent of Hiland assets are expected to be fee-based, "which supports Kinder's largely fee-based or hedged business model."  Stifel believes that the net effect of lower oil and gas prices, combined with the Hiland acquisition will be slightly negative on EBDA for 2015. Stifel - KMI Investment Thesis  Stifel noted that regardless of commodity price moves, "the management team at Kinder operates a fee-oriented, take-or-pay business model that should support compounded annual distribution growth of 10% over the next five years."  Prior to the KMI roll up of the various entities, "the cost of capital at Kinder Morgan Energy Partners LP was approximately 9.0% … With the consolidated Kinder, [Stifel estimates] the after-tax cost of capital is approximately 3.5%.  Stifel believes under the current structure, KMI will "compete for growth capital projects and participate in the M&A market, highlighted by the recent purchase of Hiland Partners." KMI - Well Covered & Growing Dividend  Stifel expects KMI "to pay distributions of $2.00 and $2.20 in FY15 and FY16, which indicate growth rates of approximately 15.0% and 10.0%, respectively."  Additionally, Kinder has guided ~10% annual dividend growth through 2020, based on its growth capital project backlog; which currently stands at ~$18 billion of projects, primarily fee-based.  Stifel's "DCF and distribution estimates generate coverage ratios of approximately 1.1x for each year."  However, Stifel noted that "the commodity environment is expected to pressure that coverage without a significant pick up in prices." Stifel - KMI $47 PT Risks Stifel noted factors, including: "significant changes to supply/demand or prices of crude oil, refined products, natural gas and CO2, competition, hazardous weather, increased regulation, increased interest rates, access to capital markets and a downgrade to non-investment grade from the credit rating agencies."