Kinder Morgan (KMI) to Ride on Fee-Based Deals, Debts High

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On Jun 13, we issued an updated research report on energy infrastructure company Kinder Morgan Inc. KMI. The company has the largest network of natural gas pipelines in North America that could fetch stable fee-based revenues. However, high dependence on debt financing could hurt its prospects.

Kinder Morgan currently carries a Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

The company's pipeline network in North America spreads over almost 70,000 miles. Most importantly, the company's midstream properties are linked to all the prospective plays in the U.S. that are rich in natural gas. These extensive networks of gas pipelines, for which the company has invested almost $32 billion to date, provide it with stable fee-based revenues. In fact, Kinder Morgan expects 91% of its 2017 cash flow generation to come from fees charged for using its midstream properties.

It is to be noted that the U.S is utilizing natural gas for generating power as the price of the commodity is low. This might drive demand for natural gas in power generation. This has created an increasing need for more natural gas storage and transportation facilities to support higher natural gas volumes. Kinder Morgan, having extensive natural gas transportation facilities, is likely to gain from the development.

Moreover, Kinder Morgan is the transporter of the largest volumes of petroleum products and CO2 in North America. On top of that, the company operates almost 155 terminals that are arguably the largest in the continent.

However, the company's total debt now stands higher than equity capital, reflecting balance sheet weakness. Also, Kinder Morgan's year-to-date pricing chart shows weakness as reflected by the stock's 8.5% fall as compared to almost 2% downfall for the Zacks categorized Oil & Gas-Production/Pipeline industry.

Moreover, Kinder Morgan's Trans Mountain expansion project is facing strong opposition from two political parties in British Columbia. New Democratic Party and The Green Party have agreed to join forces in order to remove the ruling British Columbia Liberal Party – considered fossil fuel friendly and a supporter of the pipeline expansion – from power. It is to be noted that the company received $1.3 billion from the recent IPO of its Canadian unit, which is among the largest in the nation, for financing the controversial expansion project. This could significantly increase transportation capacity of Trans Mountain pipeline and boost the country's crude export to Asia. Thus, the political disturbances that is hurting the pipeline development has raised questions about the company's prospects.

Stocks to Consider

Better-ranked players in the energy sector include Canadian Natural Resources Limited CNQ, McDermott International Inc. MDR and W&T Offshore Inc. WTI. Canadian Natural and McDermott sport a Zacks Rank #1 (Strong Buy), while W&T Offshore carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.      

We expect year-over-year earnings growth for Canadian Natural of almost 725% for 2017. 

McDermott beat the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 387.50%.   

W&T Offshore had an average positive earnings surprise of 69.21% in the last four quarters.

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Canadian Natural Resources Limited CNQ: Free Stock Analysis Report

Kinder Morgan, Inc. KMI: Free Stock Analysis Report

W&T Offshore, Inc. WTI: Free Stock Analysis Report

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