A High-Yield Play on Natural Gas

Energy stocks have been under extreme pressure since the beginning of 2020. This is due largely to weakness in oil stocks, reflecting plunging oil prices over the course of the year. Oil prices have been negatively impacted in part by an uncertain demand outlook. But not all energy stocks are created equal. Companies operating in natural gas face a less uncertain future, as natural gas remains a key component in electricity generation. Energy investors have good reason to consider natural gas stocks such as Kinder Morgan , as natural gas arguably has a better long-term outlook than other fossil fuels. In the meantime, Kinder Morgan has a high dividend yield of 7.6%. Kinder Morgan is a midstream operator with a heavy focus on natural gas, which could prove to be an operating advantage in the years ahead. The dividend payout is also covered by sufficient cash flow, making Kinder Morgan stock attractive for income investors. Business Overview Kinder Morgan is one of the largest energy companies in the United States. It operates in midstream transportation and storage with a massive network of assets. It has heavy exposure to natural gas, with 70,000 miles of natural gas pipelines, and 1,200 miles of natural gas liquids pipelines. It also operates 6,800 miles of refined products pipelines and 3,100 miles of crude oil pipelines. Kinder Morgan is also the largest independent terminals operator with 147 terminals and 16 Jones Act vessels. Lastly, Kinder Morgan is the largest transporter of carbon dioxide. As a midstream company, Kinder Morgan is not as reliant on the underlying commodity price as the exploration and production companies. This has helped Kinder Morgan stay afloat in 2020. In the third quarter, distributable cash flow fell just 5% year over year. Lower commodity prices were a challenge, but the company remained solidly profitable with net income of $455 million. The company has a huge presence in natural gas, which will serve it well in the years ahead as natural gas faces a more optimistic outlook than other fossil fuels. According to a recent company presentation, demand for U.S. natural gas is expected to increase from 2020 to 2030 by 21.2 billion cubic feet per day. Natural gas is expected to make up 25% of the U.S. energy mix by 2040, up from 23% in 2019. By contrast, oil as a percentage of the energy mix is expected to decline to 28% by 2040, from 31% last year. Coal is expected to see an even bigger decline in usage, while nuclear is expected to remain flat. Kinder Morgan is in prime position to capitalize on the growth in natural gas demand, as it is the leading natural gas infrastructure company in the United States. It has invested heavily to reach the leadership position, with $12.3 billion in total capital invested from 2015-2019. The company still has $2.6 billion of commercially secured projects underway, which will pave the way for future growth as demand for natural gas rises. Renewables are expected to show the biggest increase in usage, from 14% in 2019 to 22% in 2040. This makes renewable energy arguably the biggest area of growth, and Kinder Morgan is investing here as well. Kinder Morgan's huge asset network includes storage and transportation facilities for biofuels. Additionally, the company states it is currently considering multiple hubs for renewable products and/or biofuels on the West Coast. Dividends in the Pipeline Kinder Morgan generates enough cash flow to maintain its dividend, even in the current coronavirus pandemic and ensuing recession. In the third quarter, the company achieved $487 million of excess distributable cash flow above its declared dividend. Furthermore, the company expects to fully fund its dividend payments for 2020 with internally generated cash flow. Cost reductions will also help Kinder Morgan's dividend coverage. The company reduced its 2020 expenses and sustaining capital expenditures by approximately $175 million versus its original budget and also reduced its expansion capital expenditures by approximately $680 million, or almost 30%. The company has also taken significant steps to shore up its financial position in recent years. Since 2015, the company has reduced its debt load by over $10 billion. This has paid off, as Kinder Morgan expects to end 2020 with a debt-to-adjusted-EBITDA ratio of 4.6x, down from 5.6x in 2015. Full-year distributable cash flow is estimated at $2.24 per share. With expected dividends of $1.05 per share, Kinder Morgan's dividend payout represents less than half of full-year projected DCF. This indicates the dividend is secure, room for future increases once the pandemic ends and economic conditions return to normal. In the meantime, Kinder Morgan's 7.4% dividend yield compares very favorably to the S&P 500 Index, which currently yields 1.7% on average. Final Thoughts The collapse in oil prices has brought down many energy stocks with it. Multiple oil stocks have cut or suspended their dividend payouts over the course of 2020. But Kinder Morgan has continued to maintain its dividend, with sufficient coverage from underlying cash flow. Its focus on natural gas is proving to be a major advantage, at a time when so many oil companies are struggling. Going forward, the rise in natural gas demand will be a tailwind for Kinder Morgan. Investors can take advantage of the selloff in Kinder Morgan stock with a high dividend yield of 7.4%. Kinder Morgan is an attractive income stock for investors considering energy stocks.

A High-Yield Play on Natural Gas

Not all energy stocks are created equal.

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