AI and Related Technologies Boost Kinder Morgan's Backlog, Raising the Question: Is the Stock Worth Investing In?
Kinder Morgan, (KMI -0.42%), recently released impressive fourth-quarter results and unveiled 2025 projections. What truly caught the eye was the surge in project backlog, mainly driven by natural gas demand for LNG exports, power plants, and artificial intelligence (AI). Let's delve into its latest results, guidance, and see if this is an opportune time to invest.
Unveiling the Results: Backlog and Growth
A significant detail stemming from Kinder Morgan's earnings report was its growing project backlog, which skyrocketed by an astonishing 60%. The backlog now stands at a massive $8.1 billion, up from $5.1 billion in the third quarter. Almost 90% of this backlog is directly linked to natural gas projects.
The company expects the EBITDA multiple for most of its projects, aside from carbon dioxide enhanced oil recovery, to reach a solid 5.8 times. This means that for every $100 million spent, Kind Morgan anticipates generating an incremental $17.24 million in EBITDA from these projects. This is a promising return, as midstream projects typically fall between 6x to 8x EBITDA multiples.
Three prominent natural gas projects that Kinder Morgan has secured recently include South System Expansion 4, Mississippi Crossing, and the Trident Intrastate Pipeline. The company prides itself on its position to capitalize on trends driving natural gas volumes, serving 45% of LNG export demand, 50% of natural gas exports to Mexico, and 45% of power demand in the southwestern, Texas, and southeastern regions. The future of AI data centers in these regions also seems promising, as we're still in the early stages of this rapid growth.
Within the US, Kinder Morgan sees natural gas demand increasing by a significant 28 billion cubic feet (BCF) a day by 2030. This projection mirrors the 28.5 BCF a day increase forecasted by natural gas producer Antero Resources, representing an enormous growth in consumption.
Earnings Highlights
Kinder Morgan reported a noteworthy 14% leap in adjusted earnings per share (EPS) to $0.32. Though it fell short of analyst's anticipated EPS of $0.34, its adjusted EBITDA rose 7% to $2.06 billion. The distributable cash flow (DCF), a critical metric used to evaluate midstream companies, climbed by 8% to $1.26 billion. Its DCF per share increased by 10% to $0.57.
The company declared a $0.2875 dividend per share, marking a 2% increase compared to a year ago. Its forward yield is approximately 3.8%. The stock price remained robust with a free cash flow of $449 million after dividend payments, ensuring the dividend was well-covered.
Kinder Morgan ended the year with a leverage (net debt divided by trailing-12-month adjusted EBITDA) of 4 times. This falls within the usual 3 to 4.5 times range for midstream companies and its intended leverage target of 3.5 to 4.5 times.
Looking forward, Kinder Morgan estimates a 4% increase in adjusted EBITDA to $8.3 billion and a 10% rise in adjusted EPS to $1.27. The company wants to decrease its leverage to 3.8 times by the end of the year while raising its dividend by 2% to $1.17 for the year. This guidance does not account for its recently acquired Outrigger Energy II project, which it acquired at a multiple of 8 times 2025 expected EBITDA, equating to around $80 billion if the company owned it all year.
Post-acquisition, Kinder Morgan plans to increase its growth capital expenditures (capex) to $2.5 billion annually over the next few years, up from an initial budget of $2 billion.
Should You Invest in Kinder Morgan Stock?
Kinder Morgan's Q4 results and predictable guidance are commendable, but it's the company's flourishing project backlog and the expected returns from these projects that truly excite investors. The energy industry is anticipating a surge in natural gas demand over the coming years, and Kinder Morgan is perfectly positioned to capitalize on these increased volumes.
In addition to expanding US natural gas consumption due to AI data centers, there is a considerable demand for LNG exports and natural gas for Mexico. Kinder Morgan has strong ties to the Texas utility market and has pipelines near Abilene, Texas, which will serve as the first site for the proposed $500 billion Stargate AI data center project. It looks to be well-positioned to capture AI opportunities, as Texas seems to be at the heart of AI data center buildouts due to its proximity to cheap gas coming from the Permian basin.
From a valuation perspective, Kinder Morgan trades at an enterprise value (EV)-to-EBITDA ratio of just over 11 times, a more appealing price point compared to historical midstream company valuations. As a result, Kinder Morgan is an appealing investment at its current price level.
Given Kinder Morgan's impressive earnings report and 2025 projections, potential investors might be interested in further exploring the company's growth prospects in finance. The surge in Kinder Morgan's project backlog, which now stands at $8.1 billion after a 60% increase, is a testament to its financial health and investment potential in the natural gas sector. With nearly 90% of this backlog stemming from natural gas projects, investors who are keen on financing projects linked to increasing natural gas demand for LNG exports, power plants, and artificial intelligence (AI) could find Kinder Morgan an attractive investment opportunity.