When energy midstream giant Kinder Morgan Inc. (NYSE: KMI) reported fourth-quarter 2015 earnings Wednesday night, the per-share loss of $0.29 and 8% revenue drop-off took center stage. Shares closed down more than 4% for the day and didn’t move much in the after-hours session.
The story changed Thursday morning though after investors had a chance to absorb the details of the company’s report. Shares were up about 5% in the first half hour of trading, and were destined to rise further.
The 75% dividend cut Kinder Morgan announced in early December was affirmed Wednesday, and the company said it expects to pay an annual dividend of $0.50 this year and “use cash in excess of dividend payments to fully fund growth investments.”
The company also cut its projected capital spending for 2016 by $900 million to a total of $3.3 billion, while cash flow in excess of dividends is expected to reach $3.6 billion.
In its preliminary 2016 plan, the company said it expected to spend $4.2 billion on new investments. The cut is almost certainly the result of expected lower revenues due to lower prices for crude oil and natural gas.
Investors understand that midstream companies, whether master limited partnerships (MLPs) or C-corporations like Kinder Morgan, either must grow or die. Regulated fees account for about 87% of Kinder Morgan’s revenues and about all the company can do to ensure maximum revenue is to keep the pipelines full.
When energy prices are this low, however, some producers throttle production and some even go out of business. Take-or-pay contracts help, but holding a producer’s feet to the fire is not always in a pipeline operator’s best interest. The object at some point becomes mutual survival.
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