In December of 2015, Kinder Morgan Inc. (NYSE: KMI) announced that it would slash its dividend by 75%, from $2.04 annually to $0.50. Shares had been dropping since February, and the oil and gas midstream company hoped to stop the slide by funding new projects from cash flow rather than new borrowing. By January of 2016, the stock had fallen to a low of around $11 a share.
Since then, the stock has never risen above $25, but the dividend has been increased to $1.05 per share annually and shares currently trade at just under $15.
On Tuesday, Kinder Morgan announced preliminary financial projections for next year, including an increase of 3% to its dividend, raising the payout to shareholders to $1.08 per share. To meet that increase, the company projects capital spending (capex) to fall by $680 million from 2020’s original estimate of $2.4 billion. For the first three-quarters of 2020, Kinder Morgan’s capex totaled $1.35 billion.
The company said it expects to close out 2020 with a net debt to adjusted EBITDA ratio of approximately 4.6×. Kinder Morgan’s long-term target for this ratio is 4.5×.
For 2021, Kinder Morgan estimates net income of around $2.1 billion, and the company expects to generate $4.4 billion in distributable cash flow (DCF). Excluding discretionary capital spending and dividend payments, Kinder Morgan expects 2021 DCF to be about $700 million more than 2020’s total.
In making its calculations, Kinder Morgan assumed a 2021 average annual price for West Texas Intermediate crude oil of $43 a barrel and Henry Hub natural gas prices of $3 per million BTUs. The company also noted that the “vast majority” of its cash generation is fee-based and not subject to swings in commodity prices.
Kinder Morgan also estimates that every $1 per barrel change in the average price of crude will raise or lower DCF by approximately $4 million. Likewise, a $0.10 change in the price of natural gas will raise or lower DCF by around $1 million.
The announcement’s impact on Tuesday’s trading price was modest. Shares traded as high as $15 (up 1.3%), but pulled back to around $14.90, up about 0.8% for the day. The stock’s 52-week range is $9.42 to $22.58, and the consensus price target is $16.67, implying a potential upside of nearly 12% to the current share price. Kinder Morgan pays a dividend yield of 7.09%.