3 Things to Watch When Kinder Morgan Reports Its Q2 Results

Matthew DiLallo, The Motley Fool

Kinder Morgan (NYSE: KMI) stock has been blistering hot in 2019. Shares of the natural gas pipeline company have rebounded more than 35% year to date, thanks in part to a solid showing in the first quarter.

While it will be tough for the midstream giant to repeat that performance in the second half, it could add even more fuel to keep its rally going if it reports strong second-quarter results later this week. Here are a few things to keep an eye on in that report.

Pipelines on green grass and blue sky in the background.

Image source: Getty Images.

1. See if its results matched its budget

While Kinder Morgan's first-quarter forecast called for it to haul in $1.35 billion, or $0.59 per share, of distributable cash flow (DCF), it outperformed slightly, tallying $1.37 billion, or $0.60 per share. That better-than-expected result was fueled by its natural gas pipeline segment, where earnings surged 12% year over year thanks to higher volumes as its customers grew production, which benefited both legacy assets and recently completed expansion projects.

The company's full-year budget anticipates that it will generate $5 billion, or $2.20 per share, of DCF this year (up 6% and 4% from 2018, respectively), with 23% of that total coming in the second quarter. As such, the company should report $1.15 billion, or $0.51 per share, of DCF in the seasonally slower period. If Kinder Morgan misses that mark, investors will want to understand precisely what hindered its results, and whether the issue or issues are limited duration headwinds or reflect longer-term problems.

2. Check out its progress on finishing growth projects

Kinder Morgan plans to spend $3.1 billion on expanding its operations this year, which will support its growth in 2019 and 2020. One of the key drivers of this year's growth will be the Elba Liquefaction Project, which is an LNG export facility near Savannah, Georgia. The company expected to place the first of the 10 liquefaction trains in service by the beginning of May. It anticipates starting commercial service on the other nine at a rate of one per month after that. Ideally, the company will remain on schedule with finishing these units.

The other expansion to keep an eye on is Gulf Coast Express, which is a natural gas pipeline from the Permian Basin to the Texas coast. The company and its partners anticipate placing the system in service by October. As long as there are no speed bumps in completing these and other projects, then Kinder Morgan's growth engine should accelerate later this year.

3. See if it added any new expansions to its backlog

The company currently expects that it can secure $2.5 billion to $3 billion of expansion projects per year. At the low end, that would be enough to increase its earnings at a 4% annual rate. Kinder Morgan got 2019 off to a good start by securing $600 million of new expansion projects during Q1, mainly in its natural gas pipeline segment.

The company had several other projects under development that it could have officially approved during Q2. For example, it teamed up with fellow midstream company Tallgrass Energy (NYSE: TGE) to pursue a joint venture (JV) that would increase oil transportation capacity out of the Rockies. Kinder Morgan would contribute two underutilized natural gas pipelines to the JV, which it would convert to oil service. Meanwhile, Tallgrass Energy would expand its Pony Express Pipeline System. If they secure enough customers to move forward, that could also allow Kinder Morgan to expand its Double H oil pipeline in North Dakota, which would feed into Pony Express.

Kinder Morgan is also working with Phillips 66 Partners (NYSE: PSX) on a potential project in Texas. The agreement would allow shippers on Phillips 66 Partners' Gray Oak oil pipeline to also move oil on Kinder Morgan's crude and condensate system to delivery points along the Houston Ship Channel. If the companies receive enough shipper interest, it could enable Kinder Morgan to expand its pipeline.

Kinder Morgan's success in securing these and other projects would enable it to grow earnings at a faster pace in the coming years, which is why investors should keep a close eye on its progress in locking up new expansions.

All eyes on growth

While meeting its budget expectations and staying on track with constructing its largest near-term expansions are essential, the most important information for investors in the Q2 report will be the news about how successful Kinder Morgan has been at securing new growth projects. If it has done so, that will boost the market's confidence in the company's longer-term growth prospects, which should help continue driving up its valuation.

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Matthew DiLallo owns shares of Kinder Morgan and Phillips 66. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.