Let's just be blunt about this: Aside from a dividend cut in early 2016, there aren't many great reasons explaining why Kinder Morgan (NYSE: KMI) shares have fallen so dramatically in recent years. The stock is down 22% in the last year alone, despite stable and improving operations. Revenue grew year over year in 2017, while free cash flow decreased by a rounding error.
The uncomfortable reality for investors is that Mr. Market isn't always rational in the short term. That said, he tends to get his act together over time, especially when deserving companies deliver consistent results that are too good to ignore. If all goes according to plan with a sharp dividend increase and steadily improving operations, then 2018 could be the year Kinder Morgan begins to regain the respect of Wall Street. Given future growth potential and a ridiculously low valuation , I think now is the time to get greedy with this pipeline stock.
Image source: Getty Images.
Are shares poised for a breakout?
Investors shouldn't expect impressive growth in 2018 compared to last year. Guidance calls for adjusted EBITDA to increase 4%, distributable cash flow to creep up 2%, and the year to end with a net debt to adjusted EBITDA ratio of 5.1 tim. It may not seem like much, but executing on those objectives would result in a solid performance. The more important consideration for investors is that the focus in recent years on cleaning up the balance sheet and investing in organic growth projects will start to bear fruit in the year ahead.
The dividend will increase a whopping 60% in 2018, while a $2 billion share repurchase program will return even more value to shareholders. Meanwhile, the next batch of growth projects will come online and begin contributing incremental earnings from low-risk, long-term contracts. Although it will be spread out over the next several years, the company's current total backlog of expansion projects are expected to add up to $1.6 billion in additional earnings at full capacity.
And even after all of that, management still expects to generate $568 million in excess cash flow in 2018. Depending on how the year shakes out, the extra capital will be thrown at new growth projects, extra share repurchases, and/or further debt repayments. Financial flexibility is never a bad thing.
Despite stable operations, gobs of cash flow, and a pipeline chocked full of growth projects; Kinder Morgan can't seem to gain the respect of Wall Street. The company is vastly undervalued compared to leading peers such as ONEOK and Enbridge .
Price to book
EV to EBITDA
Data source: Yahoo! Finance.
Both ONEOK and Enbridge have growth projects coming online this year, too, in addition to plans to increase their dividends at impressive clips through the end of the decade. But that's because all three companies stand to capture a lot of value from North America's ongoing energy boom.
It doesn't get enough attention, but North American energy independence -- you know, that pipe dream that has eluded Uncle Sam for decades? -- is a slam dunk. In fact, the United States is expected to become a net energy exporter by 2022, according to the U.S. Energy Information Administration. The incredible and virtually overnight transformation in energy trade will be driven by massive volumes of liquefied natural gas (LNG) and petroleum leaving our shores.
The continent's top pipeline company will play an integral role in the energy transformation. After all, Kinder Morgan owns the largest natural gas transmission network in North America and is the largest independent transporter of petroleum products, the largest transporter of carbon dioxide, and largest terminal operator on the continent. It also owns the only pipeline trekking from the Canadian oil sands to the country's West Coast export terminals.
Couple the long-term trends in North American energy production and trade with Kinder Morgan stock's ridiculously low valuation and midstream leadership position, and it's clear that long-term investors are presented with a golden opportunity.
Time to get greedy with Kinder Morgan stock
Management executed on all of its stated objectives in 2017, but Kinder Morgan shares slid throughout the year anyway. That's a bit surprising considering there aren't many great reasons supporting a lack of confidence in the stock. The company's cash flow remains strong and predictable. The amount of cash flow distributed per share is about to increase 60% in 2018. Near- and long-term trends hint at incredible opportunities for pipeline operators in the years and decades ahead. That all makes it easy to come to one conclusion: It's time to get greedy with Kinder Morgan stock.
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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge, Kinder Morgan, and ONEOK. The Motley Fool has a disclosure policy .