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Kinder Morgan (KMI) Q2 Earnings: Is a Surprise in Store?

Midstream energy assets operator, Kinder Morgan, Inc. ( KMI ) is expected to report second-quarter 2016 earnings on Jul 20, after the closing bell.

Last quarter, the company's earnings of 12 cents per share missed the Zacks Consensus Estimate of 19 cents and plunged 50% from the year-ago earnings of 24 cents. Let's see how things are shaping up prior to the announcement.

Factors to Consider This Quarter

Kinder Morgan is undergoing numerous large scale projects that could face delays or opposition. Delays in these projects are likely to defer cash flow realizations. In this respect, the TransMountain pipeline expansion in Canada deserves special mention. Any further delay in the project will have an adverse impact on the company's earnings as well as long-term growth.

KINDER MORGAN Price and EPS Surprise

KINDER MORGAN Price and EPS Surprise | KINDER MORGAN Quote

Further, we believe that gas infrastructure opportunities are limited to the near-to-medium term. This is mainly due to low basis differentials and reduced dry gas drilling. The only positive we see for natural gas infrastructure is the Marcellus shale development.

We remain concerned about Kinder Morgan's high debt levels, which leave the company vulnerable to an extended downturn. As of Mar 31, 2016, Kinder Morgan had total debt of around $44 billion, representing a debt-to-capitalization ratio of approximately 55%.

However, Kinder Morgan is one of the largest midstream companies in North America. We believe that the company's size will prove to be advantageous with opportunities to build smaller adjacent pipelines at a lower cost than its peers. Further, an increased demand for power generation and exports are expected to drive continued infrastructure build-out for the company in the coming quarters.

Earnings Whispers

Our proven model does not conclusively show that Kinder Morgan will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -13.33%. This is because the Most Accurate estimate stands at 13 cents, while the Zacks Consensus Estimate is pegged higher at 15 cents.

Zacks Rank: Kinder Morgan has a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While an earnings beat looks uncertain for Kinder Morgan, here are some firms that you may want to consider on the basis of our model. These have the right combination of elements to post an earnings beat this quarter:

Legacy Reserves LP LGCY has an Earnings ESP of +15.79% and a Zacks Rank #1. The partnership is expected to release earnings results on Aug 3.

Ring Energy, Inc. REI has an Earnings ESP of +33.33% and a Zacks Rank #1. The company is anticipated to release earnings results on Aug 8.

Anadarko Petroleum Corporation APC has an Earnings ESP of +11.25% and a Zacks Rank #2. The company is likely to release earnings results on Jul 26.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

KINDER MORGAN (KMI): Free Stock Analysis Report

ANADARKO PETROL (APC): Free Stock Analysis Report

LEGACY RESERVES (LGCY): Free Stock Analysis Report

RING ENERGY INC (REI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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