Kinder Morgan‘s (NYSE:KMI) growth engine has run out of gas in recent years. The company had invested heavily to build new pipelines and other infrastructure to expand its operations. However, those opportunities have been drying up because of volatile energy prices and a steady shift toward cleaner alternative energy options.
That’s leading Kinder Morgan to shift fuel sources by starting to make acquisitions again. The company recently unveiled its second deal of the year, which sets it up for future growth. Here’s a closer look at the company’s new strategic focus.
Details on the latest deal
Kinder Morgan is buying Kinetrex Energy in a $310 million deal. Kinetrex is a leading supplier of liquified natural gas (LNG) in the Midwest with two small-scale domestic LNG production and fueling facilities. In addition, the company owns a 50% stake in a landfill renewable natural gas (RNG) facility with three more RNG facilities in development.
The draw here is the RNG development capabilities. Kinetrex has commercial agreements in place to start construction on the new landfill-based RNG facilities. Once operational, the company’s four sites will produce more than four billion cubic feet of RNG each year. They will capture the methane produced from the decomposition of organic waste, which will reduce the greenhouse gas emissions of those sites while providing a cleaner-burning fuel source to the country’s gas distribution system.
Kinder Morgan expects the deal to be accretive to shareholders as the three RNG facilities begin operations over the next 18 months. When combined with the additional capital needed to complete the projects, the overall investment represents less than six times Kinetrex’s 2023 EBITDA.
For perspective, that’s a bit better valuation than the company’s recent $1.225 billion purchase of Stagecoach Gas Services. Kinder Morgan paid 10 times Stagecoach’s 2020 EBITDA. However, it sees that number falling to a high single-digit EBITDA multiple as it captures costs savings by integrating the pipeline and storage assets into its existing network.
Positioning for the energy transition
Kinetrex represents the first major investment since Kinder Morgan launched its Energy Transition Ventures Group earlier this year. It formed that business unit to identify, analyze, and pursue commercial opportunities that emerge as the global economy transitions to lower-carbon energy sources. The group is taking a broad approach. It’s looking at opportunities in carbon capture and sequestration, renewable natural gas capture, hydrogen production, renewable power generation, electric transmission, and renewable diesel production.
It has identified RNG as an ideal opportunity. RNG has the potential to grow rapidly in the near term and deliver attractive investment returns because landfills provide low-cost, predictable, and long-term methane supplies. Further, there are many potential synergies with its existing assets since RNG is already pipeline-quality gas making it interchangeable with conventional gas. As such, Kinder Morgan can transport and store it without making any modifications to its legacy infrastructure.
The company believes it can leverage Kinetrex’s expertise and platform to develop and acquire additional RNG assets. There are abundant opportunities given the currently fragmented ownership of existing RNG assets and the potential to build RNG facilities supported by wastewater treatment plants and agricultural operations in addition to landfills.
Beyond RNG, Kinder Morgan is investing in a couple of other projects to support alternative fuels. It’s spending $60 million to build new renewable diesel hubs in Northern and Southern California to serve that state’s renewable fuels market. It also has terminals and pipelines capable of blending, storing, and exporting ethanol and other biofuels while evaluating multiple opportunities to establish new hubs to handle those products. The company could also target acquisitions to further bolster its capabilities to handle biofuels.
Transitioning back to growth mode
Kinder Morgan’s focus in recent years has been on shoring up its financial profile. That’s led it to shrink by selling assets. However, it’s now shifting back to growth mode by going on the offensive and acquiring assets to increase its scale and diversify into new growth markets. These investments have the potential of growing its cash flow so that the company can sustain and expand its 6%-yielding dividend. That’s making Kinder Morgan look like a more attractive income stock these days since it appears to finally have some visible growth ahead.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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