With the backlog of projects growing, is now the time to buy Kinder Morgan?

While Children Morgan‘S (KMI 0.52%) The stock didn’t get much of a boost from its recent earnings report, but it has performed strongly this year, with its price up about 40% year-to-date.

The pipeline operator has seen relatively modest growth this year, and third-quarter results were no different. However, management commentary indicated that there are still many opportunities for growth.

Let’s take a look at Kinder Morgan’s recent results and see why 2025 could be a good year for the company.

Poor Q3 results, but good prospects

Kinder Morgan’s Q3 results were nothing to write home about. Adjusted earnings per share (EPS) were flat year-over-year at $0.25, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 2% to $1.88 billion. Its distributable cash flow (DCF), which is similar to free cash flow except that it deducts only maintenance capital expenditure (capex) rather than growth capital expenditure, was essentially unchanged at $1.1 billion.

Meanwhile, the volumes in the systems were different. Natural gas transportation volume increased 2% year-over-year, while natural gas gathering volume increased 4%. However, crude oil and condensate volumes fell by 4%. Kinder Morgan ended the quarter with a leverage ratio (net debt divided by trailing 12-month adjusted EBITDA) of 4.1. A dividend of $0.2875 per share was declared, unchanged from last quarter and increasing 2% year-over-year. This corresponds to a forward yield of 4.6%.

Kinder Morgan management lowered its full-year forecast, saying it expects adjusted EBITDA to be about 2% below previous forecasts and adjusted EPS to be about 4% below expectations. The company previously guided for adjusted EBITDA of $8.16 billion and DCF of $5 billion, up 8% each. It is now assumed that the year will end with a debt ratio four times higher. The decline was due to lower raw material prices and a delay in the commissioning of a renewable natural gas (RNG) plant.

Despite the lowered 2024 forecast, the company said it has “never seen a macroeconomic environment so rich in opportunities for the incremental expansion of natural gas infrastructure.” The upward trend was attributed to the expansion of artificial intelligence (AI) data centers, as well as liquefied natural gas (LNG) exports and natural gas exports to Mexico.

Kinder Morgan highlighted its previously announced $3 billion South System Expansion 4 project to meet growing electricity needs in the Southeast, as well as the expansion of its GCX system in Texas to transport associated Permian natural gas. It is expected to announce additional growth projects in the coming months that will result in sustainable and consistent growth in EPS, EBITDA and DCF.

Overall, the company has a backlog of $5.1 billion, up 34% from a year ago. The company aims to spend around $2 billion annually on capital expenditure, perhaps more, and can fund up to $2.5 billion in cash flow generation.

Is now a good time to buy the stock?

Although it also operates other businesses, Kinder Morgan is primarily a natural gas transportation company. Almost two-thirds of cash flow comes from natural gas-related activities, and in this segment, 88% comes from transportation and storage, while the rest comes from extraction and processing.

The Company’s system also has strong ties to Texas and Louisiana, where demand growth is expected due to favorable Permian associated gas and export facilities in the Gulf. Earlier this month, the Department of Energy even issued a long-term permit for natural gas to be delivered to Mexico, converted into LNG, and then shipped from the west coast of Mexico to any country that has a free trade agreement with the United States

Therefore, the combination of increasing AI power consumption and export opportunities bodes well for Kinder Morgan in the next few years.

From a valuation perspective, Kinder Morgan trades at a forward enterprise value-to-EBITDA multiple of approximately 11x, which is higher than its peers structured as master limited partnerships (MLPs), but below peers Williams Pursue.

KMI EV to EBITDA (Forward) data from YCharts

While I prefer Kinder’s MLP colleagues Energy transfer And Enterprise Products Partner Because of the valuation gap, similar natural gas opportunities, and better recent growth, Kinder is still a solid option for investors who don’t want to deal with the MLP structure and K-1s. Furthermore, despite its higher valuation, the share price is still below the sector’s levels a few years before the pandemic.

Therefore, I would still be a buyer of Kinder Morgan at current levels.

Geoffrey Seiler holds positions in energy transfer and corporate product partner. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.