Kinder Morgan’s Dividend Growth Prospects Just Got a Little Brighter

There have been some questions about whether Kinder Morgan (NYSE: KMI) will have enough fuel to continue growing its dividend in the future. The pipeline company expects to invest $1.5 billion on capital projects this year, which would nearly exhaust its roughly $1.7 billion expansion backlog. That’s a far cry from the $2 billion to $3 billion it used to invest each year in expanding its operations. With the company investing in fewer capital projects, cash flow won’t grow as fast in the future, limiting its ability to increase the dividend.

However, the pipeline company’s dividend growth prospects are getting a little brighter after Kinder Morgan and its partners agreed to expand their Permian Highway Pipeline. The project will supply them with some incremental cash flow starting late next year.

A near-term growth driver

Kinder Morgan, Kinetik Holdings (NASDAQ: KNTK), and ExxonMobil (NYSE: XOM) made a positive final investment decision to expand the Permian Highway Pipeline. The project will increase that pipeline’s capacity by 550 million cubic feet of natural gas per day. The companies signed firm transportation agreements with shippers for all the available space. They hope to complete the project — primarily adding more compression to push additional volumes through the pipeline — by November 2023, assuming they receive all the required approvals.

The partners initially pitched the expansion project in April, seeking to expand the pipeline by nearly 650 million cubic feet per day, with an October 2023 in-service date. They had already secured a foundation shipper for half that capacity. The partners have since signed enough additional contracts to move forward with a slightly smaller capacity expansion.

Kinder Morgan owns a 26.7% interest in the pipeline, which it operates. Kinetik Holdings is the majority owner with a 53.3% interest, while oil giant ExxonMobil holds the remaining 20% minority interest. Thus, they’ll fund their portion of the associated capital investment needed to add more compression while receiving a proportional share of the future cash flows from the new contracts.

Where does Kinder Morgan grow from here?

The Permian Highway Pipeline expansion is one of several projects Kinder Morgan has in development. It’s also looking to expand its Gulf Coast Express Pipeline. The company and its partners, including Kinetik Holdings, are seeking firm transportation commitments for a capacity expansion of nearly 570 million cubic feet per day. If they receive those commitments, the partners could have that project in service by the end of next year.

Kinder Morgan is also working on a third large-scale natural gas pipeline out of the Permian Basin called Permian Pass. It initially proposed that project in 2019 but had to shelve it the following year due to the turbulence in the oil market caused by the pandemic. However, with oil and gas prices surging, the industry might need additional pipeline capacity in the future to support increased production. In addition to that Permian pipeline, the company sees the potential for a gas pipeline to support growing production in Haynesville, Louisiana.

Two other projects the company could dust off due to higher oil and gas prices are expanding its Elba LNG facility in Georgia and converting its Gulf LNG facility in Mississippi from import to export. The company had put those projects on the back burner but has started discussing opportunities with customers at both sites.

Kinder Morgan is also starting to expand into lower-carbon energy. It bought Kinetrex Energy last year, which is developing three renewable natural gas (RNG) production facilities in Indiana. These facilities would produce RNG from gas captured at landfills owned by Waste Management (NYSE: WM). The company bought Kinetrex to help it capitalize on the growing demand for RNG.

Several companies are planning to capitalize on the potential of RNG. For example, WM recently unveiled plans to invest $825 million over the next few years to expand its RNG production, aiming to build 17 more plants by 2026. Meanwhile, leading utility NextEra Energy (NYSE: NEE) launched its Real Zero goal to eliminate its carbon emissions by 2045. One aspect of that strategy is to replace natural gas with RNG at its power plants. With more companies looking to capitalize on the benefits of RNG, it could provide Kinder Morgan with additional investment opportunities in the sector.

Adding a bit more fuel

The Permian Highway Expansion project will provide Kinder Morgan with some incremental cash flow when the company and its partners complete that project next year. That will give it more fuel to support its high-yielding dividend. It’s one of several projects the company has in the pipeline as it looks to refill its growth engine to hopefully continue growing its dividend in the future.

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Matthew DiLallo has positions in Kinder Morgan, NextEra Energy, and Waste Management. The Motley Fool has positions in and recommends Kinder Morgan and NextEra Energy. The Motley Fool recommends Waste Management. The Motley Fool has a disclosure policy.

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