Kinder Morgan Should Benefit from AI Growth and Rate Cuts (NYSE:KMI)

Kinder Morgan (NYSE:KMI) is quite valued, but looks poised to appreciate due to increasing global demand for energy, including to meet the need for growing data centers and demand for artificial intelligence. I think Kinder Morgan is likely to become recognized as an AI derivative play that offers relatively safe value at risk due to KMI’s valuable and conservative asset base and core business model.

Kinder Morgan’s average assets consist primarily of pipelines that distribute oil and natural gas, including liquefied natural gas. Kinder Morgan also owns storage terminals for these petroleum products. A significant portion of Kinder’s assets serve Texas manufacturing. As a result, Kinder’s oil and gas delivery should benefit from likely continued growth from the Permian Basin.

Kinder Morgan should also benefit from further development of the Haynesville Basin in eastern Texas and western Louisiana. As these basins continue to be developed, Kinder Morgan’s assets should benefit from a growing supply distribution. The Kinder Morgan pipelines will serve both domestic demand and the growing LNG export business internationally.

Kinder Morgan’s long-term growth is likely to depend on the continued development of its domestic LNG export business. US liquefied natural gas exports are likely to double before the end of this decade. At the same time, gas assets should continue to be in high demand domestically.

In addition, natural gas and LNG products are likely to benefit from increasing AI demands on energy infrastructure. Artificial intelligence is becoming a growing user of utility power generation, and these gas products are among the cheapest and most consistent power sources. AI developers seem to prefer gas and nuclear because of the intermittency issues that affect the consistency of alternatives like solar and wind.

The use of AI energy could dramatically increase gas demand between now and the end of this decade and absorb more than 15% of total electricity demand. The demand for artificial intelligence creates an increase in energy consumption, where previous demand was relatively constant, despite population growth, due to the efficiency of many electrical products. Therefore, as AI continues to grow and absorb a greater share of total electricity supply, Kinder Morgan is likely to serve an increasing rate of natural gas products to domestic utilities. Kinder currently supplies oil and gas to about 20 percent of the U.S. energy market and transports about 40 percent of domestic gas.

Kinder Morgan currently supplies about seven billion cubic meters per day of US LNG contracts and looks to have 9.5-10 billion cubic meters per day of capacity before the end of 2025. In addition, it is possible that Kinder Morgan to be able to increase its capacity in excess of 10 billion cubic meters per day through additional acquisitions and improvements to existing assets. The company has a history of growing through acquisitions, where any future acquisitions are likely to increase its capacity to transport LNG.

Kinder Morgan’s existing earnings have been reasonably consistent and positive, with some variability due to acquisitions and development costs. When it delivered last quarter’s earnings, Kinder Morgan confirmed its 2024 guidance of $8.16 billion in EBITDA, implying eight percent growth from 2023. Kinder Morgan’s project backlog also rose to $5.2 billion at the end of the second quarter, up from $3.3 billion at the end of the first quarter.

We see higher demand for natural gas to be delivered to the US Gulf Coast in 2024-2025 (as more LNG export facilities enter the market). We believe KMI’s gas-related demand should increase in the coming years given its positioning in this region. Although the Biden Administration has issued a temporary freeze on new LNG export licenses, we believe this move will only negatively impact US Gulf Coast LNG supplies if the shutdown persists for years. New LNG liquefaction terminals typically take three to four years to build, and construction depends on securing long-term contracts first.

I believe that Kinder Morgan’s high-quality assets and the potential for it to benefit from the continued expansion and development of AI are likely to support the stock price. Moreover, as interest rates fall due to a Federal Reserve rate cut cycle that is highly anticipated, yields like Kinder Morgan’s should become more desirable. The stock currently yields around 5.4 percent and the dividend is reasonably covered by existing operations.

If we assume Kinder Morgan should trade at a multiple range of 9-10x based on its full-year and 2025 EBITDA guidance, the stock should trade between $22 and $24 per share. I believe Kinder Morgan will soon be re-rated in such a trading range, with the potential to move even higher if yields decline at an accelerated rate.

Shares of Kinder Morgan have done quite well so far this year and currently appear to be reeling for a move, up or down. While the future is uncertain, KMI appears to be trading just above $21, which has acted as support for the past few weeks. Furthermore, if this level does not hold, there appears to be another stronger level of support around $20.

Risk

Risks for Kinder Morgan include lower energy prices and demand. If the demand for AI were not to grow in a currently anticipated way, that absence should be removed from future forecasts. Kinder Morgan is also becoming increasingly dependent on LNG exports, and future international demand for US LNG could face risks beyond prices, including regulatory changes.

Kinder Morgan is likely to benefit from lower interest rates and should be at a disadvantage if rate cuts were to stall or increase from current levels. This is due to both the risk-free rate competition it has on Kinder Morgan’s high yield and the additional costs those rates bring to fund likely future acquisitions. Kinder Morgan has a reasonable amount of debt, and refinancing it at higher yields would also be problematic for its profitability and valuation.

Conclusion

Kinder Morgan is reasonably valued, but the stock looks set to rise due to the upcoming rate cut cycle, which should make the above-average dividend more desirable. Kinder Morgan is also likely to become a beneficiary of the continued development of AI and its effect on energy consumption, as it transports around 40% of domestic gas, which is likely to remain a preferred energy source for years to come.

Shares of Kinder Morgan appear to be trading in a tight range, with support levels both one and five percent below the share price. Similarly, Kinder Morgan’s 5.4% dividend yield is likely to support the stock as the rate cut cycle begins. Therefore, Kinder Morgan appears to offer significant value at risk, with the potential to increase value in the near term.