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Dividends From the Gas Glut

January 03, 2019

The petroleum market has been highly focused on crude oil, with prices climbing significantly from recent lows in 2016, only to give back some of the gains in the fourth quarter of 2018.

But natural gas has been almost ignored as a product of the petrol patch. For much of the past twelve months, natural gas has been plodding along at or below $3 per million British Thermal Units (MBTU). And while inventories dropped with more meager prices, the market was caught out in November of last year, as colder weather hit much of the US, driving demand for gas.

The market spiked gas prices to a high in November of $4.84 per MBTU and after some added production and piping of gas, prices are settling down to a current level of $2.95 per MBTU.

Natural gas production in the US is surging. In December alone, US gas production climbed by 34% over the prior December, as reported by the Energy Information Administration (EIA). But this isn’t the whole story about gas supply, demand and prices.

Gas production from US shale fields is a byproduct of crude oil drilling. And in many of the shale fields, particularly in the Permian Basin, producers are so overwhelmed with natural gas production that prices for its product are much lower than for the general gas market, which uses as its benchmark the Henry Hub in Louisiana on the Gulf Coast.

In fact, at the Waha Hub in West Texas, natural gas prices have fallen to as low as -25 cents per MBTU. That’s right, the price is negative—meaning that producers pay to deliver gas from the Permian.

This is a boon for some gas utilities and their customers that have pipe to pull in the better-than-free natural gas, as well as for electric utilities pulling in gas for power production.

For producers, this is a nightmare. They long have had a solution for making excess gas go away, by simply burning it off at the field level, which is known as flaring. But flaring now requires permits in many areas. And companies may continue to find more resistance by regulators, even in the petrol-focused state of Texas.

The solution, of course, is more pipe and natural-gas-gathering facilities to capture and transport the glut of natural gas from the Permian to national networks that will pay for gas.

And it also means that liquified natural gas (LNG) processing and transport facilities will benefit, especially those with marine terminals that can transport LNG to European and Asian markets where supply is limited and demand is on the rise, and that therefore pay significantly more for LNG.

One of the companies in this market is Kinder Morgan (KMI). The pipeline company already has an impressive network of gathering, transport and storage for gas. And this year, Kinder Morgan will be turning on new pipe for gas from the Permian right through to Corpus Christi, Texas. This pipe will deliver gas that can be used for LNG export and in turn will help to drive prices for Permian gas to more market prices.

Kinder Morgan is already a profitable company. Revenues over the trailing 12 months are up by 5.00%. And operating margins are at a very fat 25.90%. The added gas pipe revenues will only improve the company’s fortunes this year and into the following years.

The dividend is currently 20 cents a share, for a yield of 5.10%, and the distributions are up 45.00% over the past year. And with more revenues from more gas and other pipe assets, the company should deliver more dividends over time.

And yet, the market values the stock at a mere 2.5 times its great book of assets. And it is valued at pretty much equal to its trailing sales, making for a bargain buy right now.

So, for a value stock with a good and rising dividend which should further improve with added gas pipe assets, Kinder Morgan is a dividend buy right now.