adaask
Kinder Morgan (NYSE:KMI) and Antero Midstream (NYSE:AM) are both midstream C-Corps (meaning that they issue the 1099 tax form instead of the often dreaded K-1 tax form) with very stable cash-flowing business models. While AM’s yield is ~320 basis points greater than KMI’s, KMI boasts a meaningfully higher credit rating, implying a lower risk profile.
In this article, we will compare the business models, balance sheets, growth potential, and valuation of these two companies side-by-side to determine which is the better buy today.
AM vs KMI: Business Models
AM has a very low risk asset portfolio with an integrated full value chain midstream infrastructure system consisting of nearly 500 miles of pipelines that include gathering and compression, natural gas processing, and water delivery and blending assets which provide the first mile infrastructure to deliver gas to the LNG Fairway. The company’s revenues are 100% fixed fee and inflation protected with CPI-linked contract escalators. 85% of its business mix is natural gas processing and gathering and 15% of it is water handling.
These assets have also generated impressive returns on invested capital, with a 15% average ROIC since going public and a 17% ROIC during 2020 despite the enormous energy and COVID-19 related headwinds for the sector. Moving forward, management expects these ROIC numbers to improve even more to between 17% and 20% thanks to slashing capital expenditures and a strong cash flow profile boosted by growing volumes and inflation-linked contract escalators.
While this paints a great low risk picture for the business, one very important consideration to keep in mind is that AM is largely beholden to Antero Resources (AR). AR owns a large stake in AM and AM’s assets are largely custom built to service AR. While AR is posting very robust results and this symbiotic relationship between the two does contribute to AM’s safety to some degree, it also could lead to some sort of conflict of interest down the road, so this is something investors should keep in mind.
KMI, meanwhile, enjoys a major scale advantage and owns the largest natural gas transmission network, the largest CO2 transportation business, the largest independent refined products transportation network, and the largest independent terminal operation in North America. It owns a whopping 70,000 miles of natural gas pipelines while its natural gas liquids pipeline network spans 1,200 miles. This leads to it transporting ~40% of the United States’ total natural gas consumption and exports. Its refined products pipeline network spans 6,800 miles and its crude pipelines span 3,100 miles.
On top of that, its cash flow profile is similar to AM’s in that virtually all (97%) of its cash flows are linked to take-or-pay fee-based/hedged contracts. However, instead of being dependent on primarily one non-investment grade client like AM is, KMI’s counterparties are more diversified and 76% of them are investment grade or equivalent.
As a result, while AM’s business model is pretty good and overall low risk, KMI definitely wins the head-to-head competition.
AM vs. KMI: Balance Sheets
AM’s balance sheet is not investment grade (BB from S&P), but it is rapidly heading in that direction. Its leverage ratio is one of the lower ones in the sector at 3.6x and it received an incredible three upgrades in 2021, rising from a very low junk rating of B- in late 2020 to BB by the end of 2021. Meanwhile, it has no debt maturities until 2026 and has $700 million of liquidity as of 3/31/22, giving it a very solid financial footing, particularly when combined with its stable cash flow profile.
On top of that, the company is expected to generate between $700 and $800 million in free cash flow after dividends between now and 2026, and is focused on using that free cash flow exclusively for paying down its $3.15 billion debt pile into 2024. That means it will likely be able to pay off its current balance on its credit facility prior to its maturity in 2026, giving it an improved debt profile once its maturities begin coming due in the latter half of this decade. As a result, we expect management to be able to meet its goal of reducing leverage below 3x by 2024, which we also expect will likely result in an upgrade to an investment grade credit rating. This should greatly improve its refinancing terms and may be enable AM to refinance its debt ahead of schedule to reduce interest expense.
KMI meanwhile has a meaningfully higher credit rating at BBB with plenty of liquidity and a well-laddered debt maturity profile. While AM’s balance sheet is certainly in good shape for the foreseeable future and appears poised to continue improving, KMI still has a considerable edge here.
AM vs. KMI: Growth Potential
From a growth perspective, both businesses are slashing capital expenditures and are focused on maximizing free cash flow. However, analysts expect AM to grow its distributable cash flow per share at an 8.9% CAGR through 2026 in contrast to KMI’s 4.4% expected distributable cash flow per share CAGR over the same time frame. This is largely driven by the superior returns on invested capital that AM tends to generate and its more aggressive debt paydown profile (leading to interest expense savings) relative to KMI.
That said, analysts and management comments imply that AM is unlikely to grow its dividend at all between now and 2026, opting instead for buybacks and debt reduction. In contrast, analysts expect KMI to continue growing its dividend – albeit at a subdued 2.8% CAGR – between now and 2026.
AM vs. KMI: Valuation
While KMI bests AM in terms of overall portfolio quality and balance sheet safety, AM does appear to have a slight edge in growth potential. It is also meaningfully cheaper according to a variety of valuation metrics:
| Metric | P/DCF | Div Yield | EV/EBITDA |
| AM | 6.9x | 9.9% | 8.4x |
| KMI | 7.8x | 6.7% | 9.7x |
While AM particularly runs up the score in the dividend yield department, it is important to note that KMI’s DCF payout ratio is only 51% whereas AM’s is a bit higher at 65%. As a result, we view KMI’s dividend as meaningfully safer than AM’s, especially when considering the fact that its balance sheet and business model are ranked as stronger as well.
Investor Takeaway
Overall, we like both of these midstream businesses right now and think they should deliver outsized returns for the foreseeable future. That said, we think neither is the best opportunity in midstream right now and – if we had to pick one of these two – we would pick KMI as its meaningfully lower risk profile more than offsets AM’s slightly better growth and valuation profiles. When investing in midstream, balance sheet strength has been proven time and again to be very important and KMI’s asset portfolio is also much better diversified and insulated against potential disruption to the energy space in the future.
Be the first to comment