High oil and gas prices due to the Russian oil ban and rising demand bode well for Kinder Morgan (KMI) and MPLX (MPLX). But which of these midstream oil and gas stocks is a better buy right now? Read more to find out.
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Rising demand for oil and natural gas with the resumption of economic and industrial activities and the controlled supply of OPEC+ led to high energy prices last year. However, increasing Western sanctions against Russian oil have significantly disrupted oil supplies and pushed prices up even further. As OPEC+ sticks to its original plan to increase oil production by a modest amount, rising demand is expected to prices higher in the coming months†
High oil prices should benefit midstream companies with an established network of pipelines and terminals. Investor interest in this space is evidenced by the USCF Midstream Energy Income Fund ETFs (UMI) 9.2% gain over the past three months versus the SPDR S&P 500 Trust ETFs (SPY) 10.3% loss.
Kinder Morgan, Inc. †RMI) and MPLX LP (MPLX) are two prominent players in the mid-market segment of the oil and gas sector. KMI is an energy infrastructure company that operates through natural gas pipelines; Products Pipelines; connections; and CO2 segments. It owns approximately 83,000 miles of pipelines that carry natural gas, gasoline, crude oil, carbon dioxide and other products, and 143 terminals that store petroleum products and chemicals and process bulk materials such as coal and petroleum coke. MPLX is a diversified master limited partnership (MLP) that owns and operates midstream energy infrastructure and logistics assets and provides fuel distribution services. It is also engaged in inland shipping activities, including the transportation of light products, heavy oils, crude oil, renewable fuels, chemicals and raw materials, and operates boats and barges, refining logistics, terminals, rail facilities and storage caverns.
While MPLX has gained 3.2% since the beginning of the year, KMI rose 20%. Which of these stocks is a better choice now? Let’s find out.
Latest developments
On February 7, 2022, KMI received the necessary commercial commitments to build a renewable diesel hub in Southern California. Once built, this hub will enable customers to collect renewable diesel batches (R99) in the Los Angeles area and move them through pipeline transportation and energy storage company SFPP, LP’s pipeline system to high-demand markets in Colton and Mission Valley. This will create up to 20,000 barrels per day (bpd) of mixed diesel throughput on the truck racks, with the potential to expand in the future.
On May 2, 2022, MPLX, WhiteWater Midstream, Stonepeak Infrastructure Partners and natural gas company West Texas Gas, Inc. made their final investment decision to expand the Whistler Pipeline after securing sufficiently robust transportation agreements with shippers. The extension is expected to be commissioned in September 2023 and will increase the main line capacity from 2 Bcf/d to 2.5 Bcf/d through the planned installation of three new compressor stations. This will further improve the pipeline’s ability to reliably and cost-effectively transport residual gas from the Permian Basin, benefiting the growing gas processing position of the companies, producers in the region and gas customers.
Recent financial results
KMI’s revenue for the first quarter of fiscal 2022 ended March 31, 2022, declined 17.6% year over year to $4.29 billion. The company’s operating income came in at $1.02 billion, down 45.7% from the same period last year. While year-over-year adjusted net income declined 46.7% to $732 million, adjusted earnings per share declined 46.7% to $0.32. As of March 31, 2022, the company had $84 million in cash and cash equivalents.
For the first quarter of 2022 ended March 31, 2022, MPLX’s total revenues and other revenues grew 11.6% year over year to $2.61 billion. Operating income came in at $1.06 billion, indicating an 8.8% year-over-year improvement. Net income came in at $825 million, an increase of 11.6% from the same period last year. MPLX’s earnings per share came in at $0.78, indicating a 14.7% year-over-year improvement. As of March 31, 2022, the company had $42 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, KMI’s EBITDA, total assets and free cash flow have declined to CAGRs of 3.2%, 3.2% and 5.2%, respectively.
KMI’s earnings per share are expected to decline by 13.6% year-over-year in fiscal 2022, ending December 31, 2022, and increase by 2.6% in fiscal 2023. Revenue is expected to decline by 5.5% in fiscal 2023. fiscal 2022 and up 0.4% in fiscal 2023. Analysts expect the company’s earnings per share to fall 2.7% per year over the next five years.
Over the past three years, MPLX’s EBITDA, Total Assets, and Free Cash Flow have increased by 9.7%, 14.9% and 164.1%, respectively, at CAGRs.
Analysts expect MPLX’s earnings per share to grow 11.2% yoy in fiscal 2022, ending December 31, 2022, and 4.4% in fiscal 2023. Revenue is expected to grow 3.1% yoy. -year in fiscal 2022 and decline 0.2% in fiscal 2023. Analysts expect the company’s earnings per share to grow at 3.7% per year over the next five years.
valuation
In terms of non-GAAP forward PEG, MPLX is currently trading at 3.73x, 55.4% higher than KMI’s 0.88x. In terms of forward EV/Sales, KMI’s 4.90x is comparable to MPLX’s 5.15x.
profitability
RMI’s 12-month turnover is almost 1.6 times that of MPLX. However, MPLX is more profitable, with a 50.7% EBITDA margin versus RMIs 36.7%.
In addition, MPLX’s ROE, ROA, and ROTC of 23.8%, 6.6%, and 6.9% are comparable to KMI’s 3.4%, 3.3%, and 3.5%, respectively.
POWR ratings
While MPLX has an overall B grade, which translates to Strong Buy in our patented POWR ratings system, KMI has a general C class, which corresponds to Neutral. The POWR ratings are calculated by taking into account 118 different factors, each of which is optimally weighted.
Both KMI and MPLX received an A for Momentum, in line with their impressive price increases over the past year. KMI gained 19.4% in the past nine months, while MPLX gained 12.2%.
KMI has been rated a B in quality, in line with profitability ratios that are higher than those in the sector. KMI’s 26% trailing 12-month levered free cash flow margin is 266.8% ahead of the industry average of 7.1%. MPLX’s C-score for quality reflects profit margins that are lower than those in the industry. MPLX has a free cash flow margin of 4.3% over a 12 month period, 40% lower than the industry average of 7.1%.
Out of 33 stocks in the A rating MLPs – Oil and Gas industry, MPLX is ranked #7. KMI, on the other hand, is number 59 out of 98 shares in the B rating Energy – Oil & Gas industry.
In addition to what we mentioned above, our POWR Ratings system has rated MPLX and KMI for sentiment, value, stability and growth. Get all MPLX reviews here† Also, click here to see the additional POWR ratings for RMI.
The winner
Rising energy prices should benefit midstream operators KMI and MPLX in the coming months. However, higher profitability now makes MPLX a better buy.
Our research shows that betting on stocks with an overall POWR rating of Buy or Strong Buy increases the odds of success. click here to access the top-rated stocks in the MLPs – oil and gas industry, and here for those in the energy oil and gas industry.
RMI shares traded at $19.23 per share Monday afternoon, up $0.20 (+1.05%). Year-to-date, KMI is up 25.00%, compared to a -16.25% increase in the benchmark S&P 500 index over the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She has a passion for educating investors so that they can find success in the stock market.
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