Morgan Kinder (NYSE:KMI) been in a rut since the past several years. The gas pipeline giant’s profits barely budged as contract expirations wiped out profits from expansion projects. As a result, its share price had stagnated at around $18 per share since mid-2021.

However, everything has changed this year. Shares of Kinder Morgan soared, jumping more than 50% so far this year, adding about $10 to the stock price. Here’s a look at what fueled this rally and whether investors should still buy the pipeline stock.

Headwinds give way to strong tailwinds

Kinder Morgan generated adjusted earnings before interest, taxes, depreciation and amortization of $7.5 billion (EBITDA) last year. This was the same level as 2022. It was also comparable to 2018 after adding $500 million in revenue from asset sales. In other words, Kinder Morgan’s profits hadn’t increased in five years. The main culprit was big contract expirations on some major piping systems.

However, the company reached an inflection point this year. The company is on track to produce adjusted EBITDA of $8.2 billion, up 8% from last year. The headwinds related to the expiration of its contracts are in the rearview mirror. Meanwhile, the capacity of its existing pipelines begins to fill as demand increases, what is leading to higher contract renewal rates. It is Also benefit from the impact of high-yield expansion projects and its $1.8 billion acquisition of STX Midstream last year.

At the same time, the demand for additional pipeline capacity is starts to heat up rising, fueled by an expected increase in energy demand by the end of the decade from AI data centers and other enablers. Kinder Morgan has already begun to pursue new expansion opportunities. For example, the company is investing $1.7 billion to expand a natural gas pipeline to meet growing demand for electricity and local distribution in Southeast markets by 2028. This resurgence in growth has helped to spark a rally in Kinder Morgan shares.

The value proposition

With its share price soaring, Kinder Morgan’s value proposition isn’t it enough as convincing as it used to be. The company’s dividend yield fell from over 6% to around 4%. Meanwhile, with a stock price above $27 per share, Kinder Morgan NOW trades at more than 12 times its free cash flow, with $2.26 per share expected in 2024.

However, these measures remain relatively attractive. THE S&P500 currently offers a dividend yield of 1.2%, around its lowest level in 20 years. Meanwhile, the broader market index is trading at more than 25 times earnings.

Kinder Morgan is trading at an attractive level for a company expected to grow at an accelerated pace in the years to come. Gas demand in the United States is about to increase by 19% through 2030, from 108 billion cubic feet per day (Bcf/d) to 128 Bcf/d. That’s before taking into account the potential increase in AI data centers, which could add more than 10 Bcf/d. of additional demand by 2030.

This potential increase in demand comes at a time when Kinder Morgan’s pipelines are already seeing increased utilization, rising from 73% in 2016 to 87% last year. This allows it to sign new contracts for longer durations or at higher rates. This also provided the company with the opportunity to expand its systems. Its order book currently includes $4.2 billion in natural gas projects.

Kinder Morgan sees a rich opportunity for continued expansion. The company “expects to announce additional significant projects in the coming months that will allow us to expand and expand our network.” to better meet the needs of our customers and benefit our bottom line,” co-founder Richard Kinder said of the company’s results. third quarter earnings conference call. CEO Kim Dang noted during the call that “opportunities have continued to increase.” during this year, and the conversations are becoming more focused and specific. »

Increased utilization of its existing capacity and construction of additional expansion projects should help grow Kinder Morgan’s earnings and cash flow at a healthy pace over the coming years. It also has a strong financial profile, which could allow it to make additional accretive acquisitions like STX Midstream. These growth drivers should allow the company to continue to increase its high-yielding dividend.

Still so attractive

Kinder Morgan is not the screaming deal it made this year. However, the company still trades at an attractive valuation and dividend yield. In the meantime, he has a lot future growth. These factors should give the company the necessary fuel to continue to produce attractive overall returns in the years to come. Although more value-minded investors may want to wait and see if there is a pullback, Kinder Morgan still appears to be a solid long-term buy, even after its epic rally this year.

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Matt DiLallo holds positions at Kinder Morgan. The Motley Fool holds positions with and recommends Kinder Morgan. The Motley Fool has a disclosure policy.