Kinder Morgan, Inc. (KMI) Earnings Call Transcript & Summary

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Hey, everyone. Welcome, and thank you for joining us for the Kinder Morgan investor presentation. We have Steve Kean here, the CEO of Kinder Morgan, and he will take you through some slides about the company, and then we will have Q&A. You've probably heard this in some of the other presentations, but for interactive Q&A, please use the Pigeonhole link, which is on the left side of your screen. You can both ask questions there and vote on questions to be asked. And by the way, I'm Jean Ann Salisbury, the natural gas and midstream analyst at Bernstein. So with that, I will turn it over to you, Steve. Thank you so much for coming.

Thank you, Jean Ann. And so with me on the line is Anthony Ashley, who's our Treasurer and Vice President, Investor Relations as well as several members of our Investor Relations team: Peter Staples, Hannah Stuckey and Ashley Zavala. And so now on Page 3. So this is an overview of our businesses and our assets. We have unparalleled and, we believe, irreplaceable asset footprint. The largest interstate natural gas transmission and storage network; the largest independent transporter of refined products; the largest independent terminal operator, which is primarily also a refined products business; and then the largest transporter of CO2 for enhanced oil recovery for us and as well as others in West Texas. If you look over on the right-hand side, you can see it on -- not on the screen, but on your copy of the presentation, you see our business mix. 63% of our segment EBDA is natural gas, another 14% each in products and terminals. If you look at the commodity-sensitive parts of our business, it's really, I would say, that 60%, that's our EOR production, our enhanced oil recovery business in the CO2 segment. And then if you look at our G&P assets, we have some of that in our products pipelines with the crude gathering and then we have some also in our natural gas business. You put those 2 together, and it's mostly on the natural gas side, but you put the 2 together, it's about 10% of our segment EBDA. Then going to the next page, we believe we're a core energy infrastructure holding. Large cap company, 1 of the 10 largest energy companies in the S&P 500. Significant management and Board of Directors ownership, 14%. That causes us to behave, make decisions, act like principals, not as agents, so significant inside ownership. We return value to our shareholders. After we've put our balance sheet in order and fund attractive return projects, we return value to shareholders, currently a 7% dividend yield with $1.05 annualized dividend run rate. We also return value to shareholders through share repurchases. We're not currently doing those, but we did some in the first quarter at some attractive prices. And we used about $575 million of the $2 billion authorization to date. Finally, strong balance sheets. We're a mid-BBB investment grade-rated entity. And we've got substantial liquidity, $4 billion undrawn. On the next page, like everyone else, we're working hard to manage the coronavirus situation. And like everyone else, our first priority has been making sure that we protect our workers and their families while keeping our essential businesses running. So we're a business that has to stay running and we do stay running through all kinds of circumstances. We've had plenty of test runs, if you will, in the past, with hurricanes, wildfires, et cetera, and we keep the business running. If the world is running, our assets are running. And even when the world took a pause, our assets were still running. Throughout this entire crisis, every one of our assets was operating. And albeit some were at slightly lower throughput, lower volume levels, but everything was running. So our business stayed open. We have a pandemic response team. We did extra things to make sure our operations would work. We're telecommuting. It's working remarkably effectively with our 5,000 office staff logging in every day. In the field, we had to make adjustments to our procedures to make sure we can maintain social distancing in our operations and where we couldn't, where we had adequate PPE in place. And we're doing that on our projects as well with our contractors. So delivering energy that's essential to people, communities and the businesses that we serve. We stayed on. We're also -- we've got a couple of slides here that are on the topic of just resilience. So on Slide 6, you see that we've been through multiple commodity price -- deep commodity price dislocations and still generated over $1.7 billion of adjusted EBITDA for 20 consecutive -- 20-plus consecutive quarters. And you can't see, I think the screenshots block it on the far right, but we've got a $40 a barrel decline associated with the recent activity. So we've been through multiple cycles, and this shows the resilience of our business. And I'll get into that a little bit more in a moment. Going to the next page. We have a strong balance sheet. We've spent a lot of time, a lot of effort, strengthening that balance sheet further. Upgraded by all 3 ratings agencies early last year to BBB flat. We've reduced our debt by over $10 billion -- by about $10 billion, almost exactly $10 billion since the third quarter of 2015. And we've self-funded all of our dividends and our CapEx with over $19 billion of cash flow from operations since 2016. If you look at the following page, Page 8, we did give some updated guidance. So we form our budget in the fourth quarter of 2019, and then we announce it typically in December and then we go through in the detail in January. Well, a lot has happened since then, clearly. And so what we did this time is, for our Q1 call, is we did a bottoms-up look at all of our businesses and a bottoms-up look at all of our capital projects and we revised the outlook. And you see from the numbers on here, adjusted EBITDA still at $7 billion. I think the remarkable thing about this is if you think about what's happening in energy, in particular, we've had the double impact of the supply shock when the OPEC+ deal fell apart on March 6 and we've seen -- still see commodity price -- oil prices at multiyear lows, right? That was one shock it is -- and the other was on the demand side with COVID-19. And if you put those 2 things together, I certainly came away, in my 35-year career, it's had a bigger impact on the energy sector than those 2 combined events that we're experiencing right now. And I think you have to go back to the question and maybe beyond to see anything that's affected energy as deeply as the double whammy of those 2 phenomena -- those 2 developments. And our change from 2019 full year-over-year expectation is down 8%. So I think this is another slide that points to the resilience of our business. Also, we acted quickly. We examined all of our projects and determined what was still economic or what wasn't in the current environment. And we took out about $700 million worth of expansion capital projects in this year, bringing our discretionary capital for 2020 down to $1.7 billion, which actually fully offset the decline in distributable cash flow and put us in a net cash positive position on a relative basis. We took the dividend up by 5%, but we didn't take it up all the way to $1.25, which is what we have been forecasting previously. We'll reexamine that decision when we get to the other side here -- well, when we get to January, hopefully, on the other side. When we get to January, we'll look at where things are. Assuming that we see a return to the normal economic activity, where we can see it from there, we'll reexamine that decision and remain committed to returning value to our shareholders through an increasing dividend. Page 9. What affects our customers affects us. We focus very intensely on credit. We've got a few statistics up here, showing that 75% of our revenues are from investment grade credit where we have substantial credit support, in fact. Beyond that, there are other things that work to our advantage. Our services are essential. 70% of our revenues on the demand -- coming from the demand side, people who need what we deliver in order to keep their businesses running. Typically, even if there's a bankruptcy, oftentimes, the customer continues to need the service in order to do their business and to emerge from bankruptcy. There are multiple layers of production, credit-worthy customers, tight contracts and we have collateral, I'd call, requirements. We have the essential nature of our service. When you grind and we watch credit very closely, oftentimes, before bankruptcy, there's some kind of a debt exchange or other restructuring that's favorable to trade creditors. And so we manage all that data to a fine level of detail. And 2016 is not analogous, but we did see a fair number of E&P bankruptcies, and by not analogous, I mean that this is worse. This year, this is worse. But even in a bad year like that, we had $10 million put up on our credit revolver. So a pretty good process and really underlying essential -- the underlying phenomenon is essential services on an integrated network. The next page shows our highly contracted cash flows. This is why we're only down 8%, not more, on our estimate. The other thing I'll say about that is when we updated that estimate, we also gave people sensitivity, meaning that things that are -- so much just remains unknown. So we gave people further sensitivities on the commodity prices, which is, frankly, not little -- there's very little left with that, but also on additional changes in refined products versus our forecast and a few other measures. So looking at that for a moment and what we've actually experienced since April 23 when we came out with this, refined products are stronger than what we anticipated in the second quarter. We had shown them down 40% to 45%, the recovery, the 10% to 12% down in the third and then 5% to 6% down in the fourth. Refined products are stronger. That's a regional phenomenon, but just overall, across that business, it's stronger. We also were able to either sell or lease out capacity that had been unleased previously in our terminals business unit. And on the other hand, with the shut-ins that we've seen, we probably -- we did underestimate, at least for the current quarter, we underestimated the gathering the impact, gathering and processing. Again, that's about 10% of our business, but still we did not anticipate -- or Q2 has shown, in the Bakken and the Eagle Ford, in particular, more shut-ins than what we had anticipated. Okay, flipping ahead. We still expect the U.S. natural gas demand story to remain intact. We're certainly seeing a down trough here in LNG. Now the way we service that market is under reservation-based contracts. So we're not as concerned about throughput. However, it is important over the long term that we see the LNG market in the U.S. recover, and we think it will. We have units that are still training. So there's still commissioning out there. So there is some natural push up, but no doubt, we're seeing a trough as we head into the middle part of the year here. And so going to that point also, hydrocarbons are going to be required as a part of the long-term energy story. And so if you believe that, ultimately, the virus is a temporary phenomenon, we get to the other side, things return to something closer to normal, the world continues on a trajectory of pulling people out of poverty and giving more people access to affordable and reliable energy, natural gas will have a significant role to play in that. And to that point, on Page 13, you see our backlog. This is our current -- this is a multiyear backlog, $3.3 billion. And natural gas is 70% of that backlog. So natural gas is 63% of our segment EBDA. As I mentioned, it's about 70% of the growth projects that we have in place. And our track record on Page 14, in terms of how we've done with your capital we invested, we look at it 2 ways. We look at the natural gas segment, specifically on the right-hand side, and it may be covered for you, but that's $7.6 billion and the $12.3 billion that's invested -- was invested over 2015 to 2019. When we look at a year 2 EBITDA multiple because that's when things have kind of settled out, we're actually achieving a 5.5x multiple in gas versus 6x, which was the original investment decision; and then on the overall portfolio, a 5 point times -- 5.9x multiple versus a 6.1. And so our footprint creates the opportunity for us to get good returns, capital-efficient investments on a strong network like we have. It gives us the ability to capture nice returns. Then on Page 15 is our ESG. We're in the top 10 in our sector. Look at that -- looking at that sector in 2 different ways, but especially proud of the way we've been able to reduce methane emissions. We, along with others, joined an organization called ONE Future with the objective of decreasing methane emissions, which are more powerful greenhouse gas, to 1% or less by 2025 across the whole natural gas value chain. And the allocation, specifically the transmission and storage, which is our sector, of 0.31%, we were at 0.02%. And that whole group met the target, had met it 7 years in advance. In 2018, we met it. And so this is an important part of the story. We can be a good complement to renewable energy, but we're also a low-carbon fuel as the world reduces its carbon footprint. And then finally, the last page that I'll go through on Page 16 is just a -- it kind of captures the overall summary here. And again, I'll emphasize the highly -- the high management stake that translates itself into our company culture. We are focused as principals. We run our existing assets well, safely, reliably, efficiently for the benefit of our customers, for the members of the public and for our investors. We watch our cost very closely. We're a very efficient operator. And we just worry about making money for our shareholders, and that's what we'll continue to stay focused on. And so with that, Jean Ann, I'll turn it back to you.

Great. Thanks so much for that. Again, if you would like to submit any questions or vote on questions, please go to the Pigeonhole. I have some prepared questions I will start with and then I'll start using some of the Pigeonhole questions as well.

So to start, we have a conference unifying question that we're asking everyone. As you think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relate to cutting costs or increasing levels of investment?

Okay. Yes. So we did all the short-term things that I talked about, obviously, and a lot of other companies have done as well. As we look longer term, we have always been a company that's focused on keeping our cost structure lean. And I think that's going to be a long-term differentiator for us and a long-term differentiator for any winner in this sector is you've got you an efficient operator. And so we've built that into our institutional framework, how we do our budgeting, how we do our weekly forecast updates. We're tracking our cost savings as we've been able to get concessions from vendors and equipment suppliers and people and the like. When we came out with our updated guidance, we announced that we have been -- we project $125 million worth of cost savings in terms of OpEx, G&A as well as sustaining. Now, Jean Ann, some of that is deferral, right? So that will be deferral. And so we'll see that come back to us. And some of the OpEx is throughput-related, but we've seen real savings as well to go with it. And that discipline is just in our weekly rhythm. And so we'll continue to keep focused on that. I don't think that's different. I think what might be different is whether the opportunity is there, whether that's a shorter-term opportunity as people are desperate to have our business or whether that's a longer-term opportunity that we can take advantage of over the longer run. In terms of the investment, I talked about the $700 million we took out. We're not sure if that's deferral or if that's just coming out. And so as you know, we've been running like $2 billion to $3 billion just like clockwork every year for the last 10 or 11 years of expansion capital investment opportunity. It sort of feels like that's going to be under that range. It's certainly this year at $1.7 billion, but I think that could be the case for a while. And that will really be a function, not so much the virus, which is temporary in terms of its demand impact, but I think it's more a function of what happens in U.S. energy. Do we see it will return in commodity prices that a lot of that G&P investment that we cut out wants to come back in the Bakken and the Eagle Ford and places like that? Do we see enough associated gas increase that we pull Permian Pass forward, right, which would be our third pipeline, which is not under contract? Right now, we have it kind of pushed out 2 years beyond what we thought even 6 months ago, right? And so those are the big questions. And I think those questions get answered by what happens in U.S. energy production. Does it [Technical Difficulty]? Is this going to be a trough like we saw in '15 and '16 with a recovery in '17 and growth again in '18 and beyond? Or is it going to stay a little lower for longer? And that remains to be seen.

Makes a lot of sense. There's a question I've received a lot actually from investors. Given the derating of the sector on the equity side, do you anticipate the ratings agencies might tighten the debt-to-EBITDA range that they want for IG? Like, for example, would 4x be the new target versus 4.5 if there continues to be a lot of uncertainty?

Well, god knows we can't speak for them. But we do talk to them very frequently, at least once a quarter, and we go through with them what we're reporting for the quarter, and that's worth -- what prospects that we're talking to our equity investors about, et cetera, et cetera. And all the indications that we have gotten is that they are comfortable with us, comfortable where we are with our rating at the leverage metrics that we have and with the business profile that we have. So if you think about 4.5x sounds kind of rich for most companies, and certainly it is, I mean, across the S&P 500, but if you look at our underlying assets, the long-term nature of our contracts, our contracted cash flow, the fact that we can go through Armageddon and be down just 8% year-over-year. I mean, I think that, that confidence is warranted, but we don't speak for them. But I think we're good where we are, and certainly, that's the indication that we've got.

Great. That's helpful. What do you believe is the long run growth capital forecast for KMI if there are kind of minimal new projects in the current environment?

Yes. I think something more like what we're seeing this year, which is one -- certainly below that 2 to 3 that we've historically experienced. So maybe it's 1.5 to maybe as much as 2. I think some of that is driven, Jean Ann, as you might expect, by the chunky things, like a big long-haul pipeline project to BHP right now. And as I said, Permian Pass is kind of getting pushed out. As things currently look, the next pipeline out of the Permian. And so I think that will drive it a bit. So I wouldn't be surprised to see us below that, historically, the 3 range for a year or 2 beyond this until we see the need for a significant additional infrastructure investment.

Yes, that makes sense. The pitch for midstream stocks to generalists, especially for KMI, has always kind of been the certainty of cash flows. Has that certainty materially changed in the new environment? Or is it too early to say?

Yes. So I don't think so over the long term because I think if you look at the demand side impact, that's on the virus, that is temporary. How long is temporary is still open for debate, do we see a second wave and that sort of thing. Do we get a vaccine at all? And if so, when? Or do we find another way to operate? Like I said toward the beginning, we stayed open. And we found a way to work and stay open and still get the job done. And still -- and protect our employees while we're doing it. And our customers, we're not meeting face-to-face anymore. We found a way to keep people safe while we're doing that. And so I think you see a return to normal, something like normal, maybe not on jet fuel, but that's a relatively small piece of the overall picture. And so I think that bodes well for midstream. And as I said on the resiliency point, I think the stability of our cash flows have proven it. We're proving it in a crisis situation. And we've proven, historically, in all kinds of different commodity price downturn cycles, we've demonstrated it. So I mean, I think it's demonstrated that.

I might move to a few sort of subsector asset level questions and we are getting a few in Pigeonhole as well. So when you are thinking about a new gas pipeline, especially, let's say, supply push, so GCX or Permian Highway, can you kind of talk about how you run the economics of the life of the projects and how you decide whether 10-year terms are sufficient versus longer term?

Yes. Oftentimes, it turns out to be the case that 10 years is about the most you can get in the market, that's what the market will bear. We were having somewhat preliminary conversations around Permian Pass that was stretching that to the 15-year time frame. So you do have to look at what do you think is going to happen when you get to the end of that. Now there's an argument that the Permian is a little bit different, but generally -- and I'll come back to that. But generally, what we do is we're running the economics over the contract life and then we're putting in some terminal value assumptions there. And we stress test that. So we'll look at a case where we lose 1/3 -- and this is not on a revenue basis -- where we lose 1/3 of the revenue, 50% of the revenue or 2/3 of the revenue, and we ask ourselves, is that still an attractive investment for our investors? Is that a good use of our capital? So we also -- a starting point for that, too, is that the return criteria that we hold our investments to is well north of our cost of capital. So we sort of talk about 15% unlevered after tax as the starting point for discussion, but we dial back down from that to cover a project that's got 10-year contracts, for example, with the counterparties and reservation base, et cetera, et cetera. And so we're not -- that's kind of like where we look at GCX and PHP. It's not 15%, but it's a good double-digit after tax unlevered return. And so that's how we look at it. We stress test the terminal value. Now my point about the Permian might be different. It felt more different 6 months ago, but the phenomenon that's driving our business to the Permian is we're not really a crude transporter out of the Permian. We are natural gas transporter, both our existing interstate systems as well as new pipes that we're building over to our intrastate system. And gas was essentially a waste product. And so all the economics are being driven out there by the oil and the NGL production. And I think they will one day again, and they have the gain of breakeven costs down into the 4-handle territory even before this crisis happened. And so I think who knows where price will be, but it was at $50. It was blowing and going, right? And you get to that point, and natural gas is almost a waste product. They just want to get in a [Technical Difficulty]. They don't have to burn it and have trouble with the Railroad Commission over flaring. So they want to get a pipe and they want to push it down. And so supplier push has been the way those projects have been. And on the trajectory that we're on and even something approaching that trajectory, it was kind of a pipe every 2 years, every 1 to 2 years. Now it might -- again, we might be on a hiatus here for a while, but the fundamentals analysis that we did showed prices or basis differentials returning fairly quickly to levels above the tariffs, above the tariff rates, and sending them the next pipe to be built and then the next pipe after that. That's a little bit different than what we've seen in other parts of the country. Now again, we've got to see where this shakes out on the commodity price side to see if we return to that or not.

That's really helpful. Well, we've received a couple about ESG on Pigeonhole. So how do you see ESG evolving? And how does KMI plan to position itself to appeal to more ESG-focused investors long term?

Okay. On ESG, the conversation around that slowed down during this crisis, but we didn't slow down. So we continue to do the additional reporting that we've talked about. We continue to rank well from the ratings agencies that rate companies who do that. We made a lot of progress on methane emissions, which is really where the game is for us is keeping that at a very low level. And we've reduced methane emissions over and over again as we examine all of our facilities and where do we have fugitive emissions and how can we reduce them, et cetera. Now what we're turning toward is one of the things that makes sense in, for example, a CO2 tax environment, okay? If there's a greenhouse gas tax, which they're -- one day there will be, I think. And we started to look for -- so we turned our attention -- we're using all the same management processes, all the same teams and everything that we do to do everything else, to do safe operations, to do compliance, to do our commercial organization. It is not some ESG department sitting out there. It's our people doing their work with ESG in mind. And we've already started to identify places that are cost-effective for our investors and CO2 emissions reducing. And so that's really the next step. And the next step beyond that is if you assume a CO2 tax, pick your number, what starts -- what additional investments become economic at that point. And so that's how we do it. And we'll continue to keep the focus there and continue to find not just the low-hanging fruit, but look for the things that come and are economic for our investors as you start to see a CO2 tax. The big part or the big pitch I would make in terms of our business as a predominantly natural gas business, but overall, in hydrocarbons. This is an extremely important thing just to humanity, that we give people access to affordable and reliable energy. That's important for humanity. Just full stop, you can't pull people out of poverty without it. And that's what we provide and that's what our customers provide. So when we bring gas to an LNG facility and it gets on a boat and it goes to China and it displaces a coal plant or one in India, then that's good. That's good for the planet. That's good for accessible, affordable energy. That's good for reducing smog, right? And so we think we have an important role to play and natural gas has an important role to play, like it did in the United States. I mean, many people don't realize, our greenhouse gas emissions levels are well below the 2007 levels. And a big part of that, probably the majority of it, there were other things, fuel efficiency standards, et cetera, but the big, big part of that is natural gas displacing coal in the power generation stack. As you think about things like intermittent resources like renewables, we provide the backstop. For our California customers, for example, they need our deliverability, our peak day deliverability more now than they did before renewable [ conversion ] was as steep as it is. So I think there's a very constructive role for us to play as a predominantly natural gas company in the global CO2 emissions picture, while at the same time, dealing with the practical reality of you can't solve it. You can't solve global poverty without hydrocarbons right now. So you can't lose sight of that either, and I think that's just some in this debate. And natural gas is the best hydrocarbon to do that.

Yes, completely agree. I've found in my own kind of conversations about ESG that -- what ideas are kind of what use that as a -- the entrance of natural gas and the shale revolution has been responsible for so much of the emissions reduction, and that does often get missed. Cool. Another one from Pigeonhole, ESG-related. Explain your thoughts, including financial impacts on cash flow and CapEx, on electric vehicles on KMI over the short and long run.

So that's really -- that's an impact on our refined products business, that would be where you would see the negative. Where you would see the positive is that, again, a lot of that power generation is going to have to take place using natural gas. So what's going to charge those batteries is going to be increasingly natural gas. It's taking an increasing share away from coal as well as renewable -- some share from coal, and that will continue to be the case. So we get, if you will, an uplift, hard to quantify, but an uplift on the natural gas side. EVs, we look at very closely because just like refined products and gasoline, it's the biggest refined product component, and that's what we move and store in our assets there. We see the turnover as being small, at least so far, and [ board ] to get much bigger. And even with subsidies, even with the subsidies that are in play, it's been small, relatively modest so far. And I think unless the price point can be down further, it's still a bit of a luxury product. And so I think it has a -- it's a segment of the market, lots of people are interested in it and there's an argument that it's actually a superior performing machine if you get certain things right about range and other things, maintenance is lower, et cetera, et cetera, but I think for significant penetration to happen, price has to come down further. So we see the vehicle turnover rate over a 14-year period, generally on average as well as most of that turnover is still going to ICEs, not to electric vehicles. So we see that impact being muted and kind of spread out over time, but it's something that -- it's a long-term trend that we'll absolutely continue to have to keep an eye on.

Makes sense. And then a couple about your CO2 business. So in the near term, if you could talk a bit about whether you've shut-in production and whether it's coming back. There's been some interest in that.

Okay. Yes. So our CO2 business, enhanced oil recovery. So we take the CO2 from geological sources. We bring it down by pipeline and inject in the ground and recover oil. And we shut-in some production. So we have hedges in place. Really, we're about 100% hedged for the balance of this year, including on the Mid-Cush differential -- the Midland to Cushing differential, so the price differential, the basis differential as well as the underlying commodity price. However, we looked at our assets on a -- and we looked at our production on a cash cost basis and -- versus the cash market price. And we shut-in a relatively small portion of our production at the feed. I think it was about 2,500 barrels a day. And we're now -- we're currently -- we've been bringing production back on, and we're now below 2,000 barrels a day. And in our current -- right now, we're looking to bring about half of that back on because even at the mid-30s, it makes sense from a cash standpoint, from a cash cost and revenue standpoint. So relatively small amount of shut-in. We're bringing it back on. So far, what we've seen has been good in terms of as we bring it back on, it comes back on. We turned it back on. It comes back on. And that's always a question mark. We've never been shutting in production before. So how it will behave when you turn it back on is of interest. And so the early returns here are that we turn it on and it comes back on.

That's great. And then longer term for that segment, historically, Kinder Morgan has been able to push back rock kind of the big decline out. It's always a few years out. So I think in your last investor presentation, it was kind of in the middle of this decade. Should investors be concerned that if you're kind of reducing the amount of CapEx that you're putting into the business, that, that could move up to be more in the near term?

Yes. So if we reduce capital in that business, generally, that means that there's not -- it's not offsetting decline rates. And we don't invest our capital in that business, as you know, that way. We invest it based on the returns we get, the oil that comes out of the ground for the capital that we invest and what the price is on that world it comes out. So we invest for IRR. We don't invest for replacement -- production replacement. So if we're not putting capital in though, you would expect to see a decline there. And I think to really answer your question, it comes down to what you believe on commodity prices. If commodity prices come back -- an existing CO2 flood, we can make work in the mid-40s, not every place, but we have projects to do even in the mid-40s and certainly in the 50s. A new CO2 flood, whether it's ours or a third-party who would be a customer for our CO2, the CO2 source and transportation business, really requires 60 to get to a point where people start adding CO2 floods. So we can profitably invest even in the 40s and especially in the 50s. And so if you think that prices will find their way back there, that's not the forward curve today -- maybe it gets to 40 in the out years, it's been moving around. But if you get back there on a price, what we -- the other phenomenon that's caused the pushout that you've described is just continuing to find new ways to extract from a really big original oil in place. So we have billions of barrels of original oil in place, 5 billion barrels at gates, 2.6% at SACROC, and that's before the transition zone, which is another 600 million barrels or so. So there's a massive amount of oil in place and we keep finding a way to get at. And so the more -- that's the other phenomenon. Of course, that's hard to predict. The only thing we can point to there is just our track record. If you go back to our investor conference, if you go back through that same chart you're referring to, where January is all the way back to 15 years ago, you see that thing getting pushed out and pushed out and pushed out. That's innovation and optimization, and then the other question is the price.

Makes sense. Cool. Back to a few higher level questions asked someone on M&A. If you were to acquire new assets, would you be most interested in those with sort of average more take-or-pay cash flows than the KMI average or are you comfortable with less take-or-pay?

The way we've chosen to approach the sector has been to secure our cash flows largely with take-or-pay CapEx. And so we're at 64%, something like that, take-or-pay monthly warehouse charges. We're talking about the terminals business. Another 24% is fee-based, and that's where you see like our refined products pipeline, which are common carriers, not contract carriers. So this throughput -- it is throughput-driven. And that's attractive to us. We think that's a good way to approach this sector. And so we certainly get more points for having more take-or-pay in the commercial structure. Otherwise, on M&A, really, we like the businesses that we're in. And so we see if the opportunity presents itself, whether that's M&A or whether that's asset packages that are coming on the market as people are looking at their portfolios, what we would look to do is be in businesses that we're already in, that have the commercial characteristics that our existing businesses do. Secure cash flows under contract, et cetera, businesses that we can operate. So we're in several different sectors right now. We like those sectors. And if we saw attractive things come up in those sectors, that's what we're looking for. That's more about opportunity than saying, hey, I want more gas or I want more of this and I want more of that. It's more do the economics work and is it in the business we're comfortable with.

That makes sense. Cool. There are 2 on Pigeonhole that are related so I'll just kind of tell you both of them here. One is what are Kinder Morgan's long-term capital allocation priorities. And the other is what would you have to see to proceed with the dividend raise.

Okay. Yes. So our capital allocation priorities remain the same. We are -- we prioritize the balance sheet, and I think we've demonstrated that with our behavior. Paying off the $10 billion of debt, achieving the ratings upgrades. We think we're comfortable at mid-BBB. I don't see a return advantage to our equity investors for us pushing for BBB+. That's something that we look at from time to time, but it's really not there as we see it right now. And so prioritizing the balance sheet, make sure the balance sheet is in good shape. Then the next priority is making sure that we're funding attractive return projects, things that will add to the value of the firm. That's a good use of cash, and so that's where we look to next. Now we've gotten comfortable that we'll have more than enough capability to cover the attractive return opportunities in front of us and so then we look to return value to shareholders. And so that's been in the form of share buybacks, but also the dividend, which we've increased from $0.50 now to $1.05 annualized with our announcement in April. We had originally planned -- and so we do it in that order: Make sure the balance sheet is strong, make sure we're funding attractive projects that add to the value of the firm and then look to return excess cash to our shareholders in 1 of those 2 ways. So we're returning substantial value to shareholders. We've got a 1.8x covered dividend even at the current levels. And so we've got a well-covered dividend. We're returning a lot of value there. We've used about $575 million of the $2 billion share repurchase program. We're kind of not doing a lot of share repurchases right now. We did a few in the first quarter at attractive prices, prices that we're still happy with. And -- but I think we're going to want to see a little bit more shakeout before we go deeper into that at this point. And we want to continue to make sure that we protect the balance sheet, which is why we -- even though we could have covered the $1.25, we decided not to because of the times that we're in. We gave an increase, which 5% increase was like annualized, which showed a little return on the value to shareholders, but while we could have gone to $1.25, we didn't given the circumstances. So that gets to the other question about when do those circumstances make us comfortable with getting to $1.25. Don't know. It is a bit of a know-it-when-you-see-it situation, but a couple of indicators that we'd certainly look at. And we also pushed that out in time a bit. We said we look at it in January when we have our regular Board meeting and decide on the dividend for the fourth quarter of 2020, which is payable in February and being announced in January. So we -- yes -- and so we put a time marker out there. And I think -- in thinking about returning to normal, so look at our different businesses. There's a lot of crazy stuff happening in gas markets right now, but our gas throughput volumes have been pretty normal. And so the throughput has been fairly normal, industrial demand, power demand, our LDC customers, et cetera. Where things have not been normal is refined products. And so as I mentioned, those are common carrier pipes. So they're fee-based. They're the most economic way to move the product from one place to another. So they run pretty full. And so our refined products business, that used to be a discussion over plus or minus 1%, and usually, plus 1%, right, because there's a little bit of demand growth and some export growth, et cetera. And then this year happened, right? And so we took this big reduction. The last time we saw any kind of reduction in refined products was when gas went to -- gasoline went to $4 at the pump, and we saw consumers react and there was a couple of percent or something. This has been really dramatic. And so I think seeing that recover -- and that's really normal economic activity. That's people driving in their cars. That's people, maybe not on jet, that's going to take longer, but diesel, people building stuff, moving stuff and moving themselves around. And maybe traveling less by jet and more by car, which is a less fuel-efficient way to do it, that could actually help [ find ]. Telecommuting may be a headwind to that. I think seeing some return there. I think the other thing that we'll be looking at is what's happening on the -- in the U.S. energy front on commodity prices. Are we going to see some shut-in production getting turned back on? Of course, but also, is there interest again in GNP investments and projects? People have commodity that they need to move. North America does have an incredible energy advantage now with the technology breakthroughs that we've seen. And so seeing some return to normalcy there too would be a good indicator. So those are the 2 things I'd point to.

Makes a lot of sense. As you've probably noticed, a lot of investors are getting excited about gas, gas price. People are asking about the Northeast and the Haynesville for the first time in a while. Kinder Morgan has Tennessee gas out of the Northeast and a pretty strong Haynesville presence. Can you kind of comment on if you are hearing interest in more takeaway capacity out of those basins and if there's anything that you could do, extending your existing asset base?

Yes. So there is interest in the Haynesville, but it's -- and it's beyond talking interest. It's negotiating interest now. It's getting contracts done and things like that. I would say this, though. it -- there's a lag in there, I think, because we'll get a contract done with a significant producer and they've got to get their capital together, they've got to get their project -- their drilling plan together, they've got to get out there and execute on it, et cetera. So it's a while before you see that response, but we do have a significant network in the Haynesville, depending on where that production comes on. Some of it could be accommodated without new capital. Some of it probably requires capital. I would say, on our bridge or in aggregate, it's a pretty capital-efficient expansion that we have there. The Marcellus and Utica, I think -- look, the overall underlying point to -- what you're raising is that gas demand has to be met. And we're going to burn power in the power plant. So we're going to heat homes and we're going to power factories and in any kind of normal world, we're going to be doing LNG exports. We still are, but they're coming down a bit. But we're going to be doing LNG exports. We're still doing exports to Mexico. And so that demand has to be met. And if it's not going to be met by associated gas because oil production is being turned off, it's got to be met by dry gas. And we've got plenty of it in this country. In the Haynesville and the Marcellus/Utica are 2 of the key areas for that. And so you would expect to see some resurgence in that. And there's some forward pricing indicators. I haven't checked in the last couple of days, but I mean the forwards are trying to incent some of that activity. I think there'll be a lag and may even see prices jump a bit because associated coming down and just inertia required to get back up on that dry could -- that could leave a gap in there where we have a little bit of dislocation. But in any case, for us specifically, we're not a gatherer in the Marcellus/Utica. We're a transmission provider, Tennessee gas, as you pointed out. And there, that's about filling up our existing pipe and also some probably marginal expansions. We got a couple underway that gets more of that gas into the Northeast market. Big, long-haul Northeast projects, as you've all seen, are challenged by public opposition. And it's hard to build across the State of New York, it just is. So I think really, what we're looking for is kind of the singles and doubles marginal incremental expansions that we can do to help debottleneck the system to enhance takeaway, whether that's Marcellus gas or LNG imports into Boston, right?

Yes.

So that's -- those are the kinds of investments. So I think pretty capital-efficient on TGP, too. It's more about elevating the value of our existing capacity now.

Makes sense. One question I get often from generalists is that it seems like there's so many metrics for the midstream space that don't exist elsewhere. What metric do you think is the best to use for a generalist that's starting to assess the midstream space? EBDA, EBITDA, dividend, free cash flow yields, other, a mix?

Yes. I think all of those are good indicators. There are other indicators. And so our approach to this has been not to choose for people, but just to get them all out. And you started to see, as you think, cash flow from operations increasingly. And we still show distributable cash flow, which is the measure that generalists raise the most questions about. It is a non-GAAP measure, but it is a measure that we use to manage the company. And here's how. I mean we have our earnings and our maintenance CapEx tends to well underrun our book depreciation. And so we take out the book depreciation and we add back the book depreciation and then we subtract out our maintenance capital. And so the maintenance capital is something that we manage closely. We don't want to spend more of it than we need to, to maintain efficient, reliable and safe operations. And so that's why it is a management tool for us. And I think the DCF metric is one that's worth looking at because it's one that the management team looks at, and for those reasons. But we put all of those metrics out there for people to have a look. The free cash flow, a lot of emphasis on that by us and by investors. And so we look at that. We've shown in the charts that I went through how we cover our dividends and how we cover our capital investment needs and still have cash leftover. And so I think that's looking at free cash flow yield and that sort of thing is a reasonable thing to look at. The only caveat I would make is in high CapEx years, right, where you're investing and investing for the future, you can get some anomalies in that. And so important to probably take a bit of a longer view on it, not just maybe year-to-year view, but I think that's reasonable. And that also is consistent with how we manage our business. We do manage for free cash flow, but the capital component, the expansion capital component, that's determined by returns. It's not like I'm going to throw away a 15% return project because it will hurt my free cash flow in this year, even though it benefits me next year. We don't do that. We make our capital investments as I think anybody would want this management team to. We make our capital investment decisions based on returns. But I think all of those metrics are good. And our approach to it has been to kind of have lots of different metrics so people can pick and choose the things that they find are most meaningful. I think for generalists, an important thing to understand that's different about us than maybe other companies that they're looking at is, #1, it is the [ sensibility ] of our cash flow. We contract our cash flows, people pay us for the space. And in most cases, they're paying us whether they use it or not and also paying us independent of the underlying commodity price. And we have this in our exhibits, long-term contracts that are underlying much of the business that we're doing. And that's different, that's different than walking up to a retail establishment where the contract life or the transaction life is 30 seconds. You've got to keep doing it the next day and the next day and the next day. We have a fair amount of our -- when we come into our budget process, we've got 90% of it put to bed. We're working on the last 10%. That's different, I think, than it is for a lot of companies out there. The other thing that I'd suggest that generalists look, that I think they do, is if you look at the cash-generating power of our business, you do have to make it -- you do have to do a little bit of incremental examination in a business like ours, and that is depreciation will outrun our maintenance capital expenses. Steel in the ground, in particular, can last indefinitely. It's different from -- it's book accounting-light. And so you have to -- somehow in your mind, I think you have to make some adjustment to say what's the cash-generating power of this business. You've got to think through some on the depreciation and the maintenance CapEx issue. And you also -- because we've tended to be an investor over time and we have net operating losses that have -- that we've built up and we're not expecting to be a cash taxpayer now until beyond 2027, you do have to look at that difference between book and cash tax. Investors like us tend to pay less cash tax. And so long as we continue to invest, that tends to be -- and it's certainly, in our case, it's been a long-term phenomenon. So I think there are a couple of things to look at if you want to, for our sector, get at what the true cash-generating power of the business is.

That is a very helpful answer. With that, I think we are out of time. So I will leave it there. Actually, if I could sneak in one more just because I am very interested in your thoughts on this. I recognize we're kind of pushing up on time. But this isn't really applicable to you now that you are a C-corp, but one question I get all the time is whether MLPs are just an impaired asset class. It's a very common thing to wonder if others would switch to C-corp. So I think a lot of people on this call would be really interested in any changes that you've noticed in your investor base or the way that you kind of run or disclose your business since the conversion and if you have any regrets about converting.

Yes. No regrets. I think it has -- it's worked for us as a company in terms of building our business and it's -- I think it's worked well for investors. The big changes that we've seen are a rollover from a predominant retail investor base who is essentially buying the MLP units for the yield into an institutional investor base. So that happened in a quite big way. And then -- and led by, I think our European investor cadre is up by like 70% since we did our rollout. So overall, institutional, greater institutional holding. And especially when we look at the subset of our investors, and it is a minority that the subset of our investors in Europe, picked up in a much bigger way, when the MLPs were a function of U.S. tax law and they weren't as interested. And now they're interested in us in a much larger way. So a big turnover from retail to institutional, international to institutional.

Great. Thank you. Well, that's all that I have. So thank you so much again for the presentation and for coming to the conference. And thanks, everyone, for joining.

Thank you.