Midstream Energy Showdown: Why ONEOK Is A Strong Buy Over Kinder Morgan

Investing Group Leader Samuel Smith breaks down why ONEOK (OKE) is outshining Kinder Morgan (KMI) in the 2026 energy landscape. Discover how OKE’s "capital-light" growth and acquisition synergies are driving a 5.8% yield that’s positioned to crush KMI’s capital-intensive strategy.Join High Yield Investor on Seeking Alpha!This video's transcript was generated by a third party. It is not curated or reviewed and is provided for convenience and information purposes only. The accuracy and completeness of the transcript are not guaranteed.Past performance is no guarantee of future results. Content is offered for information purposes only. Unless stated otherwise, any and all individuals participating in the video are third parties that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body. Unless stated otherwise, the views or opinions expressed may not reflect those of Seeking Alpha as a whole.The accuracy and completeness of content shared cannot be guaranteed. Seeking Alpha does not take account of your objectives or financial situation and does not offer any personalized investment advice. Seeking Alpha is not a licensed securities dealer, broker, US investment adviser, or investment bank.Nicole Benjamin: Hey, everyone. It's Nicole Benjamin, your host here at Seeking Alpha, to bring to you another episode of Portfolio Pulse, where, as the name suggests, we're going to be keeping a pulse to all the big financial moves happening in the market.Now for today's episode, we're going to be diving deep into OKE and KMI. And to help us do that, we have joining us Samuel Smith, Investing Group Leader for High Yield Investor. Now, Samuel, thank you so much for joining us today.Samuel Smith: Yeah. It's great to be here. Thanks so much.NB: Absolutely. So, for those listening in, give us a little bit about your background. I see you've been on Seeking Alpha since 2017. So, tell us more about how you got into it, what your investing philosophy is and strategy?SS: Sure. So, I started writing on Seeking Alpha in 2017 really because I've been passionate about investing for years. My grandfather was a pretty passionate investor. I grew up at his house watching CNBC whenever I'd visit him and we'd discuss investing together. And so, I just started as an extension to my own passion for investing. But in the process of that, I ended up doing a career change from engineering to investment analysis, which is a lot of the skill sets really similar, just you're using financial numbers instead of physics numbers. And then I end up getting opportunity to work for several different dividend investing firms, building my skill set leading me to ultimately launch High Yield Investor in 2020. And there, I've really implemented the lessons I've learned over the years, namely the importance of focusing on quality and durability of dividends and the business model itself along with a focus on value investing principles where you're combining an attractive current yield with inflation beating growth potential and then using capital recycling to take advantage of market volatility to lead to long-term outperformance both in terms of total returns and in income growth.NB: So, for those who are getting familiar with this sector of the market or maybe even new to it, why are midstream companies like OKE and KMI often called the tollbooths of the energy world? And why does that make their dividend so stable?SS: Sure. So, midstream companies often earn the vast majority of their cash flows and ultimately profits through contracted pipeline assets that they own. And these pipelines rather than, say, cars going through a toll road through a toll booth to collect revenues, they collect revenues as companies move oil, gas, and other energy commodities through their pipeline systems. And so, they're often volume based contracts. So, for every bit of oil or gas that moves through their pipelines, they earn a sixth fee. They also often have minimum volume commitments attached to those contracts that guarantee a baseline level of profitability from those assets that makes it worthwhile to capital investment upfront to build those pipelines in the first place. And so, that reduces their commodity price sensitivity, thereby giving them a much more stable cash flow stream, higher visibility into their cash flows years into the future because these are often long-term contracts. And so, therefore, they're able to have a higher degree of confidence in the amount of dividend or distribution they can pay out to investors who invest in their equity because of the nature of their assets.NB: Now, you pointed out that ONEOK is actually trading at a discount of 9.25 EV-to-EBITDA, and that's compared to Kinder Morgan, KMI for anybody that's listening, at 10.89. So, with that trading at a premium, what is driving the valuation disconnect there?SS: A couple of things. First of all, ONEOK is more of a diversified midstream company, so they do have a lot of exposure to natural gas and natural gas related commodities and businesses, but they also have a refined products business and other crude exposure. Although I would say their refined products business is actually really high quality. That's the former Magellan Midstream company that they acquired in the past.

Whereas Kinder Morgan, which is also diversified, is viewed more as a pure play on natural gas, and natural gas is more in favor right now. And so, I think that's one of the reasons.The other big reason is, is simply that ONEOK, because of the acquisitions they've done in recent years, they're still integrating those altogether. The market is still trying to figure out what to expect from this new company. So that degree of uncertainty, although I think the uncertainty is obviously overstated, hence my bullishness on it, market hates uncertainty. So, generally, they're probably going to have ONEOK in the penalty box until ONEOK improves that this new business is stable, is a good business, they're unlocking synergies, and then they should get rerated higher.NB: Now OKE offers a 5.8% dividend yield, compared to KMI's 4.4% with nearly just double the expected growth rate. Now, with that in mind, why is OKE able to grow its dividend just so much more aggressively?SS: Yeah. And to be clear, the expectations for OKE's dividend growth, really, the acceleration that is expected in the coming years, not in the immediate term because OKE like KMI, they're both invested in some capital projects right now. OKE is also trying to bring down its leverage, so it just focused on paying down debt. But it's expected that once ONEOK pays down that debt, they're going to have a lot more free cash flow. And so analysts, which is where I got those targeted growth numbers, the analyst consensus estimates for the mainstream Wall Street analysts, they're expecting them to pivot using the excess cash flow towards returning more capital to shareholders via buybacks and dividends, whereas Kinder Morgan has shown over the last several years that the dividend growth is just not a priority for them and that they are investing more aggressively in long-term CapEx projects, especially in their natural gas infrastructure. So, it's just a different emphasis. ONEOK is going to be more of a cash generative business model, whereas Kinder Morgan is focused more on long-term CapEx.NB: That makes sense to me. And I guess to that end, Kinder Morgan's strategy is more capital intensive, as you said, compared to OKE's capital light growth. So, I guess being bullish, how important is that to your overall Strong Buy rating that you've given it?SS: The capital light aspect of it or the synergies?NB: Both.SS: Okay. So, the synergy aspect for ONEOK, I think that's, I guess you'd call that capital light in the sense that they've made these acquisitions. They're bringing them online. They're finding, cost savings, new efficiencies that they can gather through high return, low cost growth projects, etcetera. So, that's obviously extremely important. If you look at their projections, roughly $1.2 billion or even a little bit more in synergies that they believe they can capture from other acquisitions. Their 2025 expected EBITDA is around $8 billion. So that gives you a picture right there of what we're looking at around 15% of their EBITDA coming from those synergies alone. So, that's extremely important to the Strong Buy rating that they effectively do that.The other side of the two - and to be clear, ONEOK does have some heavy capital expenditure growth projects. They're not a capital-light - entirely business model, but they're also pursuing capital-light growth projects to their natural gas deals for data centers that they're pursuing.

And Kinder Morgan's going to have some of those too. But it appears that ONEOK is focusing more on the synergies and focusing more on these data center, capital-light growth projects, high return, low capital intensity, whereas Kinder Morgan is really doubling down on their high-CapEx commitments over the long-term for their growth.And so, that is important because, again, it frees up ONEOK to return more capital to shareholders in the coming years and in the near-term, pay down debt more aggressively. And so, yes, I think that is a big part of the dividend growth story long-term for ONEOK that does, to me, give it a decisive edge over Kinder Morgan.NB: Now, I want to jump in more on the AI side of things. Both companies are investing in data centers. And I guess, how do these midstream companies that have a gas infrastructure benefit from the AI-related energy boom?SS: Yeah. So, they're investing in projects to supply natural gas to data centers. They don't own the data centers themselves. And so, obviously, companies that have a strong, strategically positioned natural gas pipeline network and natural gas infrastructure are competitively positioned to win these contracts to provide natural gas to data centers. And the reason that's important is because natural gas is in many ways viewed as the ideal energy source for data centers because it's cheap.You don't have to do a big nuclear power plant build-out or some other kind of power plant build-out beyond just the natural gas infrastructure that's already in place. It's cheap. It's very reliable. It's not only providing energy when the sun is shining or the wind is blowing. It is also relatively clean, compared to some other sources like coal, for example. So, it has all the components of being an ideal energy for the data center boom, especially until other, you could say, new renewable technologies, takes them a while to ramp up and to really advance to a point where they'd be useful. So, there's that aspect.And so then those natural gas, networks such as ONEOK’s and Kinder Morgan’s that are competitively positioned, namely they are positioned in close proximity to where a lot of these data centers are built out. They have a competitive advantage because they can get their pipelines installed to service the data centers faster than peer that – competitors that are located further away, and they can also do it for cheaper. So, that's where, ONEOK believes they are in position to compete for dozens of these projects. I'm sure Kinder Morgan is competing for some as well. And so that's what gives them an edge over some of their peers that don't have that preexisting infrastructure in close proximity to data center projects.NB: Now, I have one more question for you before we get out of here, but you've taken a Strong Buy stance with OKE. So, what are the big hurdles that they're potentially facing in 2026, and what would have to happen for you to change your stance on that? And comparatively, you're taking a step back with KMI. Is there anything that you'd like to see them do that you would potentially consider them again for your investment portfolio?SS: Yeah. So, in the near-term for ONEOK, the biggest thing for them is continuing to do a good job on their synergy realizations because I think a lot of growth is going to come just from that this year. Two, continue to pay down debt and deleverage because they really want to reach their leverage target by the end of this year so they can then pivot to really returning more capital to shareholders via dividends and buybacks. And then third, I would say, is more of a show me story, especially with commodity price volatility and energy markets recently. Probably likely to continue given all the geopolitical unrest of the world right now. I think showing that they can, in their new business model can realize those synergies with all their acquisitions on board and deliver relatively stable cash flows, I think will signal to the market that they are a dependable player and that their new business after all the acquisitions is built to last and built to thrive in the new environment. Of course, if they could win some data center contracts, that would only further help their narrative.As far as what would go wrong, I think, again, if they fail to meet their leverage targets in the near-term, if they have some issues with realizing their synergies, I think those are the biggest risks in the near-term for now.And as far as KMI, my biggest complaint with them is simply the fact that management has said one thing and done another. They cut the dividend after saying it was a number of years ago, which I think, burned a lot of investors. Since then, obviously, they've improved their balance sheet, doing a better job of supporting their dividend, but they've said in the past that they were going to grow the dividend aggressively, and they never did. And so, I think that lack of dividend growth alongside the fact that their yield is pretty low compared to peers like ONEOK’s and their valuation is fairly expensive. It just is not – there's little appeal there. Sure, long-term, they may have some good growth through natural gas. And, again, I'm not bearish on Kinder Morgan, I’m just not bullish on it. I would need to see either the stock trade down a lot so the yield became a lot higher, or I would need to see the dividend growth tick up considerably to show that management does not just empire building with these long dated projects that are hard to know really what the return on them is going to be and instead focus more on returning capital to shareholders. At least grow the dividend at a rate that beats inflation instead of this 2% per year growth rate that they've been doing.NB: Oh, we'll leave it right there. Thank you so much, Samuel, for joining us today. And for everybody listening in, go ahead, follow Samuel on Seeking Alpha. And if you haven't already done so, take a look into High Yield Investor, see if that's right for you, and check out these stock ticker symbols. See if that's also something that you'd consider for your investment portfolio. And we'll see you next time here on Portfolio Pulse.Join High Yield Investor on Seeking Alpha!