As oil prices rise, analysts see a surge coming for KMI stock

The price of oil has become a priority for many investors. Wall Street is now watching global developments that could, unfortunately, escalate into full-blown conflicts that historically bring with them higher oil prices. Indeed, after breaking through the stubborn ceiling of $75 per barrel, oil prices reached $90 for the first time since October 2023.

Supported by a bullish narrative, potential interest rate cuts by the Federal Reserve (Fed), and other fundamental trends, a rally in energy stocks appears imminent. Investors are still early, as industry trends show that March will be the first expansion of the new cycle.

While picking any stock exposed to oil can be profitable, investors might be best served by matching their portfolios with the names Wall Street is likely to choose. An example is found in Kinder Morgan Inc. New York Stock Exchange: KMIwhere the markets are easily relaunching its price, with some double-digit increases remaining.

Energy landscape boosts Kinder Morgan stock

Analysts at The Goldman Sachs Group Inc. NYSE:GS he pointed out that the price of oil would reach $100 a barrel this year. What once seemed like an extreme vision (when oil traded below $70) is now the more accepted reality, influencing how some rotate their investment capital.

Such rotations have begun for Vanguard Group, which, in the latest quarter, bought $3 million worth of Kinder shares, bringing its total position to $3 billion.

Vanguard is not alone, how The PNC Financial Services Group Inc. NYSE:PNC saw fit to purchase up to $2.5 million over the same period, bringing the group’s total positioning to $5.8 million. The answer everyone is looking for now is whether this is the beginning or the end of a new energy trend.

According to the ISM Manufacturing PMI Index, a report commonly followed by investors and professional traders, this is just the beginning. After an entire quarter of contraction, the oil and gas industry experienced its first expansionary month in March 2024.

Considering that oil producers generally increase their production rates when oil is “expensive,” corporate profits could soon flood the sector. According to the FedWatch tool of CME Group Inc. NASDAQ: ECMSupported by the potential interest rate cut in September 2024, oil demand could increase as the manufacturing sector as a whole revives.

Lower rates will likely push the dollar index lower, making American exports more attractive to foreign buyers, which is where exports come into play. The production and shipping of these exports will also increase further demand for oil and increase its price.

Investors may also look to choked supply chains in the Red Sea, the Panama Canal experiencing massive delays, and a growing conflict between Israel and Iran as reasons to focus on the energy sector.

The market landscape

After outperforming the broader S&P 500 index by as much as 10% last quarter, SPDR Fund Energy Select Sector NYSEARCA: XLE it became one of the best performing sectors of the economy. However, analysts don’t view all space stocks equally.

Two factors usually influence stock prices: earnings per share (EPS) growth prospects and how the market values ​​these EPS projections.

In the case of Kinder Morgan, analysts may have overlooked this $40 billion company in favor of giants like Shell NYSE:SHEL and even BP New York Stock Exchange: BP. But the markets have something else to say.

EPS growth projections of just 2% seem unreasonable for a company that trades at a 25% premium to its peers. Kinder Morgan’s forward price-to-earnings (P/E) ratio of 15x beats the industry average of 12x, despite growth rates below the 10% average.

Even though Shell is looking to grow its EPS by 6.3%, its forward P/E reflects a 44% discount to Kinder Morgan. The saying “It has to be expensive for a reason” applies here, as Kinder shares are valued above BP’s 7.3x forward P/E, despite potential EPS growth of 10.3% this year.

Why Kinder Morgan?

The answer may lie in the company’s financials. Kinder Morgan’s balance sheet is 50% debt, compared to 30% for Shell and 40% for BP. Therefore, analysts may be bullish because historically lower interest rates favor more leveraged companies.

Knowing this, Wall Street analysts see a consensus price target of $20.20 per share for Kinder stock, reflecting an 11.4% upside from today’s price. On the other hand, Shell’s $67 price target entails a net downside of 7.5%.

Likewise, Piper Sandler Co. New York Stock Exchange: PIPR calls for a $40 price target for BP, which calls for just 1.5% upside on that stock. Driven by its financials and exposure to the new oil trend, Kinder Morgan has a reason to be the market’s premium pick.

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