Kinder Morgan (KMI -0.26%) had been in a rut for the past several years. The natural gas pipeline giant's earnings barely budged as contract expirations offset the benefit of expansion projects. As a result, its stock price had flatlined at around $18 per share since the middle of 2021.

However, that has all changed this year. Kinder Morgan's stock has skyrocketed, surging more than 50% so far this year, adding about $10 to the share price. Here's a look at what fueled that rally and whether investors should still buy the pipeline stock.

Headwinds are giving way to strong tailwinds

Kinder Morgan generated $7.5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) last year. That was the same level as 2022. It was also on par with 2018's level after adding back $500 million of earnings from asset sales. In other words, Kinder Morgan's earnings hadn't grown for five years. The main culprit was large contract expirations on some major pipeline systems.

However, the company has reached an inflection point this year. It's on track to produce $8.2 billion in adjusted EBITDA, up 8% from last year. Its contract expiration headwinds are in the rearview mirror. Meanwhile, capacity on its existing pipelines is starting to fill up as demand increases, which is driving higher contract renewal rates. It's also benefiting from the impact of high-return expansion projects and its $1.8 billion acquisition of STX Midstream last year.

Meanwhile, demand for additional gas pipeline capacity is starting to heat up, fueled by an expected surge in power demand by the end of the decade from AI data centers and other catalysts. Kinder Morgan has already started capturing new expansion opportunities. For example, it's investing $1.7 billion to expand a gas pipeline to supply growing power and local distribution demand in southeast markets by 2028. This growth resurgence has helped spark a rally in Kinder Morgan's stock.

The value proposition

With its share price surging, Kinder Morgan's value proposition isn't quite as compelling as it once was. The company's dividend yield has fallen from over 6% to around 4%. Meanwhile, with its stock price over $27 a share, Kinder Morgan now trades at more than 12 times its free cash flow, with $2.26 per share expected in 2024.

However, those are still relatively attractive metrics. The S&P 500 currently offers a dividend yield of 1.2%, which is around its lowest level in 20 years. Meanwhile, the broad market index trades at more than 25 times earnings.

Kinder Morgan trades at a compelling level for a company that should grow at an accelerated rate in the coming years. U.S. gas demand is on pace to increase by 19% through 2030, rising from 108 billion cubic feet per day (Bcf/d) to 128 Bcf/d. That's before factoring in the potential uplift from AI data centers, which could add upwards of 10 Bcf/d of incremental demand by 2030.

This potential surge in demand is coming at a time when Kinder Morgan's pipelines are already seeing increased utilization, from 73% in 2016 to 87% last year. That's enabling it to sign new contracts at longer terms or higher rates. It has also provided the company with opportunities to expand its systems. It currently has $4.2 billion of natural gas projects in its backlog.

Kinder Morgan sees a rich opportunity for continued expansion. The company "expect[s] to announce additional significant projects over the next several months that will allow us to expand and extend our network to better serve the needs of our customers and benefit our bottom line," stated co-founder Richard Kinder on the company's third-quarter earnings conference call. CEO Kim Dang noted on that call that "the opportunity set has continued to increase over the course of this year, and the conversations are becoming more focused and specific."

The increased utilization of its existing capacity and the building of additional expansion projects should help to grow Kinder Morgan's earnings and cash flow at a healthy rate in the coming years. It also has a strong financial profile, which could enable it to make additional accretive acquisitions like STX Midstream. These growth drivers should allow the company to continue increasing its high-yielding dividend.

Still enticing

Kinder Morgan isn't the screaming bargain it had been entering this year. However, the company still trades at a compelling valuation and dividend yield. Meanwhile, it has lots of growth coming down the pipeline. These factors should give the company the fuel to continue producing attractive total returns in the coming years. While more value-conscious investors might want to wait to see if there's a pullback, Kinder Morgan still looks like a solid buy for the long term, even after its epic rally this year.