KMI - Kinder Morgan

[plato1976]

on an unleveraged metric: EV/EBITDA it's not exactly cheap?

it's sth like 12

 

The only bear thesis I have is management is not rational.

Other than that, I can't really think of one on the assets owned.

[Palantir]

 

What am I missing here?  I think this is the best buy out there.  Please post any contrary thoughts.

 

How do you anticipate them to fund their 2017 capital program? They pretty much told us today they'll cut the dividend. Expect the stock to keep getting pounded for a bit. The div cut will help alleviate the leverage issues, but the capital markets look closed for them so I'm interested in how you think they will fund their program.

[ccplz]

EBITDA was around 6.7 bn for 2014, so EV/2014 EBITDA would be around 10x?

 

Although EBITDA should be materially lower this year, maybe in the 5-6 bn range? Still seems rather expensive to me on a FCF basis.

 

Capex is at a 3.6 bn annual run rate, which I don't think they will be able to reduce by too much.

[prevalou]

 

What am I missing here?  I think this is the best buy out there.  Please post any contrary thoughts.

 

How do you anticipate them to fund their 2017 capital program? They pretty much told us today they'll cut the dividend. Expect the stock to keep getting pounded for a bit. The div cut will help alleviate the leverage issues, but the capital markets look closed for them so I'm interested in how you think they will fund their program.

 

Buffett could help

[thefatbaboon]

The company expects ebitda of around 7.3bn and ebda of 8.2 in 2015. Both seemed well on track in q3. (The main difference between the two is g&a is excluded from ebda).  The company turns nearly 70% of ebitda into dcf. (That's high like a tobacco company)

 

Conceptually, this company has been run as a partnership paying out all dcf from existing projects. And with every new project going anew to the financial market to fund, usually around 50 50 debt equity. Personally, I don't see anything wrong with this strategy except that they should retain an explicit and frequently reaffirmed right to cut the dividend when selling equity is too expensive. So when situations like today arises everyone knows that a dividend or two might be reinvested. 

 

I can see no evidence of a deterioration in their numbers brought on by the commodity collapse, except for the few hundred million they indicated in their sensitivity grid at the beginning of the year. They just seem to have become victims of their funding model. And a vicious cycle has developed as the equity gets expensive and become less appropriate as a source of funds for growth capex which then makes it more and more likely that they have to be funded from dcf which can only happen with a dividend cut which makes the equity more expensive. Counter intuitively acknowledging the possibility of an occasional dividend suspension would probably stop these kinds of silly panic cycles developing.

 

5bn of largely multi year contracted distributable cash flow that they have signalled for 2016 seems like a lot for a 38bn+2bn market cap. I've assumed a 2bn "delay" and added it to the market cap as a sort of cost. I assume all of the 1.5bn they just raised from the mandatory convert is all used up for q4 growth capex and ngpl and other debt reduction. And that my 2bn can pay for all of 2016 growth capex and Kmi doesn't have to touch the financial markets for incremental debt or equity in 2016.

 

Even with a two coupon hiatus in the dividend to get this 2bn I still think kmi is attractive. But I'd like to find out if there is non acquired growth (non growth capex-ed) in existing pipeline revenue. Also, I find myself distrustful of some of the exclusions from sustaining capex. For example I think it obvious that one has to depreciate a Jones act vessel. And the fact that they don't makes me wonder about the quality of their other judgements related to sustaining capex. If someone would kindly send me some pipeline primers to read I'd be very grateful! 

 

I like that Sarofim has been on this board forever. He sat many years on singleton's teledyne board and held a portfolio built for decades around Philip Morris and Exxon.  So he's a money manager who understands how free-cash-flowing companies make money and he's familiar with and well connected in Houston and the energy business. He personally has 28m shares of KMI.

 

 

 

 

 

[sswan11]

http://www.barrons.com/articles/kinder-morgan-signals-possible-dividend-cut-1449293142?mg=id-barrons

 

Downside in the stock, now $17, seems limited. The shares, however, don’t look like a bargain trading for about 17 times estimated 2015 earnings (based on generally accepted accounting principles), adjusted for a tax benefit, and for about 11 times projected 2015 Ebitda (earnings before interest, taxes, depreciation, and amortization). These aren’t low multiples for a leveraged, capital-intensive business that is showing no growth in underlying cash flow. Electric utilities shares are slightly cheaper than Kinder Morgan and carry much less risk.

[RRJ]

All good points to consider, folks.  My thinking is similar to thefatbaboon's below.  This probably takes a few years of cut dividends to right things.  Or they could sell off some assets to do it quickly.  Not ideal, but they do have options. 

[thefatbaboon]

Sswan,

If the 5bn in dcf is accurate then I don't agree that this isn't cheap, even if it is zero growth.  its a 12.5% dcf yield. (I think one has to take into account ebitda to dcf conversion when comparing ebitda multiples across utilities)

 

It's interesting to compare the price Brookfield and Kmi just paid for the rest of ngpl.  They are paying a higher implied ev to ebitda multiple for this rather problematic asset than one can buy the whole of Kmi at as of Friday's market close.

 

 

[Palantir]

http://www.barrons.com/articles/kinder-morgan-signals-possible-dividend-cut-1449293142?mg=id-barrons

 

Downside in the stock, now $17, seems limited.

 

Why though? People invest in MLPs for the dividend, and if the dividend is cut, there will be shareholder turnover. This has gone from a 10% dividend growth stock to a dividend cut. At some point this will be a value, but why get into this stock before the market digests the dividend growth story?

 

Putting a 9% target yield (which I see as fair for a 0% growth company) after assuming a 50% dividend cut gives me a FV of $11/share.

[scorpioncapital]

If I put a 9% dividend yield on every stock in the S&P500, I think every stock would have to drop by 1/2 to 2/3s.

 

[ccplz]

The company expects ebitda of around 7.3bn and ebda of 8.2 in 2015. Both seemed well on track in q3. (The main difference between the two is g&a is excluded from ebda).  The company turns nearly 70% of ebitda into dcf. (That's high like a tobacco company)

 

 

Even if we assume they can achieve 7.3 bn in EBITDA, how did you get the 70% conversion from EBITDA to (what I'm assuming to be) FCF?

 

Capex run rate is around 3-4 bn, so that's a 60% conversion at most? And tax is a real cash expense.

[thefatbaboon]

Rrj,

 

What do you think of possibility of them introducing a scrip dividend. With an undertaking by insiders and perhaps a couple of larger investors to take all scrip for a few years?

 

[CorpRaider]

Yeah thought they might consider bringing back a kmr/scrip dividend option.

[ScottHall]

The company expects ebitda of around 7.3bn and ebda of 8.2 in 2015. Both seemed well on track in q3. (The main difference between the two is g&a is excluded from ebda).  The company turns nearly 70% of ebitda into dcf. (That's high like a tobacco company)

 

 

Even if we assume they can achieve 7.3 bn in EBITDA, how did you get the 70% conversion from EBITDA to (what I'm assuming to be) FCF?

 

Capex run rate is around 3-4 bn, so that's a 60% conversion at most? And tax is a real cash expense.

 

People like to say this, but it's often not true. I wouldn't be surprised in KMI's case if the present value of its tax liabilities are so small that they effectively round to zero, using a reasonable discount rate.

[RRJ]

Rrj,

 

What do you think of possibility of them introducing a scrip dividend. With an undertaking by insiders and perhaps a couple of larger investors to take all scrip for a few years?

 

I hadn't thought of that but something like that might accomplish two goals at once.  I'll admit I'm not quite sure how that would work so I'll research how it was used for KMR.  I think that's what another poster mentioned. 

[RRJ]

http://www.barrons.com/articles/kinder-morgan-signals-possible-dividend-cut-1449293142?mg=id-barrons

 

Downside in the stock, now $17, seems limited.

 

Why though? People invest in MLPs for the dividend, and if the dividend is cut, there will be shareholder turnover. This has gone from a 10% dividend growth stock to a dividend cut. At some point this will be a value, but why get into this stock before the market digests the dividend growth story?

 

Putting a 9% target yield (which I see as fair for a 0% growth company) after assuming a 50% dividend cut gives me a FV of $11/share.

 

I do see your point.  A dividend cut obviously is tough for dividend investors to stomach and will cause turnover.  Much of it might even be forced selling by funds with certain dividend constancy parameters.  But who is to say the market has not already been digesting that?  I mean it's been hammered like what, 65%?  More?  As for valuation, I don't agree this is zero growth.  It might be zero growth for now, but this is temporary.  Their press release does not sound like management in denial, but squarely on top of their situation.  They are saying, we have rechecked the numbers twice, and we will have $5billion distributable cash flow for 2016.  We could cover our dividend with this as promised, but we have a higher priority first, which is protecting our credit rating.  Then taking advantage of growth assets on the cheap.  So we will cut the dividend for a while to do those things. 

 

At some point, call it four years to be safe, they will start catching up the dividend, and will have the same stellar assets with a better balance sheet and dividend coverage, and will be growing at probably 3% for inflationary average, plus 2% for anticipated natgas growth, plus 1% extra for good management and efficiencies of scale when adding assets from smaller players.  So call it 5-6% growth conservatively.  If in 4 years I am getting my current dividend of $2.00 again, assuming no growth from today (conservative), and paying $17 a share today, then I would assume the market will have reappraised this stock at some point and see some growth and price it at the historic yield of say 6%.  $2.00 / .06 = $33.33 in share price.  $17.00 to 33.33 in 4 years is not a bad return, not counting dividends received along the way.  And most importantly, this assumes no good surprises along the way, such as oil going back up.  And this is kind of a sure thing, or as sure as these things get.  I mean, are people going to be living in the US and needing energy? 

 

If you see war on the horizon, which Russia desperately wants to raise oil prices, that only helps to have things happen a bit quicker.  A good hedge stock for lots of international strife. 

[thefatbaboon]

Im thinking that kinder will be loath to cut the dividend. And mess up the great record. Especially when the fundamentals of dcf production next year are exactly as expected. Also perhaps at the current valuation he, Sarofim, Morgan, some of the local fund/pe guys will be happy to commit to reinvest dividends via a scrip programme.

 

I'm pretty sure they can get to a minimum 20% reduction in total dividend in this way. Perhaps more if others sign up to scrip. Add to that a commitment to not meaningfully increase the dividend for a few years. That's a 3bn saving from expectation over 2016 and 2017. They will want Feedback from the ratings agencies that that is enough. Personally I think it might be. Just. If it isn't enough the next step would probably be to look at jv for either some existing assets or new projects.

 

Personally I think there is a decent chance they find a way through without a dividend cut for those who don't want one. Obviously just my guess. 

 

[RRJ]

Fatbaboon - Yeah, I think you could be right.  I suspect their answer is "whatever it takes to truly make Moody's happy."  So they can't answer just yet until they walk them through it carefully and see what they say.  I really do think your idea of a scrip dividend plus an explicit "no growth for a few years" policy may be enough, and they might go that route.  I actually would prefer they cut it, and significantly.  I'm a buyer and if stock tanks further, all to the good for me.  I want to say my average cost in at this point is something like $21-$22.  I'd like to keep averaging down a bit. 

 

Saw a video of T Boone Pickens and Carl Icahn.  Pickens says oil supply is already dropping and will have to get back up to $70 a barrell in six months.  He's usually early.  Frankly, I believe management that KMI is not sensitive to oil prices near as much as folks think, so I am not sure how much of a boost it would be.  $10 million per dollar increase per barrel.  So that would be $300 million if back up to $70. 

 

I too am wondering about non-capex growth capacity in pipelines.  I suspect it's there, but limited.  For the same reason they are so stable with take or pay contracts -- they are longer term contracts, which they take on up to capacity.  So with increased pipeline demand it probably takes a while for contracts to roll off and get repriced at higher rates they can charge.  Plus regulators wouldn't let them increase too quickly.  Now, if you've had a period of no growth for a while and the pipes need reinvestment, then regulators would recognize that and allow some increased rates so that the reinvestment can get taken care of. 

 

 

[Palantir]

Looks like KMI is on its way to my $11 target price. Yee haw!

[Aberhound]

Do I think the war/civil war in the middle east will extend to oil producing and distribution centres by may 2017? Yes. I am not so sure of the date.

Will middle east oil/gas tanker insurance get prohibitively expensive? Yes.

Do I think the priority is to cut the dividend to maintain the credit rating? Yes.

Will capex be cut as the economy deteriorates? Yes but reverses if middle east war cuts oil supplies.

Will capital continue to concentrate in the US as war increases and the world economy worsens? Yes

 

Kissinger explains that a Shia/Sunni war will be severe and may go nuclear. See his interview on Google Talks.

 

All these factors led me to buy a small amount of the warrants as the risk is assymetric and it is a cheap hedge to preserve wealth if some of these things occur.

[benchmark]

Do I think the war/civil war in the middle east will extend to oil producing and distribution centres by may 2017? Yes. I am not so sure of the date.

Will middle east oil/gas tanker insurance get prohibitively expensive? Yes.

Do I think the priority is to cut the dividend to maintain the credit rating? Yes.

Will capex be cut as the economy deteriorates? Yes but reverses if middle east war cuts oil supplies.

Will capital continue to concentrate in the US as war increases and the world economy worsens? Yes

 

Kissinger explains that a Shia/Sunni war will be severe and may go nuclear. See his interview on Google Talks.

 

All these factors led me to buy a small amount of the warrants as the risk is assymetric and it is a cheap hedge to preserve wealth if some of these things occur.

Which warrant did you buy?

[Palantir]

Told you so!

[TwoCitiesCapital]

http://www.barrons.com/articles/kinder-morgan-signals-possible-dividend-cut-1449293142?mg=id-barrons

 

Downside in the stock, now $17, seems limited.

 

Why though? People invest in MLPs for the dividend, and if the dividend is cut, there will be shareholder turnover. This has gone from a 10% dividend growth stock to a dividend cut. At some point this will be a value, but why get into this stock before the market digests the dividend growth story?

 

Putting a 9% target yield (which I see as fair for a 0% growth company) after assuming a 50% dividend cut gives me a FV of $11/share.

 

Told you so!

 

Looks like the dividend was cut by more than 50%. Would you maintain that the larger than expected cut is good for forward prospects and maintain your $11 target, or do you think this should go to $6-7 as implied by 9% on the new dividend schedule?

[Picasso]

Don't know why anyone tries or tried to value this on the dividends. That's irrelevant. When someone tells me the right EV/EBITDA multiple for this business I'll start to get interested. So far everyone is still stuck in investing kindergarten thinking this is about the dividend yield.

[HJ]

Don't know why anyone tries or tried to value this on the dividends. That's irrelevant. When someone tells me the right EV/EBITDA multiple for this business I'll start to get interested. So far everyone is still stuck in investing kindergarten thinking this is about the dividend yield.

 

Bingo! 

 

So what is the proper multiple for something like these guys on EV/EVITDA basis?