KMI - Kinder Morgan

[JayGatsby]

Seems like a fair criticism: The analyst says he is "confused about the relative attractiveness of repurchasing stock at ~11-12x EBITDA vs. investing in incremental organic expansions at ~6.9x, the stated average capital-to-EBITDA multiple of KMI’s backlog." https://seekingalpha.com/news/3280001-kinder-morgan-gains-shareholder-friendly-moves-one-analyst-doubts

 

You could make the same argument about the dividend. Seems like capital allocation is being driven largely by what they think their shareholder base wants (which I guess isn't totally unreasonable). Kind of the shotgun approach to capital allocation (pay dividend, and repurchase shares, and pay down debt, and fund growth).

 

Core business seems to be holding up as expected though.

[AJDelphi]

So it looks like Kinder has weathered the lower natural gas prices just fine. Oil is important, but gas is (edit: 55%) of this business and I think some people miss that. There are some nice tailwinds with the LNG facilities coming online and with exports to power plants in Mexico too.

 

DCF, basically owner earnings, should be $1.99 for the year. The dividend will be $.50 this year and management plans to raise it to $.80 in 2018, and then up to $1.25 in 2020.

 

Backlog is $12 billion, and they expect those projects to have an average capital to EBITDA multiple of 6.8x or 14.7%. Roughly half that is the TMEP project in Canada. If they get those returns, which I suspect they will, I get to roughly $3 in DCF. I’d guess it takes 5 years or so for the backlog to be completed. In addition, they are budgeting to be able to self-fund this and not have to access the debt or equity markets. This is very different than the pre-2014 Kinder Morgan entities where I couldn't stand all the equity issuance.

 

If they have $3 in DCF I think this will be selling for MUCH higher than it is today. At $18 I think KMI is one of the more interesting things out there.

 

[Sullivcd]

It doesn't appear to be super cheap when accounting for the debt load, roughly 13x ev/ebitda. 

[AJDelphi]

I tend to think this business can service quite a heavy debt load as the cash flows are very stable. Not quite Utility like but still very good.

 

In relation to Williams and Energy Transfer it’s at roughly the same valuation 13.2 and 14.1

 

https://www.gurufocus.com/term/ev2ebitda/NYSE:WPZ/EV-to-EBITDA/Williams-Partners-LP

 

https://www.gurufocus.com/term/ev2ebitda/ETP/EV-to-EBITDA/Energy%2BTransfer%2BPartners%2BLP

 

13 is also much cheaper than the average of 20 EV to EBITDA multiple of all industries excluding financials. The data was from Jan 2017, but with the market being up I’d suspect that ratio is higher than 20 now.

 

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html

 

Utilities traded at an 18 multiple, and KMI deserves a lower multiple but I think it has better growth prospects than most utilities too.

 

Honestly, I don’t really worry about that relative valuation that much. But more importantly the $2 in owner earnings, DCF, that I think will be at $3 in 5 years.

 

[JRM]

I've spent a little time looking at KMI recently.  I'm trying to figure out why the market is so down on it.  This seems like a situation where retail investor sentiment is pretty depressed from the dividend cut.  I imagine institutional investors are mostly worried about interest rate sensitivity, but who knows.

 

I like the diversification and recent focus on natural gas.  However, I think there is a legitimate regulatory risk with any natural gas transmission company.  Under the Obama administration the Department of Transportation was close to finishing up the "mega rule" which would place much more regulatory burden on natural gas operators.  This has stalled out under the current administration, but its likely a matter of when rather than if regulations expand for natural gas operators.

 

These regulations will require operators of high pressure natural gas transmission lines to periodically perform internal and external corrosion assessments for  high and medium consequence areas.  I don't have a feel for how many miles of pipeline this would add to what KMI is currently responsible for assessing (currently only high consequence areas require assessment). 

 

One common problem for many NG transmission operators is that complete records do not exist for the 50+ year old pipe in the gound.  In liu of using the actual yield strength to calculate potential impact radii, the worst case yield strength is assumed.  This increases the miles of pipe that must be assessed and inspected.  This will likely force the operators to either replace pipe and/or redirect pipeline around HCA and MCA areas to avoid costly assessments.  The cost of the replacements would be capital rather than an O&M expense for the assessments/inspections.

 

This is the only risk that I think the market is largely unconcerned about (or unaware of).  I tend to think its not a huge risk, and likely would just be a short term issue if/when regulations are ratcheted up on the industry. 

 

[JayGatsby]

I agree with AJDelphi. A 10%+ FCF yield on a business of this nature seems very good to me. They own 40% of the natural gas transmission pipelines in the US, provide insanely stable earnings, and have a very meaningful likelihood of low-risk capex projects (risk on that the regulators prevent the money from being invested). 10% is based on current tax assets which will be used up in early 2020s (2021?), if they don't keep investing in capex.

 

As I've said before (and others have pointed out), I don't love the capital allocation. They're a bit overly focused on the dividend and current capital allocation is the "a little bit of everything" approach. Seems like if you can pay a dividend at 13x EBITDA or build more assets at anything close to 7x EBITDA the decision is pretty simple.

[JayGatsby]

Anyone have a negative view on the business? Trying to understand what I'm missing. The seekingalpha /retail crowd seems to still be negative about when they cut the dividend back in 2015. That seems like a great buying opportunity if that's what's led to the negative sentiment.

 

Debt load seems manageable to me given the stability of cash flows

 

On regulatory risk, I thought there's rules / practice that these have to be dug up / inspected every so often and examined. After that Koch pipeline blew up years back and killed the little girl I thought industry practices changed. Could be wrong though.

 

I've seen numbers that 10% of domestic nat gas production will be exported via LNG. The facilities are mostly under construction, but the demand and economics definitely seem to be there.

[JRM]

Natural Gas pipeline operators are required to perform certain indirect and direct (dig up) inspections for lines in high consequence areas (HCA).  This is determined based on proximity to densely populated areas, public areas, and large buildings.  The regulatory change I'm talking about is pending and has not been rolled out.  It would expand assessments from HCA to HCA and MCA (medium consequence areas). 

 

Like I said, I don't think this is a major concern.  Probably about as much of a concern as interest rate sensitivity to rising interest rates. Most of the transmission lines are in the middle of nowhere.

[JayGatsby]

The permian pipeline should be a success: https://www.wsj.com/articles/why-a-growing-gas-glut-could-imperil-the-west-texas-oil-boom-1510870178

 

Not a lot of news on it. Total cost is $1B and KMI will own 50%. I can't tell if they only own a portion because they're trying to save cash for the dividend or if there's actually benefits of having the other owners on board.

[JayGatsby]

Strong statement: https://www.reuters.com/article/us-canada-trudeau-transmountain/canadas-trudeau-says-kinder-morgan-pipeline-expansion-to-proceed-radio-idUSKBN1FL6AQ

 

“That pipeline is going to get built. We will stand by our decision,” Trudeau said in an interview on 630 CHED radio in Edmonton, Alberta. “We will ensure that the Kinder Morgan pipeline gets built.”

[Cardboard]

I hope he will act on it. Canada cannot be held hostage by the U.S. and needs to diversify its clients base. Right now, the U.S. pays Canada the lowest price/barrel for oil in the world and by a very large factor.

 

Then U.S. refineries export gasoline all around the world and even to Canada for a significant profit.

 

If Canadians were deciding to limit oil exports to a certain volume to save the world, that would be one thing. But, to force yourself to ship only to one client is retarded!

 

Cardboard

[TBW]

If TMX gets built KMI looks cheap.  Take a look at KML.  It will be up a lot if TMX is built.

[TBW]

Tried my hand at a SA article.  Think KMI is cheap

 

https://seekingalpha.com/article/4144461-kinder-morgan-understanding-stock-cheap?v=1518095783&comments=show

 

Really think KML is worth a look for those that want something riskier, but with more upside.

[whiterose]

Does anyone have an idea why it keeps dropping?

They talked about buybacks, at which levels do you think it would make sense to pull the trigger?

[JRM]

These seem to be the recent excuses:

 

1.  Uncertainty surrounding Trans Mountain Pipeline (TMEP) which is about half of project backlog for next several years.

2.  Sensitivity to rising interest rates.

3.  Steel tariffs

 

There are likely more, but I think this could be a double by 2021.  They are paying a well covered dividend and buying back shares at these levels.  Seems like one of the few no-brainers in the market today in the large cap space.

 

 

[AJDelphi]

These seem to be the recent excuses:

 

1.  Uncertainty surrounding Trans Mountain Pipeline (TMEP) which is about half of project backlog for next several years.

2.  Sensitivity to rising interest rates.

3.  Steel tariffs

 

There are likely more, but I think this could be a double by 2021.  They are paying a well covered dividend and buying back shares at these levels.  Seems like one of the few no-brainers in the market today in the large cap space.

 

Totally agree that it could easily double in 3 years. They used $250 million of the buyback in Q4. Edit: And another $250 Million in January, just checked the 10-K. So $1.5 billion left. Hope they are buying more now.

[mwtorock]

maybe also concerns about https://www.ferc.gov/media/news-releases/2018/2018-1/03-15-18-G-2.asp#.WrWx54jwaiO?

 

but i thought it should have little impact on corporate but more on MLPs. KMI even made a statement to clear the concerns.

 

http://ir.kindermorgan.com/press-release/kindermorgan/kinder-morgan-statement-federal-energy-regulatory-commission-notice-propo

 

 

[whiterose]

It was also my understanding that the ferc decision would not affect them in a material way.

 

28% of their debt is floating, which means +100 bps rise = approx. +100 mio interest on it.

 

I'm not really concerned about the backlog, even though some (growth) projects may not get build/approved, they could then just use the allocated cash for that to aggressively pay down debt (maybe start with the floating first) -> lower leverage, less risk, better ratings, lower ERP(?) or buy back more own shares at around book value (which is possibly understated because of inflation or "real" replacement cost?)

 

Higher steel prices.. maybe, but to what extent is it material to projected earnings?

 

In their presentations they talk about internal hurdle rates of >15% but RoE over the last years was more like 10-12%..

 

On a side note: in another thread about which company BRK could/should buy, maybe KMI would fit the bill, but then there is Kinder himself who might not want to sell.

It could be a second BNSF, with high reinvestment capacity at stable and projectable returns.

[JRM]

I didn't mention the FERC statement or any other U.S regulatory risk because I think they are complete non-factors at this point for KMI.

[jrallen81]

They are non-factors for KMI because of their reorganization as C Corp.

[JRM]

In addition to that, I think there is a very low probability that the proposed PHMSA "mega-rule" is passed into law under the Trump administration.

[Spekulatius]

In addition to that, I think there is a very low probability that the proposed PHMSA "mega-rule" is passed into law under the Trump administration.

 

The FERC ruling makes very little sense, but I think there is a concern that the overall ROE will be pushed down by the ruling. If example, if MLP do not get reimbursed for taxes, but C-Corp would, and if MLP just accepted that as is, how would C-Corps compete against MLPs in. FERC proposals, since they would be inherently more expensive for customers, everything else being equal?

 

Again,I don’t think the ruling makes sense and will be reversed or amended, but right now customer would need to pay less to MLPs than they would have to C-Corps, so why go with an expensive proposal?

[benhacker]

In addition to that, I think there is a very low probability that the proposed PHMSA "mega-rule" is passed into law under the Trump administration.

 

The FERC ruling makes very little sense, but I think there is a concern that the overall ROE will be pushed down by the ruling. If example, if MLP do not get reimbursed for taxes, but C-Corp would, and if MLP just accepted that as is, how would C-Corps compete against MLPs in. FERC proposals, since they would be inherently more expensive for customers, everything else being equal?

 

Again,I don’t think the ruling makes sense and will be reversed or amended, but right now customer would need to pay less to MLPs than they would have to C-Corps, so why go with an expensive proposal?

 

I also agree with pretty much everything here... it's probably a nothing burger but I don't think C-corps can truly say "zero impact"

[Cardboard]

https://www.msn.com/en-ca/money/topstories/alberta-wins-trans-mountain-appeal-in-federal-court/ar-BBKJ7YM?ocid=spartandhp

 

One more victory of sanity over insanity. However, the obstructionists will continue. Their plan is more lawsuits, protests and keep pushing back even with illegal means. Stand up to them!

 

Cardboard

[Cardboard]

Time to send the army and impose martial law in Lower B.C.:

 

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aKML-2591503&symbol=KML&region=C

 

Cardboard