bmichaud Posted January 28, 2014 Share Posted January 28, 2014 Is anyone worried about the on-going warrant buyback program vis a vis ultimately being able to realize full value for the warrants? Can the Company just squeeze out minority warrant holders without a premium? Or can you simply refrain from participating in any tender offer? Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 28, 2014 Share Posted January 28, 2014 The terms of the warrants are described here: http://www.sec.gov/Archives/edgar/data/1506307/000119312512255687/d355500d424b3.htm#toc355500_5 There is protection from the company issuing excessive dividends. I don't understand what you're saying about a squeeze-out. I don't see any provision where the company can squeeze out all of the warrant holders? Link to comment Share on other sites More sharing options...
thomcapital Posted January 28, 2014 Share Posted January 28, 2014 Is anyone worried about the on-going warrant buyback program vis a vis ultimately being able to realize full value for the warrants? Can the Company just squeeze out minority warrant holders without a premium? Or can you simply refrain from participating in any tender offer? I asked the same question a couple times regarding some of the bank warrants outstanding. Others here (far smarter than I) said no, it's not an issue. What is an issue - if Mr. Kinder tries another MBO at a low enough price that would put the warrants in the red. Link to comment Share on other sites More sharing options...
bmichaud Posted January 28, 2014 Share Posted January 28, 2014 Is anyone worried about the on-going warrant buyback program vis a vis ultimately being able to realize full value for the warrants? Can the Company just squeeze out minority warrant holders without a premium? Or can you simply refrain from participating in any tender offer? I asked the same question a couple times regarding some of the bank warrants outstanding. Others here (far smarter than I) said no, it's not an issue. What is an issue - if Mr. Kinder tries another MBO at a low enough price that would put the warrants in the red. Good point. He's likely to NOT pay fair value in a buyout, and a 20% premium over $36 is only $43....seems risky. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 28, 2014 Share Posted January 28, 2014 If that was his Machiavellian master plan all along, then why repurchase warrants in the first place? C'mon guys ;) Link to comment Share on other sites More sharing options...
thomcapital Posted January 28, 2014 Share Posted January 28, 2014 If that was his Machiavellian master plan all along, then why repurchase warrants in the first place? Reading the tea leaves, I'm asking myself the same question over and over again. :) Given the large number of warrants outstanding, it does give him an extra incentive to MBO at a "low" price, if he goes that route. I wonder if there's a way we could find out whether he personally owns any warrants or not? I'm guessing they would have showed up in his filings with the SEC, but I don't know for sure. Besides an MBO, what are his options for moving the stock? Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 28, 2014 Share Posted January 28, 2014 It'd be kind of unfair if you take over El Paso, issue warrants in connection with the takeover, and then take KMI private. But there's a protection against that. The ex-El Paso shareholders can vote against the merger because they own lots of warrants. Plus other KMI shareholders may vote against it. Link to comment Share on other sites More sharing options...
gfp Posted January 28, 2014 Share Posted January 28, 2014 Kinder has spent at least $620 million repurchasing warrants in the open market since May 2012. In the 4th quarter of 2013 he appeared to switch to repurchasing KMI common, spending $172 million repurchasing 5.2 million shares (avg. cost 33.08 (!!)). Every time a warrant repurchase authorization was declared by the board it was quickly used up and replaced with another authorization. Warrant count has gone from an initial 505 million to 348.44 million at the end of Q3. We don't have the 10K yet, but it appears that he used almost all of his authorization in Q4 to repurchase shares at the low of the quarter. I trust that his interests are aligned with shareholders. I'm not worried about him trying another MBO at 43 or whatever - he's still working off the EP deal debt. This thing will be public for a while. edit: just a note that there is an analyst presentation tomorrow: http://phx.corporate-ir.net/phoenix.zhtml?c=93621&p=irol-newsArticle&ID=1892415&highlight= Link to comment Share on other sites More sharing options...
gokou3 Posted January 28, 2014 Share Posted January 28, 2014 I am reading this thread with great interest. Looks like the company has a good jockey with a enviable record. I am interested to know if someone has a valuation model for it, though. I know that the company is yielding 4.6% and the dividend is growing in the double-digit percentage, which seems to say the current price is a good deal. TIA. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 28, 2014 Share Posted January 28, 2014 Hmm I'm trying to wrap my head around the accounting. KMI is incentivized to inflate KMP's yield. KMP is largely held by retail investors. The retail investors will likely value KMP based on yield. (Most institutional investors do it too.) 1- Others have accused KMP of inflating yield by under-maintaining their assets. I think that this is a terrible argument. Kinder Morgan has a reasonably good track record in safety as far as I can tell. 2- In some deals where KMP has acquired new assets, KMI has waived part of its incentive distribution fees in the short term. In later years KMP will have to pay full fees. This inflates yield in the short term at the expense of long-term yield. 3- If you look at the statement of cash flow, KMP regularly pays cash to KMI. The 2010 cash distribution was lower than the 2009 cash distribution. YE1996 - $0.268M YE1997 - $2.280M <-- Richard Kinder becomes the CEO in Feb. 1997 YE1998 - $27.450M YE1999 - $52.674M YE2000 - $91.366M YE2001 - $181.198M YE2002 - $253.344M YE2003 - $314.244M YE2004 - $376.005M YE2005 - $460.869M YE2006 - $523.198M YE2007 - $567.7M YE2008 - $764.7M YE2009 - $918.4M YE2010 - $861.7M YE2011 - $1161M YE2012 - $1340M This happened because KMI waived feeds in 2010 relating to the Petrohawk/Kinderhawk acquisition. I believe this allowed KMP to maintain the illusion of continually increasing dividends. Or am I wrong here???? 4- KMP wants investors to value the company based on distributable cash flow. This is not a good metric when: a- KMP is waiving fees in the short term at the expense of higher fees in the long run. b- Some of KMP's assets have quickly depleting cash flows. A pipeline can have a nice stream of cash flow for 60 years or more. The E&P side of KMP will have cash flows that will decline in the near future (e.g. next several years). The gathering pipeline side will likely have cash flows that will decline in the near future. The decline depends somewhat on how the contracts are structured. Inherently, the shale gas wells themselves decline. Once the well declines, there is no obvious alternative use for part or all of the gathering pipeline. Link to comment Share on other sites More sharing options...
CorpRaider Posted January 28, 2014 Share Posted January 28, 2014 They spent a fair amount of time giving color on the e&p assets on the last call, mainly to the hedge eye "analyst" if memory serves. My basic recollection was they are projecting permianesque "beast mode" longevity for those assets. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 29, 2014 Share Posted January 29, 2014 Kevin Kaiser is the Hedgeye analyst. I disagree with his thesis that KMP is underspending on maintenance capex. But distributable cash flow is a misleading way to look at E&P assets. Each individual well produces less and less each yeah after enhanced oil recovery begins. The distributable cash flow of each well will fall dramatically each year. The right way to value E&P assets is to look at their net present value. A saner way of valuing the E&P assets would be to break them out and to provide reserve data and NPVs at different discount rates. For example, Berkshire Hathaway is in a number of different industries. Buffett helps investors by breaking out the insurance companies, since they should NOT be valued based on P/E or distributable cash flow or free cash flow. Link to comment Share on other sites More sharing options...
bmichaud Posted January 29, 2014 Share Posted January 29, 2014 Trap, Did you look at the Jeffries note? SEP spends ~$18k per mile on maintenance and EPB spends $3. Do you not agree with how Jeffries looks at it? I agree distributable cash flow can be misleading. I like the "fully loaded" method Jeffries employs, which gives KMI credit for ebitda based on its percentage ownership of the distributable cash flow, which takes into account the GP split. Link to comment Share on other sites More sharing options...
alertmeipp Posted January 29, 2014 Share Posted January 29, 2014 down 3 percent with heavy volume, any news? Link to comment Share on other sites More sharing options...
gfp Posted January 29, 2014 Share Posted January 29, 2014 Ex-dividend today plus analyst meeting ongoing currently Link to comment Share on other sites More sharing options...
CorpRaider Posted January 29, 2014 Share Posted January 29, 2014 Maybe they are announcing a buyout with a 30%+ premium paid in cash that some of us seem to fear. Link to comment Share on other sites More sharing options...
alertmeipp Posted January 29, 2014 Share Posted January 29, 2014 well, i have some now, hard assets with stable cash flow should do us well. Link to comment Share on other sites More sharing options...
CorpRaider Posted January 29, 2014 Share Posted January 29, 2014 Here's the analyst day link with presentations. I listened to some of it and read through the main presentation. There is some discussion of the warrants versus stock repurchases near the end. Also a nice chart setting forth their historic an projected costs of capital ROICs and ROE. http://www.kindermorgan.com/investor/presentations/presentations.cfm Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 29, 2014 Share Posted January 29, 2014 Trap, Did you look at the Jeffries note? SEP spends ~$18k per mile on maintenance and EPB spends $3. Do you not agree with how Jeffries looks at it? I agree distributable cash flow can be misleading. I like the "fully loaded" method Jeffries employs, which gives KMI credit for ebitda based on its percentage ownership of the distributable cash flow, which takes into account the GP split. They held a conference call addressing that. http://seekingalpha.com/article/1704582-kinder-morgan-energy-partners-investors-webcast-transcript Their track record in pipeline safety seems to be fine, though I could have done more work crunching PHMSA data. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 30, 2014 Share Posted January 30, 2014 The 2010 10-K describes how KMP was able to increase its dividend and why the distributions of cash to KMI fell: On May 28, 2010, the Federal Energy Regulatory Commission, referred to in this report as the FERC, approved a settlement agreement that our subsidiary SFPP, L.P. reached with 11 of 12 shippers regarding various rate challenges. We refer to this settlement agreement as the Historical Cases Settlement, and it resolved a wide range of rate challenges dating back as early as 1992. The Historical Cases Settlement resolved all but two of the cases outstanding between SFPP and the eleven shippers, and we do not expect any material adverse impacts on our business from the remaining two unsettled cases. The twelfth shipper entered into a separate settlement agreement with SFPP, L.P. in February 2011. The FERC has not yet acted on the second settlement. In 2010, we recognized a $172.0 million expense due to adjustments of our liabilities related to both the Historical Cases Settlement and other matters related to SFPP and other rate litigation, and in June 2010, we made settlement payments to various shippers totaling $206.3 million. Our cash distributions of $4.40 per unit to our limited partners for 2010 were not impacted by these rate case litigation settlement payments because, from a cash perspective, a portion of our partnership distributions for the second quarter of 2010 was a distribution of cash from interim capital transactions, rather than a distribution of cash from operations; I made a mistake earlier. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 30, 2014 Share Posted January 30, 2014 One of the slides in the analysts conference goes over growth targets. http://www.kindermorgan.com/investor/presentations/2014_Analysts_Conf_01_Overview.pdf Long-term Growth Targets KMI – 3-year targeted dividend/share CAGR of about 8% (2013-2016) KMP / KMR – 3-year targeted LP distribution/unit CAGR of about 5% (2013-2016) EPB – LP distribution/unit growth expected to resume in 2017 with growth projects coming online beginning in 2016 Key Assumptions 2013 actual results as base year Growth varies by year No major acquisitions assumed ---- I'm guessing that management will overdeliver like it has in the past. Any accretive acquisitions by KMP or EPB will grow KMI's fees from its IDRs. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 30, 2014 Share Posted January 30, 2014 Here's my writeup on the company: http://wp.me/p1mOGr-Fl Link to comment Share on other sites More sharing options...
alertmeipp Posted January 30, 2014 Share Posted January 30, 2014 Nice write up. At expiration, the warrants should be worth 1.28X their original price. (35.47 * 1.13^3.33 – 40) / 3.16 How do you get 1.13? Are u using 5% dividend and 8% growth rate? Does warrant strike price get adjusted based on the dividend? Link to comment Share on other sites More sharing options...
james22 Posted January 30, 2014 Share Posted January 30, 2014 How do you believe Enbridge (EEQ) compares, ItsAValueTrap? Link to comment Share on other sites More sharing options...
sys Posted January 30, 2014 Share Posted January 30, 2014 Here's my writeup on the company: http://wp.me/p1mOGr-Fl thanks for sharing that, i found it useful. Link to comment Share on other sites More sharing options...
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