CorpRaider Posted February 22, 2014 Share Posted February 22, 2014 Barron's has an article this week restating the Hedgeeye bear thesis. A couple of thoughts: 1) HE criticizes KMP for not accounting for investments in E&P as sustaining cap ex and subtracting from its computation of distributible cash flow because they haven't increased annual production. This point might have some merit, but it does seem as though the investments keep resulting in extending the expected life span of the E&P assets. So while not increasing annual production they are at least corresponding (whether there is a causal link might be debatable) to a longer life for the asset and its cash flows, which is of course the very essence of an expense that should be capitalized. 2) The criticism regarding not accounting annually for replacement of the tankers seems fully answered, to my mind, by the response from Kinder: that they are not primarily in the tanker business and thus may or may not (if I take their meaning) replace the tanker capacity with new capacity at the end of its useful life. Its probably just as likely that they will take those cash flows and redeploy them into other ventures as they will buy a new fleet of jones act tankers in 30-40 years, so why account for the fiction of cash needed to sustain an ongoing business in shipping 40 years in the future? Link to comment Share on other sites More sharing options...
Spekulatius Posted February 23, 2014 Share Posted February 23, 2014 2) The criticism regarding not accounting annually for replacement of the tankers seems fully answered, to my mind, by the response from Kinder: that they are not primarily in the tanker business and thus may or may not (if I take their meaning) replace the tanker capacity with new capacity at the end of its useful life A shallow argument, imo. Even if they choose not to replace the tankers with new tankers at the end of their useful life, they would have to replace the tankers with other assets, to replace the cash flow their cash flow. They cannot do so, if all the cash flow during the useful life of their assets is spent on distributions. This is not a sustainable business model. FWIW, i own some KMI. Link to comment Share on other sites More sharing options...
gokou3 Posted February 23, 2014 Share Posted February 23, 2014 2) The criticism regarding not accounting annually for replacement of the tankers seems fully answered, to my mind, by the response from Kinder: that they are not primarily in the tanker business and thus may or may not (if I take their meaning) replace the tanker capacity with new capacity at the end of its useful life A shallow argument, imo. Even if they choose not to replace the tankers with new tankers at the end of their useful life, they would have to replace the tankers with other assets, to replace the cash flow their cash flow. They cannot do so, if all the cash flow during the useful life of their assets is spent on distributions. This is not a sustainable business model. FWIW, i own some KMI. So essentially some of the distributions the KMP unitholders receive are return OF capital, not return ON capital. FWIW, i own some KMI leap calls. Looks like there will be opportunities to add in light of this Barrons article. Link to comment Share on other sites More sharing options...
CorpRaider Posted February 23, 2014 Share Posted February 23, 2014 2) The criticism regarding not accounting annually for replacement of the tankers seems fully answered, to my mind, by the response from Kinder: that they are not primarily in the tanker business and thus may or may not (if I take their meaning) replace the tanker capacity with new capacity at the end of its useful life A shallow argument, imo. Even if they choose not to replace the tankers with new tankers at the end of their useful life, they would have to replace the tankers with other assets, to replace the cash flow their cash flow. They cannot do so, if all the cash flow during the useful life of their assets is spent on distributions. This is not a sustainable business model. FWIW, i own some KMI. Thanks for the response. It is sort of a short and dismissive response from Kinder, but who knows what else they said that wasn't quoted. I agree that if the overall actual distributed (not computed "distributable") cash flow is a 1.0 ratio and that continues to be the case throughout the useful life of the relevant capital asset, eventually the capital base of KMP would be depleted. I think KMI is saying, however, that we needn't account for our DCF for those assets on the same convention as specialists in that arena. It seems like they address any problems by just waiving IDRs, despite the fact that they are "distributable". I'm sure KMI would probably argue that while the quoted analysts don't feel that's "high quality" because its not readily modeled, the cash is worth the same. They would probably point to the track record and then buy a few million dollars more in shares. I own no KMP, but I guess I would keep an eye on the ROICs and leverage metrics moreso than worrying about the whether cash is in DCF but kicked back through waived IDRs. I don't know that we'll get much of a sell off in KMI, but one can home; didn't Kinder just file a form 4 for another $3MM yesterday? Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted February 23, 2014 Share Posted February 23, 2014 It seems like they address any problems by just waiving IDRs That's a different issue. When KMP/KMR buys assets, shareholders should be better off. If the transaction is obviously accretive (e.g. it increases intrinsic value per share), then KMI won't get into hot water for making bad deals. If KMI waives IDRs, then a non-accretive deal can turn into an accretive one. Often these waivers are higher in the beginning and go to 0 in the future. This helps to maintain the illusion of steadily increasing dividends at KMP. The underlying assets actually have lumpy cash flows or cash flows that don't kick in right away (e.g. the tankers). Link to comment Share on other sites More sharing options...
sys Posted February 24, 2014 Share Posted February 24, 2014 http://www.kindermorgan.com/investor/presentations/KMP_Responses_to_Barrons.pdf Link to comment Share on other sites More sharing options...
BargainValueHunter Posted February 24, 2014 Share Posted February 24, 2014 http://seekingalpha.com/news/1587263-rich-kinder-buys-200k-kmi-shares-as-smart-money-moves-away-from-kmp Rich Kinder buys 200K KMI shares as "smart money" moves away from KMP Rcihard Kinder discloses buying nearly 200K shares of Kinder Morgan (KMI -2.4%) worth ~$6.4M, just four days after disclosure of a 100K share purchase worth ~$3.3M. The purchases may add to the perception, discussed in this weekend's negative Barron's piece, of an enormous transfer of wealth from MLP Kinder Morgan Partners (KMP -5.3%) to general partner KMI and that “the smart money has gravitated toward the GP.” Rich Kinder owns an $8.1B stake in KMI vs. just $26M in KMP. Link to comment Share on other sites More sharing options...
CorpRaider Posted February 24, 2014 Share Posted February 24, 2014 I would note that KMI was down on El Paso guidance as well (its down more over the past 3 and 6 mos). But yep, even before the last $6 mill he definitely had placed his chips. Link to comment Share on other sites More sharing options...
sys Posted February 25, 2014 Share Posted February 25, 2014 i continue to be surprised by how poorly correlated the short-term price movements are between kmi and the warrants. Link to comment Share on other sites More sharing options...
gokou3 Posted February 25, 2014 Share Posted February 25, 2014 i continue to be surprised by how poorly correlated the short-term price movements are between kmi and the warrants. 53M warrant shares traded hand today... wow. http://finance.yahoo.com/q?s=kmi-wt&d=s Link to comment Share on other sites More sharing options...
stahleyp Posted February 25, 2014 Share Posted February 25, 2014 Wasn't the company buying the warrants at $5 or so? Wouldn't that act as a put in this case? Link to comment Share on other sites More sharing options...
saltybit Posted February 26, 2014 Share Posted February 26, 2014 i continue to be surprised by how poorly correlated the short-term price movements are between kmi and the warrants. It has negative correlation.. ;D Trading the other way today (common down, warrants up) Link to comment Share on other sites More sharing options...
ASTA Posted February 28, 2014 Share Posted February 28, 2014 Any of the experts have an opinion on why Glenn Greenberg bought a 5.6% stake in KMR and not in other vehicle? Link to comment Share on other sites More sharing options...
saltybit Posted February 28, 2014 Share Posted February 28, 2014 Any of the experts have an opinion on why Glenn Greenberg bought a 5.6% stake in KMR and not in other vehicle? I am not an expert, but if you look in slide 4 in Kinder Morgan's presentation http://www.kindermorgan.com/investor/presentations/Credit_Suisse_2014_Energy_Summit.pdf you will get an explanation of why KMR is better than KMP. (for now) Link to comment Share on other sites More sharing options...
ASTA Posted February 28, 2014 Share Posted February 28, 2014 I look at this and think that if I was to buy I just go the easy way of following Kinder in to KMI. Warrants do look interesting its just that I hate leverage and tough structures I need to be comfortable to double down :D Thanks saw the slides before too. Interesting stock for sure at the moment. Link to comment Share on other sites More sharing options...
CorpRaider Posted February 28, 2014 Share Posted February 28, 2014 Hey, stupid question here, but since the warrants are going to be net share settled, that means a holder won't have to put up any cash on expiration to exercise (assuming the warrants are in the money), right? Warrant holders will rather be given common shares, the FMV of which is equal to the amount by which the common price exceeds the strike on the settlement date, no (i.e. this will be a "cashless exercise")? PLS don't go to any trouble to figure it out, I will do the reading, just thought one of you options gurus may have this answer at hand. Thanks. W/R/T to KMR, he could have foreseen some of the slower growth/hiccups in El Paso. If he wanted to invest solely in KMP/KMR, then the rationale in the slides probably explains it. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted February 28, 2014 Share Posted February 28, 2014 SEC filing for the warrants are here: http://www.sec.gov/Archives/edgar/data/1506307/000119312512255687/d355500d424b3.htm#toc355500_5 You get the choice of either cash or cashless exercise. Hmm the document for some reason doesn't mention what happens to fractional shares. Link to comment Share on other sites More sharing options...
CorpRaider Posted February 28, 2014 Share Posted February 28, 2014 Thanks. I bought more than I had intended. It is hard for me to resist buying at prices below those paid by Mr. Morgan, of Kinder Morgan. I've got to quit buying or else I'm going to have to move into Mr. Kinder's garage if things don't go well. heh. Link to comment Share on other sites More sharing options...
yader Posted March 1, 2014 Share Posted March 1, 2014 Corp- Just a thought: Mr. Morgan purchased 6 mil in KMI recently. Owning over 8 bil of KMI and so little of KMP/KMR his bias is clear. So why isn't he purchasing the warrants? Could it be he doesn't see 42 by 2017 but does see higher than the current valuation? Link to comment Share on other sites More sharing options...
CorpRaider Posted March 1, 2014 Share Posted March 1, 2014 Yep, could be. I can't really make the case that there is insufficient liquidity, either as I believe 54 million warrants changed hands the other day. I think Lone Pine and Morgan bought the warrants though and both paid more than me. Link to comment Share on other sites More sharing options...
thomcapital Posted March 1, 2014 Share Posted March 1, 2014 Corp- Just a thought: Mr. Morgan purchased 6 mil in KMI recently. Owning over 8 bil of KMI and so little of KMP/KMR his bias is clear. So why isn't he purchasing the warrants? Could it be he doesn't see 42 by 2017 but does see higher than the current valuation? And if he doesn't see $42 by 2017, then arguably he has a big incentive to keep the stock under that level, instead. He's gotta be swinging one way or the other I would think. Link to comment Share on other sites More sharing options...
CorpRaider Posted March 1, 2014 Share Posted March 1, 2014 Yeah, I suppose it is possible that they are going to do a take under at $39.50. Though it is a pity that they didn't decide upon that course of action prior to repurchases of warrants at $5+. Link to comment Share on other sites More sharing options...
thomcapital Posted March 1, 2014 Share Posted March 1, 2014 Yeah, I suppose it is possible that they are going to do a take under at $39.50. Though it is a pity that they didn't decide upon that course of action prior to repurchases of warrants at $5+. I wasn't necessarily thinking of a take-under, just that if Mr. Kinder can keep the price under ~$42 in 2017, the warrants will expire out of the money and he will avoid the dilution. Who knows? Link to comment Share on other sites More sharing options...
alertmeipp Posted March 1, 2014 Share Posted March 1, 2014 Isn't the warrant exercise price @ $40, if share price is $42, warrant should worth $2. I think the main reason Morgan is buying common not warrants if he is mainly trying to support the common share price and send a message to the market. He is not trying to leverage like many of us. Regarding take under, well, there are other large shareholders as well, they will have to approve the deal. Link to comment Share on other sites More sharing options...
CorpRaider Posted March 1, 2014 Share Posted March 1, 2014 Yeah, I suppose it is possible that they are going to do a take under at $39.50. Though it is a pity that they didn't decide upon that course of action prior to repurchases of warrants at $5+. I wasn't necessarily thinking of a take-under, just that if Mr. Kinder can keep the price under ~$42 in 2017, the warrants will expire out of the money and he will avoid the dilution. Who knows? Yeah just kidding around. Who knows is right, but they are buying like a mofo for sure. Link to comment Share on other sites More sharing options...
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