KMI - Kinder Morgan

[prevalou]

so frommi forward rate of return becomes: -4 % (return to 15 times FCF)+5 %+8 %=9 % p.a. at best if true earnings are overstated. Not bad, but not a steal.

 

I have two questions :

 

-Is KMP and EPB debt non recourse to KMI ? (except $3.8 B El Paso)

-If KMP issues debt or shares for an acquisition, is it dilutive for KMI shareholders ?

 

thanks if you know the answer.

[Zorrofan]

Dividend = distributable cash flow as defined by the company.

 

In my opinion, distributable cash flow slightly overstates real earnings.

 

I think Frommi gets 8.1 from the Funds from operations, which was $4 billion ($4B / 1.04B shares = $3.85 x 8.1 = $31.15 share price)

Distributable cash = free cash flow,  as defined by the company i.e. after sustaining cap-ex and this is closer to $1.85ish per share

 

Is the company cheap?  5% yield plus expected long-term growth between 8 & 10%?? I guess it depends if you are looking at it for retirement income, which many are, or growth....

 

cheers

Zorro

[frommi]

Sorry i made some serious mistakes here. I just looked at the graphs at gurufocus and determined that it traded already at 15xFCF (which in reality is FFO, don`t know why gurufocus has this one wrong) and thought that be a fair multiple. But growth has fallen since then, so it is prudent not to use this number. :)

 

A better way is probably to use the graham formula 8+2g or more conservative 8+1.5g for a fair multiple. So this comes down to a fair value of around 35-41$. So the forward rate of return is something like 2-6%+5%+8% = 15-19%. Not bad, but not spectacular either. I probably reduce my portfolio holding a bit.

 

A big sorry to all, i am still learning.

[DCG]

Keep in mind that they recently reaffirmed that they will be able to pay their dividend this year, so you're being pad over 5% to wait.

[Kiltacular]

Dividend = distributable cash flow as defined by the company.

 

In my opinion, distributable cash flow slightly overstates real earnings.

 

Trap,

 

Why do you think Richard Kinder thinks KMI is cheap?

[ItsAValueTrap]

He states his opinion on various conference calls and in the Investors day presentation.

 

If you look at how the IDRs grow over time, it's obvious why this is a wonderful business.

[prevalou]

something i can't understand: with the IDRs, KMI interest is that KMP issues a lot of equity to increase profit and free cash flows via pipelines construction or acquisition. There seems to be a big conflict of interest between KMI and KMP there. Am I mistaken ?

[T-bone1]

He states his opinion on various conference calls and in the Investors day presentation.

 

If you look at how the IDRs grow over time, it's obvious why this is a wonderful business.

 

Not expressing an opinion on KMI, but a lot of people have gotten into a lot of trouble (Fannie, Freddy, EBIX, etc.) making the assumption that something must be a "wonderful business" because of how it grows over time, without really understanding it. 

 

KMI has a lot going for it, but at the end of the day, it is build on a foundation of naive retirees who are willing to fund the equity portion of risky capex projects for only a 5% return . . . there is no free lunch, even if KMI gets half of everyone else's sandwich.

[CorpRaider]

Its not a conflict, but one could envision a scenario where a short term focused GP might favor rapid growth at the expense of the longer term return for the LPs.  Of course you could probably make a case that such short term thinking might harm both interests in a similar fashion over the longer term.  There has been nothing in the performance record to indicate this has been a problem here, to my mind.  Frankly, I might struggle to name half a dozen more long-term, rational capital allocator CEOs out there.  The external management model could be a problem in unscrupulous hands, see CWH, the BDCs, etc…

 

 

[ItsAValueTrap]

something i can't understand: with the IDRs, KMI interest is that KMP issues a lot of equity to increase profit and free cash flows via pipelines construction or acquisition. There seems to be a big conflict of interest between KMI and KMP there. Am I mistaken ?

 

I do agree that it's potentially problematic.

 

1- The General Partner has a limited fiduciary duty to the LPs.  (Their fiduciary duty is actually lower than normal, as set out in the GP/LP agreement.)  An acquisitions that KMP makes has to be accretive.  If the GP wanted to game that system, the GP would make the limited partnership go out and buy lots of assets where the cash flows don't last that long or can decline quickly:

- Very old assets

- Mature gathering pipeline systems

- Tankers, ships, etc.  especially old ones

- Shipping assets at the top of an industry cycle

- E&P assets, especially old ones with not much reserves left

 

KMP does have some gathering systems, tankers, and E&P assets.  So you need to be a little bit careful.  However, most of their assets are new and/or growing their cash flows and aren't in the declining cash flow phase.

 

2- The GP also has an incentive to take on lots and lots of debt.  However, too much debt will hurt the creditworthiness of the business.  If the company wants to enter into long-term contracts with other companies, those other companies don't want counterparty risk.  So too much debt will affect how profitable the business is, because the company will have to give a discount on its long-term contracts so that its counterparties are compensated for their counterparty risk.

 

KMP and KMI have some of the highest credit ratings in their sector.

[CorpRaider]

 

"KMI has a lot going for it, but at the end of the day, it is build on a foundation of naive retirees who are willing to fund the equity portion of risky capex projects for only a 5% return . . . there is no free lunch, even if KMI gets half of everyone else's sandwich."

 

I don't know if I can follow you there.  The vast majority of the "risky" cap-ex projects are pre-subscribed by customers and based upon capacity utilization.  They do have some sensitivity to commodity prices and interest rates…I suppose if there were some nuclear crash in energy prices such that their customers credit was impaired…but even if they were in bankruptcy the client companies would need to move their energy to produce revenues, so it seems like that would be the last contract to be compromised even an an event of insolvency.  Even if prices crashed, one could easily see them benefitting as more demand is spurred and more energy moves.

[T-bone1]

 

"KMI has a lot going for it, but at the end of the day, it is build on a foundation of naive retirees who are willing to fund the equity portion of risky capex projects for only a 5% return . . . there is no free lunch, even if KMI gets half of everyone else's sandwich."

 

I don't know if I can follow you there.  The vast majority of the "risky" cap-ex projects are pre-subscribed by customers and based upon capacity utilization.  They do have some sensitivity to commodity prices and interest rates…I suppose if there were some nuclear crash in energy prices such that their customers credit was impaired…but even if they were in bankruptcy the client companies would need to move their energy to produce revenues, so it seems like that would be the last contract to be compromised even an an event of insolvency.  Even if prices crashed, one could easily see them benefitting as more demand is spurred and more energy moves.

 

I didn't mean to imply that I think the majority of these projects are "risky" in the sense that they are going to fail. 

 

What I meant is that they are "risky" in that the equity portion of any big capex project bears the majority of risk.  If I build a tiny $1 million pipeline and I fund it 50% with debt at 3% and I ask you to kick in another $500k a equity, what type of a return would you want?  Would you really give me money for a 5% return? 

 

What if the "equity" portion of this little pipeline really "yields" a 10% return, but I am only giving you half and keeping the other half (like KMI)?

 

My point is that you would never make that deal with your own real money for a risky (every project involves operational, financial, commodity, and other risks) project to only get a 5% return . . .

 

. . . yet million of retirees do that every day in vehicles like KMP, because they believe the dividends will rise forever . . .

 

I am unaware of any time a vehicle that only goes up, essentially formed for the purpose of allowing people to make an investment they wouldn't actually make on a flow through basis, hasn't eventually come a cropper.

 

What value is being created here?  How is this substantially different than a CDO or Fannie Mae or even EBIX?

[ItsAValueTrap]

KMP is like a really expensive hedge fund.  Weirdly enough, Richard Kinder has created so much value that even the KMP shareholders did really well and outpeformed the S&P 500.

 

He's just really good at the pipeline business.  He's also made money through buying other midstream assets when they are trading at depressed prices.  There's also the tax advantage that KMP enjoys (in some ways it's like a government subsidy).

 

2- In terms of stocks with high yields, I think that there is stuff out there that is much worse.

 

- Royalty trusts where the cash flows will drop off a cliff in the future.  The iron ore trusts that terminate at a certain date are the best example (e.g. Mesabi and GNI).

- You have REITs that revolve around negative carry trades.  They may profits for several years and then have individual years where they lose a lot of money at once.

- You have midstream MLPs that mainly consist of assets that have lower lives, e.g. ACMP.

- Stuff that's just overvalued and sell at a premium to book value, e.g. RESI.

 

How is this substantially different than a CDO or Fannie Mae or even EBIX?

The problem with CDOs is largely due to the detachment between the investors and the parties that originated the loans.  Loan quality was bad and the level of fraud was unusually high. 

There are other "minor" problems with CDOs in that they were poorly structured to minimize investor losses from foreclosures.  If the servicer were paid differently, the servicer would put in more effort to minimize losses from foreclosures.

 

Fannie Mae:  I believe the problem is that it went out and bought CDOs.  I think Buffett was right in purchasing Fannie shares.  Fannie has an unusual competitive advantage due to its government subsidy (the implicit guarantee of its debt meant that it had very low borrowing costs).

 

Ebix: The fat lady hasn't sung yet???  I'm shorting it, but it's possible that it's not the massive fraud that the short sellers think it is.

[frommi]

The markets are very efficient in figuring a fair value for KMP/KMI out, so i wouldn`t be overly concerned about KMP shareholders being ripped. KMP shareholders got a very good return for their capital up to date. And everybody is responsible for his own actions, its not that this whole information is kept private. And KMI profits more when KMP shareprice is high, so its in KMI`s interest to not rip KMP completly off.

[prevalou]

why is this in the interest of KMI that KMP shareprice is high ? Even if it is low KMP can issue more share for the same amount and it doesn't impact KMI

[ItsAValueTrap]

If KMP's share price is high, it can use its "strong currency" to make accretive acquisitions of other companies.  (e.g. arbitrage the valuation of its own shares versus other companies.)

[prevalou]

I understand that but it is relevant for KMP, not KMI (except fot their LP shares of KMP). For KMI, KMP has no cost of equity, because KMP dilution does'nt impact KMI GP. Or I am mistaken ?

[ItsAValueTrap]

KMI would benefit if KMP were to issue lots of lots and shares and to grow KMI's "assets under management".

[ItsAValueTrap]

I'm starting to think that KMP is secretly one of the best E&P companies around.

 

It seems like they are generating massive returns on capital with their CO2 business.  I think a lot of landowners don't understand the value of their land because the land hasn't produced significant oil revenue in a long time.

[T-bone1]

I'm starting to think that KMP is secretly one of the best E&P companies around.

 

It seems like they are generating massive returns on capital with their CO2 business.  I think a lot of landowners don't understand the value of their land because the land hasn't produced significant oil revenue in a long time.

 

Correct me if I'm wrong, but I believe only a small portion of KMP's business is "upstream" or E&P (if anything). 

 

My understanding of the recently announced CO2 project is that they are producing CO2 from a field in AZ, building pipelines to transport it to the Permian basin, and selling the CO2 to companies doing enhanced oil recovery (CO2 flooding) in old depleted fields in the Permian.

 

I would also caution that while the shale boom has created more than a few unwitting "landowners" in places like NE PA (where there has never been historic production), the Permian basin is and has been one of the largest oil fields in the world for decades.  The "landowners" (leaseholders/mineral owners) in that field are huge companies like Pioneer, Chevron, Conoco etc.  They have owned these massive assets for decades in many cases and they know exactly what they own and will pay not be providing KMP/KMI or anyone else with an undeserved windfall.

[CorpRaider]

About 24% of KMP EBDA is attributed to CO2 transport and sales or CO2 EOR per the numerous recent investor presentations, so about $1.7 billion per annum.

[ItsAValueTrap]

I would also caution that while the shale boom has created more than a few unwitting "landowners" in places like NE PA (where there has never been historic production), the Permian basin is and has been one of the largest oil fields in the world for decades.  The "landowners" (leaseholders/mineral owners) in that field are huge companies like Pioneer, Chevron, Conoco etc.  They have owned these massive assets for decades in many cases and they know exactly what they own and will pay not be providing KMP/KMI or anyone else with an undeserved windfall.

 

KMP does have a few competitors in the space, one of them being Denbury (DNR).  However, they've been able to put together an impressive track record.

 

In the investors' presentation, the presenter for the CO2 segment essentially said that the prices that they paid for land was very low and that the land was "cow pasture".

 

2- I do think that it is difficult for others to do CO2 EOR by themselves.  They would need to build their own pipeline from CO2 source fields to their oil reservoir.  KMP has excellent positioning because they already have their pipeline built and paid for.

 

With any pipeline, the dream scenario is similar to what KMP is experiencing.  You build a pipeline with excess capacity.  It turns out that demand for your pipeline is greater than originally anticipated.  You get to sell all this excess capacity at premium prices.  (Because pipelines benefit from scale, the incremental cost is much lower than a smaller pipeline / the customer's alternative.)

 

And if you really want to dream the dream, there is so much excess demand that it makes sense to build a second pipeline alongside the existing one.  This is happening in the KMP Canada segment.

[rogermunibond]

Where do you think Denbury gets its CO2?  Besides DNR, Occidental, Chevron, Apache, Hess and Whiting are all big EOR producers.

[ItsAValueTrap]

Where do you think Denbury gets its CO2?  Besides DNR, Occidental, Chevron, Hess and Whiting are big EOR producers.

http://www.denbury.com/operations/gulf-coast-region/co2-sources-and-pipelines/default.aspx

 

Natural sources:  Jackson Dome, located near Jackson, Mississippi

Man-made sources:  Various sources

[T-bone1]

I was just trying to make the point that CO2 is a relatively low-return midstream business (building pipelines and devliering CO2).  It is not a potentially high return exploration business (the E in E&P). 

 

If you look at KMI's latest project, they paid $30 million for all of the CO2 reserves (already discovered by others) and they are now spending billions to build pipelines and deliver the CO2 for a set fee.  They will make an economic return for this and it is a good business, but this has nothing to do with the E&P business (other than E&Ps being their customers)