KMI - Kinder Morgan

[Zorrofan]

What news am I missing in the MLP space today?  ETE, WMB and KMI are all getting smoked.  I'm about to pick up some WMB (you don't have to be a genius to know its in play and had an (all stock) bid of ~$64 within the last month), but spidey sense indicates there's a bus coming down the street.

 

It seems to me that the recent ridiculous weakness in KMI is due to (still) lower oil prices and the stronger expectation that it will stay low for the forseeable future.  My understanding is KMI is largely immuned from oil price fluctuations except for its CO2 business which it has hedged out its production for this year.  I guess the market is concerned when the hedges expire, their earnings / cashflow will take a hit.  May be they worry that the low oil price will squeeze out incremental NG demand too?  I don't know, KMI is mostly just a toll bridge operator.

 

Long KMI, planning to add but yes I get the spidey sense that it has further to fall.

 

I was long KMI but am out for the tome being......

 

Here are the issues I see:

 

1. Rising rates as the FED finally moves in September

2. Concerns over the payout ratio being too high

3. High debt level which needs to be rolled over at higher rates down the road

4. If oil stays lower for longer producers may go bankrupt and some long-term contracts may be lost as a result

5. Some 20% of KMI relates to CO and oil production

 

My guess is it goes lower still....my $0.02

 

cheers

Zorro

[Picasso]

From the 10-K:

 

Current or future distressed financial conditions of our customers could have an adverse impact on us in the event these

customers are unable to pay us for the products or services we provide.

Some of our customers are experiencing, or may experience in the future, severe financial problems that have had or may

have a significant impact on their creditworthiness. We cannot provide assurance that one or more of our financially distressed

customers will not default on their obligations to us or that such a default or defaults will not have a material adverse effect on

our business, financial position, future results of operations or future cash flows. Furthermore, the bankruptcy of one or more

Table of Contents

33

of our customers, or some other similar proceeding or liquidity constraint, might make it unlikely that we would be able to

collect all or a significant portion of amounts owed by the distressed entity or entities. In addition, such events might force

such customers to reduce or curtail their future use of our products and services, which could have a material adverse effect on

our results of operations, financial condition, and cash flows.

 

When you have the energy credit markets blowing up, this is going to track that to a certain extent.

[sys]

i think kmi is more vulnerable to the cost of capital increasing than to distressed oil producers.  while either could impair their leveraged vehicle for producing cash, i think they should be able to better insulate themselves against the risk of insolvent producers by choosing their projects well.  if they only build/buy assets that are necessary to deliver/process profitably produced product to a market, then regardless of if the producers' assets change hands, those assets should continue to be exploited and whoever operates them should continue to need kmi.

 

i think they are more defenseless against rising interest rates.

[Picasso]

Jesus, look at PAA and PAGP.  No wonder KMI was down as well.  Given how much retail loves KMI, I'm going to stay away for a while.

[CorpRaider]

From the 10-K:

 

Current or future distressed financial conditions of our customers could have an adverse impact on us in the event these

customers are unable to pay us for the products or services we provide.

Some of our customers are experiencing, or may experience in the future, severe financial problems that have had or may

have a significant impact on their creditworthiness. We cannot provide assurance that one or more of our financially distressed

customers will not default on their obligations to us or that such a default or defaults will not have a material adverse effect on

our business, financial position, future results of operations or future cash flows. Furthermore, the bankruptcy of one or more

Table of Contents

33

of our customers, or some other similar proceeding or liquidity constraint, might make it unlikely that we would be able to

collect all or a significant portion of amounts owed by the distressed entity or entities. In addition, such events might force

such customers to reduce or curtail their future use of our products and services, which could have a material adverse effect on

our results of operations, financial condition, and cash flows.

 

When you have the energy credit markets blowing up, this is going to track that to a certain extent.

 

Yeah, I could see that risk, really more of a generalized fear of the sector.  To me, at least a general proposition, they are structurally superior even to the senior secured debtors.  A debtor in possession is going to make sure they get paid if they want to bring in any revenue and keep the lights on.  I was assing around with some of the debt of the E&P companies and I thought hey I'd rather just be the creditor they need to pay even if the equity gets wiped out.  But I suppose expansion projects could be at risk.  KMI and WMB are going to my horses though, because I could see nat gas diverging as these LNG projects and power generation comes online over the next year.  Basically the inverse of what the saudi's did by running the oil price so high for so long....building a tsunami of demand rather than supply...reflexivity.

 

Pardon me for getting a little philosophical/grandiose...I've opened the scotch.

 

P.S. Thanks for flagging PAA...wow.  Looks like they'e got a specific issue with their Cal pipe, but the whole sector is getting murdered.  W/R/T KMI versus other, yeah retail may have liked it but I think Kinder cashiered a lot of the yield hounds and I do note that he is buying from motivated sellers rather than going for the ETE empire building:  Harry Hamm, divorce got you down?  In need of cash?  Call KMI.  Shell:  Bit off maybe more than you can chew with BG?  Need some cash?  KMI will take you out of Elba right as construction costs crater and you keep commitment to take output which underwrote the whole thing.

[Jurgis]

Is KMI currently an MLP with K-1 tax filing?

 

Sorry if it's a basic question, I seem to remember they had both and then one of them bought out the other...

 

What is the remaining one?

Or in other words: if I buy KMI, do I have to do K-1 tax forms? ;)

[Picasso]

No doubt that Rich Kinder has created the best in breed and he does savvy deals.  I think that previous weakness in KMI after the re-IPO made me nervous because it was possible that a management led buyout was always on the table.  So you had a bit of a floor on the stock especially with the massive insider buys.

 

Now you have a situation post rollup of the MLP's that he can't take this private for a while.  Just too much debt on KMI.

 

The good news is the debt for KMI still trades pretty strong.  Less than 5% for 10 year paper which is solid for BBB-.  I also agree that KMI is probably in good bargaining position during any producer bankruptcies. 

 

Sometimes I'm willing to be steam rolled a little for a decent long-term return, but I just don't see the rush to buy KMI here.  I just don't see how some of these big oil and gas producers don't go belly up in the next couple years based on how their debt and stock has been trading.

[gfp]

Is KMI currently an MLP with K-1 tax filing?

 

Or in other words: if I buy KMI, do I have to do K-1 tax forms? ;)

 

 

No.  KMI pays qualified dividends.  About a 6.8% forward looking yield, but not a ton of excess coverage.

[CorpRaider]

No doubt that Rich Kinder has created the best in breed and he does savvy deals.  I think that previous weakness in KMI after the re-IPO made me nervous because it was possible that a management led buyout was always on the table.  So you had a bit of a floor on the stock especially with the massive insider buys.

 

Now you have a situation post rollup of the MLP's that he can't take this private for a while.  Just too much debt on KMI.

 

The good news is the debt for KMI still trades pretty strong.  Less than 5% for 10 year paper which is solid for BBB-.  I also agree that KMI is probably in good bargaining position during any producer bankruptcies. 

 

Sometimes I'm willing to be steam rolled a little for a decent long-term return, but I just don't see the rush to buy KMI here.  I just don't see how some of these big oil and gas producers don't go belly up in the next couple years based on how their debt and stock has been trading.

 

Oh i agree.  Will probably get doubly smoked with irate pressures over intermediate term.

[Palantir]

Is KMI currently an MLP with K-1 tax filing?

 

Sorry if it's a basic question, I seem to remember they had both and then one of them bought out the other...

 

What is the remaining one?

Or in other words: if I buy KMI, do I have to do K-1 tax forms? ;)

 

Nope, not anymore.

[DCG]

Anyone buying/adding to KMI at these prices?

[rc197906]

Anyone take a look at these lately? Sold off significantly in the last couple of months.

[RRJ]

I am.  I think it's been priced as if the Williams deal is bad for it, when it is a buyer of assets in the sector.  I think the downturn in the sector generally makes it easier for them to hit the dividend growth targets for next several years. 

 

[CorpRaider]

I am.  I think it's been priced as if the Williams deal is bad for it, when it is a buyer of assets in the sector.  I think the downturn in the sector generally makes it easier for them to hit the dividend growth targets for next several years.

  Hope you loaded up and made a quick ~ 20%!

[DCG]

Rough year for KMI. I'm still sitting on this and trying to decide whether to sell or stick it out. They got an unfavorable writeup in this weekends' Barrons.

[CorpRaider]

Yeah, AMLP is down ~25% over the past year versus down ~28% for kmi.  YTD is more stark.  I got really lucky with my warrants timing.  Still long some common.  You can obviously get a feel for what management thinks its worth from the convert range and the pricing on the insider buys, but they are wrong for now.

[fareastwarriors]

52week low today. Who's buying more?

8)

[ccplz]

What's the bear thesis for Kinder Morgan? Why is the stock down 60% ytd?

[scorpioncapital]

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.

 

 

[gokou3]

Kinder Morgan Announces 2016 Financial Expectations

http://finance.yahoo.com/news/kinder-morgan-announces-2016-financial-165700339.html

 

KMI has now completed its 2016 budget process and expects to generate 2016 distributable cash flow of slightly over $5 billion, which would be sufficient to support dividend growth in the range discussed in the third quarter call. Alternatively, this cash flow can be used to fund some or all of KMI’s equity needs for 2016. KMI’s board will be reviewing the dividend policy and financing plans in the coming days and the company will announce that policy and plan when finalized.

 

 

Kinder Considering Dividend Cut; Stock Down 25% this Week

http://blogs.barrons.com/incomeinvesting/2015/12/04/kinder-considering-dividend-cut-stock-down-25-this-week/?mod=yahoobarrons&ru=yahoo

 

[ccplz]

Has anyone looked at the capital structure carefully? Are there any liquidity concerns in the medium term?

 

I mean it is a relatively capital intensive industry, so they are dependent on the capital markets to survive and grow.

[RRJ]

I believe the message sent today by management is that they are NOT dependent on the financial markets to survive and grow.  They have $5 billion of distributable cash, confirmed for 2016 even considering current oil and gas prices, with which to fund sustaining cap-ex, the dividend, and purchase of growth.  Moody's moved their credit rating to negative after the most recent acquisition of an additional 30% of NGPL, but Fitch and S&P did nothing, finding the deal credit neutral to KMI.  They are signalling that they are likely to cut the dividend somewhat, or at least cut the heretofore planned 6% growth in the dividend, in order to alleviate Moody's and retain investment grade credit ratings for all 3 agencies.  My guess is they won't have to cut the dividend much to do so, but let's say they cut it in half to $1.00 per share, instead of the $2.00 share dividend paid in 2015. 

 

They use funds saved on a dividend cut to purchase assets on the cheap in this sector, or to buy back stock (probably less likely for this company).  The added assets will then allow for quicker dividend raises in following years, probably more or less catching up to the current dividend schedule.  If you assume they are back to $2.00 in 3 years (current dividend levels), and the stock is trading at a historical yield of 6%, then the share price would be at $33.33 a share.  That's a 24% compounded annual return from a buy in price of $17.39 (I bought a decent amount today at that price).  Not counting whatever dividends they've paid over those 3 years.

 

Another way of looking at it -- there is a $5 billion cushion they have to play with, and that's a safe $5 billion with roughly 85% of that income locked in or hedged.  This is the Amex salad oil scandal--a temporary setback for an asset that has not changed fundamentally at all.  Hell, assume the entire dividend is suspended for 2 years -- that's $10 billion worth of cushion, at the end of which you have a fantastic asset that throws off cash, has a virtual monopoly, and is a backbone of US energy use.  There could well be short term further share price drops as the income investors (retail and institutional) shift out, which just means more buying opportunity.

 

You have to have some faith in management, but Rich Kinder's track record is damn near impeccable.  Read some of their reports and press releases -- they are crystal clear and make perfect sense.  Do you trust GAAP one-size-fits all accounting on the depreciation schedule, or is it more accurate to trust management that has gotten it right for 15 years and knows their assets?  I trust management over GAAP mandated rules for depreciation.  They point out that much of the maintenance on individual pipelines is expensed out of earnings and so already paid for so to just blindly depreciate as GAAP mandates acts as double counting the true maintenance cap-ex.  They just show you the more accurate picture and distribute cash accordingly.  They are highly levered, granted -- perhaps a bit too close for comfort these days.  But this is like a utility, not a flyer type of leverage.  It would be a financial mistake to not leverage to a relatively high extent when the assets are so predictable here.  In the biggest decline in oil and gas prices in a while, management has held up quite well and responds rationally to my mind. 

 

Delaware judgment?  Headline reads $170 million, but in the article itself it says the judge holds them liable for 58% of that, so it's really $100 million, plus they are appealing (and have a decent shot at getting a reversal based solely on the dubious claim), have already reserved for this and consider it immaterial, and have insurance coverage.  Non-event, made much of by shorts. 

 

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

[scorpioncapital]

I worry about a temporary drop in oil prices to $20 and how that will impact the flow of product through pipelines. Sure it may be temporary, but a large debt is kind of like margin in a brokerage account. You may be right but can you weather the storm?

[Guest wellmont]

kmi needs to cut divvie at least 50%. i would cut it more. they have lots of debt coming due in a couple of years. the company should just put all growth plans on hold and stabilize the ship. the balance sheet needs to get better. there is a time to play offense and a time to play defense. this is time for D. the divvie cut may present a good buying opportunity. but there is plenty of downside potential here.

[Picasso]

kmi needs to cut divvie at least 50%. i would cut it more. they have lots of debt coming due in a couple of years. the company should just put all growth plans on hold and stabilize the ship. the balance sheet needs to get better. there is a time to play offense and a time to play defense. this is time for D. the divvie cut may present a good buying opportunity. but there is plenty of downside potential here.

 

A little late to the game on this one.