Saturday, October 31, 2015

"Kinder Morgan Could Fall Another 20% or More" (KMI)

If you are a shareholder you may have heard the nonsense from management "We are insulated from commodity prices" and"our revenue is fee-based" blah blah. Taint so.
And just to show I'm no hater-come-lately...

On August 11, 2014 we relayed the news of the roll-up of the partnerships into the corp. with the note, "more to come". And boy was there.

On August 12 FT Alphaville's David Keohane directed our attention to Bloomberg's Matt Levine and "Pipeline Giant Reverse-Engineers Itself $12 Billion" which we linked to in the less politely titled "Kinder Morgan Creates Money Out of Thin Air"

That same day Alphaville's Izabella Kaminska was even more blunt with "On the art of creating value from nothing". which we linked to in "Asking the Right Question About the Kinder Morgan Deal: Why Now? (KMI)"

Mr. Levine went on to other rides in the  parc d'attractions of high finance but Ms. Kaminska came back on the 18th with "Kinder Morgan, MLPs and the sell case" which we combined with the Barron's piece "Tax Breaks -- For Whom?", the Feb. 2014 Barron's piece "Kinder Morgan: Trouble in the Pipelines?" and KMI's response to the earlier Barron's piece into the linkwrap "The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)".

Good times.

The stock bounced around $41 the week the roll-up was announced and closed yesterday at $27.35 up 15 cents and up another nickel in after-hours trading.

For what it's worth it appears all the pair trade jockeying (short common/buy new issue prf.) with the new financing (link below) has been accomplished and the wee beasties should trade on fear/greed and fundamentals once again.

From Barron's, this week's feature story:
The country’s largest pipeline company faces pressure from lower commodity prices.

Wall Street has soured on once-hot master limited partnerships tied to pipelines and other energy infrastructure. So far this year, the benchmark Alerian MLP Index has fallen 29%. 

There are multiple reasons for the big drop, including disappointing earnings, reduced expectations for dividend growth amid depressed energy prices, and concerns that the MLP business model, which relies heavily on equity and debt sales to fund growth, is breaking down. 

All of these issues are affecting industry leader Kinder Morgan (ticker: KMI), which is down 36% this year to $27. 

The Houston-based company operates an 84,000-mile network of pipelines that transports a third of U.S. natural gas, as well as a significant amount of petroleum products. It produces oil from Texas fields, operates terminals that store coal and other commodities, and owns a large crude-oil pipeline in Canada. Its enterprise value (equity plus debt) is about $104 billion. 

Kinder Morgan shares still look richly priced and could fall to the low $20s as investors focus more on the company’s flagging results and high valuation, based on traditional financial measures, such as net income and earnings before interest, taxes, depreciation, and amortization (Ebitda), instead of its tempting 7.5% dividend yield. 

“Kinder Morgan is a capital-intensive, cyclical conglomerate with low to no growth and an overlevered balance sheet,” wrote Kevin Kaiser, an analyst with Hedgeye Risk Management, a Connecticut research firm, in a recent client note. “In our opinion, the MLP go-go days of valuing this company based upon its dividend are behind us. This market is smartening up and longs have a hard lesson to learn yet.”
While Kinder Morgan is a corporation, its financial reporting and dividend policy are like those of MLPs. This reflects the accounting used by two big MLPs that had been controlled by Kinder Morgan until the parent company bought them last year, greatly simplifying its structure. 

ANALYSTS WERE UNIMPRESSED with Kinder’s recent third-quarter earnings report. The company’s adjusted operating profits of $1.84 billion were below expectations and about 1% lower than those a year earlier. The decline came despite total capital spending projected at $4 billion for this year and a $3 billion pipeline acquisition earlier this year. The shares have fallen more than 10% since the news. 
Kinder Morgan increased its quarterly dividend by two cents, to 51 cents a share, leaving it 16% above its third-quarter 2014 level of 44 cents. But it retreated from its prior expectation of 10% growth in the dividend in 2016 by setting a new target range of 6% to 10%. 

The company has been pressured by low commodity prices, which hurt its oil-production business, and results were weaker in its big natural-gas pipeline segment, too. “While we are largely insulated from commodity-price impacts, due to our predominately take-or-pay supported cash flows, we are not totally immune,” said Chairman Rich Kinder in a statement.

The report prompted John Edwards, an MLP analyst and longtime Kinder bull at Credit Suisse, to cut his rating to Neutral from Outperform and lower his price target to $39 from $52. In a report, “Management Backs Off of Guidance for the First Time Ever,” he wrote that Kinder Morgan has “missed every quarter this year and is expected to come in below budget for the full year.” ...MUCH MORE
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