Thursday, November 5, 2015

Hey, Kinder Morgan Just Set a New 52-Week Low (KMI)

Actually it's more like a 4 1/4 year low but it was the 52-week low list that caught my eye.
$25.75 last, down $1.06 (3.95%) after trading as low as $25.58.
From Brian Nelson's Tumblr, Nov. 2:

A 10%+ Cost of Capital for Midstream Equities Is Reality
Kinder Morgan floated equity capital at a cost of ~12%. The implications are far-reaching, in our view.
< This article was published on on October 27 and has subsequently been modified today. >
Kinder Morgan (KMI) disclosed how it would raise much-needed financing October 26, and our worst fears were realized: The marginal cost of raising capital in the midstream space has soared. As recently as earlier this year, Kinder Morgan’s executive team had been guiding analysts to a 3.3% cost of capital (“hurdle rate”), (see page 28 here), a level we had outlined was absolutely ludicrous. The 3.3% mark broke down into a 4.1% yield on equity and a 2.4% cost of debt, evenly split. Here’s what we wrote in our June 30 piece, “Kinder Morgan’s Fair Value: $29 Per Share,” when Kinder Morgan’s shares were in the high-$30s, nearly at $40:
“We think a ~3% discount rate makes little sense in terms of an investor hurdle rate, and we posit a high-single-digit discount rate is much more appropriate given both the corporate’s existing leverage and non-existent cash cushion to pay out dividends organically. The discount rate should match the average expected rate over the duration of the cash flows of its assets, or into the perp, not that of today. Kinder Morgan may have unlevered project returns of 8%-12%, but that’s very close to its cost of capital in our opinion. The company’s ~3.3% ‘Analyst Day Hurdle Rate’ assumption is “fantasy” when it comes to long-term intrinsic value estimation.
We assign Kinder Morgan the lowest cost of equity measure in our coverage universe at ~8.9% and assume a 6.6% long-term after-tax cost of debt, which we think is reasonable in light of evaluating long-term intrinsic worth. We discount future enterprise free cash flows at ~8%, our estimate of the company’s true cost of capital. We disclose the value breakdown, by phase, from our valuation model below. Of note, we value over 1,000 equities, and Kinder Morgan is a significant anomaly in our valuation process, which is why we’re issuing ongoing warnings to investors. (this article was our third warning to investors, released June 30)”
To continue reading the June 30 note that walks through all of our valuation assumptions to arrive at the then-$29 fair value estimate for shares >>
The unrealistically “low-cost-of-capital” days are now over, in our view.

Kinder Morgan recently announced that it would float $1.6 billion in mandatory convertible preferred stock, effectively “delayed” issuance of equity capital, which would carry a stated interest rate of 9.75%. Management had previously noted around its third-quarter earnings release that the new financing would not be equity capital, so the announcement was rather strange because, from our perspective, the end result of this transaction after three years would, in fact, be equity capital. It is only because management stated that it would not be raising equity capital that we had thought Kinder Morgan would instead “max” out the revolver as a way to finance the dividend and upcoming projects. The company may still have to “max” out said revolver, or at least Moody’s believes it might have to:...MORE

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