We intro'd Thursday's "Kinder Morgan Sets Multi-Year Low As Reality of Approaching Junk Status Sinks In (KMI) UPDATED" with:
...After trading down 7.85% yesterday the stock is down again. Today's low: $20.03.If that little bit of support from mid-2011 doesn't hold there's no technical reason the stock couldn't see $15 or even $10....$15.52 last, down another 7.73%.
In this piece Forbes goes over the history and then quotes the Hedgeye analyst Izabella Kaminska reviewed* last week.
(and last August in "Kinder Morgan, MLPs and the sell case")
Kinder Morgan Collapse Will Force Dividend Cut, Says Gadfly Analyst
“If the market is not willing to play the game, the whole business model can fall apart,” says Hedgeye’s Kevin Kaiser.
It wasn’t supposed to be like this. Kinder Morgan KMI -14.51% was supposed to be the safe port where oil and gas investors could hunker down (and collect a nice yield) while watching the storm blow apart overleveraged shale frackers like so many houses of cards. No one thought Kinder Morgan would be just as fragile.*Linked in our "Kinder Morgan: In Which Izabella Kaminska Declines To Take A Victory Lap And Instead Highlights Recent Analysis (KMI)"
Shares in Kinder are down 30% in the past week and 58% in the past 6 months. On Friday they slid almost 13% to close at a record low of $16.82. The guy taking the biggest his is Chairman Rich Kinder himself. His fortune, as estimated by Forbes, has fallen from $12 billion as of our Global Billionaires list March, to a current $5.8 billion.
At this depressed level, the company’s 51 cents per share in quarterly payouts would generate a dividend yield of 12%. Looks juicy, but only if that dividend holds. And the odds of that are fading. Kinder’s dividend payouts were thought to be sacrosanct. Before Chairman Rich Kinder consolidated his four publicly traded entities (KMP, KMR, EPB) into one (KMI) in 2014, Kinder Morgan Energy Partners had grown its cash payouts every year since 1996, at a compound annual rate of 14%. Of course nothing can compound like that forever.
Investors have been fleeing Kinder because, measured against its $43 billion debt load, its cash flows look meager, its generous dividend unsustainable. Last week Moody’s warned that it might downgrade Kinder’s credit rating, now jut one notch above junk.
In an attempt to stop the bleeding, KMI issued an unusual mid-trading-day announcement on Friday. It said that although the company expected to generate sufficient cash flow in 2016 to support dividend growth, “alternatively, this cash flow can be used to fund some or all of KMI’s equity needs for 2016.” With that, the company admitted for the first time that it is even considering cutting its dividend to shore up its balance sheet and protect its credit rating.
So how did this happen?
Owner of the nation’s biggest pipeline network, Kinder Morgan was supposed to be a relatively simple business, collecting tolls on the oil and gas moved through its 85,000 miles of pipes. As the company says in its investor relations materials, “for 2015, approximately 86 percent of our cash flows are fee based and approximately 95 percent are fee based or hedged.”
Many investors don’t appreciate that Kinder still has some significant exposure to oil and gas prices. It’s the 11th biggest oil producer in Texas, producing 57,000 barrels per day. And though it does hedge much of its pricing exposure, the company said in its annual report earlier this year that its budget assumed oil at $70 and natural gas at $3.80 per mmBTU — almost double where prices are now. Every dollar reduction in crude oil prices reduces distributable cash flow by about $10 million. As a result, the deterioration in its oil production business accounts for most of the $140 million shortfall in third quarter net income versus a year ago. And as hedges roll off in the months to come, the the economics will only get worse.
The core of the bear case against Kinder Morgan is that it can’t live within its means. Consider its performance this year: Revenues are down 12% in the past three quarters, while net income has halved to $944 million. For those nine months cash from operations came in at $3.5 billion. Compare that with cash outflows including capital spending of $3 billion, acquisitions of $1.9 billion, interest payments of $1.5 billion, and dividend payouts of $3.1 billion.
Such spending is simply not sustainable without ever-increasing indebtedness and/or sales of “overdividended” stock. But the ratings agencies say $43 billion in debt is more than enough. A credit downgrade would compound problems by making it considerably more expensive for Kinder to roll its debt forward. (Kinder has $1.7 billion in debt maturing in 2016 and $3 billion in 2017.) A hike in borrowing costs from 5% to a junk level of around 8% would add roughly $1.2 billion to its annual interest expense. And shareholders don’t want to see any stock sales at these depressed levels; management earlier this year promised not to sell any more shares.
For some perspective, I called up Kevin Kaiser, an analyst at Hedgeye Research, who gained notoriety in September 2013 when he launched an attack on Kinder Morgan, calling it “a house of cards, completely misunderstood and mispriced.”
Kinder management and even rival analysts struck back, criticizing Kaiser, 28, for just trying to make a name for himself. Now, of course, he looks prescient....MORE
Possibly also of interest, Friday's:
Kinder Morgan Down Another 12.67% As Company Considers A Dividend Cut (KMI)
Because there is no longer a place on the chart you can point to and call long term support, the trick now will be judging when the sellers have exhausted themselves. To that end a cut in the dividend would probably have the paradoxical effect of setting a firm bottom.