Author Topic: KMI - Kinder Morgan  (Read 150648 times)

ccplz

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Re: KMI - Kinder Morgan
« Reply #220 on: December 04, 2015, 01:21:06 PM »
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.
« Last Edit: December 04, 2015, 02:00:35 PM by ccplz »


RRJ

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Re: KMI - Kinder Morgan
« Reply #221 on: December 04, 2015, 02:57:03 PM »
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

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Re: KMI - Kinder Morgan
« Reply #222 on: December 04, 2015, 03:03:25 PM »
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?

wellmont

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Re: KMI - Kinder Morgan
« Reply #223 on: December 04, 2015, 03:44:59 PM »
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

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Re: KMI - Kinder Morgan
« Reply #224 on: December 04, 2015, 03:56:45 PM »
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. 

plato1976

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Re: KMI - Kinder Morgan
« Reply #225 on: December 04, 2015, 06:23:13 PM »
on an unleveraged metric: EV/EBITDA it's not exactly cheap?
it's sth like 12

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.

Palantir

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Re: KMI - Kinder Morgan
« Reply #226 on: December 04, 2015, 09:35:48 PM »

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

How do you anticipate them to fund their 2017 capital program? They pretty much told us today they'll cut the dividend. Expect the stock to keep getting pounded for a bit. The div cut will help alleviate the leverage issues, but the capital markets look closed for them so I'm interested in how you think they will fund their program.
« Last Edit: December 04, 2015, 09:39:47 PM by Palantir »
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ccplz

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Re: KMI - Kinder Morgan
« Reply #227 on: December 04, 2015, 09:59:56 PM »
EBITDA was around 6.7 bn for 2014, so EV/2014 EBITDA would be around 10x?

Although EBITDA should be materially lower this year, maybe in the 5-6 bn range? Still seems rather expensive to me on a FCF basis.

Capex is at a 3.6 bn annual run rate, which I don't think they will be able to reduce by too much.
« Last Edit: December 04, 2015, 10:12:04 PM by ccplz »

prevalou

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Re: KMI - Kinder Morgan
« Reply #228 on: December 05, 2015, 04:23:58 AM »

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

How do you anticipate them to fund their 2017 capital program? They pretty much told us today they'll cut the dividend. Expect the stock to keep getting pounded for a bit. The div cut will help alleviate the leverage issues, but the capital markets look closed for them so I'm interested in how you think they will fund their program.


Buffett could help

thefatbaboon

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Re: KMI - Kinder Morgan
« Reply #229 on: December 05, 2015, 04:37:45 AM »
 The company expects ebitda of around 7.3bn and ebda of 8.2 in 2015. Both seemed well on track in q3. (The main difference between the two is g&a is excluded from ebda).  The company turns nearly 70% of ebitda into dcf. (That's high like a tobacco company)

Conceptually, this company has been run as a partnership paying out all dcf from existing projects. And with every new project going anew to the financial market to fund, usually around 50 50 debt equity. Personally, I don't see anything wrong with this strategy except that they should retain an explicit and frequently reaffirmed right to cut the dividend when selling equity is too expensive. So when situations like today arises everyone knows that a dividend or two might be reinvested. 

I can see no evidence of a deterioration in their numbers brought on by the commodity collapse, except for the few hundred million they indicated in their sensitivity grid at the beginning of the year. They just seem to have become victims of their funding model. And a vicious cycle has developed as the equity gets expensive and become less appropriate as a source of funds for growth capex which then makes it more and more likely that they have to be funded from dcf which can only happen with a dividend cut which makes the equity more expensive. Counter intuitively acknowledging the possibility of an occasional dividend suspension would probably stop these kinds of silly panic cycles developing.

 5bn of largely multi year contracted distributable cash flow that they have signalled for 2016 seems like a lot for a 38bn+2bn market cap. I've assumed a 2bn "delay" and added it to the market cap as a sort of cost. I assume all of the 1.5bn they just raised from the mandatory convert is all used up for q4 growth capex and ngpl and other debt reduction. And that my 2bn can pay for all of 2016 growth capex and Kmi doesn't have to touch the financial markets for incremental debt or equity in 2016.

Even with a two coupon hiatus in the dividend to get this 2bn I still think kmi is attractive. But I'd like to find out if there is non acquired growth (non growth capex-ed) in existing pipeline revenue. Also, I find myself distrustful of some of the exclusions from sustaining capex. For example I think it obvious that one has to depreciate a Jones act vessel. And the fact that they don't makes me wonder about the quality of their other judgements related to sustaining capex. If someone would kindly send me some pipeline primers to read I'd be very grateful! 

I like that Sarofim has been on this board forever. He sat many years on singleton's teledyne board and held a portfolio built for decades around Philip Morris and Exxon.  So he's a money manager who understands how free-cash-flowing companies make money and he's familiar with and well connected in Houston and the energy business. He personally has 28m shares of KMI.