Author Topic: KMI - Kinder Morgan  (Read 128330 times)

ItsAValueTrap

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Re: KMI - Kinder Morgan
« Reply #130 on: March 20, 2014, 08:48:22 AM »
He states his opinion on various conference calls and in the Investors day presentation.

If you look at how the IDRs grow over time, it's obvious why this is a wonderful business.
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prevalou

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Re: KMI - Kinder Morgan
« Reply #131 on: March 20, 2014, 08:56:15 AM »
something i can't understand: with the IDRs, KMI interest is that KMP issues a lot of equity to increase profit and free cash flows via pipelines construction or acquisition. There seems to be a big conflict of interest between KMI and KMP there. Am I mistaken ?

T-bone1

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Re: KMI - Kinder Morgan
« Reply #132 on: March 20, 2014, 09:02:28 AM »
He states his opinion on various conference calls and in the Investors day presentation.

If you look at how the IDRs grow over time, it's obvious why this is a wonderful business.

Not expressing an opinion on KMI, but a lot of people have gotten into a lot of trouble (Fannie, Freddy, EBIX, etc.) making the assumption that something must be a "wonderful business" because of how it grows over time, without really understanding it. 

KMI has a lot going for it, but at the end of the day, it is build on a foundation of naive retirees who are willing to fund the equity portion of risky capex projects for only a 5% return . . . there is no free lunch, even if KMI gets half of everyone else's sandwich.

CorpRaider

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Re: KMI - Kinder Morgan
« Reply #133 on: March 20, 2014, 09:05:02 AM »
Its not a conflict, but one could envision a scenario where a short term focused GP might favor rapid growth at the expense of the longer term return for the LPs.  Of course you could probably make a case that such short term thinking might harm both interests in a similar fashion over the longer term.  There has been nothing in the performance record to indicate this has been a problem here, to my mind.  Frankly, I might struggle to name half a dozen more long-term, rational capital allocator CEOs out there.  The external management model could be a problem in unscrupulous hands, see CWH, the BDCs, etc…

« Last Edit: March 20, 2014, 09:06:52 AM by CorpRaider »

ItsAValueTrap

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Re: KMI - Kinder Morgan
« Reply #134 on: March 20, 2014, 09:08:31 AM »
something i can't understand: with the IDRs, KMI interest is that KMP issues a lot of equity to increase profit and free cash flows via pipelines construction or acquisition. There seems to be a big conflict of interest between KMI and KMP there. Am I mistaken ?

I do agree that it's potentially problematic.

1- The General Partner has a limited fiduciary duty to the LPs.  (Their fiduciary duty is actually lower than normal, as set out in the GP/LP agreement.)  An acquisitions that KMP makes has to be accretive.  If the GP wanted to game that system, the GP would make the limited partnership go out and buy lots of assets where the cash flows don't last that long or can decline quickly:
- Very old assets
- Mature gathering pipeline systems
- Tankers, ships, etc.  especially old ones
- Shipping assets at the top of an industry cycle
- E&P assets, especially old ones with not much reserves left

KMP does have some gathering systems, tankers, and E&P assets.  So you need to be a little bit careful.  However, most of their assets are new and/or growing their cash flows and aren't in the declining cash flow phase.

2- The GP also has an incentive to take on lots and lots of debt.  However, too much debt will hurt the creditworthiness of the business.  If the company wants to enter into long-term contracts with other companies, those other companies don't want counterparty risk.  So too much debt will affect how profitable the business is, because the company will have to give a discount on its long-term contracts so that its counterparties are compensated for their counterparty risk.

KMP and KMI have some of the highest credit ratings in their sector.
« Last Edit: March 20, 2014, 09:32:12 AM by ItsAValueTrap »
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CorpRaider

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Re: KMI - Kinder Morgan
« Reply #135 on: March 20, 2014, 09:17:25 AM »

"KMI has a lot going for it, but at the end of the day, it is build on a foundation of naive retirees who are willing to fund the equity portion of risky capex projects for only a 5% return . . . there is no free lunch, even if KMI gets half of everyone else's sandwich."

I don't know if I can follow you there.  The vast majority of the "risky" cap-ex projects are pre-subscribed by customers and based upon capacity utilization.  They do have some sensitivity to commodity prices and interest rates…I suppose if there were some nuclear crash in energy prices such that their customers credit was impaired…but even if they were in bankruptcy the client companies would need to move their energy to produce revenues, so it seems like that would be the last contract to be compromised even an an event of insolvency.  Even if prices crashed, one could easily see them benefitting as more demand is spurred and more energy moves.

T-bone1

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Re: KMI - Kinder Morgan
« Reply #136 on: March 20, 2014, 09:35:04 AM »

"KMI has a lot going for it, but at the end of the day, it is build on a foundation of naive retirees who are willing to fund the equity portion of risky capex projects for only a 5% return . . . there is no free lunch, even if KMI gets half of everyone else's sandwich."

I don't know if I can follow you there.  The vast majority of the "risky" cap-ex projects are pre-subscribed by customers and based upon capacity utilization.  They do have some sensitivity to commodity prices and interest rates…I suppose if there were some nuclear crash in energy prices such that their customers credit was impaired…but even if they were in bankruptcy the client companies would need to move their energy to produce revenues, so it seems like that would be the last contract to be compromised even an an event of insolvency.  Even if prices crashed, one could easily see them benefitting as more demand is spurred and more energy moves.

I didn't mean to imply that I think the majority of these projects are "risky" in the sense that they are going to fail. 

What I meant is that they are "risky" in that the equity portion of any big capex project bears the majority of risk.  If I build a tiny $1 million pipeline and I fund it 50% with debt at 3% and I ask you to kick in another $500k a equity, what type of a return would you want?  Would you really give me money for a 5% return? 

What if the "equity" portion of this little pipeline really "yields" a 10% return, but I am only giving you half and keeping the other half (like KMI)?

My point is that you would never make that deal with your own real money for a risky (every project involves operational, financial, commodity, and other risks) project to only get a 5% return . . .

. . . yet million of retirees do that every day in vehicles like KMP, because they believe the dividends will rise forever . . .

I am unaware of any time a vehicle that only goes up, essentially formed for the purpose of allowing people to make an investment they wouldn't actually make on a flow through basis, hasn't eventually come a cropper.

What value is being created here?  How is this substantially different than a CDO or Fannie Mae or even EBIX?

ItsAValueTrap

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Re: KMI - Kinder Morgan
« Reply #137 on: March 20, 2014, 10:12:23 AM »
KMP is like a really expensive hedge fund.  Weirdly enough, Richard Kinder has created so much value that even the KMP shareholders did really well and outpeformed the S&P 500.

He's just really good at the pipeline business.  He's also made money through buying other midstream assets when they are trading at depressed prices.  There's also the tax advantage that KMP enjoys (in some ways it's like a government subsidy).

2- In terms of stocks with high yields, I think that there is stuff out there that is much worse.

- Royalty trusts where the cash flows will drop off a cliff in the future.  The iron ore trusts that terminate at a certain date are the best example (e.g. Mesabi and GNI).
- You have REITs that revolve around negative carry trades.  They may profits for several years and then have individual years where they lose a lot of money at once.
- You have midstream MLPs that mainly consist of assets that have lower lives, e.g. ACMP.
- Stuff that's just overvalued and sell at a premium to book value, e.g. RESI.

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How is this substantially different than a CDO or Fannie Mae or even EBIX?
The problem with CDOs is largely due to the detachment between the investors and the parties that originated the loans.  Loan quality was bad and the level of fraud was unusually high. 
There are other "minor" problems with CDOs in that they were poorly structured to minimize investor losses from foreclosures.  If the servicer were paid differently, the servicer would put in more effort to minimize losses from foreclosures.

Fannie Mae:  I believe the problem is that it went out and bought CDOs.  I think Buffett was right in purchasing Fannie shares.  Fannie has an unusual competitive advantage due to its government subsidy (the implicit guarantee of its debt meant that it had very low borrowing costs).

Ebix: The fat lady hasn't sung yet???  I'm shorting it, but it's possible that it's not the massive fraud that the short sellers think it is.
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frommi

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Re: KMI - Kinder Morgan
« Reply #138 on: March 20, 2014, 10:13:07 AM »
The markets are very efficient in figuring a fair value for KMP/KMI out, so i wouldn`t be overly concerned about KMP shareholders being ripped. KMP shareholders got a very good return for their capital up to date. And everybody is responsible for his own actions, its not that this whole information is kept private. And KMI profits more when KMP shareprice is high, so its in KMI`s interest to not rip KMP completly off.

prevalou

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Re: KMI - Kinder Morgan
« Reply #139 on: March 20, 2014, 10:21:13 AM »
why is this in the interest of KMI that KMP shareprice is high ? Even if it is low KMP can issue more share for the same amount and it doesn't impact KMI