Author Topic: KMI - Kinder Morgan  (Read 128160 times)

Patmo

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Re: KMI - Kinder Morgan
« Reply #250 on: December 08, 2015, 04:16:44 PM »
Don't know why anyone tries or tried to value this on the dividends. That's irrelevant. When someone tells me the right EV/EBITDA multiple for this business I'll start to get interested. So far everyone is still stuck in investing kindergarten thinking this is about the dividend yield.

What makes EV/EBITDA as a standalone valuation metric relevant in KMI's case? And why is dividend yield irrelevant? From your comment it seems like you are just trading one cookie cutter for another, no?
« Last Edit: December 08, 2015, 04:19:28 PM by Patmo »


Palantir

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Re: KMI - Kinder Morgan
« Reply #251 on: December 08, 2015, 04:47:37 PM »

Looks like the dividend was cut by more than 50%. Would you maintain that the larger than expected cut is good for forward prospects and maintain your $11 target, or do you think this should go to $6-7 as implied by 9% on the new dividend schedule?

Indeed the cut was quite aggressive, good for maintaining operations, not so good for the guys who didn't expect a cut.  Right now a $0.125/q dividend places them at a current yield of 3.4%, which would only be justified for a very fast growing name. If price doesn't move, then either the market expects uber growth, or it hasn't been truly priced in.

Can they achieve growth?

Just some back of envelope calcs - 50% cut would save them about $2.3B, and this 75% cut will save them $3.4B. They will need about $2B of that for capex just for 2016 and $1.4B to pay down debt, which is really not enough. When 2017 comes around and they need $5B in capital, it is unclear where that will come from. They could cut capex, which of course would hurt longer term growth expectations.

If they grow the dividend from the .125/q base rate, then they're going to cut into that $3.4b cushion earmarked for investment and debt reduction, so they cannot do all three. So I am suspicious about how much dividend growth can be generated. They need to reduce debt by about $10B to reach some semblance of normality, after which they can grow again.

Since the cut was aggressive, I think a lower target yield is justified. I think a 7% yield is pretty reasonable, but even that only puts it at $7 or so...
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Picasso

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Re: KMI - Kinder Morgan
« Reply #252 on: December 08, 2015, 05:37:06 PM »
Don't know why anyone tries or tried to value this on the dividends. That's irrelevant. When someone tells me the right EV/EBITDA multiple for this business I'll start to get interested. So far everyone is still stuck in investing kindergarten thinking this is about the dividend yield.

What makes EV/EBITDA as a standalone valuation metric relevant in KMI's case? And why is dividend yield irrelevant? From your comment it seems like you are just trading one cookie cutter for another, no?

EV/EBITDA for a business this levered is a much, much better starting point to getting comfortable with any valuation.  It could trade for 8x EBITDA and have a stock trading like a worthless option with only time value. 

Let's say you want to value this based on dividends.  Okay fine.  We have $0.50/year for the next five years and then maybe $1/year for the next five years after.  How much do you want to pay for $7.50 of levered dividends over five years?

EV/EBITDA at least gets you to a conversation where someone could make an unlevered bid and you can explain the value.  Otherwise we're just talking about how much cash the equity stub can spit out before the bondholders decide enough is enough.  That's not margin of safety investing.

scorpioncapital

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Re: KMI - Kinder Morgan
« Reply #253 on: December 08, 2015, 05:51:11 PM »
On a sidenote does it make sense to compare return on invested capital to yield on purchase price? My theory is that you have a gradient between ROIC and yield but perhaps the gradient should be between ROE and yield.
E.g

A company has a ROIC of 15% but uses debt. Your yield if you buy the stock today is say 10%. You are going in the right direction.

However, that same company may have an ROE of 30%. Should you compare the initial yield of 10% against 30% or 15%? Seems the direction is the same but the magnitude is substantially different.

I'm thinking of this as a bond with an expanding coupon. Expanding at 15% vs 30% is a big difference.

Palantir

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Re: KMI - Kinder Morgan
« Reply #254 on: December 08, 2015, 06:22:53 PM »
Who is going to make an unlevered bid for KMI?
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Picasso

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Re: KMI - Kinder Morgan
« Reply #255 on: December 08, 2015, 06:28:48 PM »
Probably no one. But that doesn't mean you should ignore the cash flow to the enterprise value. If it's not worth it to an acquirer to take on all that debt then why would a minority equty investor feel okay paying 12x EBITDA?

Palantir

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Re: KMI - Kinder Morgan
« Reply #256 on: December 08, 2015, 07:23:27 PM »
Who is ignoring the cash flow to the bondholders? The people valuing it by dividend yield are surely not.
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Picasso

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Re: KMI - Kinder Morgan
« Reply #257 on: December 08, 2015, 07:35:04 PM »
The dividend yield on this levered entity is like being long the worst tranche of a deteriorating bond.  A yield of 7%, 10%, 15%, 30% doesn't tell you your risk.  Knowing the full value of the entity versus the crappy part of the capital structure is going to tell you what this should be trading for.

Again, target dividend yields on this stock tell you close to nothing about where it should be valued.

rpadebet

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Re: KMI - Kinder Morgan
« Reply #258 on: December 08, 2015, 07:54:47 PM »
Not sure of the value at these levels,

If bonds are yielding 9%, why should equity stub yield less? Especially when growth is some ways off in the future and the structure is so levered?

I think an EV/EBITDA of 9-10x should be base (or even optimistic) case. It would have to trade lower for this to be value.
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scorpioncapital

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Re: KMI - Kinder Morgan
« Reply #259 on: December 08, 2015, 08:22:59 PM »
I'm just trying to understand the inherent return here. I mean it seems to be 5b DCF into 80 billion invested capital or 6.25%. Only marginally above the cost of debt. Of course all utilities are leveraged, but for example electric utilities have such dependable cash flows investors don't mind the low returns. Companies like Berkshire Energy also earn a low return but can deploy large amounts of (low cost?) debt to make the return attractive. What does Kinder Morgan bring to the table?