Author Topic: KMI - Kinder Morgan  (Read 136993 times)

Sunrider

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Re: KMI - Kinder Morgan
« Reply #260 on: December 09, 2015, 12:39:19 AM »

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...

Sorry Palantir - maybe I didn't follow this properly: prior to the cut, they said they can cover the dividend and maintenance capex. They cut because of rating agency concerns and will use this to pay down debt (and possibly fund growth investments, since they can't increase leverage). So in your calculation, why do you say they need 2/3.4bn for maintenance capex? What is the 5bn in 2017 you're referring to? My understanding was that they entire amount of dividend saved can be used to reduce debt or fund growth investments (or both) as it is already after all their required maintenance. What am I misunderstanding here? Thank you. C


Palantir

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Re: KMI - Kinder Morgan
« Reply #261 on: December 09, 2015, 02:52:24 AM »
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.

Not true. If you model out the company, you are able to take all these risks into account.
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Palantir

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Re: KMI - Kinder Morgan
« Reply #262 on: December 09, 2015, 02:59:09 AM »
Sorry Palantir - maybe I didn't follow this properly: prior to the cut, they said they can cover the dividend and maintenance capex. They cut because of rating agency concerns and will use this to pay down debt (and possibly fund growth investments, since they can't increase leverage). So in your calculation, why do you say they need 2/3.4bn for maintenance capex? What is the 5bn in 2017 you're referring to? My understanding was that they entire amount of dividend saved can be used to reduce debt or fund growth investments (or both) as it is already after all their required maintenance. What am I misunderstanding here? Thank you. C

So they may cover dividend and maintenance capex, but they can't cover dividend, maintenance capex, and growth capex, which is around a $2B plan for 2016. So where will they raise the money for growth? Equity financing is ruled out, so is debt financing. Only option is to use the cash saved from not paying dividend - about $3.4B or so. They need to do two things with the cash - pay growth capex and reduce debt levels. (Good target for Debt/EBITDA is <4x, right now they are above 5x). In 2017, I believe their capital program is $5B, so that problem gets bigger...hope you see the issue.
« Last Edit: December 09, 2015, 03:00:48 AM by Palantir »
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Sunrider

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Re: KMI - Kinder Morgan
« Reply #263 on: December 09, 2015, 04:05:19 AM »
Ok thank you - understand what you're saying now.

Sorry Palantir - maybe I didn't follow this properly: prior to the cut, they said they can cover the dividend and maintenance capex. They cut because of rating agency concerns and will use this to pay down debt (and possibly fund growth investments, since they can't increase leverage). So in your calculation, why do you say they need 2/3.4bn for maintenance capex? What is the 5bn in 2017 you're referring to? My understanding was that they entire amount of dividend saved can be used to reduce debt or fund growth investments (or both) as it is already after all their required maintenance. What am I misunderstanding here? Thank you. C

So they may cover dividend and maintenance capex, but they can't cover dividend, maintenance capex, and growth capex, which is around a $2B plan for 2016. So where will they raise the money for growth? Equity financing is ruled out, so is debt financing. Only option is to use the cash saved from not paying dividend - about $3.4B or so. They need to do two things with the cash - pay growth capex and reduce debt levels. (Good target for Debt/EBITDA is <4x, right now they are above 5x). In 2017, I believe their capital program is $5B, so that problem gets bigger...hope you see the issue.

frommi

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Re: KMI - Kinder Morgan
« Reply #264 on: December 09, 2015, 04:53:01 AM »
There is a lot of misinformation here. They don`t plan to pay down debt, they will simply grow EBITDA to delever. This is the malone playbook and the way Kinder has created 20% CAGRs with KMP.
Their plan for 2016 is to delever to around 5.5 x Net Debt/EBITDA without issuing more stock or debt. With 44 billion in debt that means they plan to have EBITDA of ~8 billion in 2016.

So we can calculate owner earnings:

8000 EBITDA
- ~2000 interest
- 500 taxes
- 500 maintenace CAPEX
= 5000 million owner earnings

This is exactly what they talk about when they mention DCF. Since this number will not grow without further investments (or max @ GDP growth) a fair multiple is around 8-10, which gives a fair price of 40-50 billion $ in 2016. But this ignores that they can create value by investing @ 13 % returns and take on debt @6%, so the real value is maybe 20-30% higher.

Other pipeline companies (ETP,MMP) trade @ EV/EBITDA multiples of 14-15. At 8k EBITDA this gives 14x8=60 billion fair value for the equity for next year when everything goes according to plan. Even at 12 x EV//EBITDA this is a 60% return. And since 85% of KMI is not a capital intensive business (they build pipelines that last for decades...) i don`t see that as expensive.

Somebody sold me a big chunk of his shares @ 14.4$ in pre hours, i have now skin in the game.
« Last Edit: December 09, 2015, 05:02:21 AM by frommi »

Palantir

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Re: KMI - Kinder Morgan
« Reply #265 on: December 09, 2015, 05:15:27 AM »
How exactly are they going to grow ebitda? Take on more debt? How much more ebitda do you think they need to bring the multiple down to a reasonable number?
« Last Edit: December 09, 2015, 05:20:15 AM by Palantir »
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frommi

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Re: KMI - Kinder Morgan
« Reply #266 on: December 09, 2015, 05:19:59 AM »
How exactly are they going to grow ebitda? Take on more debt?

They just reinvest the part of the owner earnings that they are not paying as dividend?

Palantir

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Re: KMI - Kinder Morgan
« Reply #267 on: December 09, 2015, 05:53:51 AM »
^ What do you estimate retained earnings to be? How much incremental ebitda do you expect to accrete from that reinvestment?
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frommi

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Re: KMI - Kinder Morgan
« Reply #268 on: December 09, 2015, 06:06:01 AM »
^ What do you estimate retained earnings to be? How much incremental ebitda do you expect to accrete from that reinvestment?

5k - 1.1k=3.9k x 11-13% = 400-500 million incremental EBITDA.

Palantir

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Re: KMI - Kinder Morgan
« Reply #269 on: December 09, 2015, 06:09:06 AM »
That makes basically no impact on leverage. This thing is levered 5.5x. Lowering to something reasonable needs at least ten times the ebitda you calced.
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