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Old 12-04-2015, 07:41 PM   #21
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I was commenting more on the mid streams in general, but I suspect KMI will be able to maintain the dividend, though they did not raise it meaningfully at the last meeting. I also think they were caught with their pants down buying out KMP and this other distressed pipeline, assumed a lot of debt and probably overestimated capital markets willingness to provide financing. Bottom line, KMI cash flow from operations will not change much as a midstream player and though they may be capital starved at the moment, their assets and cash flow is so strong that when capital markets reopen, they'll be just fine. I don't own much of it, and my opinion is on the overall midstream space. In sum, people are confused about coverage ratios and assume they'll never be able to borrow again, that's just plain silly on both accounts.
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Old 12-04-2015, 08:28 PM   #22
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Usually a poor investment for one, at some point can become a great investment for another, barring bankruptcy. This interests me a lot for some reason, and I know its been painful for investors. The simpleton in still says something is wrong...Alcoa far from the bastion of financial strength with same bond debt rating as KMI also has a preferred convertible and it yields 8.5%. KMI-A is now butting up on an astronomical 14%. Compare those to conservative Dominion Resources with a convertible yielding 5.65%. It just appears that the risk level is very high... But that may just be me as I am basically Mr. Baa3 and that is at the preferred level, not note level.


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Old 12-04-2015, 08:40 PM   #23
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Yes, they are levered, quick ratio .5. Bad timing. KMI is .1% of my portfolio and I don't intend to buy any more. I think high quality midstream MLPs on the other hand look unbelievably underpriced. Many of them can fund their distributions and capex as well as distribution growth out of cash flow for many years. In other words, they don't need to tap capital markets which is the MLP model. This is in the midstream space only. Upstream is a completely different story. People are selling first and asking questions later which is usually the case but when the dust settles they will realize their reason for selling was wrong, at least for midstream MLPs. I can't think of a time when the market got it so wrong...

On a separate note, Kinder's comments on its budgeting, equity funding and dividend for 2016 today only said that they are not looking to issue stock as they have less expensive alternatives. I read the comment that perhaps they will be able to fund everything from cash flow. A citi analyst assumed this opened the door to a dividend cut. I think that is a bit too early to conclude this since only a month or so ago they were committed to 6 to 10% dividend growth, and they could fund projects by only raising it slightly or keeping it steady. I mean a 5% delta on its cash flow is $250,0000,0000!
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Old 12-06-2015, 04:46 PM   #24
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I am not sure what your cash flow number is that you are claiming for KMI but almost certainly they are cutting the dividend. I assume you put 2 too many zero's in there. 250 million in cash is trivial to KMI. The dividend is nearly 5 billion dollars and they have 20 billion they need for capital spending over the intermediate term. They stated they would do what it takes to maintain investment rating and not issue equity, by definition they cannot borrow or their leverage will be too high and result in a rating downgrade so they are certainly either cutting capital project (impossible as it would expose prior bad investments) or they are cutting dividend. So it is almost certain to me that they will cut dividend to between $0.80 - $1.60 annually.

An interesting play on KMI is coming into play with the preferred issue which almost certainly will have the dividend paid on the preferred and will convert to stock in 3 years. I am trying to determine if the preferred has a corridor where the conversion allows $10 to be a low stock price and $100 to be a maximum for conversion. But if the dividend is cut to $1.20 per year then the preferred will outperform the common as long as the stock ends at 30 or lower in 3 years. If there is a $10 minimum redemption value on the preferred then the maximum present value (discounting future dividends by 4%) loss if the preferred pays the dividends is 7.13% over 3 years. And if KMI would recover to 20-25 at the end of 3 years the preferred offers an annual return between 13-20%, if the preferred drops a couple points more its a 15-22% return range.

Update: There is a floor of 9.75 to represent a floor of 35% of the original issue price.
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Old 12-06-2015, 05:06 PM   #25
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........ so they are certainly either cutting capital project (impossible as it would expose prior bad investments) or they are cutting dividend. So it is almost certain to me that they will cut dividend to between $0.80 - $1.60 annually.
Cutting capital spending is not "impossible" as many companies in the energy industry are doing just that right now. And I have no clue how you can say that if KMI does that, it will "expose prior bad investments" or why that would matter if they did? What's spent is spent and any new projects are open for evaluation prior to funding. Thje capital plan is just that; a plan. Projects that are in process can be shut in/curtailed for future completion, if need be.

Statements like you made lead me to believe you are a numbers type of guy (an accountant/banker?) and not one well versed in the energy business operations and what it takes to provide liquid products at the pump or gas meter. Not that that matters for evaluating a stock, though, and I have enjoyed reading your analysis in threads.

KMI is certainly hurting and so is the entire energy industry. But, there are a lot of smart energy operators out there and most will survive or become part of another similar organization. What surprises me, and I work in the energy business (asset acquisition due diligence), is the never ending stream of loans being made to energy (upstream and downstream) companies that continue to be made (now), even as we face lower oil and gas futures prices. The investment bankers must be the real idiots in this mess.
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Old 12-06-2015, 05:15 PM   #26
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Last year their total capex was $3.3 billion, 90% of it was growth capital. $337 mm was maintenance capital. They haven't released their budgeting this year but I think the $225mm distressed gas pipeline acquisition they just made is what prompted the downgrade. If they backed away from raising the dividend they could pay for the acquisition. They just committed to a 6 to 10% dividend increase in October, not much has changed since then apart from the acquisition and the downgrade. I am not in love with KMI, I think they are far too levered, but I also think they will do everything in their power not to cut the dividend. One thing I don't know is how much their cash flow will be cut by their production assets. If they were a pure midstream MLP, I would expect no material decrease in cash flow next year. My point really is that midstreams have been unfairly punished because the industry leader took on too much leverage. I also think it is not a sure thing they will cut.
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Old 12-06-2015, 05:24 PM   #27
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Last year their total capex was $3.3 billion, 90% of it was growth capital. $337 mm was maintenance capital. They haven't released their budgeting this year but I think the $225mm distressed gas pipeline acquisition they just made is what prompted the downgrade. If they backed away from raising the dividend they could pay for the acquisition. They just committed to a 6 to 10% dividend increase in October, not much has changed since then apart from the acquisition and the downgrade. I am not in love with KMI, I think they are far too levered, but I also think they will do everything in their power not to cut the dividend. One thing I don't know is how much their cash flow will be cut by their production assets. If they were a pure midstream MLP, I would expect no material decrease in cash flow next year. My point really is that midstreams have been unfairly punished because the industry leader took on too much leverage. I also think it is not a sure thing they will cut.
It's much easier and quicker to buy pipelines than build them. Everything is for sale right now and the smart guys are (hopefully) buying cheaply and using banker's funds. Pipelines are cash cows.
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Old 12-06-2015, 05:32 PM   #28
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It's much easier and quicker to buy pipelines than build them. Everything is for sale right now and the smart guys are (hopefully) buying cheaply and using banker's funds. Pipelines are cash cows.
So true! I mean, you have to scratch your head and ask why would they make such a move and risk a downgrade? Obviously, they know what they are doing; I think they got caught with their pants down here and sentiment is a powerful thing, but so is 5 billion in cash flow. It would be a stunning about face, so it will be interesting to see what they meant in their statement - I see it as a bit cryptic and not as clear cut as others. One thing is for sure, if they can hold onto these assets, they are going to make a pile of money when things normalize.
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Old 12-06-2015, 08:08 PM   #29
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Last year their total capex was $3.3 billion, 90% of it was growth capital. $337 mm was maintenance capital. They haven't released their budgeting this year but I think the $225mm distressed gas pipeline acquisition they just made is what prompted the downgrade. If they backed away from raising the dividend they could pay for the acquisition. They just committed to a 6 to 10% dividend increase in October, not much has changed since then apart from the acquisition and the downgrade. I am not in love with KMI, I think they are far too levered, but I also think they will do everything in their power not to cut the dividend. One thing I don't know is how much their cash flow will be cut by their production assets. If they were a pure midstream MLP, I would expect no material decrease in cash flow next year. My point really is that midstreams have been unfairly punished because the industry leader took on too much leverage. I also think it is not a sure thing they will cut.
The reason for the downgrade has nothing to do with the price paid but for the company purchased by KMI (50% now) NGPL is cash negative and levered 10X. NGPL has 285 million in EBITDA but 3 Billion in debt, they actual lost money last year on the cold winter due to higher costs to run nat gas pipes and then had to mark down inventory when Nat gas prices declined. Of their debt at NGPL 2 Billion is due in 2017 rated CCC and their revolving line of credit is fully utilized. While this could be a good deal in the very long term, in the short term this absorbs even more KMI cash.
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Old 12-06-2015, 08:49 PM   #30
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Cutting capital spending is not "impossible" as many companies in the energy industry are doing just that right now. And I have no clue how you can say that if KMI does that, it will "expose prior bad investments" or why that would matter if they did? What's spent is spent and any new projects are open for evaluation prior to funding. Thje capital plan is just that; a plan. Projects that are in process can be shut in/curtailed for future completion, if need be.

Statements like you made lead me to believe you are a numbers type of guy (an accountant/banker?) and not one well versed in the energy business operations and what it takes to provide liquid products at the pump or gas meter. Not that that matters for evaluating a stock, though, and I have enjoyed reading your analysis in threads.

KMI is certainly hurting and so is the entire energy industry. But, there are a lot of smart energy operators out there and most will survive or become part of another similar organization. What surprises me, and I work in the energy business (asset acquisition due diligence), is the never ending stream of loans being made to energy (upstream and downstream) companies that continue to be made (now), even as we face lower oil and gas futures prices. The investment bankers must be the real idiots in this mess.
What I am trying to say if they cut capital project spending to only needed spending it shows exactly the amount of maintenance capital they actually need. If you want to believe KMI can maintain 40 billion dollars of assets with 300 million of capital then you also believe their assets have 110 year useful life.

What happens and I did work in accounting with responsibility for capital projects approval as part of my duties is that capital is approved as a growth project that replaces equipment that needs to be replaced. It is a game played in most corporate environments and I sincerely doubt it is not played in a very capital intensive businesses such as the one that KMI is in trying to sell "Distributable Cash Flow". In the last year KMI wrote off 500 million in fixed assets valuations. Most likely they need 1-2 billion just to maintain the asset base that they have (this would still be only 50-70% of the annual depreciation of 2.3 billion), from a numbers point of view and just plain common sense.
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Old 12-06-2015, 09:46 PM   #31
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What I am trying to say if they cut capital project spending to only needed spending it shows exactly the amount of maintenance capital they actually need. If you want to believe KMI can maintain 40 billion dollars of assets with 300 million of capital then you also believe their assets have 110 year useful life.

What happens and I did work in accounting with responsibility for capital projects approval as part of my duties is that capital is approved as a growth project that replaces equipment that needs to be replaced. It is a game played in most corporate environments and I sincerely doubt it is not played in a very capital intensive businesses such as the one that KMI is in trying to sell "Distributable Cash Flow". In the last year KMI wrote off 500 million in fixed assets valuations. Most likely they need 1-2 billion just to maintain the asset base that they have (this would still be only 50-70% of the annual depreciation of 2.3 billion), from a numbers point of view and just plain common sense.
Thanks for the additional information. I fully understand maintaining large and complicated equipment and understand the process. What we are seeing now in the deals we are working on (mainly oil and gas production asset sales) is the cost of contract services, typically equipment maintenance or new construction, being drastically reduced in this competitive market. During the recent "hayday", service companies were gouging operators and that has been reversed. While that won't fix KMI's issues, it certainly will help across the asset base.

I just got back from North Dakota last week and the cost to drill and frac a Bakken horizontal is about 50% of what it cost two years ago. Of course, no one is drilling now...but that's another issue.
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Old 12-07-2015, 06:08 AM   #32
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The reason for the downgrade has nothing to do with the price paid but for the company purchased by KMI (50% now) NGPL is cash negative and levered 10X. NGPL has 285 million in EBITDA but 3 Billion in debt, they actual lost money last year on the cold winter due to higher costs to run nat gas pipes and then had to mark down inventory when Nat gas prices declined. Of their debt at NGPL 2 Billion is due in 2017 rated CCC and their revolving line of credit is fully utilized. While this could be a good deal in the very long term, in the short term this absorbs even more KMI cash.
I think the cash flow hit will still be pretty close to to the acquisition price; the debt is a separate issue. Interesting but not surprising to see NGPL cash flow negative, but this would be peanuts from KMI's standpoint.
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Old 12-07-2015, 09:00 AM   #33
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OK so this morning I did purchase a 1/2 position (1% of my portfolio) in KMI/PA. When it fell on the opening by more than 2 points I jumped in as I do not think KMI is going to go bankrupt or totally stop paying dividends so even if KMI gets stuck in a range of 10-20 (which is a fair value price range I think at this point) my return will be between -1.2% -14% annually with significant upside potential of as much of 24% annually if KMI would get back to 30 over 3 years. Normally I would not have purchased KMI but this preferred is really the common at this point with just a higher yield and less participation in case of a massive recovery but really a chance to limit losses on the down side.

I will buy another 1/2 position if KMI/PA were to fall below 30 at which at 15 for KMI you have a 10% annual return and with dividends paid minimum return is 5.25% over 3 years
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Old 12-07-2015, 10:02 AM   #34
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Im watching... I have read and still don't fully understand the bowels of their "convertible preferred". Im not even sure its cumulative and others have stated it can be paid with stock instead of cash. Might do a little more studying...AMLP has been hit over the head with a club today also, down under $10 off 9% today alone.


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Old 12-07-2015, 12:34 PM   #35
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I am watching too. I sold out of my other MLP positions in time but held onto KMI since it generates its' cash from being the toll gate and had converted out of MLP status. I hold a position and have taken quite a bath although I never put more than 4% in any one position. Too late to sell now. So…may wait until all the tax loss harvesting and reassess after year end. May double my position.
Even if they cut the dividend by as much as 50% it is still a good yield and basically around the yield I started it with. They have the largest midstream infrastructure in North America.
From what I read the first debt restructure isn't until 2017, they have a 3.9 billion dollar credit line and I have to believe Richard Kinder knows what he is doing as evidenced from the past. That said, who knows. The stock has gotten really beaten up. Like a feeding frenzy.
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Old 12-08-2015, 03:52 PM   #36
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Note: Just released Kinder Morgan is cutting it's dividend by even more than I had thought, I thought a cut to $0.80 was on tap and they cut to $0.50. I think this means anyone that wants to own this should sell the KMI shares and buy they KMI/PA shares if they fall tomorrow to the 32-33 range. Perhaps lower if you were luck. The KMI stock would have to rally to 30 to equal the return from the preferred over the next three years if you could buy KMI/PA @ 32.

After hours KMI is trading just under $15 and there could be a further move down, but it is very close to fair value and this move is actually a good move in my opinion financially but shows they need more capital than claimed and "Distributable" in DCF is a fantasy.
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Old 12-08-2015, 04:01 PM   #37
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Wow! Dividend cut.
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Old 12-08-2015, 06:23 PM   #38
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It is kinda odd how amateur bloggers can smell out the fact KMI has to cut dividend while company continued to hold to the fallacy of continued dividend growth, suckering many yield seekers into the trap.
I am an income investor thought mostly in preferreds. Im glad I put my faith in the bloggers as I have looked at this issue for many months and never could pull the trigger. They don't tell the truth...I am not investing in any company that cant figure out what amateur sleuths can.


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Old 12-08-2015, 06:27 PM   #39
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Note: Just released Kinder Morgan is cutting it's dividend by even more than I had thought, I thought a cut to $0.80 was on tap and they cut to $0.50. I think this means anyone that wants to own this should sell the KMI shares and buy they KMI/PA shares if they fall tomorrow to the 32-33 range. Perhaps lower if you were luck. The KMI stock would have to rally to 30 to equal the return from the preferred over the next three years if you could buy KMI/PA @ 32.

After hours KMI is trading just under $15 and there could be a further move down, but it is very close to fair value and this move is actually a good move in my opinion financially but shows they need more capital than claimed and "Distributable" in DCF is a fantasy.

I wouldnt trust this outfit as far as I could throw them. Prospectus says they can pay you in common stock instead of cash if they so desire...They already misled on dividend growth, I am not trusting them to give me a dividend on a preferred either....


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Old 12-08-2015, 07:16 PM   #40
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This is really more of a common stock purchase with a larger than average dividend for 3 years, which puts a floor on downside risk. I feel the value is quite good at the 33 I paid for the preferred, it really is a common play with low risk not an income play. What has happened is that KMI is now just back to being a regular old common stock yielding 3.3%, a value between 10-20 depending on what happens in the next 3 years, paying out about half of their earnings, something corporations due but MLP's cannot. Again KMI is not was not and in present corporate structure will never be an MLP. Distributable cash flow as I stated in my first post is a worthless statistic, I could care less if Richard Kinder and all the analysts on Wall Street like it, that statistic is the worst valuation metric I have ever seen proposed and right now as dividends are cut this will end the debate on this man made monstrosity.

But this indicates they will most likely be paying off the debt as it comes due instead of rolling it, a very favorable but necessary event due to the cost of capital skyrocketing for them. With the amount coming out in the next few years unless their business grows exponentially they will pay down the debt and have more room to do an acquisition if that fits their outlook.
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