KMI - On the road to disaster?

[StuckinCT]

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.

 

[aja8888]

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.

 

[StuckinCT]

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.

 

[Running_Man]

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.

 

[Running_Man]

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.

 

[aja8888]

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.

 

[StuckinCT]

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.

 

[Running_Man]

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

 

[Mulligan]

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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[sheehs1]

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.

 

[Running_Man]

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.

 

[audreyh1]

Wow! Dividend cut.

 

[Mulligan]

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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[Mulligan]

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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[Running_Man]

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.

 

[Mulligan]

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.

We have been in agreement on this outfit for several weeks now. At some point, one mans loss can become another persons gain, and a successful investment. It probably wasn't really ever in my wheelhouse to begin with. It is more a traditional type of investment now which isn't what I do with comfort. I am only in things for income, and ultimately it is more a play on the common like you stated. So it probably wouldn't matter to you, but I would be ticked off if they gave me common shares instead of the cash on KMI-A.


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[Running_Man]

After the dividend cut, Moodys has upgraded the credit rating to stable, the common stock after dropping to 14.50 in after hours is up to 16.84 and KMI/PA is up to 40.75 a 23.5% increase from my buy point earlier this week and it appears everyone is jumping on the high dividend value of this common substitute, as a common substitute with stock trading between 15 and 17.50 KMI/PA should trade between 41 and 45 and then you earn dividend of 12% on top of that. Looks like the opportunity to avoid any losses with purchase in low 30's on preferred is now gone.

 

[Mulligan]

After the dividend cut, Moodys has upgraded the credit rating to stable, the common stock after dropping to 14.50 in after hours is up to 16.84 and KMI/PA is up to 40.75 a 23.5% increase from my buy point earlier this week and it appears everyone is jumping on the high dividend value of this common substitute, as a common substitute with stock trading between 15 and 17.50 KMI/PA should trade between 41 and 45 and then you earn dividend of 12% on top of that. Looks like the opportunity to avoid any losses with purchase in low 30's on preferred is now gone.

Good call Runningman...If it was in my Roth and I had bought, I would be tempted to cash in the one week profit and pat myself on the back.


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[Fermion]

Good call Runningman...If it was in my Roth and I had bought, I would be tempted to cash in the one week profit and pat myself on the back.


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I wouldn't be tempted, I would have already done so about 30 seconds after the market opened and I had that one day gain.

Pop and drop back is all this market does now, especially oil and gas.

 

[Mulligan]

I wouldn't be tempted, I would have already done so about 30 seconds after the market opened and I had that one day gain.

Pop and drop back is all this market does now, especially oil and gas.

I certainly enjoy my pension so I shouldn't complain... But I was a dipsh!t and didn't fully fund my roth over the years so I have limited space in that area. So most of my money is in taxable and I have had a few quick poppers this year, but giving back 31% right off the top has forced me to keep them.


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[Sunset]

Running_Man
Wonderful move made there, I immediately came to this thread after seeing the news about the dividend cut you had predicted.

 

[papadad111]

Short term trades on KMI this week have been profitable.

Two round trips resulting in > 10 percent two day gain in the position.

At 50 cents and shares @ 16 it's a 3% yield- not sure I would hold longer term, but one obvious upside thesis being a modest oil recovery could increase the share price significantly even if dividend remains unchanged at the new lower level.

Probably should put this on LOLs thread

 

[hesperus]

Yes, kudos to RM for catching this one in real time.
Running_man: the KMI soothsayer

 

[Running_Man]

Thanks Mully, Sunset and hesperus. It helped me that I was a previous owner of KMI and knew what they were trying to do. I try to only post on stocks when I feel strongly that there is a something big that can occur, how I positioned this is how I track most of my stocks in trying to have a value that I think something is worth. I actually was really impressed by Mulligan how he wanted to buy KMI as he likes the yield but did what is a very hard thing to do, stopped himself because he really didn't agree with either position. You can save a lot of money by looking at what he was thinking throughout the thread.

 

[Mulligan]

Thanks Mully, Sunset and hesperus. It helped me that I was a previous owner of KMI and knew what they were trying to do. I try to only post on stocks when I feel strongly that there is a something big that can occur, how I positioned this is how I track most of my stocks in trying to have a value that I think something is worth. I actually was really impressed by Mulligan how he wanted to buy KMI as he likes the yield but did what is a very hard thing to do, stopped himself because he really didn't agree with either position. You can save a lot of money by looking at what he was thinking throughout the thread.

RM- There is a playbook I have read about but never have really used. Just curious if that influenced your decision to buy as it proved true again. That being...A yield stock that has dropped huge over a fear of the dividend cut should be bought right after the cut is finally announced. It certainly fit this occasion. Did that influence you to buy?


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