This MLP’s Distribution Is At Serious Risk
December 11, 2015
A version of this article was originally published on November 16. The Keystone XL pipeline has been perhaps the most talked about issue surrounding midstream operators in recent years. The rejection of the proposed pipeline by the US government has brought increased attention and bravado to pipeline opponents, while also highlighting the increased risks associated with midstream entities. Specifically, pipeline opponents are now turning their attention to Kinder Morgan’s (KMI) Trans Mountain pipeline in southern Canada. Environmental advocates are pushing for a similar result that was realized along the northern Pacific coast of Canada, where the Canadian government will ban crude oil tankers, effectively ending the usefulness of Enbridge’s (ENB) Northern Gateway pipeline. These developments are both damaging to pipeline
Why Did It Take So Long To Make A Call on Kinder Morgan?
December 11, 2015
Republished from June 28, 2015. Members: Thanks for the great questions. The primary reason for the change in our opinion of Kinder Morgan (KMI) rested in a comprehensive evaluation of the combination of four separate entities that were combined into one corporation coupled with the release of audited and consolidated financial statements via the 10-k release in late February in addition to the incremental information in Kinder Morgan’s first-quarter results, released after that. It took several months of thesis re-development. The company was removed at a profit in the Dividend Growth Newsletter portfolio and was a substantial relative outperformer compared with the rest of the oil universe during its holding period. Readers were positioned extremely well prior to the collapse
Risky Business: Business Development Companies
December 11, 2015
Big name business development companies (BDCs) such as Prospect Capital () and Main Street Capital () continue to be vulnerable equities, in our view, particularly as credit conditions deteriorate. Ongoing pressure in the energy and metals and mining markets has increased the wariness of investors and their propensity to tolerate weak credits (and those tied to them), and several factors loom that may significantly increase the already-high level of business-model risk associated with BDCs. Investing in these relatively obscure publicly-traded “venture capital” entities is not for the faint of heart. The market may bear witness to a surge in defaults within the high-yield arena in coming years, and a prolonged weakness in commodity prices may seal that fate. Mostly overleveraged upstream
Alert: Energy Transfer Equity Is More than 7x Leveraged!
December 10, 2015
Edited December 16, 2015 at 1:07pm following conversation with ETE executive team. The Securities and Exchange Commission performs a vital function when it comes to truth in reporting, helping investors sort through what’s true and what’s not. The Form 10-K (annual) and Form 10-Q (quarter) can be used to compare what a company’s reported, actual net leverage is to what management says it is – in their presentation slide deck or on some of the more popular business channels. Investors in midstream equities have long been “pitched” the idea that leverage is contained, but from our perspective, it is not. Bondholders deserve to know the actual, reported net leverage of companies in the midstream space because they won’t hear it
Corporate Shopping This Holiday Season
December 10, 2015
2015 may very well end up being remembered as the “year of the merger,” as the total dollar value of mergers and acquisitions in the year is on pace to set an all-time record. According to recent reports, Dow Chemical (DOW), DuPont (DD), and Yahoo! (YHOO), are doing what they can to be a part of that record. All three have faced tremendous pressure from activist investors as of late. On December 8, Dow Chemical and DuPont were reported to be in advanced talks on a massive merger. The rival chemical producers would likely split into three separate companies following the transaction; the three independently operating businesses would be material sciences, specialty products, and agrochemicals. Though labeled a “merger of
Presentation Slides: Kinder Morgan, MLPs, and the Risk of $0
December 10, 2015
Please select the image below to download the slides:
Not So Happy Holidays at Kinder Morgan
December 9, 2015
In a sharp reversal from just a few days ago when Kinder Morgan (KMI) said it would generate sufficient “distributable cash flow” to fund dividend growth of 6%-10% in 2016, the executive team opted to cut its dividend December 8 by 75%, to $0.50 per share annually, a move that despite our best efforts has still managed to surprise the market, as evidenced by shares indicated down in after-hours trading. Though we plan to tweak our valuation model to account for the impact of recent acquisitive activity and the slide in energy resource pricing on Kinder Morgan’s intrinsic value, we’re reiterating the low end of our fair value estimate range at this time. We plan to update our 16-page valuation
Dividends Not Safe as Energy Markets Swoon
December 8, 2015
We’ve been cautious on the oil and gas markets (XLE, AMLP) for some time, and that includes our October move closer to market neutral on the sector, but we’re still underweight the group. We’ve been saying that crude oil prices are more likely to hit the $20 per barrel level than move significantly higher, and we maintain our view that they may never again return to the $100 per barrel, a level many have grown accustomed to. After all, why should they? Unfortunately, the fallout continues to punish traditional “buy and hold” investors who have been trained to ignore most “news” and may still be holding on the belief of the fallacy of mean reversion, something that we believe cannot
Best Buy and GameStop Limp Into Holiday Season
December 8, 2015
The seasonality of specialty retailers Best Buy (BBY) and GameStop (GME) is no secret, and both are depending on strong holiday shopping to buoy full-year results. Let’s take a look at recent performance to get a feel for how both are trending heading into the holidays. Electronic sales remain a bright spot, so we’re paying very close attention to what’s flying off the shelves and what’s not, but with all the promotional activity going on, the biggest question is whether margins will hold up. In the third quarter of fiscal 2016, ended October 31, Best Buy reported total revenue falling 2.4% from the year-ago period to ~$8.8 billion. Comparable sales grew 0.8% (down from the 2.9% pace in last year’s
Keurig Green Mountain Goes Private
December 7, 2015
Keurig Green Mountain (GMCR) will be taken private by a JAB Holding Co. led investor group for ~$13.9 billion in cash. The price of ~$92 per share represents a 78% premium to the company’s December 4 closing share price, which was the result of a year of disappointing earnings and questions about the firm’s long-term growth prospects. In its fourth-quarter earnings report, Keurig recorded double-digit declines in net sales, operating income, net income, and diluted income per share. Though the price premium certainly was a surprise (greater than the high end of the fair value estimate range), the buyout hardly comes as a surprise to us. We have been of the opinion that a takeout would the best case scenario
