AMLP

Update: A 10%+ Cost of Capital for Midstream Equities Is Reality

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< This article was published on valuentum.com/ on October 27 and was subsequently modified yesterday. > Kinder Morgan (KMI) disclosed how it would raise much-needed financing October 26, and our worst fears were realized: The marginal cost of raising capital in the midstream space has soared. As recently as earlier this year, Kinder Morgan’s executive team had been guiding analysts to a 3.3% cost of capital (“hurdle rate”), (see page 28 here), a level we had outlined was absolutely ludicrous. The 3.3% mark broke down into a 4.1% yield on equity and a 2.4% cost of debt, evenly split. Here’s what we wrote in our June 30 piece, “Kinder Morgan’s Fair Value: $29 Per Share,” when Kinder Morgan’s shares were in … Read more

Correction: Understanding the MLP Valuation Conversation

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A correction was performed to the table in this article October 29, 2015, at 7:20pm. How to interpret the changes: In this illustrative example that includes both growth capital spending and a marginal cost of capital of 10%, holders of MLPs will have to wait years before the intrinsic value of the security catches up to the present market price (comparison shown in orange). Said differently, units in this example are significantly overpriced in today’s market. 

A 10%+ Cost of Capital for Midstream Equities Is Reality

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Kinder Morgan (KMI) disclosed how it would raise much-needed financing October 26, and our worst fears were realized: The marginal cost of raising capital in the midstream space has soared. As recently as earlier this year, Kinder Morgan’s executive team had been guiding analysts to a 3.3% cost of capital (“hurdle rate”), a level we had outlined was absolutely ludicrous (see page 28 here). The 3.3% mark broke down into a 4.1% yield on equity and a 2.4% cost of debt, evenly split. Those days are now over.   Kinder Morgan recently announced that it would float $1.6 billion in mandatory convertible preferred stock, effectively “delayed” issuance of equity capital, which would carry a stated interest rate of 9.75%. Management … Read more

Nelson: Time to Consider Buying Kinder Morgan?

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“Buy and hold investing has done more to turn perfectly decent people into the worst sort.” As others are poo-pooing Kinder Morgan’s (KMI) third-quarter report, we wanted to share a few observations. Our $29 per share fair value estimate for the corporate is unchanged, as we note the low end of our fair value range is $23 per share. We’re reiterating our “neutral” view on the company. First, we were beyond pleased to see Executive Chairman Richard Kinder come to terms with emphasizing the fact that Kinder Morgan is not totally immune to commodity price impacts. He said as much in the press release. Though top analysts on Wall Street are well-aware of this (or they should be), there are … Read more

Thank You for the Victory Lap Barron’s!

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For those that saw the reference to our recent article in Barron’s and the unfortunate, derogatory counter-punch by another author, we appreciate the support and congratulations! The Barron’s article highlighting our work was a victory lap on our call on Kinder Morgan, or we think most should have interpreted it as such. The recognition was well-received by existing members and interested new members alike! How to interpret our call on Kinder Morgan >> As many of you know, however, the call on Kinder Morgan has been off the table for some time now. We had recently moved to “neutral” on Kinder Morgan (see here), after shares collapsed from $40 to $29, which is our current fair value estimate of the firm … Read more

FAQ: Regarding your article, “Warning: The Master Limited Partnership Business Model May Not Survive…”

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Q: Regarding your article, “Warning: The Master Limited Partnership Business Model May Not Survive,” – what are you basing your comments on financial engineering the dividend on? It seems to me that Energy Transfer Equity has enough free cash flow to cover its dividend with a 1.2x coverage ratio. Am I missing something? A: Thank you for your question. Most master limited partnerships and midstream corporates do not cover their distributions and dividends, respectively, on a traditional free cash flow basis, as measured by cash flow from operations less all capital spending. That means that such payouts are being financed in part, some more than others, from the cash flow from financing section of the cash flow statement, hence the term financially-engineered. … Read more

Warning: The Master Limited Partnership Business Model May Not Survive

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Warren Buffett has famously said that, “only when the tide goes out do you discover who’s been swimming naked.” We now know what’s been swimming naked, and it’s the master limited partnership (MLP) business model during the latest downdraft of this energy cycle. A tremendous fall-out may still be ahead for MLPs, unfortunately, as energy markets weaken and as credit markets tighten. We now believe the financial operating structure of the MLP may not survive in its current form, even as we say that most businesses using the MLP model are good ones. Our view continues to be that most master limited partnerships including Energy Transfer Partners (ETP) and most midstream corporate business models including Kinder Morgan (KMI) are dependent … Read more

China, Petrobras and the Circling Sharks

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The Federal Reserve meeting last week came and went, and now the markets are back to focusing on fundamentals, as they should. The problem for equity investors, however, is that the fundamentals aren’t great, and it is becoming increasingly more difficult for even the most bullish investors to find reasons for optimism, at least in the near term. The economic environment in China (FXI) continues to worsen. We outlined our grave concerns regarding the implications of its collapsing stock market on the health of the country’s property market, and the resulting consequences on China’s largest banks. Commodity-linked entities in China continue to feel pain, and the preliminary reading on the Caixin China manufacturing purchasing managers’ (PMI) index fell to Financial … Read more

Setting the Record Straight on Kinder Morgan

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Most, if not all, MLPs report distributable cash flow (DCF), which does not in the calculation consider growth capex, an important driver behind the generation of increased cash flow from operations in the future. When MLPs report distribution coverage ratios, this particular calculation also backs out growth capex from the equation, instead using only ‘sustaining capital expenditures.’ There are a number of contractual reasons why the data is presented in such a way, but from a valuation standpoint, we’ve always taken an issue with the MLP universe being implicitly valued on a future distributable cash flow stream that “covers” the distribution than on future free operating cash flow, which is a better measure of the free operating cash flow that … Read more