Exclusive Analysis for the Discerning Investor
Traditional free cash flow generation has been strong for the oil majors through the first nine months of the year, but their balance sheets remain bloated with net debt. A few haven’t covered their cash dividends with free cash flow generation through the first nine months of 2017. Oil & Gas – Major: BP, COP, CVX, PTR, RDS, TOT, XOM
Image Source: Stefan Buddy Question: Valuentum’s latest note on Kinder Morgan (KMI) hinted the company’s situation is improving, even though its ratings are weaker than Enterprise Products Partners’ (EPD). Would you please compare these companies? Is Valuentum saying Kinder Morgan is a better bet than Enterprise Products Partners because Kinder Morgan is a corporation and not an master limited partnership? By Brian Nelson, CFA Answer: Thanks for the note and your question. It’s often difficult for us to compare and contrast two companies that are very net debt heavy as we tend to be very debt averse in the first place. That said, there are a few things that we look at with respect to Kinder Morgan versus Energy Products … Read more
Image Source: Roy Luck After its infamous dividend cut, Kinder Morgan is getting things back on track. We applaud management for its ability to bounce back from a tumultuous energy-resource pricing environment. By Brian Nelson, CFA We have a lot of good things to say about Kinder Morgan (KMI). Here’s what we wrote following its second-quarter results in July: Kinder Morgan appears to be back on track, something that it set the stage for in early 2016 when Barron’s wrote about Valuentum’s take, “Is Kinder Morgan on the Road to Recovery (January 2016).” The pipeline operator continues to trade near our fair value estimate of $20, so it’s hard to make the case that there is a tremendous valuation opportunity … Read more
Image Shown: Plains All American’s stock price may be building in a distribution cut that may materialize in the near term. Several companies disappointed the Street as of late. Though the broader equity markets have been generally calm and steadily-advancing, some underlying constituents have been anything but. By Brian Nelson, CFA It’s been a bull market for some time, but that doesn’t mean all is calm within the ranks. Plains All American (PAA) disappointed investors August 8 after performance during its second quarter came in below expectations and the company lowered forward guidance. We’ve been cautious on the master limited partnership (MLP) space and critical of certain industry-specific metrics for some time, so the disappointment shouldn’t be surprising to our readership. … Read more
–> Handout 1: Pitfalls of Distribution Yield Analysis (pdf) –> Handout 2: Linking P/DCF to Enterprise Free Cash Flow Valuation (pdf) Let’s talk about a controversial metric that is used in master limited partnership (MLP) reporting. Just how useful is it, and should it be allowed? By Brian Nelson, CFA It’s been a few years since the fallout in the prices of most master limited partnerships (AMLP), but to me, it still feels like yesterday. We continue to have many concerns about the longevity of the business models of MLPs, and we maintain our view that the operating structure will be challenged over the long haul. New equity and debt funding (issuance) continues to, in part, fuel the distributions of most MLPs, … Read more
Event Description: Mr. Nelson will walk through his experiences in valuation and financial statement analysis within the stock selection process to help portfolio managers learn how to optimize the strength and resilience of client portfolios–those either built for capital appreciation or income, or both. The centerpiece of the presentation will be a discussion on midstream corporate Kinder Morgan (KMI) and the master limited partnership (MLP) business model, in general, and how applying tried-and-true financial statement, valuation, and credit analysis (in the Valuentum approach) put portfolio managers far ahead the dividend/distribution cuts and the massive slide in share prices… To learn more >> To register >> This event is hosted by the CFA Society of Houston.
Image Source: Roy Luck By Kris Rosemann and Brian Nelson, CFA Valuentum’s opinion of the significant capital-market dependence of the master limited partner (MLP) business model has not changed, and it appears the Williams’ family, Williams Companies (WMB) Williams Partners (WPZ), has become the latest illustration of this ongoing need. We maintain our view that there will be continued challenges to the MLP structure in the coming years, particularly in the event energy resource prices start to give back some of their recent gains and/or if high-yield spreads begin to expand (making borrowing more costly, irrespective of what the 10-year Treasury does). However, with energy resource pricing improving since the doldrums of January/February and the high-yield market warming up to … Read more
“How Simple Financial Statement Analysis Could Save You Big”
Image show above: Performance of the Alerian MLP ETF. “Perhaps the worst thing about MLPs is that investors can spend more time doing and thinking about tax-related items than actually evaluating the businesses of the underlying entities. This could result in poor investment decisions.” – Brian Nelson, CFA By Brian Nelson, CFA What a sensitive topic for many… Our team presented at the Chicago chapter of the American Association of Individual Investors (AAII) last weekend. It is always an honor and a privilege to have the opportunity to present to such wonderful people! They ask so many great questions. (By the way, I’m working on my schedule for 2017, so if you’d like our team to speak on a topic … Read more
“What the parent has done in this example is financially engineer the future distribution stream and capital structure of a brand new distribution-paying entity with effectively no new capital or assets at all. The parent is just standing behind the subsidiary reinforcing its investment-grade borrowing capacity, which supports the distribution that supports the equity price, which provides incremental equity capital that can also be used to support the distribution and so on.” — Brian Nelson, CFA By Brian Nelson, CFA Using a hypothetical example of an MLP and its parent, let’s explain how MLP stock value can essentially be created from “nothing.” The following example is purely hypothetical and for educational purposes only. Let’s say the parent holds a pristine … Read more