KMI

This MLP’s Distribution Is At Serious Risk

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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 … Read more

Why Did It Take So Long To Make A Call on Kinder Morgan?

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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 … Read more

Not So Happy Holidays at Kinder Morgan

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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 … Read more

Dividends Not Safe as Energy Markets Swoon

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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 … Read more

Master Limited Partnership Model Still At Risk

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Valuentum’s President Brian Nelson’s concerns regarding the master limited partnership business model became mainstream in June of this year. In his piece, “5 Reasons Why We Think Kinder Morgan’s Shares Will Collapse,” an article that itself may go down in history as one of the most timely pieces of research ever written–in light of Kinder Morgan’s (KMI) eventual collapse–Mr. Nelson said of the MLP space at that time: 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 … Read more

Alibaba Pops; Kinder Morgan Drops; Chipotle Flops

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A discounted cash-flow process is your best friend. Not only does it allow you to identify the substance of a company’s balance sheet, what it owns (similar to what you have in your own savings account less all debt), but it also encourages a focus on the future free cash flow stream of the entity (much like your salary after expenses, for example). Intrinsic value estimation provides the backbone behind the conviction that an investor gains in either sticking with an idea or throwing in the cards. You can perform discounted cash flow analysis, too.   Let’s walk through a few examples to help explain this concept. In mid-September, shares of Alibaba (BABA) had been in a tailspin, with investors … Read more

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.