Back in October, I briefly summarized Kinder Morgan Inc. (KMI), the parent company and General Partner of Kinder Morgan Partners (KMP) and El Paso Pipeline Partners (EPB), while owning shares in Kinder Morgan Management (KMR). I first became enthused by KMI due the classification of its fantastic, robustly increasing 4% yield as a regular dividend and not partnership distributions, as with KMP; thus avoiding certain tax complications.
The article mostly boasted Richard Kinder's continued intentions of increasing the dividends of KMI as well as the company's amazing status as the largest midstream and the third largest energy company in North America. More importantly though, it also mentioned the KMI warrants. Following publication, I noticed there was immense interest by readers, and subsequently an intelligent conversation unfolded regarding the warrants, which trade under the symbol KMI+, or sometimes KMI-WT.
This paper, which was first issued following the El Paso acquisition last spring, gives the buyer the right to buy 1 share of KMI stock at $40/share through expiration fixed at 5/25/2017. Since that article, the premium of the warrants have risen from $3.86 to $4.35 today, an amazing gain of 12.69%, while the stock has floundered upward just a few percent during the same period. Why have the warrants flourished while the stock, generally speaking, has not? The answer is buybacks by KMI.
Supply and Demand:
As part of the EL Paso transaction, 505 Million warrants were issued. Shortly after, Kinder Morgan announced a program to repurchase about $250 M worth of the warrants through 2012 and beyond. Since then, KMI has repurchased about $156 M or 65 M units, or about 13% of the outstanding float.
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This is an immense buyback considering it was done in under a year's time. I feel this quick action definitely contributed to the very strong upward trend of the warrants despite turbulent trading sessions of the underlying KMI shares, which at times floundered up and down over the past year -- particularly during the June and November pullbacks:
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Usually, leveraged instruments such as warrants have higher volatility than the underlying, but not in this case due primarily to the buyback program, which I feel has acted much like a protective put, which sometimes occurs because of large buyback programs more commonly performed on underlying shares on companies.
The question is, will the buyback continue?
A commenter of my prior article was friendly enough to share a video of the recent KMI presentation, featuring Mr. Richard Kinder, the CEO:
According to Mr Kinder, management is proud of the $156 M or 62% of authorized monies which was used to repurchase warrants thus far, and also fully intends to spend the remaining $94 M, or 38% remaining of authorized funding in the near future. Most importantly though, Mr Kinder emphasized the possibility of additional repurchases after this remaining $94 M is exhausted. At 0:42 in the video, he stated:
" ... we will continue to evaluate whether we want to purchase more warrants."
I feel the remainder of the already authorized buyback will help buoy the warrants even if KMI common encounters turbulent trading for whatever reason. However, if more funding is approved for additional buybacks over the next several years, the warrants will become an even stronger investment than otherwise.
KMI is a sound investment due to North America's growth as a producer of energy, but KMI warrants utilized in tandem with the underlying common shares should continue to boost returns and offers a fabulous investment going forward.