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Brian Nelson  

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  • 5 More Reasons Why We Think Kinder Morgan's Shares Will Collapse [View article]
    Hi all,

    I've directed commenters from the first '5 Reasons' article I wrote to this one, '5 More Reasons,' which I hope answers their questions.

    For the questions remaining on this chain, I've commented on a few subsequently-published KMI articles, and I encourage all to read the comment sections in those.

    Here are the links:

    http://seekingalpha.co...

    http://seekingalpha.co...

    For those interested in why we only respond to member questions, please view the following article. I think you'll find the answer quite straightforward:

    http://tinyurl.com/qh3...

    Thank you again for your interest in my writings.

    Brian
    Jun 29, 2015. 06:21 PM | 1 Like Like |Link to Comment
  • Why We're Dumping Kinder Morgan Right Now [View article]
    Hi all,

    I wanted to follow up to make sure that everybody had a chance to read our '5 More Reasons' piece, which can be found at the following link:

    http://seekingalpha.co...

    I hope it answers most of the questions on this chain. If not, I'm always available at brian@valuentum.com. Please also read the following for why we only respond to comments on our own website, the primary source of the article:

    http://tinyurl.com/qh3...

    My best wishes,

    Brian
    Jun 29, 2015. 06:12 PM | Likes Like |Link to Comment
  • Kinder Morgan: Bear Attacks Are Misguided And Won't Succeed, Here's Why [View article]
    User 12839421:

    In almost all cases of strong cash-flow generators, a corporate's first source for growth capital spending is cash flow from operations.

    On a fully-consolidated, restated, and audited basis, free cash flow (cash flow from operations less both maintenance and growth capex) was $750-$850 million in each of the past three years.

    Most of the executive teams in the S&P 500 set their dividend policies on the basis of either a payout of earnings or a target of free cash flow (cash flow from operations less all capital spending). In doing so, they are paying an organically-derived dividend.

    KMI's $4+ billion in expected annual future cash dividends paid, however, is roughly 5 times its consistent consolidated and audited free cash flow generation in each of the past three years. KMI's dividend is in part financially-engineered (fictitious).

    We may not have anything further to talk about. In your response in 6 above, your natural instinct was to deduct growth capex from cash flow from operations in a scenario in which the dividend did not exist. This is the correct way to look at it and should not change in a scenario in which the dividend does exist. Growth capex comes out of cash flow from operations.

    The "circular flow of unsubstantiated support" is also very apparent in your response.

    In 1) above, you assume access to investment-grade debt, which cannot be guaranteed;

    in 2) above, to defend the dividend, you exclude growth capex, which is a cash outlay;

    in 3) it's worth noting that KMI has added roughly a half-turn of reported leverage since the November rating was released; if its debt is downgraded to "junk," then the reasoning behind 1 falls apart, which then impacts 2, the ability to defend the dividend, and so on;

    in 4) recourse debt is considered and the claim on cash flows would support the credit rating, not the dividend;

    in 5) you're ignoring that cash outlays are actually occurring with respect to the dividend regardless of whether KMI will/can eliminate the payout or not;

    in 6) you deduct growth capital spending from cash flow from operations, which is exactly correct. In then deducting cash dividend payments, the shortfall becomes evident.

    in 7) you're assuming the dividend is cut to support the credit, and this would send its equity value tumbling, which may impact the credit and so on;

    In my view, one has to look at all of KMI's existing present-value cash, debt-like obligations relative to what it can service organically. In doing so, it avoids the circular reasoning that can be used to support individual components but not the whole take together. The dividend is debt-infused, which is driving a stock bubble, and the financial engineering is readily apparent. The firm's implied leverage is ~19 times, and this is not an investment-grade credit, from where I stand.

    Organic free cash flow generation is insufficient.

    Brian
    Jun 23, 2015. 09:38 PM | Likes Like |Link to Comment
  • Kinder Morgan: Bear Attacks Are Misguided And Won't Succeed, Here's Why [View article]
    User 12839421,

    I think we can agree that there is nothing wrong with KMI raising debt and equity to fund new projects. But for corporates that are so dependent on the capital markets as KMI is, a dividend payment, by extension, should be considered a luxury that they cannot reasonably afford.

    Corporate credits with ~6-times reported leverage that pay out 5x annual free cash flow and the vast majority of cash flow from operations as dividends should not be considered investment-grade. In many ways, firms with KMI's profile should have trouble raising debt financing at all, let alone investment-grade capital.

    Bond holders are claiming an EBITDA stream as their own when the vast majority of such EBITDA stream already belongs to equity capital via future dividend obligations. If KMI scraps its dividend plans, the corporate will still be leveraged ~6 times, with massive capital plans ahead of it. Even under this condition, a reasonable argument could be made that its debt is still "junk." -- and that's after it cuts its dividend.

    The vast majority of KMI's dividend is financially-engineered, in our view, and an integral part of the"circular flow of unsubstantiated support" we've emphasized in our work.

    Brian
    Jun 23, 2015. 02:15 PM | 1 Like Like |Link to Comment
  • Kinder Morgan Inc - Look Past The Punditry And See The Big Picture [View article]
    User 12839421,

    1. The majority of the value in KMI is long-term in nature and rests on normalized assumptions, of which tax consequences should be considered. Depending on cash flow estimates, the cash tax holiday is only for a few years.

    2. If you use a market-derived beta, your fair value estimate will change daily. For example, the discount rate will have increased because KMI's equity has fallen or even increased. This does not hold with fundamental analysis and does not make sense in the context of intrinsic value estimation.

    I think you're reading too much into insider activity.

    Brian
    Jun 23, 2015. 01:35 PM | 1 Like Like |Link to Comment
  • Kinder Morgan Inc - Look Past The Punditry And See The Big Picture [View article]
    Steve,

    My team directed me to your questions. I wanted to thank you for your continued interest in my writings.

    I read your response, and I think we covered most of what you said in our articles. I unfortunately do not think it would make much sense for me to repeat it on this chain, nor do I think it is fair. The 10 reasons together should be read as one given what I would describe to be a "circular flow of unsubstantiated support" at the company.

    I believe that KMI should change its disclosures to make it very clear that it does not cover its dividend by organic means.

    My best wishes,

    Brian
    Jun 23, 2015. 12:13 AM | 2 Likes Like |Link to Comment
  • Kinder Morgan Inc - Look Past The Punditry And See The Big Picture [View article]
    User 12839421,

    I will give you two hints to help, in addition to the one our team already provided above on capex, but then that's it:

    1) You forgot to tax-effect long-term EBI (use a long-term cash tax rate; remember: you're after adjusted cash taxes, not the effective tax rate). EBI = NOPLAT, or earnings before interest; est impact to your back-of-the-envelope fve = -20% to -30%.

    2) A 5% discount rate is pure fantasy. Hurdle rates for investors are significantly higher than that, and the discount rate should match the cash flow duration stream (suggestion: do not use a 'meaningless' market-derived beta, but instead derive a useful fundamental beta); est impact to your back-of-the-envelope fve = an additional -20% to -30%

    I believe our previous two articles address the remainder of your post. I unfortunately won't have time to respond to you again, but I wish you well. I hope that you will remove the insults and attacks against me and Valuentum.

    Kind regards,

    Brian
    Jun 23, 2015. 12:05 AM | 2 Likes Like |Link to Comment
  • 5 More Reasons Why We Think Kinder Morgan's Shares Will Collapse [View article]
    All,

    I wanted to make a correction to this article. The implied leverage is not 24 times adjusted EBITDA. It is 19 times adjusted EBITDA. Changes should be reflected shortly.

    Thank you all again for reading!

    My best wishes,

    Brian
    Jun 22, 2015. 03:10 PM | Likes Like |Link to Comment
  • Why We're Dumping Kinder Morgan Right Now [View article]
    All,

    I wanted to thank everyone for your comments and questions.

    As I can't possibly respond to everyone on this comment chain, please feel free to reach out to me at brian@valuentum.com, and I promise to return your email.

    My best wishes,

    Brian
    http://www.valuentum.com
    Jun 12, 2015. 09:55 PM | Likes Like |Link to Comment
  • Why We're Dumping Kinder Morgan Right Now [View article]
    Hi all,

    It would seem that, based on the quantity of comments, I won't be able to answer every question that comes up on this feed.

    If you want to email me directly, I can be reached at brian@valuentum.com, and this will help me prioritize accordingly. Thank you for reading!

    Brian
    Jun 11, 2015. 01:34 PM | 4 Likes Like |Link to Comment
  • Part III: Nelson's Notes On Berkshire Hathaway's 2014 Newsletter [View article]
    Yes, really. And it's also important to be humble. The proper balance between the two is where one finds success. This is a four part series, so not only this article.

    Thanks for reading!

    Brian
    Apr 7, 2015. 12:23 PM | Likes Like |Link to Comment
  • Omega Healthcare Is A Classic Textbook Model Of Repeatability [View article]
    Brad,

    I read your article twice and I did not find one piece of forward looking information. Where are your forecasts for NOI? What is the expected cap rate on the acquired portfolio? How did you assess the valuation, and why are you referring to a third-party provider of valuation? Is all the information you have provided sourced from the company? If we pulled all the external sources from your research, what are your own thoughts?

    Thanks,

    Brian
    Apr 2, 2015. 10:38 AM | 2 Likes Like |Link to Comment
  • Brian Nelson: 4 Top Ideas To Consider In 2015 [View article]
    Thanks for reading and your comments. I don't want us to get lost in speculating on which companies may become interested in an underpriced stock, but rather to emphasize that such interest would increase if Gilead's shares see further pressure. Though uncommon, it is not unlikely for smaller companies to acquire larger ones, particularly those that are very acquisitive. Antitrust issues may impede any JNJ/GILD tie-up, given HCV exposure.

    Brian
    Jan 6, 2015. 02:04 PM | Likes Like |Link to Comment
  • There's Not Much Of An Investment Case In Sprint [View article]
    Papa Bear30,

    Thanks for reading.

    The value of any asset is the present value of the future free cash flows that can be generated from that asset less the capital costs of the acquisition. The analysis above, in considering the future expected free cash flows, captures the value of its spectrum.

    Sprint is buried under a mountain of debt, and it is not generating or expected to generate free cash flow in the foreseeable future. The ability to pin down a precise value of Sprint's operations given its sliver of equity on top of a mountain of debt is a fool's errand. Sprint's price, on the other hand, could double or go to zero -- but its value is but a sliver.

    At the end of the day, speculators are hoping that someone will bail out the firm and overpay for its spectrum assets. T-Mobil, however, is a more likely takeout by a suitor. Sprint doesn't have much of an investment case, in my view.

    Thanks for reading!

    Brian
    Dec 25, 2014. 03:16 PM | Likes Like |Link to Comment
  • McDonald's Third Quarter Performance Ugly, Even Worse Than Yum Brands' Performance [View article]
    Thanks for the comment keith68!
    Oct 29, 2014. 03:02 PM | Likes Like |Link to Comment
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