Richard Kinder, CEO and Founder of the Kinder Morgan entities, which include Kinder Morgan Inc (NYSE:KMI) Kinder Morgan Energy Partners (NYSE:KMP) Kinder Morgan Management (NYSE:KMR), and El Paso Pipeline Partners (NYSE:EPB), aired an exciting webcast aimed to refute some of the various claims made by Hedgeye which aimed to drive down the share price due to their short position.
Most notably, Hedgeye claimed Kinder's strategy is to "starve its pipelines and related infrastructure of routine maintenance spending" so that it can artificially inflate distributable cash flow and therefore increase payments to the GP, KMI; the entity Richard Kinder happens to own 230,759,786 shares of. The allegation basically accused Kinder Morgan of juicing payouts in the present, while deferring these maintenance costs to the future. However, Richard Kinder seemed to adequately dispute this short selling hedge fund's claims.
Key Points From The Call:
- For starters, Kinder explained the reductions in capex did not threaten any safety standards or performance of any pipeline assets.
- "Most costs of real pipeline integrity are not in sustaining capex at all-they are in the expense category." Kinder explained "Ili tools", (or in-line-inspection tools) like "smart pigs" and the affiliated repairs that occur because of those scans are also considered expense items. Kinder continued, "sustaining capex...is a misleading indicator of how well you maintain your system.".
- Under roughly 31 safety metrics, including spills per mile etc, the entire kinder network is safer than industry average. These incident measures are accurate ways to measure the vigor in which an MLP maintenances infrastructure. This is partly due to the varying size and scope of different assets, as well as their locations or their exposure to climates. For instance, submerged pipes in the Gulf may require more costs than those in moderate, consistent climates. This seemed to be reasonable logic to me.
- Next, Kinder mentioned Goldman's Sept 9th 2013 attempt to compare the Sustaining Capex as % of EBITDA of multiple large MLP's. In the report, Kinder Morgan spent 11.1% of EBITDA on sustaining capex vs. the industry average of 9.8% for 2012. For 2013 estimates, Kinder Morgan spent 9.8% vs 8.9% industry average. Therefore, Kinder Morgan spent more under this metric than industry comparisons, which seems to refute Hedgeye's claim.
There is much detail in the 57 minute webcast, and I highly suggest shareholders listen to the full audio; I found it truly enlightening. More importantly though, Richard Kinder's main points as well as answers to analyst questions adequately disputed most of Hedgeye's claims. Kinder explained the often unreliable nature of capex in regard to measuring infrastructure maintenance and repair, errors in some of Hedgeye's research, as well as Kinder Morgan's capex comparisons to industry peers.
Sleep tight Hedgeye, time to put your short position to bed.
Disclosure: I am long KMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.