Seeking Alpha

Kinder Morgan companies rise as Hedgeye releases critical report

  • Hedgeye analyst Kevin Kaiser unleashed a firestorm last week when he dubbed the Kinder Morgan (KMI) companies a "house of cards," but today's release of the full 45-page report produced little heat.
  • The report claims Kinder's overriding strategy is to "starve the assets of routine maintenance expenses and capex in order to maximize [distributable cash flow]," and has cut nearly in half the amount of maintenance capital it spends on the pipeline assets it acquired in its 2012 purchase of El Paso (EPB).
  • By cutting or deferring the maintenance spending, general partner KMI is getting more payments than it deserves, Hedgeye alleges, essentially pointing to CEO/chairman Richard Kinder, who bought $18M in KMI stock as it slumped recently.
  • "Our business units perform a bottom up review of maintenance capital needs and operating expenses, with the objective being to increasingly reduce risk and improve safety," the company responds, without addressing the details of Hedgeye's report.
  • In today's trading: KMI +1.9%, KMP +1.2%, KMR +1.4%, EPB +1.6%.
Comments (45)
  • Ocean Man
    , contributor
    Comments (536) | Send Message
     
    Who's Hedgeye?
    10 Sep 2013, 07:39 PM Reply Like
  • Energysystems
    , contributor
    Comments (944) | Send Message
     
    Hedgewho?

     

    http://bit.ly/17X2OOK
    10 Sep 2013, 08:10 PM Reply Like
  • Trainer
    , contributor
    Comments (136) | Send Message
     
    This Hedgeye sounds like the Sen. Ted Cruz of Wall St. All sound and fury signifying nothing.
    10 Sep 2013, 08:00 PM Reply Like
  • fredj
    , contributor
    Comments (128) | Send Message
     
    What's the matter Democrat, you afraid of Ted Cruz?
    10 Sep 2013, 08:03 PM Reply Like
  • crash9010
    , contributor
    Comments (103) | Send Message
     
    Dem or not, Cruz is a ton of bluster. I don't like anyone in congress who does nothing but play games and bluster (often Mcarthy-esque). Obviously with that said I don't like many in congress.
    10 Sep 2013, 08:08 PM Reply Like
  • burghdood
    , contributor
    Comments (35) | Send Message
     
    Hadn't been following the senatorial circus too closely lately, but did hear Cruz weigh in on Syria-i was struck by how much sense he made (vs. other Policy Makers). The fact that his name popped up on this board is probably indicative of his impact on the body politic. I liked him! Clear thinkers like Mssrs. Kinder & Cruz (from what little I've heard) are more of what this country needs vs. obvious Obfuscators (& I need not name any names ;0) in business & politics!
    11 Sep 2013, 01:50 AM Reply Like
  • fredj
    , contributor
    Comments (128) | Send Message
     
    Glad I added to my KMR position last week after these Hedgeye clowns tweeted their useless crapola.
    10 Sep 2013, 08:05 PM Reply Like
  • Craigcosta
    , contributor
    Comments (36) | Send Message
     
    Same here. Glad this happened, created a good buying opportunity.
    10 Sep 2013, 08:35 PM Reply Like
  • Zeke1947
    , contributor
    Comments (6) | Send Message
     
    Added 300 KMR & 300 KMI to what I had. (:
    10 Sep 2013, 10:36 PM Reply Like
  • dividend_growth
    , contributor
    Comments (2878) | Send Message
     
    HedgeEye's core short thesis is Kinder Morgan cuts too much into maintenance capex, which may lead to major accidents and dividend cuts in the future.

     

    Other points are however bogus.
    10 Sep 2013, 08:05 PM Reply Like
  • alpinair
    , contributor
    Comments (8) | Send Message
     
    If KM is shorting maintenance than it could be a Very volatile situation...especially now that someone has brought attention to it. Politicians and investors will have major spook if any spills or leaks ensue in the near future!
    11 Sep 2013, 10:45 PM Reply Like
  • movies555
    , contributor
    Comments (592) | Send Message
     
    What if Browneye (er, I mean Hedgeye) released a report and no one gave a crap - was it ever really released?

     

    The fact that a 26-year-old had this much effect is ridiculous.
    10 Sep 2013, 08:10 PM Reply Like
  • crash9010
    , contributor
    Comments (103) | Send Message
     
    If the Kinder Morgan family does cut that much from maintenance it does bother me some long term. That said, calling them a "house of cards" is like yelling fire in a theater to find better seats.
    10 Sep 2013, 08:11 PM Reply Like
  • Zeus2012
    , contributor
    Comments (696) | Send Message
     
    LOL. Very good analogy. Yes, the company may be a little short sighted but the same type of report / argument can probably be made on any M&A or acquisition involving cost cutting. There's always a balance. Having said that, Richard Kinder does own more than 10% of the combined entities and I'm going out on a limb on assuming that he's not interested in cutting his own throat.
    10 Sep 2013, 08:41 PM Reply Like
  • jerrywengler
    , contributor
    Comments (402) | Send Message
     
    Do you suppose there's any chance Mr. Kinder knows more about the maintenance of company lines than hedgehog does?
    10 Sep 2013, 10:21 PM Reply Like
  • PendragonY
    , contributor
    Comments (5400) | Send Message
     
    "Do you suppose there's any chance Mr. Kinder knows more about the maintenance of company lines than hedgehog does? "

     

    Nope, no chance at all. That's why one of them runs a large successful pipeline company and the other prints on on-line magazine. Oh, wait ....
    11 Sep 2013, 09:30 AM Reply Like
  • Alpha Wolf
    , contributor
    Comments (51) | Send Message
     
    Glad I added to my KMI position when the twit from HedgeEye first drove the price down. What a moron--"it is our opinion that Kinder Morgan defers LP maintenance expenses and CapEx". Great, nice opinion, where's the beef? There isn't any.

     

    I expected as much from a 26 year-old juvenile who's twitter profile says, "I'm the guy that does his job, you must be the other guy." Guess he didn't do his job very well this time.
    10 Sep 2013, 08:12 PM Reply Like
  • Energysystems
    , contributor
    Comments (944) | Send Message
     
    Where's the beef? Fits Hedgewho to a T.
    10 Sep 2013, 08:37 PM Reply Like
  • Bryce_in_TX
    , contributor
    Comments (2571) | Send Message
     
    IF what Hedgeye claims is true, then "economic" depreciation, that is the real rate of depreciation, is equal to or exceeds book depreciation. That would mean that the GAAP financials would be a good starting point to evaluate KMP's operating performance, rather than DCF.

     

    Whether Hedgeye's claims are true, I don't know. But, Hedgeye is opening my eyes to how companies can play the earnings management game through the playing down of GAAP standards and the emphasis of non-GAAP measures, in order to "manipulate" the numbers to a company's advantage. The ultimate motive to be to maximize the company's stock price, as well as maximize value to the GP.

     

    Greed is alive and well in corporate America.
    10 Sep 2013, 09:09 PM Reply Like
  • Energysystems
    , contributor
    Comments (944) | Send Message
     
    Hedgewho's ultimate motivation is to leverage short interest via social media for a payout.
    10 Sep 2013, 09:36 PM Reply Like
  • User 64398
    , contributor
    Comments (119) | Send Message
     
    Hedgeye's report is not actually an analysis.

     

    Several pages of unrelated quotes from famous people always make for a bad start. Then finishes up with a cartoon turkey on the last page... Most likely the turkey is for anyone signing up for Hedgeye's $29/monthly subscription.

     

    If you want real financial analysis, stay with Moodys or Zachs.......
    10 Sep 2013, 08:32 PM Reply Like
  • jerrywengler
    , contributor
    Comments (402) | Send Message
     
    Do you think if you spent $29 each month buying a little more Kinder Morgan you might be doing better? Or, maybe you could split that investment, and buy a little more LINE too.
    10 Sep 2013, 10:25 PM Reply Like
  • roy schick
    , contributor
    Comments (30) | Send Message
     
    Where is the support for his "House of Cards" comment ?

     

    Does he work for $1.00 per year ? Perhaps he should......
    10 Sep 2013, 08:33 PM Reply Like
  • Uncle Pie
    , contributor
    Comments (2674) | Send Message
     
    Actually I thought it was a pretty good report. I've owned KMP for decades and have seen it debunked by other analysts, with no effect. But that doesn't mean there are no issues. I agree with hedgeye that most investors don't understand IDRs (Incentive Distribution Rights) as they apply to MLPs. IDRs are a piece of financial engineering to siphon off cash from one class of investors to another. Remember Richard Kinder and his partner Bill Morgan came out of the old Enron, speaking of financial engineering.

     

    There are many pipeline companies to invest in where there are no IDRs. I would have not invested in KMP if I had known as much about IDRs then as I do now. Not when there are excellent IDR-free alternatives.
    10 Sep 2013, 08:55 PM Reply Like
  • lsuavecito
    , contributor
    Comments (340) | Send Message
     
    Uncle Pie, I've read some of your previous comments. You seem to be a fairly astute dude when it relates to MLP's and IDR's. If the IDR thing turns you off, there is KMI, and a few others that have no IDR's,[MMP, MWE, BPL] and those like KMI thast collect the IDR's.
    10 Sep 2013, 09:22 PM Reply Like
  • durango58
    , contributor
    Comments (270) | Send Message
     
    Rich Kinder left Enron 5 years before they collapsed because he smelled a rat and didn't think the accounting practices were up to GAAP. Smart man.
    10 Sep 2013, 09:47 PM Reply Like
  • alpinair
    , contributor
    Comments (8) | Send Message
     
    I took a bath on Enron and hope that Rick is not duplicating any of the "off the books" accounting Enron did. I'm heavy on KMR & KMI and watching closely to any spills or financial tricks Enron did.
    11 Sep 2013, 10:45 PM Reply Like
  • 21thomas99
    , contributor
    Comments (396) | Send Message
     
    Richard Kinder left Enron before their illegalities started.
    27 Sep 2013, 01:27 PM Reply Like
  • Bryce_in_TX
    , contributor
    Comments (2571) | Send Message
     
    I would concur with 21thomas99. Fastow didn't become CFO until 1998. That's when most of the monkey business began, IMO. (See Early Career in link.)

     

    The Texas State Board of Accountancy has revoked Carl Bass's CPA license due to failing to abide by GAAP in the 1997 and 1998 Enron audit. So, perhaps something was amiss as early as 1997. But most of the nonsense began in 1998, I think.
    http://bit.ly/15A07s3
    27 Sep 2013, 02:25 PM Reply Like
  • 21thomas99
    , contributor
    Comments (396) | Send Message
     
    Being as how Kinder left in November, 1996 and coupled with your comment, I don't see Kinder being involved with the shenanigans of Fastow, Skilling, et. al.
    27 Sep 2013, 04:03 PM Reply Like
  • Albert Alfonso
    , contributor
    Comments (1358) | Send Message
     
    Thanks Hedgeye for allowing me to lower my cost basis on KMI. I am still surprised that a tweet caused this stock to lose $4B in market cap..
    10 Sep 2013, 08:58 PM Reply Like
  • buffeteer
    , contributor
    Comments (6) | Send Message
     
    I've been heavily invested in KMP for over 10 years. I listen to every quarterly broadcast. I am 71 now, and so far so good. I am very pleased with the increases in dividends I have benefited from and am amazed at how steady the build-out of the company has been and how prescient the executives have been in acquiring natural gas pipeline assets. The companies also have no problem in going to the capital markets to raise money for expansion and acquisition. I have read books on Enron and know why Kinder left and how smart he was to buy the hard assets of their pipelines together with Mr. Morgan.
    10 Sep 2013, 10:04 PM Reply Like
  • 21thomas99
    , contributor
    Comments (396) | Send Message
     
    I read somewhere Messrs. Kinder and Morgan bought these hard assets from Enron for (only!) $40 million.

     

    They (Kinder and Morgan) have had a nice return on this $40 million.
    27 Sep 2013, 04:07 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2481) | Send Message
     
    A lot of ppl here blasting Hedgeye, but no comments on why the assets from EPB saw maintenance capex reduced so much. Not an apples to apples comparison, but EPD reported "sustaining cap ex" of $365 mil in 2012, vs KMP of around $220 mil in 2013 on a similar, though definitely not identical, set of assets. House of Cards is hardly accurate, but they might have a point on capex being too low. You can get away with skimping on it for years, but at some point, things need to be replaced. Only time will tell.
    10 Sep 2013, 10:46 PM Reply Like
  • FreeStateYank
    , contributor
    Comments (803) | Send Message
     
    Perhaps the reduction was due to less need for maintenance? OR, perhaps Kinder is able to do more with less money, either by better purchasing power and/or greater in-house service provision at a reduced cost from going outside to service providers?

     

    To fully understand if Hedgehole's point has any merit must go beyond dollars and look at exactly what was done. Difficult to do, of course.
    11 Sep 2013, 03:24 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2481) | Send Message
     
    EPB's maintenance was pretty consistent for a decade, and then suddenly drops after a new owner takes over. I doubt there's anything economies of scale could do to lower maintenance costs 50% in a year, its not like EPB was a small company. I dont know what is right or what is wrong, but if I was an owner of any asset, and an expense that had been stable for a decade suddenly dropped 50%, I'd be happy, but I'd want to know why.

     

    All I'm saying is that while Hedgeye makes inflammatory statements to get media attention and drive web traffic, they do raise a legitimate question about the cap ex numbers.
    11 Sep 2013, 10:19 AM Reply Like
  • Clayton Rulli
    , contributor
    Comments (2468) | Send Message
     
    used the dip to buy (KMI) and STO cash secured puts. Go Richie Kinder!
    10 Sep 2013, 11:10 PM Reply Like
  • virtalex
    , contributor
    Comments (253) | Send Message
     
    Looking forward to the next Hedgeye bashing report...

     

    These guys are doing a great job for the LONGs ))
    11 Sep 2013, 02:28 AM Reply Like
  • buffeteer
    , contributor
    Comments (6) | Send Message
     
    Next analyst conference coming up in October. If this is an important observation about maintenance, I expect at least one analyst to ask questions about the points Hedgeye made.
    11 Sep 2013, 09:08 AM Reply Like
  • 2tired2talk
    , contributor
    Comments (82) | Send Message
     
    I think there is one important point to consider in the HedgEye report: "In our view, KMI is enriched at the expense of the LP's, KMP/KMR and EPB."

     

    According to the 2012 proxy statement, Richard Kinder owns 240mm shares of KMI (+500,000 this week) and only about 300,000 each of KMP & KMR.

     

    For sure KMI is "enriched" by the LP's since they are the primary asset of KMI. Whether or not there is anything improper is a different question. Either way, if you are going with the jockey, buy KMI, not he LP's.
    11 Sep 2013, 09:21 AM Reply Like
  • lsuavecito
    , contributor
    Comments (340) | Send Message
     
    The 'jockey' just invested another $18M in his race horse. That appears to be saying alot without talking.
    12 Sep 2013, 12:20 PM Reply Like
  • Blue22
    , contributor
    Comments (127) | Send Message
     
    To me shorting and trashing Kinder Morgan is a GOA (Game Of Assholes) which has destroyed every one of my energy investments! This stupidity is like shooting off your own foot. Kinder controls most of the critical pipeline structures in the most productive areas in this country. El Paso was a small company, very well run, which did not have the structure to minimize expenditures. Keep shorting and watch fuel prices catch up to London!
    26 Sep 2013, 01:47 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2481) | Send Message
     
    "El Paso was a small company, very well run, which did not have the structure to minimize expenditures."

     

    Really? $21 billion takeover, or $38 bil including debt, and El Paso was just a small company with no ability to minimize expenses?
    26 Sep 2013, 02:49 PM Reply Like
  • Iwantinfo
    , contributor
    Comments (16) | Send Message
     
    I live in a small N.M. town near El Paso, and I can tell y'all they're working on that pipeline constantly. They are NOT neglecting maintenance.! What the "H" is HedgeEye talking about. He's NOT aware of the facts as they are on the ground.!!
    26 Sep 2013, 05:49 PM Reply Like
  • buffeteer
    , contributor
    Comments (6) | Send Message
     
    How's that "shorty" thing been workin' for you, Kaiser Wilhelm followers?
    27 Sep 2013, 08:46 AM Reply Like
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