Seeking Alpha

Kinder Morgan gains as it holds conference call

Comments (49)
  • Clayton Rulli
    , contributor
    Comments (2949) | Send Message
     
    And why wasn't Kaiser on the call? Hmm thats a mystery!
    18 Sep 2013, 09:40 AM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    Apparently, he wasn't invited; was not given the dial-in number.
    18 Sep 2013, 10:22 AM Reply Like
  • Energysystems
    , contributor
    Comments (1347) | Send Message
     
    Why invite someone with zero credibility or reputation on a CC? That's more amateur than open mic night at a comedy club.
    18 Sep 2013, 10:49 AM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    Energysystems:

     

    It begs the question: If the guy is such an amateur, why did Kinder feel obliged to have a special conference call to address his claims?
    18 Sep 2013, 10:52 AM Reply Like
  • Energysystems
    , contributor
    Comments (1347) | Send Message
     
    Personally, I didn't see the need to address him or hedgewho. To me, they're not worth addressing. In fact, I believe all this does is help garner more attention to this group of entry level "analysts", and allows them future opportunities to leverage shorts via social media. They don't care whether they're right or wrong, they're in it for the cheap $.
    18 Sep 2013, 11:00 AM Reply Like
  • Zeus2012
    , contributor
    Comments (707) | Send Message
     
    This reminds me of those who thumped their nose at Mike Mayo when he was questioning Citi. While I don't agree with HE's view on Kinder, as a KMI shareholder, I would have been very interested Kaiser on the call. It never hurts to hear the other side.
    18 Sep 2013, 01:04 PM Reply Like
  • Left Banker
    , contributor
    Comments (2283) | Send Message
     
    James, Let's not be disingenuous, it doesn't become you. You know full well why a special conference call was appropriate: The stock got hammered by this guy's report. He's got the PTBarnum gene for enhanced self-promotion. It was imperative to respond forcefully.

     

    Now, do I believe it?
    18 Sep 2013, 01:40 PM Reply Like
  • bigbenorr
    , contributor
    Comments (841) | Send Message
     
    James,

     

    I was wondering the same thing. After listening to the call, I think it was partly because Kinder was offended that the guy accused them of cutting corners on safety.
    19 Sep 2013, 01:18 AM Reply Like
  • bigbenorr
    , contributor
    Comments (841) | Send Message
     
    Zeus, you know that would have turned into a circus.
    19 Sep 2013, 01:19 AM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    bigbenorr:

     

    Please note that have offered no opinion on whether it was appropriate for Kinder to not invite the Hedgeye analyst to the call.

     

    Somebody made a comment initially here asking why the analyst was not on the call and implied he was a coward. I simply pointed out that he was not invited. I certainly can see why he was not invited although I think reasonable people could perhaps differ on whether he should have been invited.
    19 Sep 2013, 02:47 AM Reply Like
  • bigbenorr
    , contributor
    Comments (841) | Send Message
     
    I was referring to your comment "If the guy is such an amateur, why did Kinder feel obliged to have a special conference call to address his claims?"

     

    When this all started and alot of people on SA were calling for a response from Kinder, I didn't think they would actually get it. Seems kind of pedestrian for a huge company to go on defense vs a tiny research firm, but the story kind of blew up and my guess is Rich Kinder wanted to clarify that they are not letting their pipelines fall apart and risking spills or anything.
    19 Sep 2013, 11:22 AM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    bigbenorr:

     

    Big companies do not tend to hold conference calls to refute claims that have no credibility.

     

    The bottom line is that Kinder was feeling the heat from big institutional investors and sell-side firms that where saying: "What's up with this, Rich? This kid is right, there is something that smells fishy here."

     

    The Hedgeye report was credible in many (though not all) respects, it gained traction amongst the sell-side and buy-side and Kinder felt obliged to respond. If the report were not credible at all he would not have bothered responding.
    19 Sep 2013, 12:46 PM Reply Like
  • bigbenorr
    , contributor
    Comments (841) | Send Message
     
    I think Kinder's comments at least showed that the claims of poor maintenance were not credible. I tend to agree that the response shows there is perhaps reason for concern, but I didn't see anything in the original report that was really earth shattering, mostly rehashing old issues. The bottom line is that if you believe that the US oil/gas market will remain strong (which I do) then KMI/KMP will have no problem continuing to grow. If not things could get ugly, but that is always the nature of the market.
    20 Sep 2013, 07:16 AM Reply Like
  • holdencaulfield729
    , contributor
    Comments (21) | Send Message
     
    ^Says the KMI/KMIWS/KMP short
    18 Sep 2013, 09:51 AM Reply Like
  • WhatdoIknow1
    , contributor
    Comments (661) | Send Message
     
    What point could Kaiser possibly raise that wasn't in the report. Hedgeye has dominated the conversation for two weeks. If I was the CEO of Kinder I wouldn't invite him to the party either.

     

    Long KMP
    18 Sep 2013, 10:03 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2724) | Send Message
     
    Why not invite him? If there is a misinformed analyst that is causing uncertainty among investors, wouldn't it benefit investors to sit down with the analyst and attempt to smooth out concerns? By shutting Kaiser out Hedgeye can keep on saying that analysts at big banks ignore possible issues at Kinder Morgan in exchange for lucrative investment banking work.
    18 Sep 2013, 10:49 AM Reply Like
  • PendragonY
    , contributor
    Comments (7361) | Send Message
     
    Why invite him? So he can take time from more knowledgeable analysts? So Kinder can give his uninformed or misinformed claims more credence? Is he the only one who is able to analyze Kinder's performance? To give more credence to his smear of the other analysts? Inviting him looks like all upside for him and all downside for Kinder and the other participants.
    18 Sep 2013, 10:59 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2724) | Send Message
     
    As said above, having a call to dispute the analysis of someone, but not actually speaking to them to help clear up where they raise questions, seems to be sending mixed signals. You claim he doesnt know what he's talking about, yet the CEO of the company takes the time to discuss with analysts the very points he brings up. Like it or not, Hedgeye appears to have the ability to move the markets. If his analysis is wrong, sit him down and point out the flaws. But locking him out of an interview only further makes his case that KM and the analysts have a relationship that is more based on securing future fees than it is serving the investors they provide research to.
    18 Sep 2013, 12:11 PM Reply Like
  • PendragonY
    , contributor
    Comments (7361) | Send Message
     
    Mike,

     

    Your instincts are correct when dealing with an honest critic. Dealing with a guy whose only interest is to drive down the share price is a different matter.
    18 Sep 2013, 01:29 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2724) | Send Message
     
    I actually think his only interest is to get his name out there, in which case he's doing a fairly good job haha.
    18 Sep 2013, 02:17 PM Reply Like
  • losbronces
    , contributor
    Comments (787) | Send Message
     
    If he is playing it short as indicated, he has made some money too.
    18 Sep 2013, 02:37 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2724) | Send Message
     
    I could be wrong, but I'm pretty sure he indicated he didnt has a position in the name, on either side.
    18 Sep 2013, 02:55 PM Reply Like
  • Maryellen41
    , contributor
    Comments (6) | Send Message
     
    How are things going at Headhog regarding your growth and loan repayment schedule?
    18 Sep 2013, 10:14 AM Reply Like
  • JD in NJ
    , contributor
    Comments (1429) | Send Message
     
    Is it time to go short on Hedgeye yet?
    18 Sep 2013, 10:49 AM Reply Like
  • mikeehlert
    , contributor
    Comments (76) | Send Message
     
    I am sure Kaiser was in attendance and Kinder knew it - registration you know. However, this is a company sponsored event and they are in no way obligated to give anyone a forum.

     

    If Kaiser wants a forum he can sponsor his own call.
    18 Sep 2013, 11:00 AM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    I read the transcript of the conference call. It largely (if not entirely) vindicates the Hedgeye analyst in my view. Two reasons:

     

    1. The only way that Kinder was able to reply several of the allegations was be discussing PREVIOUSLY UNDISCLOSED information that they disclosed at this conference call. That means that there were legitimate questions raised that could only be answered by releasing previously undisclosed information about certain types of maintenance capex. Furthermore, given the way the disclosures were made, there is no way to actually verify whether they are actually satisfactory explanations. But even if one assumes that the previously undisclosed information do provide adequate explanation, the Hedgeye analyst's original questions are vindicated as having been legitimate.

     

    2. I don't think that Kinder adequately answered about 50% of the arguments made by Hedgeye. For example, they did not explain why replacement of a 12 pipe by an 18 inch pipe is all "growth" capex rather than being 67% maintenance and 33% growth. This was a key allegation by Hedgeye and it seems that Kinder had no real answer.
    18 Sep 2013, 11:13 AM Reply Like
  • pigeonguy
    , contributor
    Comments (128) | Send Message
     
    James If you have a widget factory that has been producing widgets. You now determine that you need to produce widgets at 3 times the original rate. So you tear down the previous widget factory and build a new one. The new widget factory would fall under cap exp. The fact that the demolished factory previously produced widgets is not a factor in determining capex for the new factory at least this is from my experience in capex.
    18 Sep 2013, 11:32 AM Reply Like
  • Value Doc
    , contributor
    Comments (778) | Send Message
     
    1. Fair enough--it illustrates the limits to what you can do with financial disclosures and shows that at the end of the day, a lot comes down to management credibility and trust. However, I'm satisfied. A little bit of paranoia is healthy, but beyond a certain point, you just need to have some faith in management. Unlike Hedgeye, I don't smell anything funny here.

     

    That El Paso maint cap reduction was exactly what I expected--some abnormally high one-off ramp-up timing issues when the assets were owned by El Paso.

     

    Ditto with the Phoenix/Las Vegas pipeline project--the local economy crashed--just an unlucky investment--not a nefarious accounting scheme.

     

    2. It's to maximize the rate base. He can't be too up-front about that--it's awkward from a regulatory and customer PR perspective. It's fine from the perspective of analyzing the business's economics to book it at 100% as long as the incremental cashflows (not the total cashflows, in which case you're cannibalizing the existing cashflows) support 100% of the new investment.

     

    3. Hedgeye's strongest argument is probably the E&P segment sustaining vs.growing production. However, I see that as more of a biz risk than an accounting issue and am comfortable with the magnitude of the risk (anyway, they've fully disclosed expected production declines post-2016, i.e. it's factored into biz planning and cashflow forecasts), not to mention that there's probably long-term upside from higher oil prices. The real potential bombshell, in my opinion, was the pipeline maint cap arguments which I believe have been discredited.

     

    - Interestingly, from Kaiser's tweets last night, it sounds like he's bullish on EPD (at least on a relative basis). I can't argue with that one--it's my largest holding.
    18 Sep 2013, 11:37 AM Reply Like
  • losbronces
    , contributor
    Comments (787) | Send Message
     
    The flow supported by a pipeline is directly proportional to the cross-sectional area of the pipe and the cross-sectional area of a pipe is Pi x the radius squared--just saying 33% (12 inch going to 18 inch diameter) is wrong even if were going to break capital down that way. As pipeline diameter increases, the flow supported (which of course depends on pressure, temperature and the fluid transported) goes up exponentially.
    18 Sep 2013, 01:00 PM Reply Like
  • stvrob_63
    , contributor
    Comments (1112) | Send Message
     
    Actually it doesnt go up exponentially, it goes up by the square of the diameter. So the capacity of an 18 inch would be 2.25X that of a 12 inch. (Which is exactly what you said at first)
    18 Sep 2013, 01:19 PM Reply Like
  • losbronces
    , contributor
    Comments (787) | Send Message
     
    In this case, the exponent is 2 and not e. Please check the definition of exponentially. I have applied that word correctly. See 2A here: http://bit.ly/156owja or look in a Cambridge dictionary which shows simply: describes a rate of increase that becomes quicker and quicker as the thing that increases becomes larger.
    18 Sep 2013, 01:45 PM Reply Like
  • Left Banker
    , contributor
    Comments (2283) | Send Message
     
    James's points are well taken here. I, for one, am listening.

     

    I am long KMI (with a smallish position) so I'm paying attention, but I'm not emotionally committed to this thing. If it looks edgy, I'd just as soon bail. That sea is loaded with fish. Teeming with them.

     

    That does not seem to be the case for many here. There is a tone of blind naivete along the lines of "I luvs my KMx, don't you be dissing it, man."

     

    Seems to me if something is off in the maintenance or the reporting of the maintenance, I would think any KMx shareholder would be eager to know more, rather than eager to shut down the messenger.

     

    Want an example? Look into how much inadequate pipeline maintenance has cost PG&E in California -- not to mention how many people were killed as a result -- and the hemorrhaging there is far from over.
    18 Sep 2013, 01:51 PM Reply Like
  • stvrob_63
    , contributor
    Comments (1112) | Send Message
     
    Not really. The Exponential function is when the exponent IS the independent variable; like y=e^x. But the pipeline cross section example is a second order function of the form y=x^2. In other words, an exponential function requires the independent variable to be the exponent that it is raised to.

     

    Not trying to be argumentative, in retrospect I shouldn't have brought it up at all.
    18 Sep 2013, 02:36 PM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1778) | Send Message
     
    James - in all likelihood that 12 pipe was already fully depreciated
    18 Sep 2013, 04:48 PM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    Douglas:

     

    Yes, but depreciation plays no role in DCF. If it did, DCF would be lower every quarter and so would distributions. DCF is based on "maintenance capex." So, on that basis if you have to spend on capex to maintain the same amount of flow, that should be maintenance capex.

     

    You can't have your cake and eat it too. If you exclude depreciation expense from DCF and then say that you should not charge maintenance capex because the asset has been fully depreciated.
    18 Sep 2013, 05:59 PM Reply Like
  • Disturber
    , contributor
    Comments (184) | Send Message
     
    The costs of a failed pipeline are enormous. Not only does the owner have tort liability for any injuries to persons or property, but there are a raft of environmental fines, fees and expenses. In addition, while the pipeline is down, it does not generate revenue and a great deal of administrative resources have to be diverted from ordinary administration to deal with the damage and attendant problems. This also does not include legal and other professional expenses.

     

    That having been said, even the best maintained pipelines can fail and companies like KM are acutely aware of the risks of inadequate maintenance. I find it very hard to believe that KM's maintenance expenses are being driven by accounting issues rather than by prudent and careful considerations of pipeline maintenance.

     

    You are correct about the PG&E situation and it is clear that the company failed in its maintenance responsibilities. Some heads should roll. Also, PG&E operates in a terrible regulatory climate here in CA and I expect that because they are constantly facing issues of whether improvements result in rate adjustments, accounting issue figure disproportionately and possibly imprudently in their maintenance decisions.

     

    KM also had an accident in Walnut Creek, CA some years ago where one of their airplane fuel pipelines was punctured by a contractor digging in the area. Two workers died. I remember all of the adverse publicity and the cascade of resulting lawsuits. I am sure that KM learned a lesson from that one even if they weren't at fault.

     

    Disturber
    18 Sep 2013, 10:51 PM Reply Like
  • Chancer
    , contributor
    Comments (3210) | Send Message
     
    The definition of PREVIOUSLY UNDISCLOSED could be absolutely everything inside a corporation. There are numerous reasons for not disclosing everything:
    -not required.
    -not necessary.
    -for competitive reasons.
    -not of interest to most, as boring, gets into the weeds, etc.
    -makes financial reports huge. Instead of disclosing the most relevant data, the most relevant becomes buried in a very large cumbersome report.

     

    The definition for James/Hedgeye of PREVIOUSLY UNDISCLOSED is the company is hiding something. This is silly and absurd.

     

    When a company is publicly attacked (like by Hedgeye), they have to decide if they want to respond with more information- often "previously undisclosed". Some do. Some don't.

     

    My personal view is that debating with the likes of James and Hedgeye makes the erroneous assumption that James and Hedgeye are interested in providing enlightenment. They are not. Whatever the question, they will always take you down rabbit trails. If you are close to proving them wrong, they change to a different rabbit trail over and over again. They have absolutely no interest in enlightenment. They are only interested in exalting themselves as the SMARTEST PEOPLE IN THE ROOM TO TAKE YOUR MONEY. Just a waste of your time.
    18 Sep 2013, 12:19 PM Reply Like
  • Chancer
    , contributor
    Comments (3210) | Send Message
     
    Recommended read on Seeking Alpha today:

     

    "Kinder Morgan Partners: Hedgeye's Error Could Cost You" by Stephen Rosenman
    18 Sep 2013, 01:15 PM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    "PREVIOUSLY UNDISCLOSED," as I used the term, has zero implication that there is anything nefarious involved. My only point is that the Hedgeye analyst was raising legitimate questions given the information available.

     

    There is no question that Kinder's maintenance capex looks suspicious on various grounds. Kinder essentially acknowledged that fact by giving this press conference and acknowledging that they had some explaining to do. They gave their explanations and people can decide whether or not they think they are sufficient.

     

    The bottom line is that the Hedgeye analyst raised legitimate issues and the ad hominem attacks on him have been inappropriate. The degree of shock and the nature of the attacks also show pretty clearly that a great many Kinder shareholders don't know as much about their holdings as they thought they did.
    18 Sep 2013, 05:54 PM Reply Like
  • Left Banker
    , contributor
    Comments (2283) | Send Message
     
    Wandering wilderness
    Warning voices in the air
    Shouldn't we listen?
    18 Sep 2013, 06:02 PM Reply Like
  • Energysystems
    , contributor
    Comments (1347) | Send Message
     
    How does Kinder's maintenance capex look suspicious? Compare maintenance cost per mile of pipe and it's in-line with the industry.

     

    Please be specific. I know you're riding the coattails of Hedgewho in this, but specifically note the "suspicious" parts.
    18 Sep 2013, 06:07 PM Reply Like
  • Left Banker
    , contributor
    Comments (2283) | Send Message
     
    The wise man listens
    Carefully with mind open
    Before consclusions
    18 Sep 2013, 06:43 PM Reply Like
  • Value Doc
    , contributor
    Comments (778) | Send Message
     
    James,

     

    He raised some legitimate questions, but I think the overly brash and confident tone in his report is what likely turned a lot of people off. Similarly, he's not backing down or toning it down even after many of his central claims have been refuted (e.g. the El Paso maint cap discrepancy)--he's playing like a lawyer arguing a case rather than like an objective analyst. That was even evident a month ago in his Twitter log when he was researching KMP and stated "I hope I find something here." Confirmation bias, anyone?

     

    Probably the biggest criticism I would have of the original research was his circumstantial cherry-picking of the safety/env record when it would have been very easy to examine the incidents record of both KMP and the entire industry and note that the trajectory has improved over the past 10 years, and that KMP's record has followed a similar trajectory and is above-average. This is inexcusable--if he were a journalist, this would be deemed major incompetence and/or a journalistic ethics violation.

     

    I corresponded with Hedgeye/Kaiser a bit via Twitter some days ago with substantive counters to their arguments and would note that they also selectively re-tweet my comments while blocking ones that discredit their arguments. Again, this demonstrates lack of objectivity and good faith in analyzing the issues.

     

    Finally, they've thrown around misleading financial metrics out-of-context in their brief media appearances and on Twitter and elsewhere in a way that strikes me as disingenuous scare-mongering. I've never seen this sort of nonsense when Jim Chanos announces a new short position.

     

    All that said, I don't like to be too harsh with him as I believe that skeptics and short-sellers are absolutely necessary for a healthy capital market, and the sell-side tends to be too conformist and not tough enough sometimes. His foray led to more info being disclosed and more probing than would otherwise have taken place, and that's a good thing.
    18 Sep 2013, 10:18 PM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    Value Doc:

     

    I hear you. I don't think I disagree with much of what you said. For example I think "house of cards" was probably a bit strong given the evidence he presented. But I also think we agree that some people have been too dismissive of the guy.
    19 Sep 2013, 02:50 AM Reply Like
  • Value Doc
    , contributor
    Comments (778) | Send Message
     
    James,

     

    I was studying the tail end of the KMP transcript, and it confirms my understanding of the controversy regarding E&P maintenance capex. KMP evaluates new investment on a well-by-well or project-by-project basis and labels such capex as growth capex if the investment causes more oil to come out of the ground (than would come out without the new investment).

     

    Hedgeye asserts that if the total EXISTING production base is declining without that new investment, then such capex should be deemed maint cap. The unstated implication here is that we should be scared because the existing production base is in decline due to depletion, i.e. the cashflows cannot be sustained perpetually (at least, not without further maint capex disguised as growth capex), and that means the DCF-based distributions are self-liquidating the business, i.e. the E&P cashflows are finite in duration while the equity and debt used to finance them are perpetual.

     

    The reason the Hedgeye allegations are specious is that (i) the decline of the existing production base is already factored into the cashflow forecasts and (ii) from the perspective of DCF vs. GAAP and long-term sustainability of the business model (i.e. "no Ponzi finance rule"), the capital that was invested many years ago in E&P has already been fully recovered, with adequate returns thereon, due to the very high IRRs (26-28%) historically enjoyed by the E&P biz. What's coming in now and for the next several years are basically the tail end of the discounted cashflows.

     

    KM will occasionally put a small amount of new capex into E&P if the returns it generates can be justified on a STAND-ALONE BASIS, but it has nothing to do with the existing production base, and it's not done to disguise the decline of the existing base, which KMP has been very up-front about and disclosed.

     

    Probably the worst that could be said about E&P is that KM only enjoyed those high IRRs because of the one-time huge surge in crude prices after they invested in E&P. Nonetheless, it's ancient history--they made the smart (or lucky?) strategic move, they recouped full payback on the capital expended plus good returns thereon, and as far as their business model, they don't need to rely on any similar big move in crude prices going forward--any upside over $91bbl is all gravy. KMP isn't now ramping up E&P with $100 oil on the assumption that they'll get high IRRs due to $200 oil in a few years even if that's effectively what they did (with success) in 2003-05.

     

    This is in sharp contrast to upstream MLPs which essentially need, so long as they are continuing to buy properties, continuously rising energy prices.

     

    I don't think Hedgeye or most critics understand the IRR and pay-back concepts, or the idea that an asset with a finite duration cashflow stream can still be a great investment if the IRR is high enough, even if the equity and debt issued to finance it is perpetual (provided it has a much lower cost-of-capital than the investment's IRR).

     

    So, their E&P critique on KMP has also been discredited just as has their pipeline critique. Thought?
    19 Sep 2013, 10:28 PM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    1. I agree with you that E&P can be a great investment on an IRR or ROIC basis even if the assets are being depleted to zero.

     

    2. Your thesis on the treatment of a declining asset is reasonable, but debatable, I think. As I understand it, DCF is supposed to give us a notion of what level of cash flow is sustainable on an ongoing basis. If the cash flows from E&P are not sustainable because the asset base is declining, then to "replace" those cash flows, Kinder will have to make another investment -- whether it be in E&P or pipes or whatever. So, I think it makes sense to account somehow for the expenditure needed to maintain cash flows. Otherwise, what we have is merely return of capital and that is not really what DCF is all about, in my view. Having said that, I don't think there is a crystal clear answer on how to deal with a situation in which a company is depleting its asset base. Maybe you require the company to disclose return of capital separately from sustainable DCF? That is a bit messy, but it would better than pretending return of capital and return on capital are all the same thing and we call it by the same name of DCF.
    19 Sep 2013, 11:42 PM Reply Like
  • James A. Kostohryz
    , contributor
    Comments (5797) | Send Message
     
    Value Doc:
    By the way, I can' t remember if this was discussed on this thread, but I assume you saw the Jeffries report today in which they say that they are not fully satisfied with Kinder's explanations om maintenance capex.
    As you know, prior to the release of the Hedgeye report, the Jeffries initiation of coverage report raised questions about Kinder's practices regarding maintenance capex.
    19 Sep 2013, 11:46 PM Reply Like
  • Value Doc
    , contributor
    Comments (778) | Send Message
     
    Yes, that's correct--I would assume that the excess returns from E&P are being invested in other business lines that will eventually offset the declining E&P. I don't see a need to trace or segregate asset-specific cashflows to evaluate the sustainability of the cashflows and/or biz model--cash is fungible. The key point is that these excess cash returns replace what would otherwise be the issue of additional units to finance those other business lines, so it's not as though they're unsustainably paying out cash from the issuance of new units.

     

    We all know that oil fields deplete, so if we saw an IRR for E&P that was similar to that of pipelines (e.g. 13%), and we know that KMP unit-holders are looking for about 13% (current yield plus yield growth), then we know something is very wrong, and the dividend expectations are unsustainable. (For simplicity, I'm leaving out the lower debt part of the cost-of-capital and the KMI IDRs, which largely offset, but the numbers even in this simplified example are pretty close to reality).

     

    I didn't see the Jeffries report--only the garbled and incomprehensible http://www.theStreet.com article about the Jeffries report. Please send me the link if it's publicly available.

     

    I would note that one of the sell-side analysts on the call (Tudor Pickering) simply whined about the E&P maint cap treatment without any real analysis ("why don't you change it, it makes some people upset"), and I also note that the Jeffries analyst is completely new to KMP (recent addition of coverage). So, I certainly don't defer to any sell-side analyst on subtle and complex issues like this. However, I would like to review their report and concerns.

     

    Another thought on the whole DCF vs. GAAP mid-stream controversy. Hasn't anyone noticed that EPD, MMP, etc. would have been subject to the same GAAP vs. DCF Ponzi finance criticisms if you looked at them 10 years ago (or even 5 yrs ago), but since then, the GAAP EPS has inexorably risen to meet and exceed the dividends (which have also grown robustly over those 10 years)? They have similar maint cap ratios to KMP. Doesn't that basically validate the whole mid-stream model and the validity of DCF (at least in many cases) as a more accurate valuation marker for a pipeline MLP than GAAP EPS? 10 yrs ago, GAAP EPS would have incorrectly overstated the valuations of these names, understated their long-term cash-generating ability, and led to similar Ponzi finance allegations.
    20 Sep 2013, 12:24 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (5400) | Send Message
     
    KMI has one of my favorite management teams and businesses. For more on KMI: http://seekingalpha.co...
    18 Sep 2013, 12:56 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Hub
ETF Screener: Search and filter by asset class, strategy, theme, performance, yield, and much more
ETF Performance: View ETF performance across key asset classes and investing themes
ETF Investing Guide: Learn how to build and manage a well-diversified, low cost ETF portfolio
ETF Selector: An explanation of how to select and use ETFs