Dan Notestein

Kinder Morgan: Energy Infrastructure Fee Machine

Hmm, let's address these points quickly:
1) 50% of incremental cash flow versus actual cash flow: Oh, please... That fixed cash flow you're talking is indeed fixed, and doesn't change as the company increases capitalization via equity offerings. Eventually, that "fixed cash flow" becomes a relatively small figure when you constantly expand the company.

2) Most MLP investors are institutions: First, I'm not sure what made you think this is only a problem for non-institutional investors. I'm quite confident that there are just as many institutional investors getting fooled by such schemes (you apparently give them much more credit than I do).

3) Start your own MLP: Good idea! I see an unethical business practice, so naturally I should copy it! This is the kind of thinking that makes me distrust so many people...

And I don't buy into the publicly traded GPs for two reasons: 1) I don't want to profit from robbing other people, and 2) I'd be a fool to trust a management team that operates a company aimed at robbing other people.

4) As it happens, I DO own shares in LGCY, exactly because it doesn't have IDRs. I don't condemn all MLPs, just the ones that have onerous IDRs. If you can get away from the IDRs, the tax advantage is nice :-)

On 2008 Oct 11 09:36 AM weiwentg wrote:

> This is a lot of caterwauling over a non-issue. The general partner
> is getting 50% of KMP's -incremental- cash flow, not 50% of all cash
> flow. The partnership has to achieve a certain (quite large) amount
> of distributions to hit the high splits, where 50% of incremental
> cash flow goes to the GP. This provides incentive for the GP to run
> the partnership to maximize cash flow.
>
> If you think this is unfair to small investors, first, most MLP investors
> are institutions. Second, there's many worse cases of Wall Street
> being unfair to small investors.
>
> If you're really dissatisfied, you have three options. One, pony
> up the cash and start your own MLP. Two, find an MLP that doesn't
> have incentive distributions for general partners. Legacy Holdings
> LP (seekingalpha.com/symbo...) is one which I recommend.
> Three, there are publicly traded general partners, like Enterprise
> GP Holdings (seekingalpha.com/symbo...) and Magellan Midstream
> Holdings (seekingalpha.com/symbo...), both of which I recommend.

Oil Income Stocks Decline to New Price Lows

In general, Wulf makes good points, but he's clearly wrong in this case about the amount of hedging from LINE versus PWE and others. LINE is considerably more hedged, and their plan to swap their current 5 year hedging position for a shorter 2 year term, higher valued one looks like a great plan.

NOWHEREMAN claims LINE management 'screwed up" in 08, but in hindsight, clearly they didn't. They hedged their risk well, it's not really subject to argument now.

Despite Wulf's mistake here, his general analysis of O&G stocks is solid. In particular, he's right on the money about the MLP's with 50% IDRs such as KMP. That scams like this are so easily perpetuated in the face of direct warnings is a clear sign that we're doomed to repeat stock market disasters for many years to come.

Kinder Morgan: Energy Infrastructure Fee Machine

Ah, the classic argument of Ponzi schemes: if you had just invested x numbers of years ago, you would have made 10 times your initial investment. This works fine up until the point where the Ponzi scheme collapses, then you lose all your money. KMP is a relative new form of ponzi scheme and it's successfully cloaked this aspect of it's financial structure using a legitimate underlying business, unlike most ponzi schemes.

Mr. Wulf may be too eloquent in his description of the nature of the problem with KMP, so I'm going to try to simplify it:

For every billion dollars of new money that goes into KMP (which is happening yearly now), the profits for 50% of that money go to the general partner. This means there's an effective toll of 50% on the earning power of all new investment (this costs existing limited partners as well as the new equity). In other words, when new equity is issued, KMP shareholders get diluted, but the general partner doesn't. And KMP is massively diluting and taken on huge amounts debt for extremely rapid expansion. This makes perfect sense for the general partner, since he's truly using "other people's money" to make a killing. If the doesn't make the problem clear, let me know, and I can go into more detail on how this works.

As for the argument about analyst recommendations, analysts have missed many such boondoggles. I suggest as a starting point reading Ben Graham's The Intelligent Investor to see just how wrong they can be. And this case it's even worse, since one of the most commonly cited reccommenders of this stock is Goldman Sachs, who just happens to own a huge portion of general partner shares (as Wolf mentions in his article).


On Feb 28 11:53 AM Tony Soprano wrote:

> It's nice to know that Mr. Dan Notestein cares so much about his
> mother's investment in KMP. However, if she had purchased the stock
> in 1992 at 6 she would have increased her value by nearly TEN FOLD
> (not including dividends). If she had purchased KMP in 1998 at 18
> she would have increased her value by THREE FOLD (not including dividends).
>
>
> Also, Mr. Dan Notestein states that "Secret's are always relative."
> There is no secret here, so how can it be relative? He goes on to
> back up this statement with the idea that "It's an EXTREMELY non-standard
> practice (yes, a number of MLP's do it'. How can extremely non-standard
> practice and yes, a number of MLP's do it make any sense. There are
> not that may pipeline MLP's to begin with so this comparison makes
> no sense. How KMP handles its accounting and IDR payments is built
> into the price of the stock.
>
> FIRST CALL has a buy recommendation for KMP. Out of 13 analyst 6
> are strong buys, 3 are buys and 4 are holds. S&P gives KMP five stars,
> a strong buy.
>
> Yesterday KMP had a public offering of 5 million shares. Most of
> those shares sold for $57. This proves to me that KMP can raise capital
> successfully. If there was a concern about deceptive accounting procedures
> or their IDR payments it did not impede their effort to raise nearly
> 300 million dollars.
>

Is Kinder Morgan Just a Fee Trick?

Hi Sellstop, no, KMR is not the GP. The GP is a private company nowadays, owned by Kinder Morgan, Goldman Sachs, etc.

Oil and Natural Gas Will Decouple - Big Time

I believe the market's negative take on LINE is because of it's long term hedges of around 85% of it's oil (6 years) and nat gas (5 years) production. These long term hedges look even worse on their books, because the 5 years of losses due to increasing prices show up immediately on their books all at once, whereas their presumed profit from the increased prices doesn't get accounted for until they actually produce it.

Kinder Morgan: Energy Infrastructure Fee Machine

Secret's are always relative. It's an EXTREMELY non-standard practice (yes, a number of MLP's do it, but that's a drop in the bucket compared to the number of stocks and the history of the stock market). The average investor using normal valuation methodologies will easily get mislead by this practice and will dramatically overvalue the stock. My personal involvement with this stock began when my mom invested in this stock, then later asked me to look into it. It was really more luck than anything else that I decided to read thru the whole annual report and managed to spot the IDR payments in their. This stock will collapse eventually, it's only a matter of how long before it goes down, it could last a few more years, unfortunately, and cost a lot more people money. I don't feel too sorry for the investors who are fully informed on the IDRs and still think it's a price worth paying because they get the "incredible management" abilities of KM (these guys just make me laugh), but do feel sorry for the the investors who just don't know of this deceptive practice. So this information is worth repeating as often as possible, to limit the number of such investors.

Kinder Morgan Energy: A Little Corruption, American Style

Kurt is completely on target here. Anyone with a true understanding of company financials should be able to recognize this as a classic case of "cooking the books". Footballtaxman's statement that this is the way a number of MLP's operate is also true, but this is just saying that there are a number of crooks out there (no suprise to a modern investor, I hope). Anyone clueless enough to think that handing 50% of a company's profit to management to "incentivize" them to work harder, should not be investing (and definitely shouldn't be advising anyone else).