Kinder Morgan: When A Beautiful Dream Becomes A Nightmarish Reality

About: Kinder Morgan, Inc. (KMI), Includes: ET
by: David Alton Clark

Kinder Morgan just now offered its preliminary financial projections for 2017.

The company stated it will generate of $4.46 billion of distributable cash flow for the year.

Kean stated he is confident on the outlook for growth supported by a $13 billion backlog of infrastructure expansion opportunities with high probabilities of completion in the next few years.

As you may have guessed, I am not as confident in the outlook for growth.

In the following article I will lay out my bear case on the company for dividend growth and income investors.

Kinder Morgan (NYSE: KMI) recently revealed its preliminary financial projections for 2017. The company stated it was very confident in its outlook for growth. Steve Kean, president and CEO stated:

"We are also confident in our outlook for growth, largely supported by our $13 billion backlog of energy infrastructure expansion opportunities that have a high probability of completion over the next few years."

I am not so sure. That being said, in the following article I will lay out an alternative bearish case for dividend and income investors to ponder.

Where is the beef for dividend and income investors?

After reading through the recent press release, I couldn't help but notice Kinder Morgan effectively froze the dividend for the entirety of 2017 at $0.50 per share. Kean went on to say:

"Kinder Morgan would provide guidance on a revised dividend policy in the latter part of 2017, with a view toward delivering additional value to its shareholders in 2018."

The company expects new growth projects coming on line to provide excess cash that will be used to boost the dividend. Here lies the issue. Let me explain.

Energy Transfer Partners opens lower on Dakota delay

Energy Transfer Partners (NYSE: ETP) opened lower on Monday after the U.S. Army Corps of Engineers refused a crucial permit needed for completion of their $3.7B Dakota Access pipeline project, which said the companies would need to consider alternative routes other than passing under Lake Oahe.

In an angry statement, the companies say the decision is "a purely political action... the latest in a series of overt and transparent political actions by an administration which has abandoned the rule of law in favor of currying favor with a narrow and extreme political constituency". Jo-Ellen Darcy, the Army's assistant secretary for civil works, said in a statement:

"The best way to complete that work responsibly and expeditiously is to explore alternate routes for the pipeline crossing."

Analysts generally agree that a Trump administration eventually will approve the project but warn that investors should be aware of headline pressure. The move could augur a lengthy environmental review that has the potential to block the pipeline's construction for months or years.

Here is the problem

The major issue is nearly any outcome delays completion until mid-2017. ETP has said it expects to lose nearly $84 million each month the pipeline is delayed. Furthermore, the delay may cause shippers to drop out resulting in its cancellation altogether.

Not good news for Kinder Morgan

This doesn't bode well for Kinder Morgan's Trans Mountain Expansion project which is already receiving fierce resistance by British Columbia's green groups, municipal and opposition leaders and aboriginal leaders.

Furthermore, one of Kinder Morgan's key growth projects has already been scuttled. Kinder Morgan said in a statement on the pipeline:

"Despite working for more than two years and expending substantial shareholder resources, Kinder Morgan did not receive the additional commitments it expected. As a result, there are currently neither sufficient volumes, nor a reasonable expectation of securing them, to proceed with the project as it is currently configured."

The NED project was one of Kinder Morgan's key projects. KMI's East Region Natural Gas Pipelines President Kimberly S. Watson made an eerily similar statement as Kean did Monday about the project. Watson stated prior to the project being scrapped:

"Together with our shippers, we have worked hard to develop a regional solution that is a win-win for New England. Securing anchor shippers provides an important foundation for the successful development of the NED Project."

This does not set a great precedent as far as I am concerned. My confidence in Kinder Morgan's ability to bring these projects to fruition is extremely low at this point. For me, it is an easy pass for dividend and income investors.

Kinder Morgan is now a speculative growth play

As far as dividend growth and income investors are concerned, I would say Kinder Morgan is a No Touch at this time. On the other hand, if you are looking for a high risk / high reward speculative play, Kinder Morgan may be for you.


Kinder Morgan guided for a dividend increase of 16% in 2015 raising the dividend to $2.00. Furthermore, the company stated it would increase the dividend at an annual growth rate of 10% over the next five years. What actually happened was the dividend was cut by 75%, the share price crated and the company's debt load increased substantially.

So please, take the guidance from the company with a grain of salt. It is intriguing to me that this tasty morsel of guidance just happened to come out on the same day the bad news about ETP's Dakota pipeline came out. The conspiracy theorist in me thinks it may have been a damage control move, but who knows.

Final Thought

I know there will be a plethora of articles written about the exciting guidance from the company in the coming days. With a yield of merely 2.25% currently, you could achieve a similar by buying a dividend index fund and sleep very well at night. The risk is not worth the reward at this level. If you do decide to take a position in the company I would definitely layer in to a full position to reduce risk. I wanted to provide this contrarian view to balance out the coverage. I hope you found this article interesting. I look forward to your input in the comments section.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.