Kinder Morgan: Warren Buffett Just Liquidated His Entire Position. What Gives?

| About: Kinder Morgan, (KMI)
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Buffett is best known for making contrarian bets.

His most famous quote is “be greedy when others are fearful.”.

Buffett’s Berkshire Hathaway bought over 20 million shares of Kinder Morgan at the lows in early 2016 after a nasty 75% dividend cut.

Nevertheless, according to the latest 13F filing just out, in Buffett liquidated his entire position the fourth quarter of 2016.

In the following sections we will discuss the potential reasons for Buffett’s abrupt exit.

Kinder Morgan (NYSE: KMI) has been a battleground stock ever since the company's share price cratered to its 52-week low of $14.97 in the first quarter of 2016.

Long-term Chart


The final fall to the lows was induced by a dreadful 75% dividend cut in December of 2015. In the first quarter of 2016 it was revealed Warren Buffett's Berkshire Hathaway (NYSE: BRK.A, BRK.B) bought over 20 million shares of the company at or near the lows in the first quarter, which matches perfectly with Buffett's overarching mantra of:

"Be fearful when others are greedy and greedy when others are fearful."

Nonetheless, a ton of good news has come out regarding Kinder Morgan since the dividend cut disaster. In fact, Kinder Morgan stock has gained 55% year to date.

Current Chart


This is a significant fact seemingly forgotten by bloggers bullish on the stock. All the hullabaloo regarding Trump's infrastructure stimulus package, the TMEP pipeline being approved, and a marked increase in natural gas volumes have underpinned the stock over the past year.

Now, the question is after this tremendous run, is it still time to be greedy? Being born in Omaha, Nebraska, myself, I couldn't help but become a Warren Buffett fan. My favorite Buffett quote is the one above regarding the tenets of fear and greed.

Basically, if everyone is fearful regarding a stock, it is not the time to sell, but buy. Yet, Buffett doesn't buy stocks that are out of favor for good reason. He buys stocks he feels are down, yet have the chance for redemption or have been sold off unjustly. The fact of the matter is the company has worked diligently to right the ship. Yet, Buffett in his infinite wisdom liquidated his entire position in the fourth quarter of 2016 according to the latest 13F filing.


So is it still time to be greedy? Or is it time to be fearful? In the following sections I will detail some of the reasons I believe Buffett may have sold out.

Buy the rumor, sell the news

The "buy the rumor, sell the news" phenomenon occurs all the time in the markets today. Investors buy up stocks based on what they believe will happen in a given earnings report, economic event or new product release (the rumor). After the event transpires or the report is released (the news), they dump their positions and the stock moves lower. These "buy the rumor, sell the news" spectacles often apply to things like the announcement of major projects being approved. It seems Kinder Morgan stock may be experiencing this effect as we speak.

What happens is, the stock rallies hard into the event. The rally occurs because investors are emboldened by the positive rumors that their favorite stock - Kinder Morgan in this case - is going to hit it out of the park in regard to exceeding earnings estimates due to the Trans Mountain expansion project approval success. The buying prior to the announcement has run the stock up 55% over the past year, leaving it vulnerable to profit-taking once the actual approval was reported. Nonetheless, there are real issues still to be resolved. Let me explain.

Trans Mountain not a lock

Many predicted Prime Minister Justin Trudeau's and British Columbia Premier Clark's approval of the project would cause the stock to spike higher. Those who have been following the story should have known the writing was on the wall all along. Trudeau pretty much telegraphed his approval.

Nonetheless, British Columbia's green groups, municipal and opposition leaders and aboriginal leaders have slammed Trudeau's approval and Clark's support for it. Vancouver's mayor says he will continue to oppose the project because it "doesn't make sense for our economic or environmental future," and he predicts the opposition will get ugly.

Furthermore, Kinder Morgan needs to sell off half the project to reduce risk. With the project accounting for nearly half the current backlog, the company is quite adroitly looking to reduce risk by selling off half the project.

Dividend increase a long way off

I believe it will get ugly. At the very least, it will be significantly delayed. If everything went perfectly as planned today, the project is not expected to generate any cash flow until 2019. That is already quite a long wait. The project is already two years behind schedule as it stands.

Potential decreases to cash flows

As of now, Kinder Morgan has not provided an updated estimate on the profit potential of the project. This is because the deal with British Columbia has not yet been hashed out. Furthermore, the company stated it may be looking to divest a portion of the project to a joint venture partner to cut down on the potential capital expenditure. I'm not so sure this project will turn out to be the DCF money maker many are expecting it to be.


When I'm looking for a stock to buy as a dividend and income investor, I'm looking for three things - safe and predictable cash flow, a low-risk company profile, and a yield of at least 3%. I do not feel Kinder Morgan fulfills any of these three characteristics currently.

With a yield of merely 2.25% currently, you could achieve the yield by buying a dividend index fund and sleep very well at night. The risk is not worth the reward at this level.

Furthermore, Kinder Morgan's Trans Mountain project accounts for nearly half the capex budget for the next five years. This is a very important project for the company. The future cash flows are being counted on to continue to pay down the debt. That is a lot of the company's future riding on this one project. Plus all the good news regarding the project has already been priced in to the stock if you ask me.

Maybe that is why Buffett exited his position. Maybe that is why the stock can't seem to break through resistance at $22.50. I don't know for sure. What I do know is this stock no longer qualifies as an ideal dividend growth and income stock as far as I am concerned and judging by Buffett's liquidation of the entire position in Kinder Morgan he doesn't think so either.

Even so, a great number of positive articles have been written on the stock recently. This makes me wary. I do not believe these bloggers have taken into consideration all the good news is currently priced in to the stock. The stock is up over 50% in less than one year. I believe Buffett made the right decision to liquidate and move on. I would stick with Buffett leaving the building as well if I was a shareholder. The stock is no longer simply an avoid for me at this point. I would say it is a sell based on the news of Buffett's divestiture.

The market is current sitting at all-time highs at the same time uncertainty is running rampant. I expect the current rally to fade and provide a better entry point in the stock if you have your mind set on buying. Currently, the risk does not justify the reward if you ask me.

Final Thought

Those are my thoughts on the subject. I look forward to reading yours. Do you feel now is the time to start a position? Is all the good news currently priced in? Why do you think Buffett sold out? If you found this article interesting please hit the follow button by my name above. It would be greatly appreciated.

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.