Kinder Morgan: Is It Time To Throw In The Towel?

| About: Kinder Morgan, (KMI)
This article is now exclusive for PRO subscribers.

Summary

Kinder Morgan has been on a tremendous run over the past year, rallying over 40% off its lows.

Some believe the party is just getting started and the stock represents a massive buying opportunity at this level.

Nonetheless, I believe a major sell signal just flashed, indicating a major trend reversal may be in the cards.

In the following article we will do our best to determine whether Kinder Morgan currently represents a value trade or trap.

Kinder Morgan: (NYSE: KMI) has been on a tremendous run since hitting its lows a little over a year ago. In fact, the stock has rallied 45% off its 52-week low of $14.97. Some believe the party has just begun and the stock represents a solid buying opportunity as we speak. This is due to the fact the company has made significant progress on many fronts and Richard Kinder's statement the company's top priority is increasing the dividend. Nonetheless, I suspect most of the good news is already priced in the stock. Furthermore, a major sell signal just flashed indicating a trend reversal may be looming. In the following sections I will make case the stock represents a value trap rather than trade at present.

Bearish technical reversal pattern forming

The stock has been in a solid uptrend for the last year, yet it appears things may be about to change. A Double Top Reversal pattern has occurred, yet is has not been confirmed.

Current Chart

Source: finviz.com

The pattern is made up of two consecutive peaks that are approximately equal with a modest trough between them. You can clearly see a double top reversal pattern present in the chart above. Nonetheless, the pattern has not yet been confirmed. The decline from the second peak is now testing support at the current 50-day sma. Before the trend reversal can be confirmed, a significant support break must occur. If support fails at the 50-day and 200-day smas, the trend reversal will be nearly complete. This should provide shareholders with plenty of time to determine their risk tolerance. A trend reversal will not be fulfilled until the stock breaks below the lowest point between the peaks which looks to be at the $19.50 mark. So, the bearish double top reversal pattern is not confirmed at present, but shareholders should take heed if support is broken. I believe it will be for the following reasons.

Good news is priced in

Another issue is the fact the stock was incapable of breaking out to the upside no matter what kind of great news has been reported. Here is a short list of recent bullish developments.

  • Trans Mountain Expansion Project approved by Trudeau and Clark.
  • Trump elected president creating pipeline friendly environment.
  • The company has done a tremendous job of reducing risk by shoring up the balance through joint venture announcements and high grading the backlog.
  • The announcement the company is looking for a joint venture partner for the Trans Mountain project. After high grading the backlog, the Trans Mountain project ended up accounting for nearly half the company's remaining backlog. Kinder Morgan can adroitly reduce risk associated with this project by bringing in a JV partner.
  • Rich Kinder stating the company's primary focus is increasing the dividend in 2018. He stated the company will provide shareholders an update on dividend policy near the end of 2017.

This all sounds like great news. Nonetheless, these developments are what many of the bullish bloggers have espoused as catalysts for the stock to move higher. Here is the problem. I submit to you all of them are currently priced in to the stock. Even with all these events coming to fruition, the stock has languished just above the $20 mark and can't seem to break out to new highs. Moreover, I don't see a lot of new growth catalysts on the horizon either. Let me explain.

I asked the investor relations team on our recent conference call if the company had any new major growth projects about to be added to the official backlog. They said no, not at the present time. They did go on to say there may be opportunities for acquisitions in the future. The issue with this is where are they going to get the money to make an acquisition? Just doing back of the envelope math, it appears to me a majority of distributable cash flow in 2018 and beyond will be chewed up by the Trans Mountain project, potential doubling of the dividend, and paying down the debt. So, the way I see it, we pretty much have the full story on the company for the next few years, and it looks like dead money to me.

The Last Word

Kinder Morgan has a significant level of uncertainty regarding its future results presently. Will it be successful in bringing in a joint venture partner to help foot the bill and reduce the risk regarding the Trans Mountain project? Will they use the proceeds from the sale of assets to pay down the billions in debt? Will Kinder Morgan get good deals on either of these sales? I believe all the good news is currently priced. What's more, I don't see any big positive catalysts for the stock in the near future. The reward does not appear to be worth the risk at present. Here is why.

Risk not worth reward presently

Increased uncertainty equals increased risk to any investment thesis. With the stock's current yield of 2.25%, I submit dividend growth and income investors would be better served by investing in a stock with much less risk. Finally, with interest rates on the rise, the stock market at all-time highs and Kinder Morgan's stock forming a double top reversal pattern, I'm not so sure I would dive in head first right now. I was bullish on the stock when the stock was yielding over 5%. Even if Richard Kinder doubled the dividend in 2018 the stock would yield less than 5%. Furthermore, the current low yield of 2.25% has essentially put a cap on any hopes for significant capital appreciation. The stock is a sell in my book at this time.

Final Thought

I hope you found this article interesting. Do you believe Kinder Morgan is a viable dividend growth and income stock currently? Has all the good news been priced in at present? Do you believe the stock will reverse trend? I look forward to your input in the comments section. The true value of my articles is derived from the most prescient comments by Seeking Alpha members made in the comments section. If you found this article informative, please click on the "Follow" button at the top of the article by my picture. I would greatly appreciate it.

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.