Kinder Morgan (NYSE: KMI) just announced it reached a deal with Russian steelmaker Evraz to supply it with approximately 250,000 metric tons of pipe for the expansion of the Trans Mountain pipeline. The company says more than 75% of the pipe for the project will come from Evraz's plant in Regina, Saskatchewan. So what is the big deal you say?
President Trump's edict to use U.S. steel
This move would seem to be in direct contradiction to President Trump's edict that U.S. pipelines must use U.S. steel for new projects. The catch here is this is not a U.S. pipeline project and the Russian steel will come from a Canadian steel plant the Russian's bought years ago. Even so, the appearance doesn't do any good for the perception of the company if you ask me. This could be the last straw that breaks the camel's back. Here is why.
Perception is already negative
First let's get something straight. The last straw that breaks the camel's back is often not a huge event. The last straw is defined as:
For me, this amounts to a final irritation. True, it's no big deal because the pipeline will not be built in the U.S. and the steel plant was once Canadian owned, but it just doesn't look good at this point. Especially since we already seem to be having some issues with Canada regarding Canadian government subsidized lumber and milk dumping. I just don't like the look of it. I would have loved to have heard U.S. steel would be used to build the pipeline. Nevertheless, Kinder Morgan has much bigger problems than this. Let me explain.
Loss of faith in management
After telling market participants to expect a dividend of $2.00 per share and significant growth over the next five years in 2014, Kinder Moran proceeded to cut the dividend by 75% in 2015. The current level is $0.50 per year which amounts to a 2.44% yield.
Richard Kinder constantly told shareholders the dividend was growing, safe, and predictable based on the "toll road" model. Richard Kinder touted that the pipeline was virtually immune to commodity price fluctuations based on the way the contracts were set up. Obviously this was not the case. I believe this significantly damaged his credibility. In fact the stock has been dead money for quite some time and is on the verge of completing a technical trend reversal.
Dead money despite positive news
The stock drifted lower after earnings despite posting decent numbers and reiterating guidance. Furthermore, the stock has basically been dead money for the past three quarters.
In fact, the stock is down nearly 10% in just the last quarter and currently standing squarely in the middle of no man's land. This is a very precarious position to be in if you ask me. Keep in mind this is in the face of several positive developments. Long Player wrote an article extolling the virtues of Kinder Morgan's opportunity in the Permian. The article is titled, "Kinder Morgan: It's The Permian, The Permian, And The Permian."
I read Long Player's article and feel Long Player's extremely positive take on the Permian opportunity may be a big overdone. Even so, if Long Player is correct, and this was a huge win for the company, why didn't it move the stock? I submit this opportunity won't be as big a pop to the bottom line as Long Player projects. In fact, the company hasn't even released any information regarding the profitability of the endeavor as of yet. We shall see. The Permian has been around for over 100 years. There are a multitude of pipeline already built and several pipeline companies with assets in the areas already. Let move on to distributable cash flow
Distributable cash flow conundrum
Currently Kinder Morgan sports $1.99 per share in DCF. With a current share price of $20.49, that equates to a P/DCF ratio of 10.39. This typically would indicate the stock is significantly undervalued. In fact, Balance Sheet Explorer just wrote a piece titled, "Kinder Morgan's Dividends Appear Undervalued," based on the fact the dividend could potentially be increased based on the excess.
I beg to differ. The catch is the steep discount is based on the fact the company has been forced to self-finance growth and vastly reduce payouts to shareholders. Not to mention the fact KMI is selling off massive chunks of cash flow to shore up the balance sheet and pay down debt.
In fact, in order for the company to increase the dividend payout in 2018 it will need to find a JV partner for the TMEP to make room for the increase. Much if not all excess coverage is currently slated for use in funding growth. What's more, the fact the company recently stated it may turn to an IPO rather than a JV partner to sell off half the project concerns me, more on this in a latter article.
The Bottom Line
Is Kinder Morgan's stock dead money? I say yes. Cutting the dividend 75% just after touting a substantial $2.00 per share payout with significant growth for the next five is the primary culprit. With the company seemingly struggling to find a JV partner and now using Russian steel to build it, I don't see much upside for the stock anything soon. Cash flows from The TMEP or any new pipe coming out of the Permian are a long, long way off. I say avoid the stock until the dust settles on these two endeavors. I want to see what final numbers look like on the Permian and TMEP JV or IPO prior to getting excited about these growth opportunities. Those are my thoughts on the matter. I look forward to reading yours.
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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.