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Kinder Morgan: Mr. Market Never Learns

May 06, 2020 8:35 AM ETKinder Morgan, Inc. (KMI)AMLP, CEN, EPD, ET, MIE, MMP, MPLX, PAA, WES289 Comments


  • Kinder Morgan's stock price is down significantly from its recent highs.
  • The company's management just increased the dividend 5%, pushing the yield (as of May 1) past 7%.
  • Due to Kinder Morgan's diversification, the cash flow fears of Mr. Market, which did not materialize during the 2015 crash, will not happen this time either.
  • Capital project profitability has increased and insiders are buying.
  • The impressive 7% yield is accompanied with strong share price appreciation potential, which makes investing very appealing for dividend investors.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

Co-produced with Long Player

Kinder Morgan (NYSE:KMI) has seen its stock dumped, along with other midstream companies, during the recent severe oil selloffs. However, as we'll see throughout this article, things are different this time around. The balance sheet is in better shape than 2016 and the Trans Mountain Expansion issues are long gone.

Source: Seeking Alpha Website April 27, 2020

Clearly the common shares were lumped into the rest of the oil and gas industry during the most recent sell-off. Given the way the stock is acting, the market is pricing in a severe decline in earnings potential, or maybe even something worse.

Management did announce a change in expectations:

For 2020, KMI's budget contemplated DCF of approximately $5.1 billion ($2.24 per common share) and Adjusted EBITDA of approximately $7.6 billion. Because of the COVID-19 pandemic-related reduced energy demand and the sharp decline in commodity prices, the company now expects DCF to be below plan by approximately 10 percent and Adjusted EBITDA to be below plan by approximately 8 percent. As a result, KMI now expects to end 2020 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.6 times, consistent with our long-term objective of around 4.5 times. Because considerable uncertainty exists with respect to the future pace and extent of a global economic recovery from the effects of the COVID-19 pandemic... (there are) assumptions and sensitivities for impacts on our business that may be affected by that uncertainty.

Source: Kinder Morgan 1Q Earnings press release

The immediate impacts of COVID-19 on KMI, along with the associated collapse in oil prices, are quite clear. The company is doing an impressive job to mitigate the impact. However, it's still expecting a 10% decline in DCF along with debt higher than previously forecast. However, with a more than 30% decline in share price YTD, the market has already more than priced

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Comments (289)

""The current price-to-earnings ratio is about 16""
Yes and Q1 had two good months before it hit the fan.
Q2 might be 35:1
There is no Jet Fuel market and pipe feeders are collapsing.
PendragonY profile picture
KMI transports mostly natural gas. THe natural gas pipelines produce about 4 times the income of the refined product pipelines, and jet fuel is only 13% by volume of that.
Pot Roast profile picture
"As long as Richard Kinder remains in charge, investors are in good hands."

I have no clue how this can be written with a straight face. The C Corp rollup a few years ago resulted in huge and unexpected tax bills for many shareholders. The dividend has been promised and then cut literally days later. But forget about that stuff for a minute, let's look at actual cold hard results:

Average Annual Total Return (With Dividends Reinvested, KMI's calling card):
To present, beginning: KMI SPY
Feb-11 -3.74 10.92
Jan-13 -7.57 11.84
Jan-15 -14.32 8.61
Jan-17 -6.5 9.65
(source: www.dividendchannel.com/...

Now it does look better now than in years' past, but Kinder and KMI's performance over the past decade has been nothing short of abysmal.
The Value Portfolio profile picture
This is kind of dis ingenous because it doesn't include the fact that in mid -2014 there was a massive oil crush and that we're in the middle of another crash now. The cherry-picked numbers reflect as much. Why did you skip Jan - 16, 18, 19 in your numbers?
Pot Roast profile picture
No cherry picking here. I took the first day available every other year, avoided 2014, and gave you the source to see for yourself. Since you asked, here are the average annual returns, with dividends reinvested, for Jan-16, Jan-18, Jan-19:

Jan 2016 4.17 11.15
Jan 2018 -3.46 5.62
Jan 2019 3.7 14.4
The Value Portfolio profile picture
No cherry picking but you happened to skip the best 3 years in your original comment?

You're also picking the time for Kinder Morgan when they went through the oil crash. What if you do 2000 -> 2010
Retire2020 profile picture
Few years ago, KMI did something that screwed the investors. Luckily for me, I got out before I got screwed. Many did not. Sorry, no trust in this company or her management.
You might have taken a bath on the stock. I got in after the cut. Let's
be optimistic for a better economy which will come. It always has.
Long Player profile picture
Investors do not get screwed if they have properly done their homework. Knowing the "ins" and "outs" of taxes is part of that homework. Many have followed their lead converting to a C-corp.
Retire2020 profile picture
No I made out with a gain. But after that, the price dropped like a rock. But I like your optimism. All the best.
Kinder Morgan: North America's leading gas infrastructure company. Kinder Morgan operates the largest gas pipeline system in North America, transporting 40% of all the gas consumed in the U.S. Its pipelines connect to every major supply basin and demand center.Aug 27, 2019
The Value Portfolio profile picture
Yes Kinder Morgan is intrinsically connected to natural gas, despite its share price and performance continuously lumped in with oil companies.
Rida, I greatly respect you for your past articles and I appreciate this one. Do you remember Bernie Schwartz and Loral? They always made a big deal when he added more shares right up until they augured into the turf. I generally like insider buying, but the CEO is too much of a show pony. When the little guys start loading up is when I think it's more meaningful. That said, I just can't get back in to this stock until Kinder is gone.
Long Player profile picture
That would probably be the time to consider leaving as he has a very good track record.
craftbrewinfo profile picture
Nooooooo thank you.
The Value Portfolio profile picture
Thank you for sharing your analysis behind not investing.
tgar13 profile picture
Broken Promises
Long Player profile picture
Is that really all that matters?? Keep the promises no matter how damaging they become because things changed after they were made?? Do you keep up with industry conditions and the lending environment?
The Value Portfolio profile picture
Companies can't predict their future. They're not making promises they're making their "most educated guess" but sometimes those most educated guesses are wrong.
PendragonY profile picture
Richard Kinder promised to grow DCF to support an ambitious growth in the dividend provided the credit rating for the company was maintained. In large part, because investors feared a dividend cut, they drove the share price down to the point where the credit ratings agencies demanded a dividend cut to maintain the credit rating. But somehow that is a broken promise from RK.

Recently, KMI gave guidance for a yearly increase of 25% in the dividend, but due to COVID-19 issues, the recent increase was just 5%. Keep in mind, lots of other companies have had issues not cutting their dividend. But yes, somehow despite the vastly different conditions now than when the guidance was first given, this too is considered a "broken promise".

Sorry, but I'd much rather invest with management that bases their actions on current (and future conditions) rather than driving the company under because the hold to promises made before conditions changed so much.
Actionable Conclusion profile picture
"Kinder Morgan: Mr. Market Never Learns"

Why is it that the investors who's portfolios are dripping in red ink... they are the ones insisting that they are right and the market is wrong?
Long Player profile picture
Please feel free to move onto something you are successful with!
The Value Portfolio profile picture
At the end of the day what matters is the math - buffett has proven that.
Actionable Conclusion profile picture
Do you mean poker? I would, but they shut down the card club.

Or do you mean:

I was successful in avoiding the carnage in the oil stocks.

I was successful in avoiding the carnage in OXLC.

I was successful in avoiding the carnage in the mall stocks.

Is that what you are referring to?

Either way, it does seem to be the investors who's portfolios are underwater are the ones that insist they are right and the market is wrong? Have you ever noticed that Long Player?
BMW7 profile picture
Didn’t KMI just fail to increase their distribution 25% as they promised their investors ? Overpromising and under delivering . No thanks
PendragonY profile picture

You are right, what a terrible investment, raising the dividend only 5% when lots of others are cutting and energy demand has taken a big hit. Management is a total failure for not taking this into account when they issued guidance on the dividend over a year ago!
The Value Portfolio profile picture

Being able to still increase your dividend by mid-single digits in this COVID-19 mess is impressive in my book. Obviously COVID-19 has derailed a lot of company's plans.
Graham Arader profile picture
Doesn't this company have a long, consistent record of making deals that benefit the executives and their primary investor damaging the regular stockholders?.
Phil in OKC profile picture
@Graham Arader That's the rumor on SA.
PendragonY profile picture
No, where did you get that idea?
stever88 profile picture
I'm long KMI and am also looking at OKE. Is there a big difference between the two business, other than the Sh Pr and Div? TIA
Long Player profile picture
Both are midstream. You have to decide for yourself what is material and what is not.
papaone profile picture
88, OKE, big in oil, KMI far less dependent on oil, much more into NG, transmission and storage, etc. I'm long KMI and the best in the sector, WMB.
Long Player profile picture
Now is the time to buy the big ones!
Buyandhold 2012 profile picture
"As long as Richard Kinder remains in charge, investors are in good hands."

Hence the expression: You've been kindered.

I view Kinder Morgan as a potential buy at $11 or lower and as a hold above $11.
The Value Portfolio profile picture
What was the rational behind $11?

He did make a mistake in 2015 but that doesn't define future returns.
Long Player profile picture
The comments here are pretty bullish for contrarians. This is getting interesting.
Buyandhold 2012 profile picture
The Value Portfolio,

At $11 the 5 year expected PEG ratio would be about 2.00.
papaone profile picture
Rida, you mention oil price as a current or future negative for the KMI. Yet, when I study their web site I see that commodes are not a big factor?. And, KMI has positives for oil, namely, they have oil storage on land in with Jones qualified tankers, --forgot 15 or 20?
For me the dividend is safe.
The Value Portfolio profile picture
They could be a short-term positive but it's a long-term potential risk when it comes to renewing contracts if volumes drop.
I would not give much weight to the insider buying because most of it was bought by Kinder. While I know he is a smart guy this is not necessarily a reason to say that insider buying is a big plus in this case.
Long Player profile picture
When someone who already owns 10% of the company is adding on the open market, put it down as a plus on the analysis. No one knows the company like him. Now timing may not be exact, but evidently he does see a bargain.
Mike Nadel profile picture
On 11/11/15, Kinder and a KMI director named Michael Morgan each bought 100K shares of KMI valued at about $2.5M. Another manager, Thomas Martin, bought 10K shares that day, also.

Less than a month later (and only 4 days after saying the promised dividend hike was still in the cards), KMI cut the dividend 75%. Kinder and the others still have not seen KMI's price return to the nearly $25/share they paid 4 1/2 years ago.

One could provide plenty of other examples of insider trading not necessarily being bullish signs. Sometimes management makes these kinds of moves to try to show confidence in a flagging company. For instance, the Seadrill CEO bought bunch of SDRL shortly before the dividend was eliminated.

I am not implying that Kinder has any ulterior motives here. Just pointing out that one should not assume anything.

The Value Portfolio profile picture
I think it is a reason - just because he made a mistake in the past doesn't mean he's not incredibly knowledgeable about the business and capable.
Many thanks Rida for this very timely, useful and relevant article. The investment thesis is well researched and supported.
Long Player profile picture
Thank you for the comment!
Still doesn't look like much of an investment to me...down 65% the past 5 years!
Long Player profile picture
That sounds like an excellent investment!
Analysts trotted out the same canards back in 2015 too. Turns out they were wrong and Mr. Market was right: take or pay contracts, project backlog, natural gas/diversification etc didn't matter in the face of huge debt loads and ultra low stock price.

KMI got slammed with everything else during the oil dump and it was the financials, not the fundamentals, which destroyed the investment thesis.
Exactly. When you distribute 100% of your cash flow not good. It is now a very different company financially:

Debt : from 44b to 33b
Ebitda: from 7.2b to 7.0b
Dividend: from 2.00 to 1.05
Debt x: from 5.6 to 4.5
Div coverage: from 0 to 200%
Project financing: 100% debt and equity to 100% cash

The investment thesis is the same in turn of energy but the financials are way stronger.

You do not invest in Kmi if you do not fundamentally believe in the nat gas thesis.
Long Player profile picture
No one could have predicted the last three years. This company continues to have good fundamentals. Now if you want to predict another oil price crash, a coronavirus and another OPEC price war, then go ahead and be my guest. Some of us will probably assume something more reasonable. Especially with Richard Kinder buying shares right now.
Long Player profile picture
KMI is diversified. They do more than "natural gas" as there are services there as well. Take all the oil and natural gas products out of your house and see what is left.
smurf profile picture
I agree with the author on this topic.
Rida Morwa profile picture
@smurf Thank you for reading and commenting!
People need to understand that Kmi is not an oil company. Yes about 20% of their ebitda is based on demand of refined fuel
Products (products pipelines) and certainly some exsposure to oil prices (co2) but 65% of the company is nat gas.

People stayed home and used more electricity which offset the loss of nat gas my the industrials. Why do you think nat gas volumes went up.

And look as the country reopens demand for nat gas increases. As some people continue to stay home and temperatures increase air conditioning load will go up.

Lastly as I have repeated many times any cuts in capital projects or just not doing capital projects can go toward stock repurchases. With a $2-3b excess cash for grow they could reduce the float in the stock by 4-5% each year. Eventually this will pay off.
Rida Morwa profile picture
@Texasthumper Yes, we have become more partial to MLPs with significant natural gas exposure. NG has been pretty beat up as it was in significant oversupply. As oil prices crashed and have driven down oil production, this has impacted NG production as well and will result in improving NG prices. Lower NG supply and recovering demand should be a net positive for MLPs that have significant exposure to the space.
Kinder Morgan (KMI) is now a C-corp not an MLP.
The Value Portfolio profile picture
It's worth noting, however, that a significant amount of natural gas production is subsidized by oil production. It's something worth keeping a close eye on.

Thanks for your thoughts. I'm long in my IRA (this is a LONG term investment) and will nibble at current levels.and keep dripping the dividends. People can say what they will about Rich Kinder but the last I heard he owns over 250 million shares and has forgotten more about this industry that all of us put together know. Good luck and stay safe.
Rida Morwa profile picture
@simplesolutions Thank you for reading and commenting, anything in energy today should be ready to hold for the long-haul.
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