Hedgeye/Barron's take on Kinder Morgan | TigerDroppings.com

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sneakytiger
LSU Fan
Member since Oct 2007
1212 posts

Hedgeye/Barron's take on Kinder Morgan



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From the same guys that slammed LINN a month or two ago. This one seems like a strecth. The maintenance capex issues are stating the obvious, but I have no idea how they can conclude 25% of KM's cash flow comes from E&P? Thoughts?


quote:

Hedgeye Risk Management today released its written case against U.S. energy pipeline operator Kinder Morgan and its related entities.

In a nutshell: Hedgeye says investors should worry more about Kinder’s pipeline maintenance and spending therein. And it says Kinder’s exploration and production business, while small, is NOT a pipeline enterprise and valuation should reflect that. Moreover, Hedgeye says it thinks Kinder Morgan’s strategy is to “starve its pipelines and related infrastructure of routine maintenance spending” so that it can maximize distributable cash flow and payments to the general partner, Kinder Morgan (KMI). As a structure, MLPs pay out most of their cash flow as tax-deferred distributions to investors in their “units,” as shares are called.

But KMI’s structure is more complex, and the general partner is collecting some hefty distributions from limited partners in the form of “incentive distribution rights.”

quote:

Hedgeye thinks that by cutting or deferring the limited partner maintenance spending, the general partner KMI is getting more payments — incentive distribution rights — than it deserves. Hedgeye essentially is pointing to Kinder Morgan founder Richard Kinder, the current chairman and CEO, who bought $18 million in KMI stock as it sold off recently. Richard Kinder doesn’t collect a salary, but he already owned 23% of KMI units as of March 31, according to StreetSight.net.

Continuing the report’s first bullet point, Hedgeye’s allegation is that:

“… after years of under-spending, Kinder Morgan will replace an asset, while simultaneously increasing the asset’s nameplate capacity, a technicality that allows the company to classify the entire budget of a replacement project as “expansion CapEx.” Essentially, it is our opinion that Kinder Morgan defers LP maintenance expenses and CapEx, and when the large bill eventually comes due, books 100% of it as expansion CapEx, leaving distributable cash flow unimpaired. In the meantime, any environmental or legal expenses due to poorly-maintained assets are considered “certain items,” which are added back to distributable cash flow .”

The caveat is that Kinder Morgan didn’t respond to requests from Analyst Kevin Kaiser to speak about his assumptions. Hedgeye is a relatively small and unknown investment advisor, based in Connecticut. None the less, Kaiser recommends a short on Kinder Morgan, the general partner, which reaps distributions from underlying businesses; Kinder Morgan Energy Partners (KMP), the main pipeline MLP enterprise; Kinder Morgan Management (KMR), which pays distributions in shares rather than cash; and, finally, El Paso Pipeline Partners (EPB).

There are some fair points in the report. But as Kaiser aptly points out, they haven’t mattered until now and may not constitute downside catalysts for any of the Kinder tickers. A few of those fair points:

- Kinder’s corporate structure is complex and “may distort underlying economics and valuation.”

- To wit, investors should realize “Kinder Morgan is one of Texas’ largest oil producers” and should realize that roughly a quarter of KMP distributable cash flow, before general partner accounting, is from exploration and production.

- ”KMP’s E&P business will require ~$450 million of annual CapEx to keep production and reserves flat from 2013 levels [but this business] is allocated zero sustaining CapEx, [accounting for ~20% of limited partner distributable cash flow. .... [This] may be misleading …”









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Blakely Bimbo
Alabama Fan
Member since Dec 2010
1108 posts

re: Hedgeye/Barron's take on Kinder Morgan


There's been a very funny Twitter war going on between Keith McCullough and 0Hedge over KMP.

Reminds me of little boy scrapes on the schoolyard at grammar school.






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offshoreangler
LSU Fan
713, Texas
Member since Jun 2008
19718 posts

re: Hedgeye/Barron's take on Kinder Morgan


It's ridiculous to think that 25% of Rich Kinders cash flow comes from E&P.

My brother works at the Pasadena terminal which accounts for around 20% of KM's profit a year.

I will certainly vouch for the lack of money being spent at KM. Hell, in KM's mission statement it's laid out plainly..."no frills". If it wasn't for GATX selling most of its antiquated assets along the Gulf Coast...KM would still be the Targa/Dynagy/NGC of 10 years ago.



This post was edited on 9/11 at 11:40 pm


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offshoreangler
LSU Fan
713, Texas
Member since Jun 2008
19718 posts

re: Hedgeye/Barron's take on Kinder Morgan


I will say this about KM...Mr Kinder's goals are lofty.....with BOSTCO coming online this year and future projects involving BP's distillate/jet business...the future for KM's Gulf region looks good if they can make their deadlines. IF....





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dwr353
LSU Fan
Opelousas, La
Member since Oct 2007
552 posts

re: Hedgeye/Barron's take on Kinder Morgan


I am long on kmp. S & P lists it as a Strong Buy. The yield is great. S&P has a 12 month target of 99.





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sneakytiger
LSU Fan
Member since Oct 2007
1212 posts

re: Hedgeye/Barron's take on Kinder Morgan


On Yahoo's front page today:

LINK

quote:

Of specific concern to Hedgeye is how Kinder Morgan books its maintenance capital expenditures as an expansion expense, which Kaiser equates to financing maintenance. It's a problem, they argue, that ultimately puts the firm's fat quarterly payouts to investors at risk.


I've yet to see anything to support this claim... totally baseless IMO

If you look at KMP's quarterly distributable cash calculation you will see maintenance capex as a deduction to that.



This post was edited on 9/13 at 1:10 pm


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BayouBengal
LSU Fan
München
Member since Nov 2003
26713 posts

re: Hedgeye/Barron's take on Kinder Morgan


I'm long on KMP as well. I enjoy the healthy dividend and try to pick up at least a few shares per year. My cost basis is around $55 so I'm sitting pretty for now.





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cwill
New Orleans Saints Fan
Member since Jan 2005
25070 posts

re: Hedgeye/Barron's take on Kinder Morgan


Hedgeeye said you should have sold all of your stocks in 2010.





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