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Parsing Kinder’s Money Problems

By Robert Rapier on December 18, 2015

Last week my colleague Igor Greenwald and I conducted the last monthly web chat of 2015 for subscribers of The Energy Strategist and MLP Profits. We hold these chats on the second Tuesday of each month.

This most recent session was one of the busiest on record. That’s not surprising given the current volatility in the energy markets. While we were able to address most of the questions during the chat, at the end of the allotted time there were still plenty remaining. I indicated to readers that I would provide answers for some of these in this week’s MLP Investing Insider and to others in The Energy Letter.   

Q: What are your current thoughts about KMI and ETE?

The most popular topic of the day was the outlook for Kinder Morgan (NYSE: KMI). While several questions on KMI were addressed, there were a few remaining at the end.

The chat took place right before Kinder’s deep dividend cut, but Igor indicated in an answer that he expected one. Although Kinder has long been a bellwether for the MLP sector, but last year’s buyout of affiliated MLPs dramatically increased its debt leverage. That wasn’t a big problem while commodity prices were high, but as they fell and its share price declined Kinder ran into  liquidity issues.

When Kinder Morgan slashed its 2016 dividend forecast  by 75% to 50 cents a share for the year it said it would instead use most of its distributable cash flow “of slightly over $5 billion” to finance capital spending next year, so as to “eliminate any need to access the equity market for the foreseeable future and maintain a solid investment grade credit rating.”

The same calculus has been applied to spending plans for 2017 and 2018, suggesting the dividend cut could stick for the next three years.

While this represents a dramatic comedown from onetime plans to raise the dividend 10% annually for years to come, it reconciles the company’s aggressive growth plans with the reality that recent declines have made equity issuance impractical. Nor could the company borrow its way out of its predicament; Kinder Morgan’s debt to EBITDA ratio is already uncomfortably high at 5.8x.  

The silver lining is that cutting the dividend will allow Kinder to finance projects without further diluting shareholders with low-priced equity, and without further leveraging the balance sheet.

We do feel that Energy Transfer Equity (NYSE: ETE) is a better bet than KMI right now. But its current unit price and that of its affiliated MLPs would make equity issuance as uneconomical as it would have been for Kinder, and the market likely expects that some of its affiliates’ distributions will need to be redirected to their own capital spending needs barring a sharp recovery in price.   

Q: Can you recommend a better holding than KMI that also sends a 1099 instead of a K-1?

There about about two dozen MLPs that issue 1099 forms. The largest fraction of these are involved in marine transport. (Subscribers can read an update on this sector below.) Among the midstream MLPs, there are several general partners that issue 1099s, including ONEOK (NYSE: OKE), Plains GP Holdings (NYSE: PAGP), Tallgrass Energy GP (NYSE: TEGP), EnLink Midstream (NYSE: ENLC), Williams Companies (NYSE: WMB) and Spectra Energy (NYSE: SE). Energy Transfer Equity plans to issue a tracking stock paying 1099-form dividends as part of its pending acquisition of Williams early next year. Crude tanker operators DHT Holdings (NYSE: DHT) and Euronav (NYSE: EURN), along with products tankers owner Scorpio Tankers (NYSE: STNG) issue forms 1099 as well, and are on our current Best Buys list.

Q: What are your thoughts on APU?  Is the distribution safe and will they continue to be able to increase it 4-5% per year?

We do like AmeriGas Partners (NYSE: APU). Even though the last winter was slightly warmer than normal, the leading U.S. propane distributor still delivered 1.16x coverage on a distribution currently yielding 11%. The payout rose 4.5% this year and should easily maintain that pace in 2016 based on the partnership’s forecast for 9% EBITDA growth in the new fiscal year. Units are down 36% from January’s record high and trading at six-year lows.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 

 


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