Wach. issued a report on KMR 5/19. Their bullet point summary:
Kinder Morgan Management, LLC
KMR: Reiterate Outperform - Discount To KMP Unjustified
• Discount To KMP Unjustified. We are reiterating our Outperform rating on Kinder Morgan Management, LLC. We believe KMR's 13.0% discount to KMP is unwarranted and should narrow over time as the valuations for both securities are based on the same underlying assets, earnings power and stream of future cash flows (distributions). KMR is yielding 10.2% versus KMP’s yield of 8.9%. In contrast to KMP, which pays cash distributions, KMR pays a qualifying stock dividend (i.e. investors do not receive K-1’s).
• Reversion To Mean Implies Potential Upside For KMR. Since its inception in 2001, KMR has traded at a discount to KMP of 0.5% (on a yield basis) or 50 bps on average. The spread has been as wide as 161 bps and as narrow as (34) bps. Currently, KMR trades at a 131 basis point discount. The KMR-to-KMP discount has only exceeded 130 basis points less than 3% of all trading days since KMR’s IPO in 2001. If KMR reverted to the historical mean spread (and KMP’s yield remained the same), this would imply a unit price of $45 or almost 10% upside.
• Why The Steep Discount? KMR has traded at a discount to KMP for a variety of reasons including (1) less liquidity (KMP’s 3-month average daily trading volume is 1,000,000 units versus KMR’s average daily trading volume of 450,000, (2) lack of understanding of the i-share structure, (3) the absence of a natural arbitrage between KMR and KMP, (4) investors current preference for cash over stock, and (5) possible selling pressure in late 2008.
• Headwinds In 2009 For Kinder Morgan But Distribution Appears Secure.
KMP faces a number of headwinds in 2009 including low commodity prices, a weak economy, and a sizeable financing requirement. While KMP’s cash flow is predominantly fee-based (~80%), the partnership is likely to struggle to generate sufficient cash flow to cover its distribution (which includes no budgeted increases for the year). However, we don’t believe KMP will reduce its distribution in 2009. Instead, any shortfall in cash flow could be funded with short-term borrowings.
Valuation Range: $50 to $53
Kinder Morgan is poised to grow distributions at a five-year CAGR of 3% supported by its high-quality portfolio of strategically located assets, organic growth projects, and experienced management team, in our view. With a large and diverse asset base covering most of the United States, the partnership is well positioned to capitalize on most of the major supply/demand trends driving the energy markets including: the expected growth in Canadian oils sands production, the emergence of LNG in the Gulf Coast and the continued growth of natural gas production in the Rockies, in our view.
I asked the same question a few months ago and here is the valuable info that I got from abter1:
EEQ is the only other PIK MLP out there but remember to do your own research. Don't make the mistake as I did and fall in love with the PIK model -be sure to do your own research and make sure that you want the stock in question is a great long term investment.
You are the expert, and I am not sure if i
understand KMR. Is it possible that the market
believes that the cash distribution of KMP is
too high? That the company is depleting it's
assets, and that the cashflow per share isn't
keeping up with the high cash distribution.
I understand that on ex date, shareholders
are treated about the same. Is the market
telling us that the cash distribution should
be lowered 16% to be fair for the KMR holders?
I know i probably don't get it, would appreciate
your comment. Tnank you.
I don't own OKS. Don't take that as any opinion of OKS, pro or con. Both my dad and I are overweighted in MLPS as it is. Right now we own 11 MLPS (or related investments including two GPs and KMR), so we don't need any more. I am concerned about being over-diversified within a sector...pretty soon you start looking like a sector index fund. If that is where you end up, save yourself the trouble and just buy the index fund.
KMP distributes additional I-shares to KMR each quarter (instead of a cash distribution). KMR issues a corresponding number of additional units to its owners each quarter.
This works as an effective capital raise by KMP since KMP makes a distribution of additional I-shares instead of cash.
When KMR was first introduced (long after KMP was around), there was 1-to-1 exchange for a while (at least a year??). Then they changed the KMR terms so there is no longer exchangability. The discount emerged immediately at that time (Sept 2002). After some initial chaos as the market figured it out, it settled into a range usually between 5 and 8 % (with periodic wandering to 0% and up to occasionally 10%).
Then in Oct '08 things clearly changed, and the discount increased in a real noticeable pattern shift. Since then it has averaged about 12%, wondering between 10 and 15%.