MWE borrowed heavily, doubling their long-term debt to facilitate CapEx, with reduced revenue. That trend can't continue and stay in business. IF they do pursue Appalachia exploration for NG, more CapEx will be needed, which means more borrowing (or stock sale) --- either one is dilutive and impacts their ability to continue the dividend at this level.
They better pray for an extremely cold winter.
Levifan: You've hit the nail on the head! But, why is it so? Why should the market be giving KMR a larger percentage payout than KMP? Somehow the market is not figuring out that they are the same entity - or - maybe the market is telling us they are not the same entity despite Richard Kinder's assurances (and I'll ask again why he hasn't been supporting KMR as he used to)? We all know what happened to the efficient market theory in the last 2 years - and here we apparently have another example of that nonsense!
abter1: you know how much I love your analysis, and I certainly don't want to discourage you, (and I sorry for this long delayed reply), but I must demur again: as they say, nonsense in nonsense out. your step #3 assumes purchase of KMP shares at closing price on payment date. why not select opening price, or price at noon, or any other random price during each of those payment dates? I think your analysis is interesting but is stated too precisely for the amount of useful information it seems to convey. At most, the conclusion is a very rough answer to which is more valuable. More likely, it doesn't really provide an answer at all. And it still doesn't begin to explain why what is true for KMR/KMP is not true for EEQ/EEP. Maybe if someone could figure out why those pairs behave so differently, we would know in more absolute terms why KMR is acting so poorly.
quick answer...I sure hope so ;)
I've owned MWE since 2003. I have been convinced the MWE management has "the right stuff" since I first invested in them. Their long term record of increasing distribution is very impressive. From 2002 through late 2008 they increased their distribution 21 of 24 quarters. And not mere token increases...split adjusted the distribution is now 2.5 times as high as it was at the close of 2002. Any wonder the price (also split adjusted) is 2.0 times as high? This doesn't change the fact that MWE has not been able to increase the dist. recently (4 straight quarters at $0.64/unit), but they clearly have a history, and I believe a management orientation, very much towards increasing distributions.
Their unique move to "eliminate the middle man" by getting rid of the General Partner level was an extremely pro-investor move.
And this in spite of the battering of NG prices in the past year. That is the #1 (and only, IMHO) reason the MWE price is still 40% below their all time high (which was in June '08). The quality of the overall MWE enterprise is also why the price is 3.5 times what it was only 10 months ago (12/08), when it was stupid low and hit $6.55.
MWE is very much a natural gas investment...pretty much a pure play in NG (and NG liquids) transportation and processing. Even though they don't technically have direct commodity price exposure (they don't own the gas they move and process), they are paid by the volume they ship (and do a lot of hedging to smooth out their cash flow). If NG prices are very low, the owners of the high price gas wells simply stop pumping. No gas pumped = no gas to ship and process. As a gatherer-and-processor, they are vulnerable to market forces from NG prices.
The key to MWE future growth is the their operations in the Marcellus shale in Appalachia. They have a significant first-mover position there. Part of the challenge is being able to raise sufficient capital to fully take advantage of their opportunity there, the the potential is very, very real.
Their distribution is pretty secure (and now paying 11.5% yield, that's pretty darn good news). They probably wont be able to increase their distribution until 2010 at best, and more likely into 2011. Their need for capital is going to keep those increases down. But IMHO investors getting an 11.5% yield now don't have too much complain about, especially as the underlying business grows...possibly rapidly. I expect the price will rise before the distribution starts to increase. That may turn off potential new investors in 6 or 12 months, when the yield will be lower.
I wrote about my long term opinions and thoughts about EEP/Q back in July. Try this link:
Thank you for your analysis.
I just want to add another angle:
someone who has 10K to invest right now will get about 12% more shares by buying KMR; his dividend will also be 12% higher than the guy buying KMP. By buying KMR his return on investment will be significantly higher in the future, unless the price of KMP shares drops below KMR shares....