Wide-Moat Kinder Morgan Under Attack; Looks Like a Buying Opportunity to Us
Kinder Morgan fared poorly Wednesday following a press release from research shop Hedgeye, which said the firm "may be a mere house of cards, completely misunderstood and mispriced." Investors paid attention, as Hedgeye's analysis of Linn Energy earlier this year led to a 30% drop in Linn's stock price... For the most part, we view these topics as old news and stress that we're talking about a group of companies that operate the nation's largest pipeline network, generating north of $5 billion in EBITDA from tangible physical assets. While we always welcome critical analysis and questions to the give-and-take debate over master limited partnership valuation, we're skeptical of the claims Hedgeye is making and would encourage investors to take advantage of the sell-off to buy a quality wide-moat franchise on the cheap.
Hedgeye's discussion topics, presented as "emperor has no clothes" bullet point teasers, include a critique of the role of crude oil production in Kinder's cash flows; questions around maintenance capital spending; the structure of incentive distributions; the complexity of Kinder's structure, with four publicly traded equities; the difference between the returns on equity Kinder shows in investor presentations versus actual unitholder returns; and questions on Kinder's tangible equity. Some of these are legitimate issues (several of which we've raised before); other points feel more like smoke and mirrors. We will publish a more thorough analysis following the release of the Hedgeye report, but in our initial review of these topics, we stress that Kinder Morgan is a stable, cash-generating machine grounded in hard assets that for the most part generate fee-based revenue. We are maintaining our fair value estimates and wide moat ratings