Actually, industry problems probably infect the company's stock price more than they should. Sector mutual funds are becoming a large factor in the MLP space. When investors pull money out of MLP funds due to industry issues, the fund sells what it can rather than just the problem companies. KMI is quite liquid and any sector portfolio has to dump even if it is not as strongly impacted as more oil price sensitive competitors. This implies the selling is most likely overdone.
I suspect KMI is being hit on two accounts:
1) Now that it is not a MLP, its highly leveraged capital structure is more obvious. Coverage of distributions is weak and KMI needs new equity issuance for new projects. This is aggravated by weak oil/gas markets. KMI is less exposed than most, but its weak coverage makes maintaining distributions uncertain. Given its retail shareholder base, Should it cut the dividend, retail holders are likely to sell heavily.
2) Year end tax selling. Given its high retail (tax paying) ownership and the severe decline in the stock price, a significant amount of tax loss harvesting is probably occuring. It should dry up by year end. If there is no new bad news, I would expect a bump up in the stock price by the end of January
Gas exports are already allowed and occurring. Oil is limited, but Saudi Arabia is flooding the market to knock out competition. Hard to gain. Until Saudi Arabia backs off, tough for any progress in oil pricing. The bright side is that Saudi Arabia can not afford to continue at current pricing for more than a few years given massive domestic government spending greatly exceeding current cashflow. Their cash stockpile is shrinking fast.
KMI/KMP already pays out almost all C/F as dividends and uses new equity to fund projects. The cost of new equity is quite high. Given the drop in stock price, a slow down in new capital investment might be a good thing as it reduces the issuance of new equity.
I suspect stock purchases would have a higher ROI than pipeline expansions. The price may even be low enough for an LBO, though high existing debt levels limit flexibility. A refinancing with conventional preferred shares to reduce straight debt may also make sense. Not sure if I trust the investment bankers as they really blew it on structuring the 9.75% preferred. Both expensive and dilutive at the same time!
While KMI's cashflow does not appear that vulnerable to oil prices, all contracts are subject to renegotiation in bankruptcy and many oil/gas producers are very weak financially at this point. To the extent imports are cheaper than domestic production, there is less demand for cross country transport by pipeline or Jones act tanker. The gas liquefaction facility is also risky if overseas LNG prices drop too far. The bright side is that the terminals business is great with the glut of stored oil.
Different products are sold by investment bankers to different markets. Generally, these convertibles are loved by certain hedge funds because they can create a low risk high yield vehicle by shorting the stock vs the preferred. In this case, the common yield is unusually high decreasing the profitability of the transaction. The impact on the short ratio would be muted here because the size of the issue is small relative to total common shares outstanding. These shorts tend to be dynamic--they are bought and sold on a short term basis as profitability varies. As KMI yield rises, the arbitrage trade is less favorable. Many of these financing vehicles take months to structure. If this was planned when KMI was near 40, it would make more sense.
I wonder how much of the issue is being picked up my former KMR/KMP holders as surrogates for a higher yeild/lower price action investment in Kinder Morgan operations. Doing something of this form would make some sense if the common had not fallen so far that it is becoming a high yield vehicle--more like KMI than KMP
While I am curious as to motives, my primary interest is in deciding whether to invest in it. If bullish on KMI, then KMI is a far better investment at this point. If bearish, why take the exposure, the mandatory conversion causes? The better dividend and principal protection vs the common is small--it would be crazy to buy unless you believe in KMI or are hedging.
The type of preferred issued has been referred to as "death spiral Preferred" While it can be reasonable when things go well, thes preferreds can go catastrophically bad when there is a problem.
First of all, at issuance, the high yield encourages arbitrageurs to buy the preferred and short the common resulting in a high yield hedged vehicle. The resulting shorting knocks down the common. The payment of dividends in common, should it occur, results in higher and higher amounts of common issued as the common price drops. These are generally not a problem when things are going well. Should there be another credit crunch, the high level of debt could cause rollover refinancing difficulties which hit back at the common stock price and then the preferred. The situation in which payment in common is most likely is the most dangerous. Of course, RK could have left this clause in the terms to allow raising additional equity capital on an ongoing basis as needed without going through a new financing process. IMHO, it would be cheaper to institute a dividend reinvestment plan allowing shareholders to buy more stock with dividends at a discount.
Main safety valve on common is that the preferred has a mandatory conversion in three years. Thus the potential damage is very limited and the mandatory conversion with a share ceiling prevents things from spiralling out of control.
At the current depressed common stock price, the preferred conversion band presents preferred holders with all the stock's downside, but only upside after a certain high level. In exchange, they get a slightly higher dividend and payment priority in case of difficulty. I would expect the preferred to trade at a discount given these problems at least until the common rises toward the middle of the conversion band.
Interested in hearing other peoples' impressions on this--positive or negative.
The bright side is that the gain was probably a long term gain and if harvested this year, the loss is a short term loss. This has more value if you have some short term gains to take it against. (Otherwise just applied vs LT gains)
Latest proxy amends agreement to provide a small per diem addon to be paid as a dividend at closing to compensate for delays in closing after October 1($.00844/day)