Other than Kayne Anderson, there isn't much institutional ownership of KMI. There isn't any huge ownership of KMI by a well know mutual fund or hedge fund manager. What you see mostly is index based holdings and then sector fund holdings of KMI. KMI is owned in bulk by people whose money is managed by Financial Advisors who have been sold on it lock, stock and barrel. UBS and Wells Fargo in particular, both of whom have a banking relationship with KMI, have used their FA channel to buy up KMI stock. These Financial Advisors will sell KMI only after it craters. Most FA's have no idea what KMI really is. Like most people that read this message board, all they know is that RK has promised a 10% increase in dividend.
Gary Shilling who has been right about commodities and oil and interest rates, has a pretty good case for why he thinks the bottom in oil is between $10 and $20. And his case for this price is simple...classic commodity cycle behavior. As oil prices rose, people committed huge amounts of capital to producing oil...that with any softening in demand, would cause prices to plummet.
For companies, this is not a problem...unless you are borrowing money or funding yourself through the stock market.
Oil and gas companies’ bonds outstanding increased from $455 billion in 2006 to $1.4 trillion in 2014, a growth rate of 15% per annum. Energy companies have also borrowed heavily from banks. Syndicated loans to the oil and gas sector in 2014 amounted to an estimated $1.6 trillion, an annual increase of 13% from $600 billion in 2006. Between 2010 and 2014, energy IPOs raised $43.5 bill. in funds.
That's a lot of money chasing returns that don't exist any more. I would say that oil is going to go lower from here. $30 seems very doable. And for a decade, oil is going to trade in a range that's lower than what most people can imagine right now..between $25 and $50.
The bottom gets put in slowly over time, as companies stop producing, and national oil companies stop spending to increase capacity. You can bet that at the bottom, few will want to own or buy energy stocks or assets.
What you are describing is the essence of a Ponzi scheme...where if you're in early, you make money, because there are more suckers coming in than leaving. But once there are more suckers leaving than coming in, the scheme collapses because there isn't enough money to pay all the folks that want to leave.
Using traditional financial analysis, KMI generated $1.3 bill. in operating cash flow for the second quarter. KMI Then spent $1 bill. on capital expenditure and another $1 bill. on dividends. That's means it had to come up with $700 mill. in cash to be able to do this.
To plug this gap, KMI issued $936 mill. in stock in the second quarter. $700 mill. went to dividends or capital expenditure, and $236 mill. of the money raised by selling stock went to pay down debt, short term liabilities. They also used cash to pay down debt, short term liabilities because their cash balanced is down from $259 mill. in the first quarter to $163 mill. in the second quarter. The average price of KMI stock based on closing prices in the second quarter is $40.
For a $70 bill. market cap company to only have $163 mill. in cash, locked out of debt markets is like driving a car that's running on fumes.
I imagine that there are people who will buy KMI at any price because of their belief in RK. But no cash, no access to debt, a declining stock price, exposure to collapsing oil and nat gas markets all suggest more trouble coming for KMI.
Lehman, Bear Stearns, Countrywide Credit. During the real estate bubble, lots of people believed in these folks like the way people believe in RK and KMI.
No magic in those names and no magic in KMI either. Then, like know, all there is, is a incredible amount of debt and..a story based on things were not supposed to happen...oil was never going to go below $70, nat gas below $4...pipelines are tollroads stuffed with traffic that will never stop.
All of these impossible things are turning out to be not so true, just stories Wall Street told you to get people to buy stocks and bonds that it was selling.
RK has gotten hundreds of millions in dividends by owning KMI. That's all locked up and secure. Even if KMI went belly up, he's going to be rich forever.
When things are going well no one cares about all this stuff. It was the same during the real estate, mortgage finance bubble. But oil going to $40, nat gas under $3, well capitalized energy stocks like Exxon cratering are big hints to get out of things that won't be supported by the market. KMI has left itself in such a precarious state that it can't sell any more debt because it's reached the limit of what it promised the credit rating agencies, won't sell assets because RK has said they are buyers not sellers, won't cut the dividend because it would be a huge loss of face for RK...and then the face the mortal threat of having to put up capital for their hedges against currency, interest rates and oil, all of which are going the wrong way. You can bet the credit rating agencies will cut ratings at the worst point, to add fuel to the fire. Standard operating procedure for them based on what happened in the financial crisis.
KMI is always selling stock every day using a "at the market" strategy. That means they never have to disclose up front how much equity they are selling. But if you look at the big volume days, you can bet that they represent 30% of the volume on these days.
Since analysts are there to provide a service..they publish on stocks to provide coverage. It's not their real job to actually tell you when a stock is a good buy or not. Their job is to publish research on the companies that the investment bankers are getting as clients...to issue stock or debt. The credit agencies are paid by the company that's issuing the debt to provide the rating.
So, in whose interest is it to warn people who have been sold KMI stock as a "toll road" "safe way to play shale revolution" or some story like that?
No one. Like always the people who don't know what they own, and how they came to own it will lose their shirts.
KMI mgmt has zero when they keep showing a presentation with a business plan based on $70 oil. Especially since they are taking a bath on their hedge, with a unrecognized loss of $193 mill. as of June 30.
They also have outdated stock performance information in their presentation.
And I want an explanation as to exactly what will happen if their credit rating is cut. In Q1, they said they would need an additional $1 bill. In Q2, they are saying they won't need to put up collateral.
If I'm the counterparty, why would I agree to do this when oil price is collapsing, KMI's revenue and cash flow are sinking...and the hedge is going the wrong way.
Yes, which is why companies that putting out capital up front don't pay dividends. Later once the projects are cash flow positive they start paying dividends.
KMI also using outdated assumptions in their presentation to show their "excess" dividend coverage based on $70 oil and $3.75 nat gas. Oil is now at $40 and nat gas at $2.75.
The last presentation to bond holders boasted that they could raise $1 bill. in equity in 24 days based on a $40 stock price. Both the GS presentation continue to use this outdated assumptions which you can see because use cost of equity at 4.4%, which is effectively $40.
KMI also using outdated assumptions in their presentation to show their "excess" dividend coverage based on $70 oil and $3.75 nat gas. Oil is now at $40 and nat gas at $3.75.
And in a footnote in their presentations is the fact that they can't issue debt any more...because it says that future funding is tied to maintaining Debt to EBITDA of 5.5
If I were to put odds...I bet that KMI will chop its dividend because all its problems go away with that. One move and done. But by chopping the dividend, it keeps its bankers, bond holders and all the VVIP people happy. KMI management turns over...mini-scandal...but no mega-scandal. As usual, the people owning the stock are the ones that are going to get hit. What would you pay for a KMI stock that didn't pay a dividend and valued using P/E? Because of the huge debt, the P/E would be low...so something like 11X earnings...based on 2016 estimates, that would be about $11 or 67% downside from here.
Meanwhile, KMI sits at the precipice of ratings downgrade. NGPL 20% owned by them, is already in technical default. They have a huge working capital deficit, which means daily liquidity is real issue now. They have $715 mill. in debt to roll over in 2015. $1.7 bill. in 2016. Total debt is $43 bill. Every 1% increase in rates for KMI is $105 additional interest expense. The have lost $193 mill. on their hedging. Cost of equity as KMI stock goes down is going up. They are maxed out on debt and have to keep it under 5.6X EBITDA. So, dividends, new projects have to be funded through stock sales. At $40 oil and $2.50 nat gas, KMI's own projections show that their excess dividend coverage is down to about $315 mill. GLTA
So much of what's going on with KMI reminds me of the last big energy scandal. That time the story du jour was that Independent Power Providers (IPP) were going to put up natural gas based electrical generation plants. Every utility and energy company floated an IPP...the superhero stocks of that time all went bust. AEP, Calpine (refloated since), Dynegy..and losses were huge. Eventually, the big Kahuna of this story..Enron went bust for cooking the books. And the usual suspects, analysts, credit rating agencies, accountants who claimed Enron's books were just fine all denied there was any problem. People kept buying Enron all the way down to bankruptcy.
KMI has the same feeling as what was happening then. KMI is the superhero stock of the MLPs...even if it is not an MLP itself. It has a larger than life story based on RK. But underlying the stock is huge debt and leverage, and a huge dependence on extracting money from capital markets....both stock and debt to survive. KMI's accounting is incredibly complex...you can't find a number that's not been revised, adjusted or massaged in some way...to make it seem like KMI has more cash and money that it has. All the people who should be warning you of a problem are on the take from KMI....investment bankers have made big fees from selling debt and equity for KMI, and from doing all the deals of buying other MLPs. Credit rating agencies have all made big fees from rating all the debt that's being sold. Analysts who cover KMI know what's good for them and are not going to say anything, because investment bankers will have their heads. And RK has even bamboozled the media and gotten them to be cheerleaders for him and KMI...count Jim Cramer and CNBC hosts in this camp.
Reg FD requires KMI to make a market announcement...meaning a widely distributed press release of any material information regarding the stock. Any discussions with credit rating agencies regarding a downgrade is highly material cannot be selectively disclosed to big money investors at the this conference. Same with any discussions about the dividend. RK, if he actually is the one doing the presentation...CFOs often show up for these...is going to stick to the script. 10% dividend increase. Backlog is huge, etc.
Go read the KMI conference call transcript for the last quarter. One brave analyst asked about the rating agencies and the debt to ebitda ratio. RK gives a non-answer and no one pursues it. Ridiculous. Not a single question about the revenue decline. Not a single question about the hedging book loss. No question about the working capital deficit. Or how about why KMI suddenly changed the language in the 10-Q to say that they won't be required to put up capital for a downgrade.
Yeah, the sell side analysts know better...they won't downgrade KMI or any MLP till it's too late because the investment bankers will have their heads. no one should believe the ratings or price targets from these investment banks.
Sell side analysts sit there quivering when the bankers for KMI and the MLP sector walk by. Look, anyone with a clue understands that the MLP sector is essentially a honey pot for investment banking. KMI $45 bill. in debt has generated how much in fees for UBS, Credit Suisse, Goldman Sachs bankers? Issuing all that equity when there were three stocks..more investment banking fees. What about buying El Paso, Copano, Hiland...more investment banking fees. It's always like this, the investment banks find a story that investors will buy into...toll road, natural gas -- energy of the future and sell a bunch of debt, stock, deals around it. They take their fees up front...and their gone by the time the chaos arrives. But they'll be back to clean things up, when the fee machine can kick back into gear again...either through asset sales, bankruptcy restructuring.
the dance goes on until the music stops. the music stops when some banker says no more money is going to be lent until some is paid back or the bond market stops buying the bonds. then credit rating agencies will rate KMI debt as junk. then all hell breaks loose. with LINE blowing up and oil going down and lots of junk bonds issued by energy companies unable to catch a bid...odds are good that hell is breaking loose.
The problem is that KMI has too much debt. KMI should have stopped their crazy dividend policy when they consolidated the three entities. KMI might have been okay long term with that. Now...KMI is at the mercy of its bankers, the credit rating agencies. A one notch downgrade puts KMI debt at junk. Once KMI debt is at junk, covenants will require dividend cut, asset sales, debt repayments. KMI stock will go down.