So where is that growth going to come from and how is KMI going to finance it?
All the plans to build out pipes to gather from the fracking fields are now on hold while the industry watches to see who is left standing. KMI cut div because they could not borrow money and still keep their credit rating. Pipelines need long term commitments, with customers that will exist long term. After the current frackers are liquidated, KMI will be able to deal with whoever buys those assets. Might be a while, and likely at lower terms with next generation of frackers, because they will be pumping lower priced commodities out of the ground, and will need better transportation deals in order to make money doing it.
The cash they freed from the div cut (3.5 billionish) does not go far towards growth when the company already has 80,000 miles of pipe, and 180 terminals.
The company has already said they cut the dividend to meet the requirements of projects they are already committed to completing. They couldn't borrow the money they needed, so they cut the dividend to free up the cash. Doubt there will be much left over for debt repayment and buybacks. If they had only cut div 50% the stock would be much higher today, and they might have been have able to go back to offering secondaries to raise cash. I think they cut the dividend as little as they thought possible to maintain credit rating. The div cut also pulled the rug out from under the buyers of the recent preferred offering. Pretty much killed their ability to offer a preferred in the future without paying excessively high interest.
Assets are currently valued based on the current contract rates that they negotiated back when oil/gas was higher, and industry was building out infrastructure. That has changed. Not likely that KMI will be able to negotiate the same rates now, much less negotiate the higher rates that would be necessary to significantly grow cash flow = assets will be written down. Guess the upside is that the company has few options to raise cash other than selling assets, so debt cannot increase much going forward.
Before and during the roll up of KMP/KMR/KMI the party line was that KMI was going to continue as a high payout company. Some now seem to believe that the company has changed philosophy, and will function as a more traditional corporation, that this is a good thing, and that the stock will do well from here. I am not so sure. I think if revenues stayed the same, or grew, that a 25% div cut which would have added about a billion $ to cash flow would have been sufficient. I suspect the cut was so deep because RK sees headwinds coming on the top line. It concerns me that after a 75% cut all that the company says is that it will not have to go to the market for capital for 2016. Really? A 75% cut only gets us through 2016? It is not like they said that this cut would make the company able to internally finance as a new going company philosophy. What happens after 2016? Back to regular annual dilution to raise funds?
when a company's customers are in trouble, the company is in trouble. Though most of KMI's customers, such as power plants, will be stable, some other lines of business are suffering from the oil/NG downturn. Pipelines that were going to make sense to build to serve the fracking fields do not make sense now. LNG export also in question now, as cheap oil competes as an alternative. Growth opportunities that existed when the original promises were made for growth no longer look as good. Thin KMI profit margins mean it does not take much of a reduction "at the margin" to get to negative cash flow situation. That is why the div cut was so deep.
I think KMI needs to yield at least 4% to 5% just to be comparable with buying a low growth utility stock. Still more pain ahead for KMI holders IMO.
Current cash flow is approx 4 billion net income and 4 billion dividends paid. If they were to cut div by 25% they will have 1 billion in positive cash flow and current yield would be 75% of $2.04 = $1.53 and $1.53/$20.66 = 7.4% yield with a 75% coverage ratio - which is a good coverage ratio for an income stock.
There is simply no need for the company to completely eliminate the dividend.
Sammy - your math is wrong. 4 billion in net income is calculated AFTER expenses are deducted from gross income. Your method is deducting expenses twice. Look at the cash flow statement. It is true they are essentially paying out every penny of free cash flow to cover the dividend last quarter, but the math is more like 4 billion net income and 4 billion dividends paid. Not the best situation, but not near as bad as you make it out to be. If they were to cut div by 25% they will have 1 billion in positive cash flow and current yield would be 75% of $2.04 = $1.53 and $1.53/$20.66 = 7.4%
Div cut might be avoided if they can cut expenses and get existing projects completed and producing cash. RK might not be able to pull it off, but then again he might, and div cut is baked into the cake already at today's price.