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Is the Kinder Morgan Plunge an Opportunity to Buy Its ETFs?

Sweta Killa

While the collapse in oil price has battered the energy sector as a whole, pipeline operators have been the worst hit. This is because the oil rout has prompted the cash-strapped oil producers to cut their spending on projects that pipeline operators were relying on to fund investor payouts (read: Will $20 Crude Soon Be Reality? Short These ETFs).

 

The move has taken a huge toll on Kinder Morgan’s (KMI) balance sheet and dividend payout. Shares of KMI have been in a free-fall territory over the past five days, plunging nearly 30%. From a year-to-date look, Kinder Morgan has lost 60.8% of its value.


What Happened?


The problems for Kinder Morgan started last Monday when it unveiled plans to increase its stake to 50% from 20% in a struggling natural gas pipeline company of America. The woes aggravated the next day when Moody’s Investors Service lowered the outlook for the company from stable to negative, raising concerns over the sustainability of a high dividend.


Finally, the largest pipeline infrastructure company in the world slashed its dividend by 75% for the first time in its history to conserve cash. The company quarterly dividend is now 12.5 cents, a sharp fall from 51 cents. The new policy of reduced dividend will begin from the fourth quarter. The move negates the promise of increasing dividend by 6–10% for the next year that the company made on November 18.


Since the majority of KMI stockholders are income-oriented, the action led to a huge decline in the share price. KMI shares tumbled 6.5% to a record low of $14.70 in after-market hours on Tuesday’s trading session. However, the dividend cut would be beneficial for the company in the long term as it will improve its financial position and help to maintain its investment grade status (read: Can MLP ETFs Still Lure Income Investors?).


Standard & Poor’s appreciated the move by reaffirming its stable outlook on the company. The agency believes that “the move will enable the company to continue to execute on its future growth plans and maintain a total net debt to EBITDA ratio around 5.5x for the next several years.” Additionally, Moody’s reversed its recent downgrade in outlook to stable from negative.  


As a result, the current slump in the stock could represent a great buying opportunity for long-term investors. This is especially true as the stock currently trades at a P/E ratio of 23, lower than the industry average of 25.6. In addition, the current yield is still impressive at 3.40% even with the massive dividend cut and the share price fall.


Investors seeking to tap this opportunity could consider MLP ETFs having largest allocation to this oil and gas pipeline giant. Below we highlight four products in detail:


Global X MLP & Energy Infrastructure ETF (MLPX)


This product follows the Solactive MLP & Energy Infrastructure Index and holds 39 stocks in its basket. Of these, Kinder Morgan takes the third spot with 7.4% of total assets. In terms of industrial exposure, about 84% of the portfolio is allocated to the oil and gas pipelines and distribution while oil refining and marketing firms make up for 12% share. The fund has amassed $84.8 million in its asset base and charges 45 bps in annual fees. Volume is good at around 161,000 shares on average. MLPX was down 17.4% over the past five days (read: Is This the Worst Time For MLP ETF Investing?)

 

First Trust North American Energy Infrastructure Fund (EMLP)


This ETF is an actively managed fund designed to provide exposure to the securities headquartered or incorporated in the U.S. and Canada and engaged in the energy infrastructure sector. EMLP is one of the popular funds in this space with AUM of $827.5 million and average daily volume of 410,000 shares. Expense ratio came in at 0.95%. The product holds 66 securities with Kinder Morgan occupying the second position in the basket at 5.8%. From a sector look, about half of the portfolio is allocated to pipelines while electric power companies round off the top two at 41.1%. The fund lost 9.6% in the past five days.


Tortoise North American Pipeline Fund (TPYP)


This fund follows the Tortoise North American Pipeline Index, holding 101 securities in its basket. Oil & gas pipelines make up for 72% of assets followed by natural gas utilities at 17%. Here, Kinder Morgan occupies the fifth spot with 4.9% share. The product recently debuted in the space and has accumulated $17.9 million in its asset base in six months. It trades in lower average daily volume of 13,000 shares while charges 70 bps in fees per year from investors. The ETF was down about 13% in the same period (see: all the MLP ETFs here).

 

Alerian Energy Infrastructure ETF (ENFR)


This fund tracks the Alerian Energy Infrastructure Index, holding 36 stocks in its basket. Of these, Kinder Morgan takes the thirteenth place with 3.9% share. Oil and gas pipeline and the distribution sector dominates the fund’s return at 79% while utilities, and oil refining and marketing take the remainder. The ETF is unpopular and illiquid having gained $10.5 million in total asset base. The fund trades in a paltry volume of 5,000 shares. It charges 65 bps in fees per year from investors and lost 13.6% in the past five days.











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KINDER MORGAN (KMI): Free Stock Analysis Report
 
GLBL-X MLP&EGY (MLPX): ETF Research Reports
 
FT-NA EGY INFRA (EMLP): ETF Research Reports
 
TORTS-NA PIPLN (TPYP): ETF Research Reports
 
ALERIAN-EGY INF (ENFR): ETF Research Reports
 
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