Finding a Cure for Kinder Morgan’s Frustration
(Bloomberg Opinion) -- Richard Kinder, the midstream maestro whose name is above the door of the Kinder Morgan Inc. pipelines empire, is irked:
… Like many of you on this call, I'm puzzled and frustrated that our stock price does not reflect our progress and future outlook, but I do believe that in the long term markets are rational and that the true value of our strong cash generating assets will be appropriately valued.
He was speaking on Wednesday evening’s earnings call. Kinder Morgan had just reported decent results; the company hasn’t missed a consensus earnings forecast in five quarters, Bloomberg data show. It expects to beat full-year guidance, helped by a big increase in natural gas volume flowing through its network. Just over a month ago, it plucked victory from the jaws of defeat by selling its troubled Trans Mountain Pipeline to the Canadian government for about $3.5 billion.
Rising profits – Ebitda was up 6 percent, year over year – and that Canadian pipeline sale have helped address Kinder Morgan’s biggest problem, its crushing debt. Recall that things began to go pear-shaped for the company in the final quarter of 2015, when it was forced to slash its dividend as years of expansion collided with an energy crash. Net debt ended 2015 at 5.6 times Ebitda. It ended September of this year at 4.6 times, and the company expects a rating upgrade from Standard & Poor’s early in 2019.
Yet the stock, even with Thursday morning’s 2 percent increase, is roughly where it started the year, in line with the sector. Indeed, it has been dead money for much of the past three years. Whittling away at leverage has been a laborious process. Many retail investors have simply deserted a sector sold to them as being as safe as utilities, but which succumbed to the usual hubris of the commodity cycle. Kinder Morgan’s earlier expansion into such businesses as tankers and exploration and production dragged on returns and muddled its equity story. And, as I wrote here, its shareholder communication remains puzzlingly similar to that of the master limited partnerships, a structure it ditched years ago.
All this has left Kinder Morgan’s valuation way below most of its large-cap peers. And while three out of four analysts recommend buying the stock, the average target price implies a return of about 20 percent (adding in the dividend yield) – which is fine but trails others. Williams Cos. Inc.’s implied return is almost 30 percent, for example.
So Kinder Morgan's growth story, such as it is, still isn’t resonating. That’s remarkable when you consider its dividend is expected to rise by more than 50 percent by 2020 – more than double the forecast for Williams and even further ahead of the others.
This is where Kinder Morgan ought to focus its actions. Thankfully, it provided a strong signal on Wednesday evening that it would.
With Trans Mountain sold, the raison d’etre of its listed subsidiary, Kinder Morgan Canada Ltd., has largely disappeared. Kinder Morgan is now conducting a strategic review of the business. It says it’s open to ultimately keeping it or buying it back in, but it should sell. Analysts at Tudor, Pickering, Holt & Co. estimate this could net Kinder Morgan about $2.3 billion, if it included the full Cochin cross-border pipeline (to which CEO Steven Kean, on the earnings call, indicated he was open).
Besides reducing leverage further, the money would provide more firepower for buybacks and getting shareholders focused on the rising yield. Shrinking the empire would also be in keeping with the by-now-obvious ambivalence shareholders feel toward Kinder Morgan’s supposed advantages of scale and diversification. More would still need to be done, such as selling the upstream business. In the meantime, though, Canada provides an obvious catalyst, and Kinder Morgan should deploy it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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