Questions for Kinder Morgan (Edition 1)

Kinder Morgan (KMI, KMP / KMR, and EPB) is scheduled to release 3Q13 distributable cash flow at 4pm EST today, closely followed by its quarterly conference call at 4:30pm EST.


In advance of the call, we've compiled a list of questions that we'd like management to answer.  As Kinder Morgan will not respond to our questions, perhaps someone else will ask them for us...


1.  Does PricewaterhouseCoopers audit, or deliver an opinion on, KM's sustaining capital expenditures?


2.  How does KM define "capacity" in its E&P business?


3.  Why does KM feel that relying upon a partnership agreement written in 1992 is relevant 21 years later, especially considering that E&P assets were not in the partnership at that time, and the industry defines maintenance CapEx for E&P assets completely differently?  


4.  Why doesn't KM acquire a large E&P company or asset given how accretive such a deal would be to KMP's DCF/unit with $0 sustaining CapEx?


5.  Or, if KM wants to de-emphasize its E&P business, why not sell those assets today?  What does KM believe fair / market value is for its E&P assets?


6.  How is the St. John's Dome project (CO2) going?  How much capital has been put into the project to date?  Discuss the well results?


7.  Please discuss KM’s intentions with respect to investing in “coal / other natural resources.”  How much capital will be dedicated to this effort?  What has been done so far?


8.  Is KM considering a corporate acquisition to kick off this new “coal / other natural resources” business?


9.  More importantly, how will KM define sustaining CapEx for this business?  Will there be a replacement reserve to reflect the fact that these will be depleting assets?  Or will it be similar to how KM currently defines E&P sustaining CapEx (i.e. $0)? 


10. Over the last several years, KM has spent an enormous amount of expansion CapEx in both its refined products and bulk terminals businesses, yet unit volumes, at each, has not increased.  This cannot be explained by a single project gone wrong or a bad economy; what, exactly, is this expansion CapEx going towards?


11. Within KMP’s Natural Gas Pipelines segment, there is a large gathering & processing (G&P) business, made more significant with the CPNO acquisition. For 2013, what is G&P sustaining CapEx vs. expansion CapEx (including JVs)?  What is G&P organic volume growth expected for 2013 and 2014, respectively? 


12. Over the long-term, how much capital would KMP need to spend on an annual basis to keep gathering throughput and NGL production flat (including CPNO)?


13. Does KMP include new well connections needed to keep gathering throughput flat in sustaining CapEx?  Does KMP include or reserve for processing capacity refurbishment / replacement in sustaining CapEx?


14. If KMP were to retire a 300 MMcf/d processing plant and build a new 300 MMcf/d processing plant next to it, would the CapEx incurred be sustaining CapEx or expansion CapEx?


15. On the 9/18/13 conference call, management noted that, “Everything that you do eventually gets into the rates you charge for your transportation services.”  How will the significant spending cuts at the former El Paso subsidiaries affect rates going forward?


16. On the 9/18/13 conference call, management cited a Goldman Sachs report that listed KMP’s 2012 maintenance CapEx as a % of EBITDA as 11.1%.  But in KMP’s 1/30/2013 IR presentation, it states that sustaining CapEx was $285MM and EBITDA (ex. items) was $4,144MM, for a ratio of 6.9%.  Which number is accurate?  Why did management cite the Goldman figure? 


17. In the FERC financials, which expense line includes “anomaly repairs” for the former El Paso subsidiaries?


18. In the FERC financials, where can we find the increase in O&M expenses to make up for the significant decline in maintenance CapEx on the former El Paso subsidiaries?


19. What does KM have for natural gas transmission contract roll-offs over the next few years?  Can KM quantify it in terms of EBITDA impact?



Kevin Kaiser

Senior Analyst

KO & PEP Q3 Update: Carbonated Soft Drinks Disappoint; Beverages Remain Overvalued

While broadly Consumer Staples names could now be considered a “defensive” play given the political uncertainty in Washington and Bernanke’s no-taper call (pushing yields lower, making staples names relatively more attractive), we think beverages remain overvalued with macro forces playing against the group.


To not mince words, but we’re not interested in getting long the trend of a ~ 3% annual decline in carbonated soft drink (CSD) volumes across the industry and a weakening emerging market  environment – well-established as the growth engine for the sector.  PEP is of course more diversified with 51% of its portfolio food, and we think the stock could continue to be supported on activist breakup news within the beverage business, however we’re not buyers of KO or PEP on the quarter’s print.


KO – There was much macro commentary on the call.  The company again cited a “volatile” emerging market business, which we do not expect to inflect in Q4, despite management’s claim that it’s only a “temporary” impact.   Europe broadly remains weak, with outperformance from Northwestern Europe (Germany in particular) and underperformance across the South.


Strong marketing plans for Q4, easier comps in the back half, and any pricing taking it’s able to capture, could help insulate Q4 performance, however, given the consumer moving out of CSD (including diet), and a still very weak macro environment globally, we’ll remain on the sideline on KO on the trend duration.   


On Q3 2013 results: KO reported earnings yesterday morning, inline revenues ($12.03B vs $12.05B), declining -2.5% year-over-year, and inline EPS of $0.53 (incl. 5 cent FX headwind), up +3.9% year-over-year. 

  • Total volume was up +2.0% in the quarter (Americas +1%, International +3%)
  • Company forecasts a currency headwinds of 5-6% in Q4
  • CEO Kent said that the Mexican government’s decision to increase taxes on soda is the wrong step: regressive taxes have proven in the past not to work and that consumers are the ones that suffer in the end (article). He made no comment on how the company may handle/prepare for the results in Mexico
  • Optimism around volume growth in China going forward. Volume +9% in the quarter
  • Volume weakness (flat) in LatAm (Brazil and Mexico greatest neg. contributors) on more difficult +5% comp


PEP – We believe the stock could continue to get support on activist news, including such options that PEP acquires Mondelez (MDLZ) and spins off the beverage business or PEP separates the existing business between beverage and food. CEO Nooyi addressed questions on the call by saying the company is looking into “sensible value-creating structural solutions” on beverages. All that said, we’re not buyers of the stock here. As our charts below suggest, we think the stock price has more risk than reward given the trend of declining earnings estimates and its premium P/E valuation over an overvalued group. 


On Q3 2013 results: this morning, PEP reported revenues that slightly missed consensus estimates (reported $16.9B vs $17B), up 1.5%, and EPS outperformance ($1.24 vs $1.17). The 10.7% EPS increase year-over-year was driven primarily by a lower than expected tax rate (25.5% or 80bps below last year) that contribute 6 cents of upside. The company reaffirmed its FY2013 EPS growth guidance of 7%.

  • Total volume was up +3% on the quarter (Snacks 3%/Beverages 1%)
  • Asia, Middle East & Africa (AMEA) sales underperformed,  down -3.4% Y/Y
  • Frito Lay North America sales were strong at +4.7% Y/Y
  • PepsiCo Americas Beverages sales were down -2.2% Y/Y with volume down -4%
  • Took price up ~$3 in the quarter


Valuation:  While we never base our investment preference on valuation alone, the chart below shows that both the Beverage group and KO and PEP are overvalued and trading well above historical averages.  Further, we think the direction of earnings estimates going into next quarter is flat to lower, suggesting that price has more downside than upside going forward.  


KO & PEP Q3 Update: Carbonated Soft Drinks Disappoint; Beverages Remain Overvalued - zz consumer


KO & PEP Q3 Update: Carbonated Soft Drinks Disappoint; Beverages Remain Overvalued - zz. bev


KO & PEP Q3 Update: Carbonated Soft Drinks Disappoint; Beverages Remain Overvalued - z


KO & PEP Q3 Update: Carbonated Soft Drinks Disappoint; Beverages Remain Overvalued - z. pepee


KO & PEP Q3 Update: Carbonated Soft Drinks Disappoint; Beverages Remain Overvalued - zz.eps table



Matthew Hedrick

Senior Analyst

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5 Social Media Tips for Seniors

By Moshe Silver


The SEC has two Twitter feeds that all investors should follow.  One is a news feed under @SEC_News, with over 196,000 followers.  The other, which the private investor should check daily, is its investor education feed @SEC_Investor_Ed.  This Twitter feed has only around 38,000 followers – far fewer than the number of individuals who make their own investment decisions on a regular basis.  While the Commission admittedly has had a dim record in recent years, they are pretty much all that stands between the retail investor and the deep blue sea.  If you don’t follow the news and investor education feeds, then you don’t know what the SEC thinks is important day by day.


5 Social Media Tips for Seniors - twff 


This week the Commission put out a bulletin aimed at older individuals and their families.   As with many of the Commission’s bulletins, their headline advice is, “The key to avoiding investment scams on the Internet is to be an educated investor.”  But the fact is that older Americans are becoming increasingly turned on to the social media favored by their children and grandchildren, most of whom also have no clue about how to handle their finances.  Your cute 16 year-old granddaughter may be able to teach you to be a whiz with Twitter and Facebook, but don’t look to her for which stocks to buy.


And, as with any new communication technology, the scamsters and fraudsters are out in their legions, looking for an easy mark.  Financial fraud is the fastest growing form of elder abuse – largely because, according to the AARP, people over 50 have quaint old-fashioned notions and generally expect honesty in the marketplace.  Once defrauded, older folks may be slower to realize – and are quite often hesitant to take action.  This makes it increasingly important for family members to pay close attention to their older relatives’ financial dealings.


Five Tips


The bulletin lists five areas of concern, which really apply to everyone.


1 – Look out for “Red Flags” – these include offers that look “too good to be true, which generally means almost anything that makes you jump for your checkbook because it looks so much better than anything else that’s out there.  Other causes for caution include anything using the word “guarantee” (illegal in most investment contexts), offers of high returns on investments outside the US (“learn why the world’s most sophisticated investors have invested in the Albanian bauxite industry…”) and anyone who tells you that you have to invest “right now!”


2 – Be wary of unsolicited offers – generally, investors look for professional advice, while fraudsters look for victims.  The Commission recommends particular caution any time you see a post on your social media wall, a tweet either mentioning you by name or direct messaged to you, or any other unsolicited communication about money or investments.


3 – Look out for “affinity fraud” –  Any investment pitch that you receive because you are part of a group, club or association may be affinity fraud.  If you don’t know the person or entity that is sending the message, you probably shouldn’t even open it – and should definitely not respond until you have checked it out thoroughly.  Even if you know the person making the offer, cautions the Commission, make sure you check out the investment completely.  The biggest losers in the Bernie Madoff fraud were institutions who invested with him based on advice from some of the world’s leading financial professionals.  The bad news is that even your best friends can unwittingly draw you into a fraud.  The really bad news is that even smart people can be duped.


4 – Be thoughtful about privacy and security settings – Ask your granddaughter to give you a thorough tutorial on privacy features, and don’t post any information that you want to keep confidential.  It is a literal fact that, once you post something on the Internet – regardless of security features you may employ – it is no longer confidential.  All kinds of people have nearly instant access to your emails, tweets, and Facebook postings – and most of them are not the NSA.


5 – Ask questions and check out the answers – “Be skeptical,” says the Bulletin.  “Investigate the investment thoroughly and check the truth of every statement.”


Caveat Emptor (We get to say that a lot…)

The SEC lists a few of the most common types of investment fraud.  In the good old days, these were routinely perpetrated by telephone and the mail.  In the brave new world of social media, you can lose your money much faster – and with online banking, you can do it all from the comfort of home.


We list a few headline categories here and urge you to read the full release for yourself.


“Pump-and-dump” scams, fraudulent “research opinions,” “hot stock” spam blasts, and online stock offerings.  Congress has not made matters any more transparent by permitting general solicitation of private placements – you may be hard pressed to tell the difference between a legitimate advertisement under the JOBS Act and a fraud.


The Commission urges investors to be aware of various legitimate financial services professional designations.  While most investment professionals require some form of licensing, there are titles floating around that look quite legitimate, but that have no regulatory oversight associate with them.  One pointer we can add: if you are contacted by an individual wishing to discuss investments, you can look them up on the FINRA website ( by entering their name in the BrokerCheck® database.


Remember: It takes a fair amount of preparation to properly Caveat.  But it takes only the click of a mouse to Emptor. 


Moshe Silver is a Hedgeye Managing Director and author of the Hedgeye e-book Fixing A Broken Wall Street

Draghi Leaves Door Open For Rate Cut

Takeaway: Our call remains that we expect Europe’s economy to gradually improve off low levels.

This note was originally published October 02, 2013 at 12:24 in Macro

Draghi Leaves Door Open For Rate Cut - draghi

European Central Bank (ECB) President Mario Draghi and the ECB’s governing council voted today to keep rates unchanged, although a cut was suggested by some members.


Last month’s dramatic pivot to a dovish monetary tone that interest rates should remain “at present OR lower levels for an extended period of time” was reiterated again today in remarks that monetary policy will remain accommodative for “as long as is necessary”.  Draghi described an economy that is “weak, fragile, and uneven” and left the prospect of issuing another LTRO on the table. We expect that given the continued clog in the credit channel, a liquidity package could be released into year-end (see chart below).


Interestingly, and despite the dovish commentary, the EUR/USD rose following the announcement, which we think is reflective of the impact of Bernanke talking down U.S. growth prospects (and the USD), as well as the Eurozone economy showing improvement on the margin.  


As central bankers struggle to guide expectations (hint Fed’s no-taper decision and the ECB’s and BOE’s forward guidance) we wouldn’t be surprised to see Draghi keep his cards tight on when he may issue liquidity measures or cut rates, and continue to drag his feet on any policy action until more data confirms his team’s outlook.


As it relates to the Eurozone, our call remains that we expect Europe’s economy to gradually improve off low levels (we’re UK and German equity bulls) and bullish on the EUR/USD, which is in a bullish breakout above its TRADE, TREND, and TAIL levels (see chart below).


Draghi Leaves Door Open For Rate Cut - hed1


Draghi Leaves Door Open For Rate Cut - zz. eur usd


Draghi highlights from the Press Conference:

  • Somewhat weaker growth in the beginning of Q3, but still expects a gradual recovery
  • The recovery is “weak, fragile, and uneven” and starting from very low levels
  • Unemployment, especially youth, needs to be reduced from very high levels
  • Credit dynamics remain subdued with flows “still weak, very weak” 
  • On broader developments of liquidity: ECB is ready to use all available instruments, including LTRO
  • Inflation continues to be firmly anchored, on the very low side of the 2% target (at 1.1%), but the baseline scenario has been underpinned
  • Progress is being made on political reforms:  greatest pressure should come from the inside; don’t need to be pressed by markets
  • On political instability (Italy and the rise of anti-Euro parties in Germany and Austria): while instability hampers hopes for a recovery, it doesn’t hurt the foundations of the Eurozone as it used to do a few years ago -- that suggests that the Eurozone and Euro is more stable


Draghi Leaves Door Open For Rate Cut - zz. interest rates



Matthew Hedrick

Senior Analyst

An Eye on China & Germany

Client Talking Points


A major call-out this morning is the Shanghai Composite which is down almost -2%.  This weakness is being driven by the property sector which is under pressure based on local news reports that longer term regulations could be in place soon for controlling property in China. Being the price and market driven analysts we are, the move in Chinese equities this morning is certainly a red flag in our notebooks, but isn’t changing our more positive view on China.  


More good news out of Europe today with European car sales ripping to a 2-year high. Add into the bullish economic mix a fantastic German confidence reading of 52.8 in October versus 49.6 last month This clearly bodes well for German #GrowthAccelerating and dovetails nicely with our Q4 Macro Theme #EuroBulls. Yes - we are long the German DAX.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


$DRI Breakup ‘Not the Answer’ Oppenheimer Says - HWP: Do we want more of the same? Give management more time? Seriously? Unbelievable! @HedgeyeHWP


The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money. -Alexis de Tocqueville 


The period from March 2009 to March 2012 was one of the strongest three-year market rallies in history -- stronger, in fact, than the 1996-1999 bull market. 

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