KMP’s earnings and DCF per unit came in better-than-expected, but the beat was driven by higher E&P spending and production, and lower sustaining CapEx. A low-quality beat, in our view. KMP's Natural Gas Segment volume growth is anemic – concerning given +$1 billion of “growth” CapEx in that segment last year. KMI was slightly disappointing with an EPS miss and no dividend increase from 3Q13; interestingly, it was KMI who was in the market buying back stock after the disappointing 2014 guidance in early December. No KMI warrants were repurchased in the Q. EPB was weak, as expected. Poor EPB.
The conference call was short on forward guidance given the Analyst Day in two weeks, but long interesting commentary from CEO Rich Kinder, including “You sell, I buy!”
We’ll have more to say on the Kinder Complex on the other side of the Analyst Day (1/29/14) and the 2013 10-Ks. No change in our negative view here.
KMP
- KMP reported EPU (before certain items) of $0.77 in 4Q13 (+2.7% YoY), which was better than the $0.73 consensus estimate, and $2.42 in 2013 (+4.8% YoY). The headline number – DCF/unit – came in at $1.44 in 4Q13 (+6.7% YoY), also better-than-expected, and $5.39 in 2013 (+6.3% YoY). The “payout ratio” (distribution-to-earnings per unit) was 177% in 4Q13 and 220% in 2013; payout ratios continue to creep higher, supportive of our bearish view (we are not in the “earnings don’t matter” camp). KMP’s “coverage ratio” (headline DCF-to-distribution per unit) was 1.06x in 4Q13 and 1.01x in 2013. KMP’s E&P ops and lower sustaining CapEx drove the “beat.” SACROC oil production jumped 9% QoQ, and realized oil/NGL prices were strong. Sustaining CapEx was $117MM in 4Q13 (+5.4% YoY), and $327MM in 2013 (+14.7% YoY). This growth in sustaining CapEx pales in comparison to the growth in Segment DD&A (in our opinion, a reasonable proxy), which was +29% in 4Q13 and +34% in 2013. We believe that that’s largely a function of KMP under-reporting Copano and E&P sustaining CapEx. Sustaining CapEx for 2013 came in $12MM below KMP’s guidance, despite the fact that Copano was not included in that guidance, which seems questionable.
- KMP’s EOR production surprised to upside, but at what cost? In 2013, KMP spent ~$475MM in E&P organic CapEx and at least $285MM in E&P acquisitions, for total capital expenditures of ~$760MM. And how much of that was allocated to sustaining CapEx? ZERO. An analyst asked on the call yesterday if Kinder Morgan would consider divesting the E&P assets. The answer, of course, was ‘no.’ This is the KMI gravy train, it’s not going anywhere. KMP’s net oil production was +7% in 2013, but E&P costs incurred will be up over 100% YoY, and nearly double the ~$400MM guidance put out at the start of the year. We look forward to the 2013 F&D results in the 10-K to see just how strong this year was for KMP’s E&P operations.
- KMP’s CO2 segment continues to disappoint. SW Colorado CO2 production was flat YoY despite major CapEx (at least $200MM), and the Company took down its CO2 growth guidance from an additional 800 MMcf/d by 2017 last quarter to an additional 700 MMcf/d by 2017 this quarter. We believe that the McElmo Dome project is letting KMP down.
- Most concerning to us in this quarter’s results is the anemic volume growth in KMP’s Natural Gas segment. For 2013 compared to 2012, transport volumes were -2%, sales volumes were +2%, and gathering volumes were -2%. KMP’s Natural Gas Segment growth CapEx (pro forma) is likely running ~$1.2 - $1.5 billion on an annual basis, and sustaining CapEx at only ~10% of that. It doesn’t make sense, and it’s a major headwind for KMP. This is the issue with KMP’s sustaining CapEx definition – KMP faces capital structure dilution as new “growth” or “expansion” projects do not generate pure incremental DCF, but at least in part replace cash flow declines from other assets. How much capital did KMP spend on new well connections over the last year for down gathering volumes? How much of that CapEx was sustaining CapEx?
- KMP has similar issues in its Bulk Terminals business, where volumes were down 7% YoY in 2013. Again, it’s nonsensical to have volume declines and growth CapEx.
- KMP Products had a solid 4Q13 and 2013. Volumes were up, even in California, and Segment EBDA increased $106MM YoY in 2013 as pipeline expansions ramped up and more than offset the adverse SFPP rate case.
- KMP’s 4Q13 total CapEx was ~$1 billion, about flat with 3Q13. With KMP’s 2014 growth CapEx guidance at $3.6B, it looks like the CapEx run-rate for KMP is firmly at $1 billion per quarter, before acquisitions.
- Did management say on the call that sustaining CapEx would be up $100 million in 2014? They may have let that slip… If true, that’s likely higher than most analysts are modeling, though not surprising to us, and still not even close to where it needs to be to prevent dilution at KMP over the long-term.
KMI
- KMI’s results were a bit soft with 4Q13 EPS of $0.33 coming in below consensus at $0.35. The quarterly dividend held flat at $0.41, which probably gives the bulls some concern.
- The interesting thing here is that KMI repurchased 5.2MM shares in the Q for $172MM – an average price of $33.08/share. That means that KMI came in and aggressively bought stock in early December when the stock dropped after disappointing 2014 guidance. This was the only time that KMI traded near $33/unit in the Q. We were wondering what was going on with KMI at the time, now we know.
- KMI did not repurchase any warrants in 4Q13, which could put a dent in the bull case for that particular security.
- KMI has no plans on amending the KMP Partnership Agreement with respect to how it defines and calculates sustaining CapEx.
EPB
- EPB reported EPU (before certain items) of $0.48/unit in 4Q13 (-23% YoY!), and $1.88/unit in 2013 (-14% YoY). DCF/unit was $0.66/unit in 4Q13 for 1.02x distribution coverage, but the “payout ratio” jumped to 135% in 4Q13 from 98% in 4Q12. As announced in early December, EPB has halted distribution growth, and it likely won’t be long before coverage slips below 1.00x and KMI takes more cash than it should from this MLP.
- Sustaining CapEx was $15MM in 4Q13, down 12% YoY, even as the asset base grew in size, as evidenced by DD&A up 17% over the same period. In 4Q13, EPB’s sustaining CapEx fell to just 28% of DD&A. Recall that EPB’s sustaining CapEx as a % of DD&A was +60% in the years prior to the Kinder/El Paso deal.
- Transport volumes were -3.0% YoY in 4Q13 and -4.7% YoY in 2013 – not good.
Kevin Kaiser
Managing Director
