KMP 1Q14 Takeaways

Nothing out of the 1Q14 results changes our negative view on Kinder Morgan Energy Partners (KMP/KMR).  A few takeaways from a rather uninteresting quarter (we’ll have more after the 10-Qs are out) from the Kinder Complex:


  • KMP Financial Results Mixed, But Below Budget……KMP reported EPU (before items) of $0.73, below the budgeted $0.74, and up 11% from $0.66 in 1Q13.  DCF/unit was $1.55, missing the budgeted $1.57, and up 6% from $1.46 in 1Q13.  Segment EBDA + JV DD&A was $1,591MM, below the budgeted $1,599MM.  DCF-to-Distribution coverage was 1.12x in 1Q14, down slightly from 1.13x in 1Q13 (and 1.14x in 1Q12).  As is typical, KMP builds “excess coverage” in the seasonally-strong 1Q and will give it back in 2Q and 3Q.  KMP’s Payout Ratio (Distribution-to-EPU) was 189% in 1Q14, improving from 198% in 1Q13.  KMP’s annualized return on tangible assets (net income before items / average assets ex. goodwill) was 3.6% in 1Q14, an improvement from 3.3% in 1Q13.

KMP 1Q14 Takeaways - km1


KMP 1Q14 Takeaways - km2

  • KMP Natural Gas Midstream Has Huge Growth CapEx and Doesn’t Grow……KMP’s long-haul natural gas transportation businesses are growing well (total volumes were +5.5% YoY), driven by increased demand for north-to-south capacity on Tennessee Gas (TGP) and export opportunities to Mexico via El Paso Natural Gas (EPNG).  This strong volume growth should continue going forward with additional TGP back-haul projects, expansions into New England, and increased Mexican demand.  (Related Note: Kinder was super bullish re: demand for north-to-south natural gas transportation – bullish read-through to Boardwalk Pipeline (BWP), which has a new, underutilized south-to-north system in Texas Gas Transmission that it can repurpose.)  However, KMP’s Natural Gas Midstream segment is not growing, with natural gas sales volumes down 4.4% YoY and natural gas gathering volumes down 0.6% YoY in 1Q14.  The key questions are 1) How much capital was invested into these midstream businesses over the last year for flat-to-down volumes?  And 2)  How much of that capital was included in KMP’s sustaining CapEx budget?  Stand-alone CPNO was projected to spend $458MM of growth CapEx in 2013 according to the “Case I Projection” in CPNO’s 4/22/13 8-K.  Excluding CPNO, we estimate that KMP spent ~$400MM in its Midstream Segment (G&P + TX Intrastate) in 2013.  Pro forma, that’s +$800MM in annual growth CapEx, of which a significant portion is likely needed just to maintain midstream volumes.  This maintenance CapEx understatement is another major source of low-quality DCF for KMP and KMI, and is not appreciated by consensus, in our view. 
  • Soft Quarter for KMP E&P……KMP’s CO2 segment EBDA (before items) was down $22MM (-7%) QoQ as both oil production and the realized oil price slipped 2% sequentially.  The Midland Basin crude differential blew out in 1Q and remains at a steeper-than-normal discount to WTI.  KMP doesn’t hedge basis, and is budgeting for a -$1.50/bbl differential vs. the current -$9.25/bbl; that was a minor headwind in 1Q and should be a drag again in 2Q (see chart below).  Encouragingly, SW Colorado net CO2 production ticked up to 0.6 Bcf/d for the first time in more than two years with a Doe Canyon expansion coming online.  The most important data point for KMP CO2 is CapEx, which we won’t have until the 10-Q is out.

KMP 1Q14 Takeaways - km3

  • KMP Gets into the Coal Royalty Biz ……KMP made its first coal royalty purchase in 1Q13, a $25MM acquisition.  We’ll look to the 10-Q for more detail.  As far as we know, KMP will not include a replacement CapEx reserve to account for the fact that coal royalties are depleting assets, just like oil fields.  Every coal royalty acquisition that KMP makes strengthens our conviction on the short side.
  • On KMI's Quarter……Mixed results with EPS of $0.28 missing the budgeted $0.31, but cash available for dividends of $573MM beating the budgeted $552MM.  In the quarter KMI bought back $94MM of stock and $55MM of warrants at an average price of $1.77/warrant. 

Call with any questions,


Kevin Kaiser

Managing Director

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more