KMI is Worth $10 – $13/sh……With every quarter’s results we are more convinced that KMI is massively overvalued. We see no reason why fair value for this Company isn’t in the range of 9x – 10x current EV/EBITDA, or $10 - $13/sh (on $7.2B of annualized EBITDA and $42.5B of net debt). KMI is a capital intensive, cyclical conglomerate with low-to-no growth and an over-levered balance sheet. In our opinion the MLP go-go days of valuing this company based upon its dividend/distribution are behind us – this market is smartening up and KMI longs have a hard lesson to learn yet.
3Q15 Results A Little Soft……KMI posted 3Q15 results shy of consensus expectations: adjusted EPS of $0.16/sh vs. consensus $0.18; EBIT of $1.10B vs. consensus $1.17B; and EBITDA of $1.80B vs. consensus $1.83B. FCF in the quarter was $144MM or $0.07/sh. The dividend declared was as expected at $0.51/sh. For the YTD 2015, KMI has declared dividends equal to ~4x its FCF and ~3x its adjusted EPS. In the quarter EBIT was (9)% YoY and EBITDA was (1)% YoY. Over the last year KMI has negative EBITDA growth despite spending around $1B of CapEx per quarter and making $3.5B of acquisitions.
KMI Reduces 2016 Dividend Growth Guidance; Unclear on Long-Term Dividend Growth Guidance……Just over a year after consolidating its MLPs, KMI announced that it is reducing its 2016 dividend growth guidance to a range of +6% – 10%, from the prior +10% annual CAGR through 2020. On the call KMI’s management team was rambling and reeling in response to several questions regarding long-term dividend growth – at this stage it seems uncertain and highly dependent on where the stock price is. One of the more amusing aspects of the conference call (there were many) was KMI management bemoaning, on the one hand, the high dividend yield causing financing problems, and on the other, the stock being undervalued. If the stock were truly cheap then the logical move would be to eliminate the dividend and use that cash to repurchase shares… Why not?
Mysterious New Financing Vehicle Coming Soon and That’s Not Good……Someone must be telling KMI management that the stock has traded poorly this year because of an equity overhang... Yesterday KMI announced that it has found a new source of equity capital that will eliminate the need for new common KMI shares between now and mid 2016. We speculate that it could be some equity investment from Rich Kinder himself (with other insiders and/or big holders?) with a special dividend feature (thinking something like a special class of shares that has a dividend below the common dividend for X years before converting to common). Investors should be wary of such a last-ditch effort to save a broken model.
Other Items of Note……
- Every segment will miss the 2015 budget even after including the acquired EBITDA from Hiland and the Vopak terminals that were not contemplated in the budget.
- Numerous pockets of fundamental weakness in steel and coal terminals, G&P volumes, liquids pipelines volumes, CO2 volumes, and oil E&P volumes (oil production in 3Q15 was (2)% YoY and below plan in every field).
- KMI took a $387MM impairment charge on the Goldsmith oil field; KMI bought the field in 2013 for $280MM.
- KMI issued $1.3B of common equity in 3Q15, taking YTD 2015 equity issuance up to $3.9B. KMI shareholders have been diluted by more than they’ve received in dividends so far this year.
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I’m on the road in London this week so am keeping this recap short and to the key points. Stay tuned for more after we get the 10-Q in the next couple weeks… And it may be coming time to do another deep dive presentation on KMI – it’s been too long!
Kevin Kaiser
Managing Director