This post has been updated to clarify Moody's position.
Just where is the bottom on Kinder Morgan (KMI)?
Shares of the company are down 51% for the year, and are trading at around $20, but the stock has recently seen some notable buyers -- including its co-founder Richard Kinder, who bought shares last month, and Real Money columnist Dan Dicker, who said in a video with Jim Cramer yesterday that he was buying the stock. Despite negative news for Kinder Morgan and the broader energy industry, the stock purchases could signal that Kinder Morgan's bottom is near.
But ultimately, the outlook for the company is unclear, and it is up to investors to weigh whether or not they buy the turnaround story -- which Dicker described as a slow process, "like turning a barge around."
In the short term, the company faces pressures, as investor anxiety persists and shareholders sell on valid fears about the industry -- and to take advantage of year-end, tax-loss harvesting. Key to the equation is whether those sellers will return as buyers at the end of the 61-day wash-sale period -- and what Kinder Morgan will do in the meantime.
Energy companies have been hammered of late, as lower-for-longer energy prices persist. Low prices have led to some consolidation in the industry, as weaker players are weeded out, but the buyers aren't exactly purchasing from a position of strength and the assets they have purchased have their own problems.
As an example, Kinder Morgan announced on Monday that it planned to acquire an additional 30% stake in Natural Gas Pipeline Company of America (NGPL). The announcement prompted a massive selloff on Tuesday and a revision of Kinder Morgan debt by Moody's -- to negative from stable.
"The negative outlook reflects Kinder Morgan's increased business risk profile and additional pressure on its already high leverage that will result from its agreement to increase ownership in NGPL, a distressed company," Terry Marshall, Moody's senior vice president, said. "NGPL is facing potential default on its pending interest payments, suggesting that KMI will need to provide cash injections, which will likely be debt funded, initially."
Goldman Sachs analyst Theodore Durbin maintains a neutral rating on the company, and a price target of $23.57, which does not yet factor in Kinder Morgan's proposed deal with NGPL.
"If approved, the transaction would provide KMI with additional interest in a fee-based, hard to replicate asset for minimal equity, with upside from additional contracts for southbound flows," Durbin wrote on Tuesday. "However, we are concerned with NGPL's relatively high leverage and short contract life."
How Kinder Morgan is going to pay for the deal is also, understandably, spooking investors, especially if the company resorts to raising capital by selling more shares, which would be dilutive to existing shareholders.
Doing a secondary equity offering would not be "Kinder's way," and a raise of capital will "likely happen," Dicker said on Thursday. He added that Richard Kinder's reputation in the industry will help him in raising cash -- despite the Moody's downward revision -- and concluded that "It'll be further preferred shares or further bond issues."
Ratings agency Fitch did not follow Moody's lead in revising KMI's outlook following the NGPL deal. Fitch analysts acknowledged that NGPL has a "stressed balance sheet," but noted that the acquisition does not "materially impact KMI's credit profile in the near term."