When a company with revered management such as Kinder Morgan (KMI) is down nearly 60% for the year, it is reasonable for investors to get nervous.
Shares of Kinder Morgan are down 25% this week as investors digest news of the company's controversial stake in Natural Gas Pipeline Company of America -- a 50/50 joint venture with Brookfield Infrastructure Partners (BIP) -- as well as a downward outlook revision by Moody's, uncertainty around the company's normally stable dividend, and overall uncertainty in energy markets thrown in for good measure.
The reasons for Kinder Morgan's broader decline are not that much different than what we've seen for other companies in the energy space. Amid a period of sustained low energy prices, energy companies find themselves over-leveraged and facing difficult choices about existing distribution: how to invest in infrastructure for better times, and how to convince investors -- both shareholders and bondholders -- to stay along for the ride.
In the case of Kinder Morgan's liquidity worries, the company's current ratio is 0.49 as of its third-quarter earnings release, which has it in line with its struggling peers but lower than the generally recommended 1.5 to 2.0 range. During the third-quarter earnings call, Richard Kinder, co-founder and executive chairman of Kinder Morgan, said the company would be "judicious" about using common equity to raise capital and that they "will not be required to issue common equity or access those markets through at least the middle of next year."
As for what the market is considering now, there are several key issues to conider.
Why Is Kinder Morgan's Stake in NGPL Considered Controversial?
On Monday, Kinder Morgan announced plans to increase its stake in NGPL to 50% from 20%, which led to a flurry of analyst notes assessing the stake.
"We are extremely pleased to announce an agreement to acquire full ownership of NGPL in partnership with Brookfield," CEO Steve Kean said in a press release. "This partnership ensures that NGPL is positioned to take full advantage of future opportunities to provide natural gas transportation and storage services to its current and future customers."
Indeed the acquisition could bring opportunities. NGPL is the largest transporter of natural gas in Chicago, in addition to its northbound flows, "NGPL provides a low-cost option to deliver gas southbound to serve growing Gulf Coast demand," Theodore Durbin, an analyst with Goldman Sachs wrote in a report on Thursday.
While those markets bring opportunity, they also face competition as there are other pipelines also looking to do business in Chicago: Tallgrass Development (TEP) and AGL Resources (GAS) are planning a Prairie State Pipeline to move into Chicago, and TransCanada (TRP) is weighing expanding its ANR pipeline into Chicago.
The competition is made even worse when looking at NGPL's credit outlook. NGPL has $1.9 billion of debt maturing in 2017 and is highly leveraged, Matthew Anavy, an analyst with JP Morgan Securities, wrote in a note on Tuesday.
"We view the [NGPL] transaction as a credit negative for KMI and as another dent to management's credibility," Anavy wrote.
Moody's Lowers Kinder Morgan's Outlook to Negative from Stable
Following the announcement of Kinder Morgan's stake in NGPL, Moody's changed the outlook on Kinder Morgan's debt to Negative from Stable on Tuesday. The action by Moody's was not a downgrade on Kinder Morgan debt but the outlook change raised fears that the company could soon lose its investment grade status.
"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 of Moody's wrote in Tuesday's outlook change. "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."
So far Standard & Poor's and Fitch Ratings have not yet made changes to their ratings or outlooks for Kinder Morgan but Fitch addressed concerns posed by the transaction in a statement released Tuesday.
"NGPL is facing significant debt maturities in 2017 and continued uncertainty around plans to deal with NGPL's funding and capital structure going forward," according to Fitch.
If Kinder Morgan's debt was downgraded, it would have a difficult time raising capital through a debt issuance as it would be more expensive.
Concerns Over Kinder Morgan's Dividend Are Not Overblown
Perhaps the most immediate concern to Kinder Morgan investors is the health of its dividend, which has historically been an enticement for income-hungry investors.
"One of the issues with Kinder Morgan at this stage right now is that on their third quarter conference call they lowered the growth rate on the dividend to 6% from 10%," Shneur Gershuni, an analyst with UBS Securities told Real Money on Thursday.
The dividend outlook has been discussed thoroughly here on Real Money in recent days , with additional analysis from Dan Dicker and from Adam Scott of Argyle Capital Partners, both of whom are urging investors not to panic.
Dicker and Scott are correct: Panic is a bad trait for any investor; however, their concerns are valid. Kinder Morgan's lowered guidance on its dividend to a 6% increase from 10% on the lower bound is not the same as a dividend cut. That said, some investors may find that lowered guidance coupled with tricky energy markets no longer works for them.
Investors enter positions for many reasons: they have different goals, different time horizons and a different blend of assets in their portfolios. Prudent investors should assess their positions as new information becomes available, even if their analysis results in deciding not to act.