I'm writing this column for a Monday morning release, with the assumption that shares of Kinder Morgan (KMI) will gap open lower. The panic that surrounds these shares almost assures a lower print early on Monday.
I'll likely be buying again.
Let's start with my personal perspective on this trade, before analyzing the stock here at $17. During the big bust in oil for the last year, I've been steadfast in doing little in the energy space and keeping powder dry. This is tough when you're writing three-four pieces a week on energy, and you make your living from trading oil and oil stocks.
Still, in the last year, I warned against owning the marginal U.S. exploration and production players that I thought necessarily needed massive restructuring or outright bankruptcy to clear the oil production glut. I didn't attempt to bottom fish on names like Halcon (HK) or SandRidge (SD), Goodrich (GDP) or a host of others, and still won't.
I recommended a few fiscally responsible exploration and production companies when oil drifted towards $40 and what I think is a near-term bottom. I still own them all. Similarly, I recognized the debt-laden vortex and "Ponzi-like" financing and growth schemes of the midstream pipeline players, their prospects of lowered volumes and tighter capital, and I have consistently told readers to also stay the heck away from them. I did say that if you had to own a pipeline company, I preferred Kinder Morgan, but only because of its roll-up into a C-Corp and the reputation of Richard Kinder.
But, I'm a trader and a 33-year veteran of risking my own money to make a living, which I've been rather successful at. And when I saw the panic selling of pipeline companies, mirroring in so many ways the pattern that I saw it in 2008, it piqued my trader interest -- this is, after all, what I do. In 2008, the panic selling of midstream companies brought several to single-digits stock prices with high double-digit distributions. Some were forced to cut them, but most continued to pay their dividends and the sector turned out to be the single best investment, not just in the energy space, but the whole stock market as a long-term vehicle in 2009 and beyond.
I believe that we're in the midst of another bust cycle in oil that will inevitably be followed by another boom. I predict oil prices will see over $100 a barrel and more likely $150 a barrel late in 2017. That's a calculation based not just on my long experience in the energy markets, but on the huge drop in production we're now guaranteed to see and the increasing global demand trajectory of oil. Spend five bucks and read my book to get a much fuller picture of how I feel about that.
If I am at all right in my forward projections for oil prices, a panic sale of any sustainable company in the energy space, whether in production, midstream or oil services, should make for a great trade. Kinder Morgan has gotten particularly hammered in the last week by virtue of the perfect storm of an oncoming Fed rate hike, tax loss selling from a skittish investor base better equipped to own annuities, and what was an over-aggressive move by Moody's, putting Kinder on the downgrade watch list.
So, I'm buying. But just because I buy shares, doesn't make me a "champion" for MLPs or Kinder Morgan. This is just another dispassionate trade of an agnostic trader, who will barf this one out when the market and/or my instincts tell me it was wrong. I've done it a million times before in my career, and I won't hesitate to do it a million times more. If KMI turns out to be the midstream equivalent of a Halcon or SandRidge or Goodrich, I'm dead wrong on this trade and will run.
But I am a long way from there on this call. A long way.
Much has been made of the Kinder downgrade watch and the subsequent press release from the company Friday. While Moody's now likes to look like it's acting "responsibly" given its horrible job performance during the financial crisis, it's hard to believe that it'd move to de-rate Kinder debt to junk any time soon. It would virtually single-handedly be crashing the high-yield market by adding another $41b to that pile. Still, the press release from Kinder implies that the company will do what's necessary to appease Moody's and the other rating agencies and steady the ship after this horror collapse of share prices.
So, what will it likely do?
Three choices avail themselves -- doing nothing, a dividend cut and a capital raise, most likely a private one. Unless the shares somehow show stability in the next few trading sessions, "nothing" doesn't seem like an option, especially after that very cryptic release on Friday. Howard Hinds of CBRE/Clarion Securities does an excellent job highlighting the other two options far better than I could, but concludes (as I do) that a dividend cut is neither necessary nor good for anyone. He does see a recanting of the dividend growth promises for 2016 and beyond and a PIPE, possibly along with Kinder's guarantee to forego his share of dividends for the next year.
I frankly think such a move is over-the-top and unlikely, but it would cause an insane short-covering rally if it were announced. It would really serve the shorts right if it happened, too: The jawboning of this stock from short sellers and recent articles outlining KMI's problems, now that it's trading near their lifetime lows, is beyond smelly.
In any case, the worst-case scenario I see in a full-blown dividend cut and balance sheet shore-up is a stock that delivers 6-8% and has plenty of capital to cover debt and growth, leaving shares trading in the low $20s. That's the worst case I considered when making the trade.
A better outcome would lead to a market that makes an honest reassessment of the fundamental structure of the MLP vehicle and how far they've collectively gone in financing higher growth and dividends at these now lower market caps. It will look specifically at Kinder Morgan's future debt burden and the sustainability of its growth plans and dividend from its distributable cash flow.
In making that assessment, analysts will prove to be less useful as "normal" metrics like P/Es just don't apply. Traders, both long and short, will decide where KMI should be valued, but an honest look at the company puts KMI shares, I believe, back in the high $20s. Even if the panic continues and without further information that Kinder Morgan has "cooked their books" in a modern-day Enron-like mess, I'll likely have to wait until late January or early February to see which way it goes and the final outcome of this trade. Stay tuned.
