Kinder Morgan, MLPs, and the Risk of $0
publication date: Feb 9, 2016
author/source: Valuentum Analysts
Valuentum’s Brian Nelson shares his analytical secrets and tips in an open seminar with Q&A. He’ll outline what he saw in the financials of Kinder Morgan that shocked him in June and what continues to worry him about MLPs today that prompted him to make such a controversial call to help investors avoid the collapse that has subsequently happened. There’s more, but we can’t give it all away in the teaser.
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On June 11, Valuentum's President Brian Nelson wrote '5 Reasons Why We Think Kinder Morgan's Shares Will Collapse," removing the company from Valuentum's Dividend Growth Newsletter portfolio that day at $40 per share.
The piece was highlighted by Barron's in 'The Bear Case Against Kinder Morgan' later that evening. The controversial call did not go unnoticed. Shares of Kinder Morgan (KMI) and most of the master limited partnership arena fell ~2% on the opening the following day. Credit Suisse's John Edwards released a rebuttal to Valuentum's "5 Reasons" piece point by point June 15, reiterating Credit Suisse's Outperform rating and $52 price target at the time, quipping that his team had agreed that the 'natural reaction from shareholders would be skepticism and disbelief.'
Valuentum's President Brian Nelson then countered June 18 with '5 More Reasons Why We Think Kinder Morgan's Shares Will Collapse' defining how Valuentum's thesis was separate and distinct from Barron's and Hedgeye's February 2014 piece, which focused primarily on the MLP and a questioning of the MLP's measure of sustaining capital expenditures, something that the company had already refuted. Shares of Kinder Morgan, the corporate, had peaked at nearly $45 per share in April 2015, up from the low-$30s range in February 2014 when the Barron's piece had been released.
Barron's said Nelson was back as the "Kinder Morgan Bear: 5 More Reasons to Worry," released June 19.
Unlike the traditional "short case," which searches for a "fire" within a company's accounting or some other tragic situation, Nelson's 10 reasons, published in June 2015, were based purely on a valuation and credit assessment of the corporate, which he felt was severely misaligned in the context of the entity's fundamentals. The Kinder Morgan MLP units, formerly trading under the symbol KMP, the security which Barron's and Hedgeye's February 2014 piece had primarily focused on, had since been retired after the closing of the deal November 2014. KMP unitholders benefited from a 12% premium the day of the deal announcement.
Nelson then publicly released his $29 per share fair value estimate of Kinder Morgan on June 30, "Kinder Morgan's Fair Value: $29 Per Share," with shares of the third-largest energy company in North America trading in the high $30s." On Kinder Morgan's second-quarter conference call July 15, investors continued to confuse Mr. Nelson's 10 reasons with the previous thesis on the MLP outlined in 2014, with an investment management firm proclaiming that shares were being punished by "the timely or untimely resurrection of what I thought was a wholly discredited bear attack by a tabloid claiming that your investment grade debt is not serviceable." Mr. Nelson's thesis was genuine and unique.
Valuentum agrees that the "short thesis" published on February 2014 by Barron's had been "discredited" once Kinder Morgan had rolled up its MLP structure. After all, the security KMP had ceased to exist. Nelson's thesis had only focused on the Kinder Morgan corporate, the ticker symbol KMI, shares of which were trading at $37.50 in mid-July. Nelson then took the show on the road, presenting his concerns about Kinder Morgan and MLPs, in general, at the AAII chapters in Cleveland, Silicon Valley, Milwaukee, and Madison in the subsequent months, hoping to help investors avoid any further collapse in shares that was to come.
In mid-August, Goldman Sachs added Kinder Morgan to its 'Conviction Buy' list with shares trading in the low $30s, maintaining a $48 price target and suggesting Kinder Morgan had more than 50% upside from those levels. Goldman noted at the time: "In an uncertain macro, commodity price and volume environment, we see KMI as a safe haven due to its diverse portfolio of assets with a high percentage of fee-based, take-or-pay contracts."
Nelson's concerns only grew. Valuentum then published, "Warning: The Master Limited Partnership Model May Not Survive" in late September and shared it with Barron's as a follow up to the Kinder Morgan call, published as "Why the MLP Business Model May Be a Goner." By September 29, shares of Kinder Morgan, the corporate, had collapsed to ~$26 each. Shares of the Alerian MLP ETF (AMLP) had collapsed from $16.15 per share on June 11 to $11.51 over the same time frame.
It wasn't too long before Nelson's thesis was validated. On October 22, Kinder Morgan revised lower its dividend growth plans and detailed how it would engage in sophisticated financing needs to stay afloat. Shares of the corporate fell even further. Credit Suisse's John Edwards downgraded the rating of Kinder Morgan from Outperform to Neutral and reduced the price target to $39 per share, noting "in the 13 years of following KMI, we don't recall management having to reduce guidance...ever." That day, Nelson reiterated the low end of his fair value estimate range for shares of $23 each.
On November 10, Argus cut Kinder Morgan's price target to $35 per share from $50 per share November 10, still rating the company a "buy." On December 2, Moody's then downgraded Kinder Morgan's credit rating outlook, an integral part of Mr. Nelson's thesis and what he described as "the circular flow of unsubstantiated support." Argus pulled its "buy" rating shortly thereafter. On December 7, Credit Suisse dropped its price target to $25. December 8 brought a dividend cut by Kinder Morgan, prompting Moody's to rescind the credit outlook downgrade. Credit Suisse then lowered its price target to $18 (now $20).
Valuentum's current fair value estimate of Kinder Morgan is $20, with downside risk to $13 per share. Kinder Morgan's shares, the corporate, trading under the symbol KMI, are now exchanging hands in the low teens per share, again at the low end of Valuentum's fair value range.
Valuentum's Brian Nelson shares his analytical secrets and tips and tricks in an open seminar with Q&A. He'll outline what he saw in the financials of Kinder Morgan that shocked him in June and what continues to worry him about MLPs today that prompted him to make such a controversial call to help investors avoid the collapse that has subsequently happened.
There's more, but we can't give it all away in the teaser.
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You will receive an email with additional details following confirmation.