It Isn’t Kinder Morgan That’s a House of Cardshttp://www.fool.com/investing/general/2013/09/16/it-isnt-kinder-morgan-thats-a-house-of-cards.aspx Jim Mueller
September 16, 2013
On Wednesday, Sept. 4, an email sent out by research firm Hedgeye, along with the author's comments on Twitter , caused shares of Kinder Morgan (NYSE: KMI) to fall 6% . Hedgeye claimed that the Kinder Morgan pipeline companies were "a house of cards" and that a report detailing this would be released on Tuesday, Sept. 10 .
Beyond the obvious questions of why announce it this way and why the delay, the share price movement shows how silly some investors are, selling on the merest whiff of supposition without taking time to see if analyst Kevin Kaiser of Hedgeye was right or blowing smoke.
Instead of knee-jerk selling, I held the shares of KMI my wife and I own, read the report when it finally came out, and was not impressed.
The reason for this is to enrich KMI (the general partner of the limited partnerships KMP and El Paso Energy Partners (NYSE: EPB)), as well as Richard Kinder, at the expense of the unit holders of the limited partnerships . This enrichment happens in part because maintenance capex is deducted from distributable cash flow (DCF) payable to all the partners, while expansion capex is not. By shifting maintenance capex to expansion capex, more DCF is available.
Kaiser also argued that KMI receives too much in incentive distribution rights , but I'm not going to address that here.
Maintenance capex and DCF
Kaiser argues, however, that Kinder Morgan uses the "apophatic definition" that any capex that is not expansion capex is maintenance capex , and can assign dollars spent to either category. But Kinder Morgan is hardly unique here, either.
Looking again at El Paso, they define it the same way. Not in those specific words, but in context : "Our total cash capital expenditures for the year ended December 31, 2011 were $264 million, including $101 million for maintenance and $163 million for expansion." Other pipeline operators I looked at also split total capex into the same two categories.
It's industry standard, so why should Kinder Morgan be called out? However, Kaiser has more points to argue.
Maintenance capex vs. depreciation
Pipelines are pretty static things, once they're installed. The only moving parts that would require regular replacement are the valves, the pipeline inspection "pigs," and the compressors in the compression stations . Only if a leak is found or corrosion is discovered does there need to be expensive replacement of part of the pipeline.
Chevron and ExxonMobil, on the other hand, own refineries, trucks, storage tanks, and retail outlets, and capitalize much of their well costs, among other things. It seems reasonable that the capex and D&A issues are entirely different for these companies compared to pipeline operators. In other words, it's a huge case of apples to oranges comparison.
Kinder Morgan cuts maintenance spending
Further, the numbers do not bear Kaiser out. I looked at six pipeline operators, including Kinder Morgan and El Paso before Kinder Morgan acquired it. I was looking to see how much they all spend on maintenance capex on their pipelines. Here's what I found for 2012: