Image source: Kinder Morgan.
Natural gas pipeline giant Kinder Morgan (KMI +0.11%) made several very smart moves this year, which is partially why its stock is up roughly 50% since the start of the year. That said, not every move made sense, with two in particular standing out as the worst thus far.
Giving up on Palmetto
Earlier this year Kinder Morgan pulled the plug on two major pipeline projects (Northeast Energy Direct and Palmetto) that represented more than $4.1 billion in future investments. While the decision to cancel NED made sense because it was not economically viable, the reasoning behind canceling the Palmetto project, which would have carried gasoline, diesel, and ethanol from South Carolina into Georgia and Florida, is not quite so straightforward. CEO Steve Kean commented:
Essentially the Georgia legislature prevented us from getting eminent domain and also prevented us from getting other state permits. We were making good progress with land acquisition even without eminent domain, but we needed other permits which Georgia has now put a moratorium on. We needed environmental permits, for example, which they've now put a moratorium on until mid-2017. So as a result, we are not moving forward with Palmetto.
Instead of working with the state over the next year to obtain the necessary permits, Kinder Morgan decided to abandon its pursuit. In hindsight, that decision to give up so quickly doesn't appear to be a smart move, especially in light of the recent issues with the Colonial Pipeline. That competing refined products pipeline recently leaked upwards of 8,000 barrels in Alabama, causing it to shut down for several days. One of the results was a spike in gasoline prices in Georgia, which ran up by $0.28 per gallon in a week to $2.38 per gallon, with some stations completely running out of gas. The shutdown of the Colonial pipeline showed just how quickly the gasoline market could tighten and impact motorists. While environmental groups were working to block Kinder Morgan's pipeline because of the risks of a spill, the Colonial pipeline shutdown is a reminder of the need to diversify supplies to insulate markets from future disruptions.
Misreading the markets on volume
When Kinder Morgan put out its budget for 2016, the pipeline giant expected to produce $7.5 billion in EBITDA and $4.7 billion in distributable cash flow. However, due to several factors, it cut its guidance for EBITDA by 3% and dropped distributable cash flow guidance by 4%. Some of the factors driving down guidance were beyond its control, including the bankruptcy of a key coal customer and a delay in getting permits to build two key expansion projects.
That said, Kinder Morgan's internal forecasting is also to blame for the poor budgeting. For example, it expects earnings within its natural gas pipeline segment to be 2% below budget due in part to lower volumes in its midstream group. Meanwhile, its carbon dioxide segment is expected to end the year on budget -- despite the fact that oil prices are well above expectations -- due to weaker-than-anticipated oil and carbon dioxide production volumes. Finally, the company's products pipeline segment projects to be 5% below budget due to lower crude and condensate volumes on three of its pipelines and lower rates on another. This suggests some rather poor forecasting on Kinder Morgan's part, which led it to release a budget that it could not meet at a time that the market was wary of its financial situation. The far better move would have been to release a much more conservative budget so that the company did not have to pull back its guidance after the first quarter.
Investor takeaway
While Kinder Morgan is having a relatively good year, it could have been even better if it not for a couple of missteps. The decision to base its budget on overly optimistic volumes hurt its credibility with investors at a time when its credibility was already tarnished. Meanwhile, the decision to just walk away from Palmetto instead of working with the state of Georgia to get the pipeline built just does not make much sense, especially in light of that state's need for greater diversification of gasoline supplies.
