Editor's Note; This article was updated and KMR was removed due to a misstatement about the role of Kinder Morgan Management, LLC. The Fool regrets the error.
Barron's is at it again. This time, the finance publication has taken yet another opportunity to call Kinder Morgan, (NYSE:KMI) into question. Specifically, a recent article takes aim at the midstream asset operator Kinder Morgan Energy Partners (NYSE: KMP). Barron's believes the partnership arm of the company has been misstating cash flow by understating its spending. The article caused both Kinder Morgan, and Kinder Morgan Energy Partners to lose billions in market value in a single day.
But Kinder Morgan isn't sitting idly by. The company released a statement, carefully and clearly listing each of the arguments presented by Barron's and refuting them in lengthy detail. Importantly, Kinder Morgan believes that many of its facts given to Barron's were not considered in the article. Here are the major bullet-points from Kinder Morgan's statement.
Kinder Morgan: We are not understating cash flow
The questions in the Barron's piece deal with Kinder Morgan's distributable cash flow, which is a non-GAAP comparable metric to free cash flow. This is often utilized by Master Limited Partnerships. Barron's calls into question how Kinder Morgan differentiates between growth capital expenditures versus maintenance capital expenditures.
Kinder Morgan acknowledges the disparity between the two measures. Its growth expenditures totaled $676 million last year while sustaining capex stood at just $14 million in the company's carbon dioxide segment. As Barron's believes, should Kinder Morgan be forced to more equitably split those expenses in that division, its distributable cash flow will greatly suffer.
Kinder Morgan flatly believes its sustaining capital expenditures are not understated. Management notes it has used this practice since 2003, and is widely understood by the investment community and priced into the company's valuation.
Next point: Distributions will be maintained if or when carbon dioxide DCF declines
Kinder Morgan's next argument is that it will be able to sustain its distributions with cash flow even if its cash flow from the carbon dioxide segment declines. To back this up, management cites Kinder Morgan's massive and diversified business model. Kinder Morgan's massive network of pipelines and storage terminals extends throughout the country and across the natural gas, oil, and refined product transportation and storage industries.
The oil production portion of its carbon dioxide division accounts for just 17% of the partnership's earnings before depreciation and amortization. In fact, Kinder Morgan states that Barron's questions around the carbon dioxide division involve just a $200 million potential decline in DCF in 2021, on a partnership that currently generates $4.4 billion in DCF.
Furthermore, it's a midstream operator, not an upstream exploration and production company, and as such, it's insulated against volatility in underlying commodities. Kinder Morgan Energy Partners operates much like a toll road that collects fees based on throughput volumes. To be sure, 80% of the partnership's cash flow is fee-based and over 90% of 2014 cash flow is either fee-based or hedged. That means that there will simply not be nearly as much volatility in Kinder Morgan's cash flow as the Barron's article implies.
Barron's article seems to be much ado about nothing
Essentially, the recent Barron's article is simply rehashing an old argument. Kinder Morgan has repeatedly and thoroughly refuted the arguments presented by Barron's. While everything that comes out of Kinder Morgan appears credible, it seems to a certain extent investors simply need to trust management. Kinder Morgan is a more than $100 billion company, including all of its various entities. It's easier to trust a company of this size, with its long and established track record.
Plus, trusting Kinder Morgan's statements are made easier by the fact that its Chief Executive Richard Kinder owns tens of millions worth of stock. He's putting his money where his mouth is, and for those reasons, I'll continue to keep my trust in Kinder Morgan and advise my fellow investors to do the same.
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