Source: Kinder Morgan.
Kinder Morgan's (KMI -0.27%) stock is down a whopping 50% since reporting earnings in mid-October. Investor fear has weighed heavily on the stock and these fears became a sort of self-fulfilling prophecy for the company. Its weak stock price actually turned off a major source of capital, which led the company to do what was once thought unthinkable: slash its dividend.
While that dividend reduction temporarily halted the stock's slide, that doesn't mean the bottom is in. Here are three potential catalysts that could ignite more selling in Kinder Morgan's stock.
1. More bad press
Most analysts praised the dividend reduction because it will eliminate any near-term liquidity and credit concerns for the company. In fact, credit-rating agency Moody's supported the move by upgrading the company's outlook from negative to stable. That being said, Kinder Morgan has drawn fire in the past from the press and from short-sellers and these groups smell blood in the water. Because of that, they are likely going to continue their attacks.
Barron's, which has been negative on the company in the past, was quick to come out saying that the "worse might not be over" at Kinder Morgan pointing out that its outlook is "clouded by a very weak energy price environment." Further, it came out with another article that argued Kinder Morgan's fair value should be $13 per share, not the mid-teens range where shares are currently trading.
Investors that ignored Barron's warnings in the past are more likely to listen this time around, giving future negative articles greater ability to weigh on the stock price. This could breed even more negative press for the company, which could keep pushing the stock down until the company proves everyone wrong. That is going to be tough to do amid the current oil price environment.
2. Following in the wrong footsteps
While Kinder Morgan is hoping that its dividend reduction will ease the pressure that has been weighing down its stock price, if history is our guide that might not be the case. That's because there is a good historical reference from an energy infrastructure company that took this same path.
Boardwalk Pipeline Partners (BWP) reduced its payout in early 2014 from $0.5325 per unit to $0.10 per unit on a quarterly basis. Due to difficult market conditions facing the company at that time, it decided to redirect a large portion of cash flow toward funding its growth projects and reducing its leverage. The net result for Boardwalk Pipeline Partners has been a growing asset base, to go with stable debt.
BWP Net Financial Debt (Quarterly) data by YCharts.
However, while Boardwalk's plan has worked to grow its asset base while keeping its debt from rising, it hasn't lifted any weight off its unit price. In fact, units are lower now than after the initial drop following the distribution cut. Kinder Morgan could face a similar fate of stagnation, especially with as much table pounding as its CEO has done on the dividend this year. Suffice it to say, the company's reputation with investors has been severely tarnished and it might not be able to win them back until it has resumed dividend growth.
3. Tax-loss selling
Another weight that could push the stock down over the next few weeks is tax-loss selling by investors. With the stock down more than 60% year to date, investors with a higher cost basis could decide to sell the stock at a loss and either move on or buy it back a month later in hopes of catching a future rebound. And with no near-term positive catalysts on the horizon, investors might see that as a safe bet.
A recent note put out by Barron's hinted at this, which pointed out that in a bear market the end doesn't come until 50% to 80% of the value of an asset has been wiped out. With MLPs as a whole having lost 46% of their value as of earlier last week, it suggests that there could be more downside on the way, especially with the year-end tax deadline looming.
Investor takeaway
Kinder Morgan's stock price slide might not be done because it still has quite a number of catalysts that could drive it lower. Suffice it to say, December could be a volatile month for investors.
