Kinder Morgan Inc. (KMI +0.27%) very quickly went from income dynamo to big fat loser when the midstream behemoth slashed its fat dividend in late 2015. And while the company's shares traded down as much as 25% in the months following the announcement, the stock has regained most of those losses.
So as things stand today, is Kinder Morgan a great investment or just another energy stock to avoid? We asked three of our energy contributors to weigh in. Here's what they had to say.
Bull: Rock-solid company at a bargain price
Chuck Saletta: One of the best times to buy a strong company's stock is when the market is panicking over legitimate but fixable and temporary issues. Energy pipeline giant Kinder Morgan fits that bill. After Kinder Morgan played something of a white knight to rescue the struggling NGPL pipeline, ratings agency Moody's placed a negative outlook on its debt due to its increased leverage.
In response, Kinder Morgan cut its dividend enough to shore up its credit rating and self-fund its expansion plans. That's a rational response, and exactly what you want to see if you're interested in the long-term health of the company rather than simply getting current income from its shares. Yet combine the short-term bad news of the dividend cut with plummeting oil prices and the general market sell-off we've seen in early 2016, and Kinder Morgan's shares sunk, too.
Still, the underlying business remains fundamentally healthy. According to a recent investor presentation, 86% of its cash flows come from fee-based businesses, 9% from hedged operations, and only 5% are directly exposed to commodity prices.
Overall, Kinder Morgan delivered $4.7 billion in distributable cash flow in 2015 and expects to deliver about the same in 2016. At a recent market capitalization of $34.2 billion, it's trading at around 7.3 times its cash-generating capability. That's an inexpensive price for a fundamentally strong company going through short-term difficulties.
I believe in Kinder Morgan's long-term prospects so much that I've been buying on the way down, as recently as Jan. 19, at $12.25 per share. I may not have caught the absolute bottom of its stock woes, but I firmly believe I bought a fundamentally solid company's shares at a bargain price during a temporary problem that it's already in the process of fixing.
Bear: Better, more conservatively managed midstream alternatives
Tyler Crowe: There are certainly plenty of things to like about Kinder Morgan. Its size and scale afford it some luxuries, and the pipeline and transportation business does have some monopolistic characteristics that translate to stable cash flows. But that could be said for just about any larger pipeline or midstream company out there. What separates a good company from a great one in this space is how a management team handles the company's growth, payout, and financials. In this regard, Kinder Morgan doesn't stack up as well when compared to some of its peers.
Lots of investors will point to Kinder Morgan's consolidation and recent decision to cut its dividend as prudent moves that will ensure its longer-term stability, but one thing that gets overlooked about these moves is that in some ways the company was forced to make them after being cavalier with its spending and debt levels. When the company consolidated all of its operating subsidiaries under one roof, one of the largest reasons behind it was that the structure -- operating subsidiaries that paid a managing partner incentive distribution rights -- was making the cost of capital too high to fund growth.
Similarly, after being aggressive with acquisitions of Hiland Parrtners and Natural Gas Pipeline Company of America LLC this past year, Kinder Morgan was starting to push its debt levels to a point that creditors were getting uncomfortable, and was at risk of getting its credit rating cut to junk status. The instant that its debt rating was in danger, the company axed its dividend by 75%.
What makes these moves unsettling is that its management seemed to have driven the company to the point that its back was against the wall before making them. Instead of saying that these were prudent actions -- which ultimately destroyed a lot of shareholder value over the past couple of years -- perhaps we should be wondering why the business was directed in a way that it needed to make them in the first place.
The company has now been forced into a more conservative business model where it only pays out 20%-25% of its available cash to allow it to clean up its balance sheet, but I'm more comfortable owning a midstream oil and gas company that chose to act more conservatively in the first place rather than one that was shamed into doing it.
Probably better alternatives, but Kinder Morgan still should outperform the market
Jason Hall: I largely agree with Tyler that the problems Kinder Morgan has dealt with are largely of its management's own making. Midstream businesses often do produce very steady and predictable cash flows, but that doesn't mean the company has to give all of its excess cash back to shareholders -- which Kinder Morgan has historically done -- and fund growth with debt and stock.
I also agree that there could be superior midstream investments out there, but I'm not willing to throw the baby out with the bathwater, either. Looking back at Kinder Morgan's mistakes is only part of the battle. Looking ahead is what matters today.
I think Kinder Morgan will come out of the current market uncertainty and downturn in much better shape, and that its stock is probably significantly undervalued today. Again, there are probably better midstream stocks to invest in, but I still believe that Kinder Morgan will outperform the market over the next five years or more.
