In this video segment, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman answer two listener questions about the company. Tune in to hear why it takes longer than a few months to deleverage a balance sheet and how solid Kinder Morgan's finances are looking just now.
A transcript follows the video.
This podcast was recorded on Feb. 18, 2016.
Sean O'Reilly: So, Leland was also curious, Kinder obviously got overextended and then they cut the dividend in order to focus on expanding and everything. So, he just asked, "Has the balance sheet been substantially deleveraged at this point?" I have to think the answer is no. It's a little early, right?
Tyler Crowe: No, it hasn't.
O'Reilly: Yeah. (laughs)
Crowe: I mean, when you have leverage on your balance sheet, it is... there's a couple ways you can think about it, but I think the most common way is net debt to EBITDA. And a couple months ago is when we started to see them focus on deleveraging the balance sheet. And really the only way you can do that is cut debt or increase EBITDA.
O'Reilly: There's no way that's happened in two months.
Crowe: In the market, you're certainly not seeing an increase in EBITDA from bringing on any new projects or anything like that. And they don't have that huge cash pile to pay down debt. So, if neither of those things have really moved yet, then they're not really deleveraging. However, if you look at the way they've made their dividend policy, they're on the path to do it.
O'Reilly: Got it. So, this gets a little bit more into, maybe, for our listeners who maybe don't know a ton about Kinder Morgan. His next question is, "Are all their contracts to transport oil and gas rock-solid, so they'll meet or beat their 2016 revenue and cash flow numbers?"
Taylor Muckerman: I don't have the...
O'Reilly: So, what does Kinder do and then what do you think about his question?
Muckerman: Well, I don't have the breakdown, but I would imagine that over 50% of their pipelines are filled with oil from some of the integrateds. I know, like, Enbridge is about 2/3 supplied by integrated. When you're dealing with the amount of pipeline you're dealing with with Kinder Morgan, I mean ...
O'Reilly: It's hard not to do, with ExxonMobil. (laughs)
Muckerman: Yeah. My guess would have to be that Exxon, Chevron, all these guys, are filling the pipes for the most part. So, you're looking at a pretty safe customer base. Like I said, I don't have that mix, I don't...
O'Reilly: Well, you don't get as big as Kinder Morgan by just dealing with the small players.
Muckerman: Right, exactly. I think you know, EOG might be one of the smallest companies that they work with...
Muckerman: ... because, other than that, who's going to move the needle for the kind of capacity that they're looking for? Then, they have oil and gas production, assets, not ultra meaningful in comparison. And then, you have the fleet of ships that they bought last year, or 2014, where they have oil transportation ships. So, they have smaller bits and pieces, but the bulk is the oil and natural gas transportation and terminaling, and you have to deal with integrateds to be as big as Kinder is.
Crowe: And, I think, maybe just the one weak spot where it might not have that rock-solid coverage is, like you said, in the production side. In that, they've got their CO2, carbon dioxide business, where they're supplying carbon dioxide to producers who are looking to use that for enhanced oil production, and as we've seen, over the past year or so, that has been the declining spot of earnings and where the contracts aren't as robust. And so, yeah, if you're looking from a very, very large component of it, like 85-90% of it is very strong. That little bit, that 10%, can be kind of a game changer. Certainly, a while ago, when they were paying out so much in terms of dividends, when you have a little bit of weakness, all of a sudden the dividend payment looks unsustainable. But now that they've got that much more wiggle room, it's not as bad.
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. Tyler Crowe owns shares of Berkshire Hathaway and ExxonMobil. The Motley Fool owns shares of and recommends Berkshire Hathaway and Kinder Morgan. The Motley Fool owns shares of EOG Resources and ExxonMobil and has the following options: short June 2016 $12 puts on Kinder Morgan. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.