Analyst Sees Trans Mountain Buyout as Failure for Kinder Morgan
A strangely roundabout post on the Seeking Alpha investors’ blog suggests that Canada’s buyout of the controversial Kinder Morgan pipeline was “a major blow” to the company, delaying its rebound from past business mistakes that leave it dependent on a robust long-term market for fossil fuels over the longer term.
But in what might be a questionable twist for anyone following the possibility of weakening global demand for oil and future prices as low as $30 per barrel, analyst “Dividend Sensei”, who identifies himself on Twitter as Adam Galas of Shoreview, Minnesota, maintains the Houston-based pipeliner will still gain from “strong long-term growth catalysts”. That’s based at least in part on the expectation of a sustained natural gas fracking boom in the Permian Basin in Texas and New Mexico—which itself has been the subject of some sharply critical analysis of its staying power over the medium and long term.
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But even if that brighter future is realistic, Dividend Sensei sees the buyout as an admission of defeat for Kinder Morgan.
“Kinder Morgan has spent 20 years and about US$62 billion building up one of North America’s largest and most vertically integrated midstream empires,” he writes. “That includes 85,000 miles of pipelines connecting all of continent’s biggest energy producing regions and setting up Kinder to potentially profit handsomely from America’s ongoing energy mega-boom.”
But “poor capital allocation decisions have come to haunt Kinder due to its decision to grow its dividend too quickly in the past,” paying out 93% of its available cash flow before taking on “massive amounts of debt” and selling more shares (thereby diluting existing shareholders’ ownership of the company) to fund its continuing expansion.
In the end, “Kinder ended up taking on tons of debt and more than doubling its share count (and dividend cost) right before the worst oil crash in over 50 years—one that would see the price of oil plunge 76%.” The company ended up cutting dividends and selling off many of its holdings, after the Moody’s ratings agency threatened to downgrade it to junk bond status.
The end result was that Kinder Morgan’s financial growth “slowed to a crawl,” Dividend Sensei recounts. And now, the company is selling off Trans Mountain. “This means the company just underwent yet another major asset sale, which will cost it not just future cash flow but also major [distributable cash flow] growth potential,” a loss that will affect its profit potential beginning in 2019.
“The good news is that America’s fracking-induced energy renaissance means that Kinder is riding several major industry trends, including strong growth in natural gas and booming demand for oil pipelines (especially in the Permian basin) and refined product pipelines,” Dividend Sensei writes. And its “rock-bottom [stock] valuation means a good deep value buying opportunity,” analyst-talk for the basic stock market practice of buying low and selling high.
But like much of the other analysis that hinge on strong future prospects for fossil stocks, this one assumes countries will fail in their efforts to get greenhouse gas emissions under control, that Permian Basin fossil reserves will continue to flow over the life of Kinder Morgan’s various remaining pipelines, and that the plummeting cost of renewable energy and energy storage won’t increasingly cut into demand for those pipelines’ output. None of those assumptions is cast in stone—and in an echo of Kinder’s failure with Trans Mountain, none of them is actually within the company’s ability to control.