{"id":83180,"date":"2015-12-31T10:02:18","date_gmt":"2015-12-31T15:02:18","guid":{"rendered":"http:\/\/countingpips.com\/?p=83180"},"modified":"2015-12-31T10:02:18","modified_gmt":"2015-12-31T15:02:18","slug":"kinder-morgan-cuts-dividend","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/12\/kinder-morgan-cuts-dividend\/","title":{"rendered":"Kinder Morgan Cuts Dividend"},"content":{"rendered":"
December 31, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"MLPs<\/p>\n

By Tim Maverick<\/a>, Senior Correspondent<\/em><\/p>\n

December 8, 2015 is not a day that master limited partnership (MLP) investors will soon forget. North America\u2019s largest pipeline operator \u2013 Kinder Morgan<\/strong> (KMI<\/a>) \u2013 slashed its dividend by 75%<\/em>, to just $0.50 per year.<\/p>\n

Even though KMI is no longer an MLP, it\u2019s still considered a bellwether and is the poster child for the MLP sector.<\/p>\n

So the dividend cut was quite a shock for income-seeking investors who believed the company\u2019s line about how cash payments would only go up as far as the eye can see.<\/p>\n

Somehow company management and yield-hungry investors were blind to the fact that Kinder Morgan carries a heavy debt load.<\/p>

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A load that gets heavier every time energy prices drop.<\/p>\n

And unfortunately for shareholders, KMI is no longer just a pipeline company. It\u2019s moved into energy production, paying more for assets than they\u2019re worth in this low price environment.<\/p>\n

But even the supposedly staid pipeline business turned out to be susceptible to the rout in energy prices.<\/p>\n

KMI\u2019s Growth Fueled by Debt<\/h2>\n

The real problem is KMI\u2019s high leverage. In simple terms, too much debt.<\/p>\n

Kinder Morgan\u2019s net debt load of $42.5 billion makes commodities giant Glencore Plc\u2019s <\/strong>(GLNCY<\/a>) problems with its net debt<\/a>, which peaked at $30 billion, look like a piker in comparison.<\/p>\n

The company\u2019s net debt is 5.6 times EBITDA this year and is budgeted to be 5.5 times EBITDA next year.<\/p>\n

This is above the ratio of its pipeline rivals. Enterprise Products Partners LP <\/strong>(EPD<\/a>) is at 4.1 times and Energy Transfer Partners LP <\/strong>(ETP<\/a>) is at 4.75 times.<\/p>\n

And this debt load is why Kinder Morgan slashed its dividend.<\/p>\n

Prior to the cut, Moody\u2019s projected that in 2016, Kinder Morgan will earn $5.5 billion from operations. But its capital and debt payments would\u2019ve been $6.5 billion. The $3.3 billion saved from the dividend cut and withdrawn bank lines keeps KMI afloat.<\/p>\n

So how the heck did Kinder Morgan get so deep into debt?<\/p>\n

The Greek philosopher Heraclitus once said, \u201cBig results requires big ambition.\u201d Apparently, Kinder\u2019s Co-Founder and Executive Chairman, Richard Kinder, agrees.<\/p>\n

In the period from 2011 to 2014, Kinder Morgan bought $22 billion worth of pipeline assets and nearly doubled distributions to happy shareholders. But to do this, KMI had to add $26 billion in debt.<\/p>\n

KMI Rout Hits Other MLPs<\/h2>\n

The troubles at Kinder Morgan \u2013 the pioneer in the MLP business model \u2013 have spread to other MLPs, causing shareholders to worry whether their payouts are safe.<\/p>\n

It\u2019s an industry that was<\/em> booming.<\/p>\n

MLPs became popular as a yield alternative, thanks to the Fed\u2019s zero interest rate policy. Since 2009, more than $100 billion in MLP IPOs came to market as Wall Street gave retail investors<\/a> what they wanted.<\/p>\n

And investors wanted high-yielding MLPs.<\/p>\n

From 2010 through 2014, investors poured a net $44 billion into mutual funds and ETFs that invested in MLPs. Through October 31, Morningstar said another $3 billion went into these funds.<\/p>\n

As with Kinder Morgan itself, managements\u2019 talk about steady payout increases was impossible to resist. After all, MLPs were just \u201ctoll collectors\u201d and weren\u2019t affected by energy prices. But that turned out to just be hype.<\/p>\n

Once again, that old adage about trees not growing to the sky was proved true. Those funds and their shareholders are lot lighter in the wallet today, as the NYSE Alerian MLP Index is now down over 46% this year.<\/p>\n

Will the Rout Continue?<\/h2>\n

The question on the minds of battered investors in the sector has to be: When will this carnage end?<\/p>\n

It may be a while. Many MLPs are saddled with debt, which continuously needs to be rolled. With credit and equity markets tightening on energy companies \u2013 thanks to falling prices \u2013 access to the markets is becoming iffy.<\/p>\n

Longtime KMI bear, Kevin Kaiser of Hedgeye, sees more pain for Kinder Morgan, saying, \u201cThere is still substantial downside to fair value, which we believe is less than $10 a share.\u201d<\/p>\n

He\u2019s been right so far while most of Wall Street has been wrong, so we\u2019ll see.<\/p>\n

As for the rest of the MLP space, I suggest readers look at my colleague Alan Gula\u2019s series of articles on a \u201cdividend death watch<\/a>\u201d for a number of MLPs. He has great insight into the specifics of many of these companies.<\/p>\n

MLP investing has become a lot like junk bond investing. Be very careful where you step, or you may end up face first in something very unpleasant.<\/p>\n

Good investing,<\/p>\n

Tim Maverick<\/p>\n

The post Kinder Morgan Cuts Dividend<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Tim Maverick, Senior Correspondent December 8, 2015 is not a day that master limited partnership (MLP) investors will soon forget. North America\u2019s largest pipeline operator \u2013 Kinder Morgan (KMI) \u2013 slashed its dividend by 75%, to just $0.50 per year. Even though KMI is no longer an MLP, it\u2019s still considered a […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-83180","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/83180","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=83180"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/83180\/revisions"}],"predecessor-version":[{"id":83186,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/83180\/revisions\/83186"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=83180"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=83180"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=83180"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}