Many investors, I’m sure, are angry with Barron’s for the hatchet job the magazine did last weekend on the Kinder Morgan family of energy companies. Especially irate, because the Barron’s piece (subscription required) caused the three publicly traded Kinder Morgan securities to belly-flop on a day when the stock market (as measured by the S&P 500 index) touched a new all-time high.
Two reasons why I’m taking this tempest in a cool frame of mind:
(1) The insinuations of accounting skullduggery are old, second-hand stuff that has been refuted on several occasions. Barron’s brought forward no new facts here, but simply rehashed allegations made last fall by a research boutique that specializes in short selling. For a good summary of what’s wrong with the accounting gripes, click here.
(2) I do agree with one point Barron’s made (because I’ve made it myself). Kinder Morgan (KMI), the general partner that oversees the Kinder Morgan pipeline partnership (KMP), is drawing fees that, in today’s world, are too high.
There’s nothing illegal or sneaky about this. The general partner’s Incentive Distribution Rights are spelled out, in black and white, in the partnership’s organizational documents.
Over the years, however, the IDRs have grown so big that KMI is now entitled to 50% of any incremental distributable cash flow earned by KMP.
You can see this difference in the respective partnerships’ cash yields. KMP yields 7.3%, while EPD yields only 4.3% and MMP 3.5%.
In short, the existing GP fee arrangement puts KMP at a substantial competitive disadvantage in raising capital for growth projects (new pipelines and other energy infrastructure). If the fee terms aren’t changed, KMP’s growth will eventually dwindle to a rate that equity investors will find unacceptable.
So why am I calm about this troubling prospect? Because I believe the adverse publicity is hanging around CEO Rich Kinder’s neck like a shirt afire.
A proud, stubborn (and perhaps ever so slightly greedy) Texan, Kinder is understandably reluctant to trim the fees that have made his stake in KMI worth $8 billion. If he wants his empire to keep growing, though, he’ll have to budge.
I think he will. Several years ago, the general partners at EPD and MMP agreed to eliminate their incentive distribution rights (in exchange for an increased stake in the partnership), and those partnerships have thrived.
Kinder, I think, is too smart not to grasp the market’s message, now excruciatingly loud and clear.