Fresh-off recent short recommendations at Linn Energy (LINE) and EV Energy Partners, LP (EVEP), the boys at Hedgeye Risk Management are back with their latest short candidate.
However, this time it isn’t a relatively small upstream company. No, this attack comes on one of the industry’s giants: Kinder Morgan Energy Partners, LP (KMP).
Through a series of tweets announcing a special report due out Sept. 10, Hedgeye asserted that Kinder Morgan — along with Kinder Morgan, Inc. (KMI), Kinder Morgan Management LLC (KMR) and El Paso Pipeline Partners, LP (EPB) — were ripe for a huge fall.
Naturally, investors were spooked, and shares of the various firms fell about 3% to 6% on the news.
However, with no actual facts being presented in Hedgeye’s tweets, it’s hard to gauge whether there’s any real substance to the firm’s claims. Personally, I don’t think there’ll be much there after the report comes out — after all, this is a company with 80,000 miles of oil and gas pipelines crisscrossing North America, not some fly-by-night operation.
What I am sure of is that volatility will be the name of the game for the next few weeks for KMP, et al. — and those movements could provide a huge buying opportunity.
‘A House Of Cards’
What can be gleamed from analyst Kevin Kaiser’s tweets is that there are some issues with Kinder Morgan’s upstream or E&P segment. Tucked within KMP’s vast network of terminals, gathering systems, miles of pipelines and natural gas fractionation plants, the firm has a small series of oil and gas fields that are fed CO2 to stimulate production. These fields are mostly legacy assets, held over from when the firm was first founded.
The speculation is that Hedgeye has found issues with just how Kinder Morgan accounts for maintenance and capex spending, commodity hedging and acquisition strategies. That sounds an awful lot like the firm’s claims on Linn Energy.
Kaiser also mentioned the disparity between the Kinders’ combined market cap of about $78 billion and its tangible equity value of only $1.6 billion. There has also been some speculation about CEO and founder Richard Kinder’s past history with a certain fraud of an energy company — namely, Enron.
According to Hedgeye, these factors make the midstream giant a virtual “house of cards.”
I’m not so sure.
Without actually seeing Kaiser’s work, it’s hard to analyze what’s going on in his head or the problems that Kinder could face. The guy did do good work on Linn and its subsidiary LinnCo (LNCO), so I’m not going to attack his character. But I’m not sure what could be facing Kinder Morgan — a firm with very real tangible assets and not some shadowy shell game.
As for the possible CO2 issues, Deutsche Bank issued a preemptive salvo and noted that Kinder Morgan’s CO2 business is only about 18% of KMP’s 2013 EBITDA, down from 30% back in 2010. The investment bank also predicts that the upstream segment will fade away or even be sold as Kinder focuses on midstream assets. Deutsche Bank also reported that KMP uses “actual cash generated from its production; it does not include non-cash impacts of hedging activities as is the case with some other E&P MLPs.”
The other piece to this that the upstream segment still is very small compared to Kinder’s huge network of midstream assets — the part that actually pays most of the distributions to shareholders. The bulk of those assets are tied to long-term, fixed-fee transportation contracts. Speaking to the Houston Business Journal, a Kinder Morgan rep stated that the firm’s subsidiaries — including El Paso Pipeline Partners, LP — is on track to declare over $4.4 billion in dividends and distributions for the full year.
Then there is Richard Kinder to consider.
The founder and company namesake owns a whopping $8.1 billion worth of Kinder Morgan’s various entities. Kinder actually bought $17 million worth of shares just a few weeks ago. This huge stake — plus the fact he doesn’t collect a salary from being CEO and “lives” on his distributions — is a testament to the company. Let’s face facts: No one would put this much of their savings into a fraud.
Bottom Line
Nothing seems fishy on surface at Kinder Morgan.
With that said, Kinder Morgan’s various pieces are going to be doing a fair bit of jumping around over the next few trading sessions as the market digests the tweets and Hedgeye’s upcoming report. However, this is one of those times that I think longer-focused investors could use that “jumpiness” to gain shares in the market leader in the midstream sector.
Unless, they find outright fraud, KMP/KMI/KMR/EPB should all be fine.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities, but does intend on buying should Kinder decline any further.
